It may all come down to de-risking
Frank Carnevale | Energy and CleanTech consultant | May 20, 2016: It’s understandable that while the equity markets aren’t as robust as we’d all like them to be, this fact ends up becoming a crutch masking the inabilities by executive leadership in CleanTech companies to raise funds from the right sources at the right time.
I may be oversimplifying the challenge, but I’ve passionately written before that being publicly traded isn’t a license to print money.
As a CleanTech company reaches commercialization of their products, there is a consistent industry push to assist their transition from an R&D-driven company to a sales-driven company. It’s a necessary transition, but it’s not the only transition.
In my experience, as a CleanTech company becomes publicly traded, there is an assumption that the transition to a sales-driven company is really all that’s needed to tap into new funds, but it’s a bad assumption.
There is a level of sophistication required to understand and appreciate how one can tap into a certain type of equities buyer, and other than the usual ability to present a solid team and plan with a unique solution set, it also requires the appreciation of levels of risk each investor can take with their investment.
The industry appreciates the fact that switching your equity holders from higher return expectations to equity owners with lower-return expectations is a great thing, but it seems to be lost on these smaller companies “why” investors are willing to take lower returns.
It’s all about risk mitigation and management.
Once you have a commercial solution, and the quicker you are able to design a go-to-market strategy that mitigates risk to your investor, you will be on a better and quicker path to replace equity holders with lower risk and lower return equity holders.
Let’s understand what that strategy might look like.
Say you have gone down a path of selling your equipment through a distributor/dealer model. You are going to need working capital to fund your POs until you get paid at delivery. You would have to think very strategically about which customers are credit-worthy enough to generate a lower cost PO funding vehicle or to sell more shares for capital. Selling to government, while it may seem like a long journey filled with risk, is actually the quickest way to securing low cost debt against the contracts or securing additional investors because of your customers’ credit-worthiness.
Don’t get me wrong. A US municipality is not equivalent to a Cdn one, as Cdn municipalities on average have a BBB credit rating. If you’re selling to a bond-rated entity, you are further ahead at de-risking your go-to-market strategy.
In other cases, it may also include the offloading of risk through downstream delivery partners, like an engineering partner that will take execution risk or performance guarantee risk. Yes, those come with premiums to them, but it also fairly balances your ability to secure cheaper money for yourself.
There are two Achilles’ heels for CleanTech, publicly-traded companies. They tend to focus almost exclusively on the value of the technology, and that is, of course, critical, but the afterthoughts are how the solution is integrated to ensure a successful go-to-market strategy, and the underappreciation on how to secure an additional source of funds through de-risking of those plans.
Pick CEOs and CFOs who have strategies to de-risk more than just be faces for markets. Selection of Board members seemed to move away from being able to offset and tweak internal weaknesses and instead are picked to satisfy perceived images to markets. The irony is that this type of de-risking will put your current equity at risk in these companies.
Read more commentary from Frank Carnevale >>
Frank Carnevale is a CleanTech strategist and asset manager as well as the President & CEO of Bridgepoint Group Ltd. He can be reached at @fcarnevale or fcarnevale@bridgepointgroupltd.com
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