Challenges to Raising Capital in the Clean Tech Industry

By StartUp City | Tuesday, June 23, 2020

Another reason for the lack of new investments in clean tech companies is their track record. Clean tech companies have shown that they have large capital requirements and also burn capital quickly

Fremont, CA: The quest for clean energy sources is ever-growing and clean tech companies are looking to leverage this demand and profitably solve the global energy crisis. Clean tech companies span over a variety of categories such as solar, wind, ethanol, biomass, geothermal, water purification, electric vehicles, energy storage, software, materials, data, and more. The quest for clean energy is more challenging than it is thought to be. Firstly, there is the problem of sustainability and feasibility. Any form of clean energy should be sustainable for the long run and economically affordable. The more significant challenge is raising capital. Although the clean energy sector is highly sought after and has the potential to be a game-changer, there is a definite shortage in financing for the companies brainstorming for clean tech. The failure of a few high profile clean tech experiments in the past has made investment arms skeptical of the industry.

Another reason for the lack of new investments in clean tech companies is their track record. Clean tech companies have shown that they have large capital requirements and also burn capital quickly. These companies need to prove that they can be capital efficient and do not require large influxes of money to become successful. Clean tech companies need to be able to find alternative ways to finance their project if funding from traditional venture capital firms is limited. This can be achieved through profitable early products or services, project financing, strategic partnerships, Kickstarter-style or early reservation-based capital raising, government loans or grants, and, where applicable, tapping bond markets.

15 Most Promising Clean Tech Startups - 2019Like any other businessmen, investors also seek profits, and as a result, are always keen to know the profit margins. Companies with low-profit margins or those that deal in commodities that are subject to competitive pricing challenges can find it hard to raise capital. Investors like to keep an eye on financial projections, seeking to assess the reasonableness of the numbers and the underlying assumptions. Cash flow will be another critical metric focused on by investors. Clean tech companies need to choose non-dilutive sources of funding to manage their cash flow efficiently.

Pre-orders is one such method that clean tech companies can leverage, provided the company does not engage in false advertising and has a no questions asked refund policy. Additional non-dilutive funding can come from enthusiastic consumers who are willing to provide money in advance through Kickstarter or other fundraising sites in exchange for receiving an early version of the product. An added advantage of being a clean tech company is access to various grants. Governments need a solution to the energy problem to ward off climate challenges. To propel the process, governments have provided various subsidies to these companies, who can access experts and labs free of cost.

The quality and experience of a management team play a significant role in attracting investors. Venture capital firms need to be sure that their money is in good hands and will be managed efficiently. In an industry like clean tech, where regulatory, capital, and product issues can be highly complicated, it becomes necessary to have an efficient executive committee. Businesses need to have a dynamic, experienced, and dedicated team passionate about the company's goals. Highlighting particular expertise in the group can be a bonus.

Any company that wants to survive in the long run should be able to gain traction in the market from an early stage. A company that has attained traction will be viewed positively by prospective investors, which results in better financial deals for the company. Some of the early traction signs include the creation of a beta or a minimally viable product, high profile customers, strategic partnerships with industry leaders, and positive coverage and other accolades.

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