Click here for printer friendly page
Raising capital for alternative energy companies
07/03/2007. Source:IVCJ. Bic Stevens, Ardour Capital Investments
 In this IVCJ article, Bic Stevens, managing partner at Ardour Capital Investments, answers frequently asked questions about raising capital for alternative energy companies.
What is different about raising money for alternative energy companies?
Alternative energy companies typically develop complex systems with long product development cycles. They also address new and emerging markets, thereby lengthening their product selling cycles. The result is that they tend to require frequent infusions of long-term, patient capital. Because most of their success is in the future, early stage companies are relatively risky, and the vast majority of investors tend to focus on the relative safety of later stage companies with proven products and markets.
What are investors looking for?
Investors will seek situations where they perceive the greatest reward and the least risk. At the moment, public alternative energy companies are especially sought after because they offer lower perceived risk. Yet public values have increased to such an extent that we are seeing investors stepping down and looking at less expensive private companies. We are also seeing a much more pragmatic approach to investing.
Instead of focusing on the "hydrogen economy," for example, investors are looking for those firms with real, near term markets and near term profitability. The difference between a potential technological breakthrough and a proven product that can be scaled is enormous... and this difference can be amplified many-fold if the company is public.
Which technologies and products are most interesting?
The most interesting alternative energy technologies are those with the potential for the lowest costs and the largest scale. Wind power is already a mature billion dollar business. Solar power has the potential for enormous scale and very low costs. Biomass in the near term is being driven by ethanol and biodiesel subsidies; in the long term, major opportunities will occur with cellulosic technologies. Energy storage companies (batteries, ultracapacitors, flywheels, etc.,) and energy control companies (inverters, demand response, etc.) hold considerable interest.
Fuel cell companies have been relatively out of favor; but this should improve as new solid oxide and portable technologies are introduced. Finally, we see a burgeoning interest in companies dealing with renewable energy and carbon credits. Investors should also look at the underlying value chain within each alternative energy area. For example, in the solar area, the value chain includes companies making solar cells, modules, assemblies and systems; companies installing systems; and finally, companies owning the systems themselves. At any point in time, one or more of these segments can offer significant opportunities for companies and their investors.
What is your view of energy efficiency opportunities?
Renewable energy has received enormous fanfare, but we must realize that renewable energy only comprises some 3-4 percent of the total energy market. The vast majority of investment opportunities lies with improving the existing infrastructure, i.e., energy efficiency. Importantly, efficiency projects typically provide 2-3 year paybacks without subsidies, as opposed to 5-10 year paybacks for renewable projects. Moreover, energy efficiency projects typically use readily available technologies and thus carry lower risk. Energy Efficiency Credits are also becoming available that can significantly improve the return of energy efficiency projects.
What sources of capital are available to alternative energy companies?
Sources of investment capital include individual "angel" investors, VCs, private equity, project finance, public investors and corporations.
• Angel Investors. Angels are perhaps the best source for seed capital. The problem is that they typically invest only small amounts of money and do not usually participate in multiple rounds over an extended period of time.
• Venture Capitalists. After 2001, few US VCs focused on alternative energy and the few that did were struggling with problem portfolios and poor returns. These were bleak times for alternative energy companies trying to raise VC money. Since then, the alternate energy market has rebounded strongly and US VCs are madly trying to re-invent themselves as cleantech investors. The number of lead investors has gone from a handful to perhaps 20-30 nationwide... and this number is increasing. We are seeing new VC entrants as well as existing firms add to their cleantech capabilities.
• Private Equity. We are seeing tremendous growth in alternative energy investments by major private equity firms. Such firms are moving from high-priced public equities to more favorably priced private deals.
• Project Finance. Alternative energy project finance is readily available for proven technologies. Wind projects are done "by the numbers;" solar projects are close behind; and biomass projects are being financed at large scale. There remains, however, a significant gap in financing projects that are either too large for venture capital, or contain too much technology or market risk for traditional project finance sources.
• Public Markets. The US public markets have long been the major source of capital for growing companies. Unfortunately, the US public markets are currently out of reach for all but a few alternative energy companies. We see this situation improving over the next 24 months but, in the meantime, there is an enormous "pent-up" demand from companies seeking capital and liquidity. Fortunately, the London Stock Exchange’s AIM market has taken up the slack and, over the past several years, the AIM has become the most active public arena for alternate energy companies. Over the long run, we see alternative energy investments becoming an integral part of diversified portfolios.
• Corporations. Corporations are an enormous source of capital, but their capital tends to come in and go out as alternative energy goes in or out of fashion. Corporations are finally beginning to understand that the alternative energy sector is one with significant potential. In this context, corporations can be excellent strategic partners and can provide needed sales channels and manufacturing support.
What do you see for the future?
We are extremely bullish about the alternative energy sector, and we see this sector offering the potential for exceptional returns over the next 25 to 50 years. Our reasoning is simple: The world economy is built upon a fragile infrastructure of highly concentrated oil producers, long and extended supply chains, and easily disrupted long lead-time refineries. In addition, we are facing unstoppable increases in energy demand from the industrialization of such countries as China and India as well as our inability to limit consumption. Given this, we see renewable energy losing its fringe status and becoming another standard option in the global energy equation.
Is this a "bubble?"
There will always be times when specific stocks, groups of stocks, or the sector as a whole will be undervalued or overvalued relative to either 1) other stocks, 2) other private companies, or 3) to some measure of their own intrinsic value. Furthermore, there will be times when public stock values are significantly different from comparable private company values, as well as when certain technologies are in fashion.
What fund raising advice can you give?
Financing environment technologies tends to be unpredictable and volatile. When fund raising, one should plan for the worst and be prepared to take advantage of the best. One should always have alternative financing sources and never rely upon a "single point of failure." Take the money whenever it is available, because one can never predict when it will be available again. Finally, the cost of being undercapitalized is far greater than the dilution from being overcapitalized.
Let’s look at these points through the lenses of two alternative energy companies – Plug Power, one of the early fuel cell pioneers, and Medis Technologies, an Israeli company that has developed a "next-generation" fuel cell technology. Their experiences illustrate the enormous volatility of the public markets. They also show the current highly favorable tilt toward alternative energy stocks, especially those with proven technologies and markets.
Plug Power: Plug Power went public in the late 1999 market euphoria and its stock promptly rose from $16 to $150 per share in six months. When the bubble burst, it plummeted to under $10 per share. Significantly, Plug Power’s stock performance was almost totally independent of its business performance. Plug’s stock has remained flat for almost six years, and its market capitalization is some $440 million, or approximately 41 times revenues.
Medis Technologies: Medis took advantage of the market window and went public in June 2000, at a time when Plug Power was still selling at $54 per share. Medis stock then dropped with the market and, by the end of the year, both Plug Power and Medis were selling at roughly $15 per share. At the beginning of 2006, Medis was still at $15; since then, it has begun to prove out its market and technology and its stock price is now over $35 per share. Significantly, despite not having any revenues, Medis has a market cap of close to $1 billion.
Ardour Capital is a full-service registered NASD investment bank and securities research firm that is focused solely on renewable and sustainable technologies.
This article appeared in the Israel Venture Capital & Private Equity Journal (IVCJ). IVC Research Center publishes the Israel Venture Capital & Private Equity Journal, a quarterly review of trends and developments in the Israeli-related venture capital industry. IVCJ, distributed worldwide, is dedicated to provide wide-range coverage of Israel's venture capital industry. For more information please visit www.ivc-online.com
|
