Financing Options Are Shifting for Clean Technologies

Published on November 18, 2009

Although private equity investment has largely shut down and banking standards are tighter than in ages, an overhang of almost $400 billion in private equity remains in limbo for investment, said Craig Miller, CEO of ACG Chicago.

“We’re trying to bring private equity into the new, clean technologies that will be the standards for future growth as we move forward,” said Miller, who moderated a panel at the Midwest Alternative Energy Venture Forum, sponsored by the Polsky Center for Entrepreneurship at Gleacher Center on November 18.

Traditional financing for clean tech, both at the equity and debt levels, has shrunk significantly, said Ellen Friedman, partner at Nixon Peabody LLP. Many renewable projects were financed with tax equity over the last five years, but the economic downturn has dramatically decreased the number of tax equity investors, Friedman said.

To fill that void, the U.S. government has stepped up and created many opportunities, including loans, loan guarantees, and grants through the Department of Energy and the Department of Agriculture, she said. “There’s a lot of money coming through the Recovery Act for energy efficiency and energy renewables through states and local governments,” Friedman said.

Although overall investment has declined drastically, clean-tech projects are still getting financed, just a bit differently than in recent years, said Michael Gruber, partner at VentureLab and founder and managing director of Cornerstone Angels, which both handle early-round investing. Among Gruber’s observations are:

• Deals are taking much longer to get completed.

• The number of deals angel networks finance is about the same, but the average amount financed by individual networks is decreasing.

• Deals are syndicated among several investment groups both nationally and locally.

• Pricing is better for investors, so entrepreneurs need to be realistic about valuation and expectations.

“We tell our investors and our groups that we believe now is truly the best time ever to be investing in early stage companies,” Gruber said. “We are focused on the Midwest, where we think there is a lot of great technical talent that for the most part is under-tapped. I’m looking forward, hopefully, to a great 2010.”

The venture arm within GE Energy Financial Services remains very small, with about $160 million invested in 20 companies, but operates in an interesting dynamic with VC-style executives in San Francisco, Boston, New York, and Germany, said Ray Weber, senior vice president for power and renewable energy. “They review about 1,000 to 1,500 business plans a year to identify mostly third-round financing and to match companies with expertise we have in house at GE,” Weber said.

The Toronto Stock Exchange operates a two-market platform in which the TSX Venture Exchange caters to smaller early-stage companies that graduate to the TSX after reaching market capitalization of about $75 million, said Robert Peterman, senior manager of global clean technology for both exchanges. As of Oct. 31, the dual exchanges listed 121 clean tech and renewable power companies worth $12.6 billion, the highest number of such companies for any exchange in the world, Peterman said.

The financing options panel was one of the events at the Midwest Alternative Energy Venture Forum, which featured a keynote by Matt Rogers, senior advisor to U.S. Secretary of Energy Steven Chu.

Other Chicago Booth GEW events included a discussion with Gary Locke, United States Secretary of Commerce in Singapore; the student energy conference in Chicago; an Innovation Workshop Series event, which supports commercializing university technology and innovation; a session on social entrepreneurship entitled, “Wake Up and Smell the Sustainably Produced Coffee—Why Social Enterprisers Need Feasible Business Models” at Chicago Booth’s London campus; and the 11th Annual Entrepreneurship and Venture Capital Conference (EVC), which brought together successful entrepreneurs and seasoned venture capitalists to share ideas and provide insight to entrepreneurial-minded Chicago Booth students.

                                                                                                                        — Phil Rockrohr