UK: Investor Readiness For Cleantech

Overview

This is a note of the key themes discussed during the breakfast seminar on 5 April 2011.

The seminar was chaired by David Berry, with introductions by Adrian Mayer, both partners at Charles Russell.

Our first keynote speaker, Jonathan Treacher of specialist investment bank Ardour Capital, provided some useful insights into what external investors are looking for when considering prospective projects, companies and management teams.

Patrick Caiger-Smith of Green Energy Options (GEO) addressed the issues facing cleantech companies in search of finance, particularly drawing on his own experiences as co-founder of GEO, which has raised substantial equity capital without institutional funds.

The Investment Bank perspective

Jonathan's presentation demonstrated that the willingness of investors to invest can hinge on a variety of issues. An investor is not necessarily looking for a "killer app" which is destined to dominate the global market, but it is looking for a fundable business that is transparent, simple and well-organised.

When approaching potential investors in search of finance, companies should follow these golden rules:

• Prepare a well structured business plan: Make it easy for investors to buy into your company or project by ensuring that your business plan concisely outlines your product and shows your route to market. Keep your business plan up-to-date and be ready to attend meetings with investors at short notice. Take care not to revise your forecasts downwards however, as this can be fatal. Make projections you can exceed and then exceed them.
• Know your competitors: Banks are likely to have seen previous proposals for similar kinds of products. Make your project stand out by emphasising your Unique Selling Proposition (USP).
• Understand the regulatory framework: Inspire confidence by showing potential investors that you know about the industry in which you are operating.
• Think about your management team: Show a potential investor that you have a strong and committed management committee who are ready to get involved; even if the whole team is not yet fully in place.
• Think about your audience and the tenor of the investment: Keep in mind what kind of investment your investor is likely to be looking for. How involved will they want to be? Are they looking to invest in the long or short term? Think about their exit strategy.
• Show contractual certainty: For example, in the renewables sector, an investor will want to see that you have secured a supply of feedstock and have Power Purchase Agreements in place for future sales. Show that you have a competent EPC contractor on board. Any planning permission should be arranged or imminent. Avoid springing last minute surprises on potential investors.
• Respond immediately when an investor asks for further information. " Do not let your project become "shop-worn": Approaching too many investors with a poorly structured proposal (the "shotgun approach") can weaken your options in the long run.
• Never push an investor for a "fast answer": It will usually be "No". Give investors time to get comfortable with you and your offering. Feed them a steady diet of positive news. Plan your time and money effectively to show an investor that you can do without their money, but that a boost in funds would drive you forward.
• Maximise your fundraising budget and maintain cash flow: Start fundraising 7- 8 months before you expect to run out of money in order to maximise your bargaining position. Failure to anticipate your needs for fundraising can result in a low-ball offer (or no offer at all) and will reflect poorly on your management. Remember, the process of fundraising can itself be costly, as you may need to finance trips overseas to meet investors. Obtaining funding is a key driver to the success of your business, so do not regard time or money spent on maximising opportunities as "wasted".
• Do not "burn your bridges": Even if you see a potential investor who cannot invest now, it is important to maintain good relations for the future. Above all, you need to invest time and money to make your project or company attractive to a potential investor. As Aristotle Onassis said, "when I see money, I do not run, but just walk very slowly towards it".

The Cleantech company perspective

Green Energy Options (GEO) specialises in the design and manufacture of energy management display systems for the domestic and commercial market.

As co-founder and Managing Director of GEO, Patrick Caiger-Smith has experienced first-hand the challenges facing Cleantech companies in search of finance. Although GEO's pre-revenue efforts to approach venture capitalists proved unsuccessful, GEO has raised substantial equity capital (7 figure sums) from high net worth individuals and angel investors.

Patrick's presentation demonstrated that there are significant benefits in obtaining funds from private investors, which may not first meet the eye:

• Time frame: Typically, a private investor will look to invest within just 6-8 weeks, however applying to an institutional investor can take 4-6 months.
• Extra-monetary involvement: The level of involvement offered by any investor will inevitably vary; some investors will require regular updates and have a genuine interest in the nature of the business, while others will be solely interested in their capital return. An experienced investor can add a wealth of non-monetary value to a project using their contacts and knowledge of the industry.
• Pros and cons of fundraising in stages: Fundraising in stages can be a timeconsuming and high risk strategy, as it requires multiple stages of "good news" to entice investors. That said, the challenge of having lots of minor shareholdings is often offset by the fact that it is less likely your company will need to renegotiate its shareholders' agreement, or be subject to issues of undue influence, as one agreement will usually fit all, with no one shareholder in a dominant position.
• Expected return on investment: A venture capitalist will typically expect to receive a 10 times capital return on his investment within 5 years. Patrick pointed out that this expectation can be risky for a small start-up company, as it may unrealistically embellish its business plan in order to "get to the table". As high net worth individuals are often less determined to secure this level of return, they can be a more appropriate method of investment for start-up companies. While echoing much of Jonathan's advice, Patrick would encourage companies in search of finance to consider the following:
• Keep your message simple: This is fundamental. Keep your presentations to a maximum of 30 minutes and do not talk about the intricacies of your technology. It is critical to outline your route to market.
• Find an independent broker or stock broker: This is essential. A broker will open doors by introducing you to a host of investors to whom you may not otherwise have had access.
• Register as an EIS company: The Enterprise Investment Scheme (EIS) is a government initiative that allows certain tax reliefs for investors who subscribe for qualifying shares in qualifying industries. Registering as an EIS company will make your company much more attractive to future investors, as they will benefit from 30% income tax reliefs from 6 April 2011, subject to state approval.
• Consider who you are hurting: If you are new to the market, who will you displace if your company takes off? It is important to consider and pre-empt the likely response of any existing competitors.
• Limit how much control you give away: If you choose to fundraise in stages, do not give away more than 20-30% of your company at each round of investment.
• Ensure that the investor you are targeting has the money to invest: Do not waste your valuable fundraising budget "barking up the wrong tree".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.