Universally acclaimed for its US$22 billion initiative to build Masdar City, the world’s first carbon-neutral city, and equally criticized for having the largest per capita carbon footprint of any country in the world, the United Arab Emirates (UAE) was a fitting backdrop for a global summit on cleantech, as attendees tried to balance competing forces in the industry of alternative energy — the modern effort to find reliable, clean energy sources, and the old-fashioned business of making money.
"We make no money from any one component of the earth dividend," said Ben Cotton, a partner in U.K.-based investment firm Earth Capital Partners. "It’s only the financial dividend that matters to stakeholders…. [Compassionate investing] is a nice idea, but people who make investments have a fiduciary responsibility to ensure returns."
Cleantech, the catchall phrase for the gamut of carbon-neutral, alternative energy technology in development, has spurred investors into a funding race, with global investment reaching a record US$243 billion last year, according to Bloomberg. At the recent World Future Energy Summit in the UAE capital of Abu Dhabi, venture capitalists and analysts said they found few opportunities for funding, but a number of questions concerning investing in the industry.
"Currently, we have adopted an investment model that has been successful in computing and microtechnology," noted Ralf Schnell, CEO of Siemens Venture Capital. "We still have to prove this [model] is successful in cleantech. One of the challenges is determining how does the VC model work in cleantech. The investment cycle is much too long, the capital expenditure spending and investment to bring a product to market is too high, and there is the regulatory framework that affects your business."
Conventional Over Cutting-Edge
In addition to discussions about the right investment model for cleantech, the event also included a showcase of eco-friendly luxury cars and other "green" gadgets. Both Lexus and Mercedes-Benz presented luxury hybrid saloons. While the German carmaker’s sleek F 800 Style was a concept car, the engineers at Lexus said their vehicle was ready for sale, and had already solidly booked orders in Abu Dhabi. Displays of mechanics, control systems, wind turbines and solar panel arrays rounded out the exhibition hall.
But some financial analysts were not taken by what they found. One said he was seeking out funding opportunities in cleantech, and ended up with some leads in more conventional environmental industries, such as wastewater management, rather than cutting-edge energy technology. "Everyone is trying to figure out what is the next hottest industry in cleantech," he stated. "I didn’t get any clear signs. I would’ve expected more enthusiasm, but there is a lot of caution. I didn’t get a bullish perspective here."
Deals being announced outside the event were entirely public-private partnerships with the oil-rich Emirate. One was an agreement between Siemens and Abu Dhabi for the German technology conglomerate to provide the medium-voltage network and distribution management system for the electric grid in Masdar City’s first stage of development.
According to Siemens’s Schnell, one reason for the caution on the part of private equity and venture capital firms is that while cleantech is focused on one goal, it is not a singular industry. Some aspects, such as harnessing wind and solar power, are still conceptual, while energy efficiency efforts are producing results now.
"It is a diverse space [that is] very capital intensive and takes some time to develop," Schnell said. "What you sell at the end of the day is a commodity, so you need to come up with something reliable [with a similar cost structure to] conventional energy. The general investment strategy depends on the deal — how fast can it be deployed, how short is the return, how much capital is required. The mechanisms are always the same. We need a risk-adjusted return."
Even in its most immediate applications, the cleantech effort is costly. When the owner of the iconic Empire State Building in New York City began a retrofit, he agreed to allot US$20 million of his budget for energy efficiency, noted Clay Nessler, vice president of global energy and sustainability for U.S.-based Johnson Controls, which handled the work. Simple measures such as upgrading cooling systems, adding insulation and installing modern windows resulted in a 38% reduction of energy use, and savings of $4.4 million annually. To persuade owners to try efficiency measures, upfront cost concerns have to be allayed by demonstrating potential future savings, Nessler said.
‘We Focus on What We Know’
Additionally, investment firms like Earth Capital Partners’ Cotton have a list of concerns about cleantech. Cotton agreed that the dizzying variety of technology and systems in the sector makes it hard to determine what is actually viable. The holding period for such investments is also stretched out much more than in other sectors, he said, adding that cleantech needed to set up long-term limited partnership funding to survive. "Too much money is going in the wrong direction," Cotton said. "We need to rethink our approach at the proof of concept stage. How do we deploy capital at that stage?"
Cotton also highlighted the difficulty the sector faces with government regulation, or the lack of it. "The sector is incredibly vulnerable to small changes in policy," he noted. "It’s hard to convince investors to invest in a 10-year or 20-year project, when you have changing regulations every two or three years. People as a result can’t find the right customer. There are an infinite amount of innovations in cleantech, but if there is no market, the innovators are going to go do something else."
Government policy and rules were a sticking point for Karin Larsen Burns, director of San Francisco-based Ambata Capital Partners. "I think we are losing a competitive edge [in the U.S.] because of the lack of a clear regulatory framework," she said. "You have a tough economic environment right now, you’re scaling investment risks, innovation risks, customer risks, and you add onto that an unclear regulatory environment, and it almost becomes unbearable."
Her firm’s strategy in seeking out cleantech innovators is to be part of the company from the start. "We are involved at the seed stage level, providing capital, personnel and contacts," Burns stated. Additionally, her firm works within a limited scope. "As a small firm, we focus on what we know. If we’re not comfortable in a space, we build partnerships that can give us information into opportunities while we are doing our research. Cleantech investors should focus on one or two verticals, and scale, because the technology is always changing."
In the U.S., Burns noted, additional funding structures and sources for cleantech are becoming available through grants from the federal, state and municipal levels, as well as funding from corporate VCs and family offices. But the lackluster IPO market in America is a downside. "There are a lot of deals out there, but few are getting funding," Burns said.
Burns and Ennis Rimawi, chairman of Millennium Energy Industries and managing partner of Catalyst Private Equity, shared a bearish view of the emergence of corporate VCs in the cleantech sector. Burns said in the U.S., she observed hesitancy on the part of cleantech startups to join corporate VCs, because of a fear of ideas being stolen, and being bled out by demands. As a former entrepreneur whose company dealt with such an entity, Rimawi said he had learned a number of lessons from the deal. "If I was looking for a corporation to partner with again, I would be more mature about patent protection, and what we disclose," he noted. "And I’d have to be sure the cultures are compatible."
Burns said those seeking funding in cleantech in the current market need to be aware of the challenges. She advised entrepreneurs to seek out alternative forms of funding, focus on a core market, be efficient with capital, and to remain realistic. "Whatever time you expect to raise capital, double that time, and triple the amount of funding you think you need," she said. She also had a word of advice for companies proud of their innovation. "Don’t be enamored with the technology and not have the right team to execute. You have to have a viable business model."
A Sobering Perspective
The most sobering perspective provided to financiers and cleantech entrepreneurs was by Masdar’s director, Alan Frost. His message was that even with a wealth of funding backing your efforts, getting cleantech from concept to reality is no easy task. "We’ve had all the help we wanted, and it’s still very difficult," he pointed out.
Masdar City has suffered a number of setbacks since it launched in 2006, the first being a humbling public announcement that its first phase would be inhabitable by 2015, instead of 2009, as it had first been promised; more recently, Masdar delayed a plan to build a solar panel plant in the UAE because of a lack of government financial incentives. "I think we’re being much more realistic about the market, and what we can achieve," Frost told attendees during a panel on future city development.
Cotton and other attendees had ample praise for Masdar’s efforts, despite its contradictory nature — a cleantech effort funded by oil revenues. "They’ve got it absolutely right, somebody needs to take the initiative," he noted. "It’s easy to knock people like that, but they can’t help the country was founded on oil. You have to respect they are building this vision. I feel the Middle East has a role in the debate, and should not be permanently tarred as a promoter of oil."
One lesson Frost has learned is that cleantech developers cannot think of themselves as separate from their financial supporters — in Masdar’s case, the Abu Dhabi government. "You cannot be an island. There’s not point in us doing this effort just because we have the oil money to spend." The efforts for renewable energy, Frost added, must bear financial fruit as well. "It has to be commercially viable, there has to be a return on investment."