Sep 24, 2020
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How VCs Can Still Make Money In Alternative Energy

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Guest post written by Rachel Sheinbein Rachel Sheinbein is a partner inside the energy and materials practice at CMEA Capital. She s also President of Expanding Your Horizons a non-profit that encourages younger women to pursue careers in math science engineering and technology. Her last column for Forbes was Why Cleantech Startups Need To Partner With Big Companies


Racehl Sheinbein: Energized. The dictionary provides one definition of risk as the possibility of something going wrong. Venture capitalists often categorize the possibilities of something going wrong as technology risk market risk and execution risk. My recent post on venture capital investments in energy technologies describes a way to mitigate one execution risk by investing in companies with or recruiting a Commercialization Executive


Another form of execution risk of particular importance to an energy company is the financing risk in scaling to the scale required to make an impact. It would be difficult to generate the forms of returns venture capital investors demand if it required VC firms to make billions of dollars of recent investments in start-ups to compete with the billions of dollars of past infrastructure investments made by incumbents


In any case the venture capital sweet spot is early stage companies that have technology and/or marketing risk left to resolve but that won t require large amounts of capital expenditures to start generating revenue. There are some energy sectors that fit comfortably within this familiar model of VC investing


An example is energy management companies consisting of OPower where the core technology is in software and using data to drive decisions. Another example is solar financing companies consisting of SunRun or Sungevity which are striving to possess distributed solar power production. While these companies need capital to install the depreciating assets on their customer s rooftops their ratio of variable expenses to fixed expenses is incredibly high


Each incremental dollar they invest in purchasing another solar PV system directly attributes to increased revenue; there is no requirement to design and build a $100 million manufacturing plant before the 1st revenue may well be realized as is needed of energy production companies. PROMOTED Civic Nation BRANDVOICE | Paid Program
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Why Kids Of All Races Need To Know How To Talk About Race So then have VCs been wrong to jump into capital-intensive energy investments? There is research to support the concept even a year ago VCs were already backing far from investments in capital-intensive energy sectors consisting of energy production in favor of less capital-intensive sectors consisting of energy efficiency


However we believe there are still opportunities to make VC returns even inside the capital-intensive sectors. Among the best easy methods to address the financing risk of scaling energy investments is to minimize the dollars needed with a business model that uses the output from other companies that have already scaled as an input


By doing this our companies build on top of capital that exists leveraging others previous investments and reducing total funding needs. This is easily illustrated with an example from our portfolio Solaria. Building a good solar cell manufacturing plant requires an investment of hundreds of millions of dollars. Luckily for Solaria many of these cell manufacturing facilities have already been built


Solaria can then purchase the output (solar cells) from these factories as an input into their proprietary solar module design that delivers power at a lower cost. The cost to build a solar module plant is a minimum of an order of magnitude under a cell manufacturing facility. Solaria has found a way to tap into the scale of the present solar photovoltaic industry with a more capital-efficient business model: Design Assembly and Test


Another one in all our portfolio companies Danotek Motion Technologies is also pursuing a Design Assembly and Test approach as a method of lowering capital expenses. Danotek has designed a more efficient and reliable permanent magnet generator for wind turbines. A lot of the components for this new generator design can already be produced at manufacturing facilities built and financed by other investors


Danotek should buy these custom-made or perhaps standardized parts and assemble its own proprietary generators. Of course there are other options for successfully financing the scale-up of a capital-intensive venture-backed energy company. Occasionally government money is offered to build new facilities that deliver at the promise of green jobs or energy savings


In addition an existing large corporation might have a strategic interest in a new technology and be willing to speculate significant amounts of capital to harvest the aptitude benefits. We ve talked with other venture capital firms that place confidence in strategic partners as portion of the investment thesis for scaling and you are able to reference my blog post at the importance of Strategic Partnerships for energy companies


However since there aren’t any legal arrangements or perhaps formal discussions when the company remains in an early stage we will t rely at the partners as an absolute inside the future. While this is certainly an approach that has worked we don t desire to rely upon a future strategic partner to relieve the financing risk for scaling the company


Of course we also have to remember the basics; for any technology to draw sufficient capital to scale up it must solve a genuine problem be low-cost be replicable and feature the right supporting systems in place. The option to a way to successfully scale a venture-backed energy company to deliver a meaningful solution is tricky


We evaluate several different scale-up paths for the company as portion of our due diligence routes both with and without significant capital from another source. When other financing isn’t accessible we desire to be sure our investments have a viable capital-light business model available

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