5 pillars of investment for a successful cleantech start-up

EDMONTON—The forum for Biological Solutions this year was called “Building the Business Case.” The Plenary Speaker was retired CFO from Nova Chemicals, Enerkem Board Member, and holder of the Canada Medal for outstanding work in the chemical field, Larry MacDonald. His discussion was entitled Building an Industry: The Pillars of Investment.

MacDonald uses NOVA and Enerkem as examples as he takes us through a discussion of building a business case for developing and new technologies. He focuses on hydrocarbon-based and bio-based business and acknowledges that other opportunities may have different pillars.

Though technological breakthroughs have changed the world, developing new industries is not easy, inexpensive, or fast. Financial challenges are one of the biggest problems but can be made less of a problem with the pillars in place.

Pillar 1: Social License and Government Support
Right now, society is demanding improved environmental performance. The oilsand’s social license is being challenged—in the future successful oilsands companies will have to reach for economic and environmental excellence.

By contrast, Enerkem’s social license is solid.

“The concept of turning garbage into ethanol for use in gasoline, thus reducing demand for raw hydrocarbons, is exactly the type of technological breakthrough the world is looking for,” writes MacDonald, who warns against companies like Enerkem taking this for granted.

Government support falls into a few different areas: direct investment, research grants, loan guarantees, premium product pricing, and feedstock support for new technologies such as Enerkem. For more mature companies like NOVA, support is more generic with competitive tax rates or streamlined regulatory requirements. NOVA had strong Alberta government support in the 1970s when it was starting up but there was no direct investment, primarily because it was a known technology and it was easier for NOVA to get investment dollars from conventional public sources.

Pillar 2: Technology
MacDonald didn’t speak much about technology as “this audience is full of technical experts” and his background is in finance. He did point out that the risk of failure for new technologies is very high, but that the few breakthroughs that do succeed will change the world. Time and money are key. Enerkem has been developing its technology for 14 years and it is just now starting up its first commercial-scale plant. NOVA, using known technology didn’t have these same problems.

Pillar 3: Markets and Feedstocks
Neither Enerkem nor NOVA have a problem finding a market for their products. MacDonald says that bio-based products in general should not have a problem finding a market; the challenge is to produce these products economically.

Some proven technologies may not be economical. He uses the example of synthetic rubber, which was significantly more expensive to use than natural rubber. World War II saw Japan take over Malaysia’s rubber plantations, so it was necessary for North America to build synthetic rubber plants to supply rubber for the war effort. The synthetic rubber companies were able to find uses for rubber production after the war, making the industry economically viable.

Pillar 4: Financing
Financing is the biggest problem for bio start-ups due to the risk involved. Bio start-ups with new technology must turn to unconventional sources such venture capital, angel investors, strategic investors and direct government investment.

“One you’re commercialized and you’re demonstrating revenues, or at least a track record that is going to get you to profitability, then you can access things like public equity markets and banks. There are few exceptions but it’s very rare,” says MacDonald.

A start-up using proven technology looks to these same sources but with the possibility of using private equity.

Pillar 5: The Investment Decision
One of the most important concepts is finding a competitive advantage.

“Thousands will try, but few will succeed,” says MacDonald. “Right now, society is looking for improved environmental performance. Enerkem is using garbage and turning it into a needed commodity. NOVA started a new industry using “proven” technology, therefore the risk of failure was very low.

The four pillars can be likened to table legs: if we remove one of the legs, the table will be very unstable. All four pillars are equally as important but unfortunately “many good bio ideas have died on the vine because capital could not be acquired at any price.”

Kelley Stark is a freelance writer based in Sherwood Park, Alta.