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Is Cleantech Innovation Meeting Cleantech Capital?

By Victor Bivell

This is an edited version of a presentation given to the Australasian Industrial Research Group's National Winter Meeting 2013 on 28 August in Melbourne.

Thank you for the opportunity to speak today. Is cleantech innovation meeting cleantech capital? Is there cleantech innovation in Australia? You bet there is. One study says there are about 1,300 cleantech companies in the country. That number seems to grow every year. There could be more. Hundreds of these companies have intellectual property, and some of it is world leading.

Cleantech innovation is alive and thriving. It's a real asset, a real resource for the country. I think it is unstoppable. But note it is cleantech innovation that is unstoppable. What is very stoppable is its commercialization.

Is there cleantech capital? The answer is yes and no. It's out there, but there is more in some places than others. Deals are being done, but as always money is hard to get, as it should be, and as it probably always will be.

So for today I thought we could take a tour through the capital markets and see how much money we can find for cleantech, and where it might be.

So you know where I'm coming from, Eco Investor Media produces a magazine and a couple of Forums. We look at cleantech from both sides of the coin. Our investor readers are high net worth individuals, retail investors, financial advisers, mainly ethical advisers, and small and specialist fund managers.

On the innovation side our readers are innovative cleantech companies, directors, entrepreneurs, and commercialization advisers.

And just to be clear - we use a positive screen that we developed to identify cleantech companies and put some rigour into the sector. We are different to ethical investment and sustainability, though we are part of those. The difference is that environmentally positive companies supply solutions to environmental problems. Sustainable companies consume those solutions.

So let's take our tour and see how the sector is traveling.

How Are Investors Traveling?
We know innovation is happening but commercializing it is tough, and one of the key issues has always been a lack of capital.

From the investors' point of view, there are a few constant issues but lack of commercialization skills is a key one. Also, investors are feeling poor at the moment, and their appetite for risk is low.

Once an entrepreneur incorporates their innovation and issues shares it becomes part of the equities asset class, which is a risk asset. And investor appetite for risk goes up and down with the times. We can see this with the main index for the ASX - the S&P/ ASX 200 Index.

S&P/ ASX 200 Index 1992-2013

Remember this measures demand for the safest 200 shares in the country. Below these you have 2,000 listed shares that are much more speculative and riskier, and below those are thousands of unlisted shares that are not only very high risk but also illiquid. So if the ‘safest" 200 shares in Australia can be this volatile, imagine what it happening to the companies below the chart.

The chart shows the index over the past 20 years. As you can see, the tech bubble was barely a blip on the big companies. But there was a steep rise in risk taking during the noughties and an even steeper plunge during the GFC. The sideways movement in the chart is a little deceptive as it doesn't show that the longer it moves sideways the more investors lose heart and dropout.

You can see this with the chart on margin lending based on data from the Reserve Bank. Remember, margin lending is for the top, safest listed shares only. The blue line shows actual lending - a fourfold increase during the GFC and a steep downturn that is still heading south. The red line shows total available credit for margin lending. What is interesting is that back in 2000 the gap between available credit and drawdowns was tiny. But it grew hugely with the boom and remained during the bust. So at the moment investors have capacity to invest but not the appetite for it.

Margin Lending 2000-2013. Source RBA

You can also see that with the IPO window, which is mostly closed at the moment, especially for early stage technology companies. Even if they could list they would barely register on the chart.

Other Raisings on the ASX shows that those companies that are lucky enough to be listed are raising capital. It's coming from placements, rights issues, options etc, and early stage cleantech companies are among them.

Source: RBA

So with that background let's start our tour of the cleantech capital markets. I want to do it from the point of a hypothetical engineer with two innovations to commercialize. One is a simple widget - say an energy efficiency or water efficiency device or a product that replaces chemicals. It can be manufactured for the wholesale or consumer market and needs only a few million dollars to get into production. The other is a huge capital intensive project - an energy, waste or water plant - that needs tens of million or hundreds of millions to be built.

Government
The first port of call, without doubt - is the government. I'm a big believer in the government and what it does for commercialization. I think they do a good job. Importantly, its got money, and if the entrepreneur's innovation is good their prospects for getting some are good.

There are a wide range of Federal and State Government programs for cleantech, and overall I think these are run well, and are good at sorting the sheep innovations from the goat innovations. Commercialization Australia and the Australian Renewable Energy Agency, for example, are both run by venture capitalists, and the R&D tax Incentive is a good for recycling R&D capital and sending cash starved companies a regular cheque.

But the government's strength is early stage - R&D, prototypes, demonstration plants, market research. It's good for widgets and the early days of large plants. But it's not as good at later stage and large projects. One exception is the new Clean Energy Finance Corporation. Since July it has announced its first dozen or so investments and these all look very interesting and have large and very credible co-investors.

But the CEFC is complicated by the imminent Federal election. I don't want to tell you how to vote, but if you are an entrepreneur with a large capital intensive project that is ready to go, you have a choice between one party that has put $10 billion on the table to help you and another party that promised to take the $10 billion away as so as it gets in.

Private Investors
The next port of call in the capital markets is private investors.

The angel investor market is doing well and growing. There are about 18 angel investor groups and business matching services to approach, and although there is not a lot of information about what happens in this sector we do know that cleantech deals do occasionally get done.

Specialist stock exchanges are also growing. Clean tech accelerators are new but we already have two in the cleantech sector. And the newest kid on the block and with a lot of potential is crowd funding.

All of these are good for early stage and widget style innovations, but not much use for large capital intensive projects.

Some interesting points. I've been writing about the Australian Small Scale Offerings Board or ASSOB for about 20 years and they have had tough times but they have now raised about $130 million for about 180 companies - a terrific achievement - and a good number of these are cleantech companies.

SIM VSE is a new and specialist cleantech exchange but it has its first listings despite the tough market. The Indigenous Stock Exchange or ISX helps raise capital for indigenous entrepreneurs and so far has listed a total of around 4,000 projects. Many of these are in the environmental area. Not so much with IP, but it is strong in eco-tourism and sustainable food.

A big local success story in crowd funding is LIFX, which wanted to raise $100,000 to manufacture its innovative LED light and raised $1.3 million from over 9,000 supporters.

Venture Capital
Now we come to the venture capital market. Ah yes, you could say this is the problem child of the Australian capital markets. The Government has tried every trick in the book to get a formal venture capital market going, but after 30 years and hundreds of millions of dollars the sector still can't stand on its own two feet.

There are problems with the model and with the industry's lack of investment success, so most institutions won't buy the product. The venture capital business model needs work.

There are also problems for entrepreneurs. There are only a small number of funds, and even less for cleantech. There are barely a handful of specialist cleantech funds, not all of which are traveling well, and a dozen or so other early stage technology funds that will also look at cleantech. It doesn't take many phone calls before the entrepreneur can take the rest of the day off.

The funds are small in size, so competition is intense and they lack capacity for large follow on investments. They may be good for a few million, but they are unlikely to fund large capital intensive projects.

Information flow is poor. Some cleantech deals have been done but with limited success so far. Overall, formal venture capital is a 'nice to have' but it is not the main funding game.

Nor is overseas venture capital. It does happen, but an entrepreneur has to be very lucky or work very hard for it.

Corporate Partners
That brings us to corporate partners. Corporate venturing has a long history of failure in Australia, but corporate partnering is alive and providing equity.

It generally comes from corporates within the same industry, and many of these are large international corporates. There are many examples of Australian cleantechs that have overseas corporate equity partners. The partners listed come from Saudi Arabia, Japan, US, and Germany.

There are also examples of domestic corporates providing equity to local cleantechs. Some of these are old or not traveling too well, but others are fine and overall local corporates do support local innovations with equity.

The ASX
That brings us to the ASX, which in my mind is without doubt the main venture capital game in Australia.

Capital is continually being raised on the ASX and that includes risk or venture capital. It comes through placements, rights issues, share purchase plans, options. And the money comes from a wide cross-section of investors - existing shareholders, directors, broker clients, underwriters, fund managers and institutions.

The ASX used to have about 110 cleantechs but post GFC that has come down to around 90, most of which are pre-revenue, pre-profit or pre-dividend. These are speculative stocks for punters. And I think that just fine, because these companies have access to the largest equity market in Australia. The bottom nine tenths of the ASX is a venture capital market and investors understand that.

As well as speculative equity, the ASX is also good for large amounts of capital. This is the one capital market that can really help our hypothetical entrepreneur with their big capital intensive project.

Now, some people argue that companies list to early on the ASX. To me, that's nonsense. Being alive and early on the stock exchange is better than being dead. End of argument.

The ASX also has big advantages for investors, and the biggest is risk management. There is a huge flow of information about each company. The entry cost is low as the minimum investment is $500. There is liquidity or some liquidity, and for small investors even with smaller mostly illiquid stocks. And investors can use a portfolio approach to spread risk and increase the likelihood of success.

Let's look at some leading cleantech companies on the ASX. These are my picks, and all of them have world leading intellectual property.

Some Leading Cleantechs

The first thing to notice is that they come from a healthy cross section of industries - waste to energy, semiconductors, wave energy, fuel cells, water purification and mineral extraction, solar energy, geothermal energy and electric scooters. As I said, innovation is alive and well.

Not so encouraging is the next column. Five of these companies are pre-revenue and two are at early revenue. Yet look how long it has taken for them to get to this stage. Ceramic Fuel Cells since 1992 - 21 years, and now at early revenue. Dyesol - 20 years and still pre-revenue. BluGlass - 17 years and still pre-revenue. And so on with the other companies.

What this tells us is that everyone - governments, investors, entrepreneurs, venture capitalists - have seriously under-estimated how long it takes to commercialize world leading technology. How long it takes to get it to market and to start making first sales. Let alone how long it takes to achieve profitability.

So spare a thought for the early investors, and whether they will still be alive if it happens.

Also worrying is the next column. This tells how much equity each of these companies has raised so far. The amounts are huge - $346 million, $288 million, $123 million, and these numbers don't include government grants, which are on top.

Again, everyone has seriously under-estimated how much money it takes to commercialize world leading technology.

And again, spare a thought for the investors when you look at the last column and see each company's accumulated losses so far - Ceramic Fuel Cells $269 million, Geodynamics $206 million, Dyesol $68 million, AnaeCo $61 million, and so on.

So where did all this money come from?

Most of it, especially in the early days, came from retail investors. This chart shows that each of these companies has a very large base of shareholders, and the next column shows that the overwhelming majority of these investors have 100,000 shares or less. They are normal people.

So I can't over-emphasize how important it is for directors to build a base of loyal shareholders and look after them. Geodynamics has over 15,000 shareholders, Ceramic Fuel Cells over 12,000. To persuade so many people to support your project is a terrific achievement.

As the companies have developed, the money has come from corporate partners, directors of the companies, high net worth individuals, private investment companies, family trusts, and self managed super funds.

Where are the big guys, the financial market big boys? That's what everyone wants to know, but you have look hard in the top 20 shareholders to see any evidence of them. The last column shows institutions in the top 20. It's a rough guide only that I put together mainly from nominee companies. There are not many, and even fewer big names.

So, unless they are in that zone between retail investors and the top 20, they are not there. And I am not surprised. The big institutions and super funds are interested in low risk big companies not high risk small companies. By all means keep the pressure on them to develop an interest in the sector, but be realistic about the chances.

So how are these companies traveling? This chart shows their June 30 cash position. There are some double digit millions there but also some single digit millions. They have enough cash for the short to medium term and being as good as they are they have a good chance of topping up when they need to go back to the market.

Cash Position of Leading Cleantechs

But these are the leading stocks. The picture at the other end is not pretty. These companies also have world leading technology, but not the cash - barely one or two hundred thousand. At these cash levels they are in imminent mortal peril. Why is their cash low? Either the directors have not built a large and loyal shareholder base, or else the market is not buying their story. Or not buying it yet. Two of the companies, Algae.Tec and Enerji have since raised about three quarters of a million dollars each but they are still not out of the woods.

Low Cash Cleantechs

I'll finish with this comparison between cleantechs and some companies I loosely call eco resource stocks. Eco Investor follows a small group of these because their resources have important environmental benefits.

Leading Eco Resource Stocks

For example Lynas Corporation mines and produces rare earths that are used in electric motors and wind turbines, Orocobre and Galaxy Resources are involved with mining and processing lithium for batteries, and so on.

Firstly, notice how much more cash they have than the cleantechs. $141 million. $18 million. $17 million. And so on. They have serious cash. They also have more institutions in the top 20. And they raise more cash when they go to market.

Yet these companies are just as early stage, just as pre-revenue or just as early revenue, as the cleantechs.

Why the difference? The difference is that Australian investors - retail and institutional - understand how to punt on resource projects. There is a long history of Australian investors punting on resources, and many many success stories. In contrast, technology has few local success stories, and investors don't understand technology and how to punt on it nearly as well. And they have been led astray that technology is for government and venture capital funds, or what they do in America.

We need to do better than that. Technology, including cleantech, has a core group of punters, many thousands, but it is not anywhere near big enough to meet demand. We need to grow that pool of investors. We need to encourage investors to punt on technology and educate them on how to do it. That's where the future is. It works for resources and it can work for technology and clean technology.

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