The cleantech challenge

As the economic downturn deepens and spreads across the world, GrowthBusiness looks at how cleantech companies are reconciling the need for short-term survival with their long-term aims.

Finding alternative sources of energy is a serious business. Funding for the world’s sustainable energy rose by 60 per cent to more than $148 billion (£121 million) in 2007, according to figures from the UN Environment Programme’s Global Trends in Sustainable Energy Investment 2008 report. Global recession aside, between now and 2012 it is expected to reach $450 billion a year, rising to $600 billion in 2020.

At TMO Renewables, which has pioneered a process to produce ethanol from organic waste, the building blocks are being put in place to capitalise on this growing market. ‘The ethanol industry in the US alone is currently $30 billion per annum and rising,’ observes Curran. ‘By 2020, the Energy Security Act requires it to be something like $200 billion per annum.’

The company has taken steps in 2008 to secure a piece of that market. ‘We got planning permission in August 2007 for a process demonstration unit and it was built and delivered on budget this year,’ says Curran. Now that ethanol producers can see how the process works, he is confident a deal is closer to getting signed.

Waiting games

Like pharmaceutical companies, developers of alternative energy solutions can be at the proof-of-concept stage for years. Chromogenics, a Swedish developer of a technology that reduces air-conditioning bills by controlling the amount of heat that comes through windows, is a case in point.

‘This is not our main market, but it does help us on the way’

‘We are addressing an area of clear interest for people who want to see better technology for the building industry in Europe,’ says Bengt Åkerström, Chromogenics’ CEO. ‘Buildings consume 40 per cent of all energy in Europe. If we have a technology that can help in reducing energy consumption, that is a major breakthrough.’

Commercially, the company has clinched offbeat revenue-generating deals with motorcycle manufacturers after it applied its technology to crash helmets. ‘We have a coating that goes onto the visor so that it can be adjusted according to the levels of light and the weather. This is not our main market, but it does give us help on the way,’ says Åkerström.

The heart of the business is the light-filtering window panes. Åkerström says that a new production plant is to be opened in 2009 and while that pushes the company forward, a few years of testing remain before reaching the stage where deals can be signed to try and generate returns for investors.

Political sway

For both TMO and Chromogenics to develop as commercial, profit-delivering entities, additional funding is required.

In Chromogenics’ case, a consortium of organisations interested in its application – including tech giant Siemens – is approaching the European Union for a €500,000 grant under the Seventh Research Framework Programme. ‘We have applied for funding and signed a contract with the consortium,’ observes Åkerström.

For Curran at TMO, Barack Obama’s presidential win is music to his ears. ‘We are working hard with clients [who are interested in our process] to find out how we can leverage government support in the US. It takes capital for a client to adopt our technology and these aren’t the greatest times for raising it.’

According to the UN’s report on sustainable energy, the second quarter of 2008 showed solid investment despite the chaos in the global markets. Sustainable energy venture capital and private equity in the second quarter was up 34 per cent on the equivalent period the year before. However, merger and acquisition activity increased by 52 per cent to $25.7 billion in 2007. Saving the world is all well and good, but the bottom line matters and that is leading to consolidation and exits for investors.

Fear of the new

For Simon Daniel, the CEO of USB battery developer Moixa, the biggest source of frustration has not been lack of finance but getting his products to market. Even when deals have been negotiated with a large distributor, such as a supermarket, there’s no guarantee it will hit the shelves.

There is light at the end of the tunnel, however. ‘We’ve just gone live in Morrisons and also recently in Halfords,’ says Daniel with evident relief.

‘It takes capital for a company to adopt our product’

An additional problem is the disruptive nature of Moixa’s product. Daniel is pitting his battery against multi-national organisations which sell regular batteries through long-established distribution networks.

‘It is partly about scale,’ notes Daniel. ‘In the UK battery market, 650 million units are sold every year. So there is a particular way you enter the market as you can’t enter from day one at that scale. There are so many types of [suppliers] and, of course, batteries are sold virtually everywhere.’

Moreover, the buyers which stock the batteries can predict their sales as opposed to taking a risk on margins with an unknown product: ‘There are – not quite cartels – but historic distribution channels that control how this volume happen. Sales in supermarkets border on the scientific.’

Resistance from traditional players can form a significant barrier to entry. TMO’s Curran knows this only too well, claiming that the American Grocers’ Association (AGA) has been instrumental in the campaign to discredit biofuel. ‘On this matter, the press has been totally hoodwinked [in the US] by a very well-funded campaign. Corn growers are now getting the subsidies to grow an indigenous fuel and the AGA’s objective is to reduce the strategic support that has gone into the ethanol industry and stick the subsidies back into the food industry.’

Hard yards

CEOs running these companies are generally exceptionally bright individuals, leaving you to wonder why they haven’t opted for a simpler way to make a living. The technology is complicated, the politics both a blessing and a curse, and profits can remain elusive for years – or never come. Of course, the lure for these entrepreneurs is the thought of the riches to be attained when they hit the jackpot and, who knows, perhaps some do actually want to make a difference.

The renewable energy revolution presents a melting pot of ingenuity, greed, foolishness and standout brilliance. It’s the hunt for ivory in Africa, and gold in the Klondike, and new technology in Silicon Valley, all rolled into one.

Then there’s the planet too and the human cost of oil. To go back to TMO’s Curran: ‘The US understands that the consequence of its addiction to foreign oil is body bags.’

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.

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