Many fledgling green energy schemes are now approaching the public sector for investment. Here are 10 top tips to help you tell the princes from the frogs.
My little girl’s favourite bedtime story is the one where the impossibly attractive doe-eyed princess kisses a frog that turns into an impossibly attractive chiselled jawed prince. I am less enamoured with the story because it reminds me a lot of my day job, which is raising money for renewable energy projects and early-stage technologies so in the course of a typical year we get to kiss a lot of frogs and meet relatively few princes.
The relevance of this to the public sector is that many of the people who come to see me have often applied for grants, soft loans or other sorts of financing from the public sector. This alternative funding route has evolved since the recession and now both central and local government bodies are setting themselves up as rivals to the traditional bank and private equity funders.
Now this is all very laudable stuff and the state can play a significant role in getting projects and technologies off the ground. However the very real risk is that the public sector becomes the soft touch funder of last resort, the go to people for the mad inventor with the 1000-yard stare that everyone else has passed on.
Although there are thousands of potential projects in the world, these include an awful lot of frogs so, having spent 15 years kissing amphibians, here is my handy 10-point guide to spotting the things that you really really should avoid investing in;
1. There is no working prototype. This is a big no no. Pretty much everybody of a certain age has equity in their own or their parents houses so if your inventor has not risked at least a little bit of this money to develop a primitive prototype of their big idea then walk away.
2. Their idea addresses a non-problem. You see a lot of this in renewables. People invent something clever then try to find a problem it can solve. Ask yourself what is the addressable market, what alternatives currently exist and why is this one better.
3. It’s a Goldilocks project i.e. it’s too big or too small. Sometimes people are far too ambitious. Last year I saw a guy whose opening Powerpoint slide said he had solved the world’s energy problems. He hadn’t. He had reinvented a water wheel. Conversely, it may be too niche and only address a very small market. There may be a gap in the market but is there a market in the gap?
4. Nobody makes any money. Project returns should be 1.5 to 1.75 times your money over five years so this should be a starting point for your negotiation.
5. They are too fixated on your public sector grant or soft loan so most of their business case talks about job creation, regeneration etc. This is not the point. The point is to solve problems and make money. Any job creation should be a nice collateral benefit not the main purpose. Look at the big success stories of our lifetime: the mobile phone, the internet, the personal computer. Nobody invested in these ideas just to create jobs in Bradford but their industries now employ millions of people worldwide.
6. Your developer is more than a bit odd. There is a tricky balance between a bit and too much. Entrepreneurs are a unique bunch of people so most of them are slightly off the wall which is why they are fun to work with. However sometimes a bit odd can be too far and they are effectively unbankable. Always bear in mind that your career is in the hands of the people you are investing in so quirky is good, sociopath less so.
7. They relentlessly deride their competition. Excusing the pun but rubbishing the opposition seems particularly prevalent in the waste industry. If your guy claims that he is the only credible technology in the whole wide world then he is not credible is he?
8. Vagueness. I hate vagueness. Hate it with a passion that sometimes surprises me. Your developer should be able to say if you invest A then we will build B and make a profit of C. Not D or E depending if we do B or B1. Your average investor sees dozens of business cases a year so has the attention span of a crack-addicted gnat. Seriously, ask yourself if they cannot marshal their thoughts to put together a simple narrative what chance do they have of actually building the project?
9. Don’t rely on other people’s debt to make your equity position seem attractive. Gearing the project up to the hilt to make money is the financial equivalent of putting lipstick on a pig. If it doesn’t make money at the unlevered project IRR level then it’s a pig. Or maybe a frog. Either way it’s not a prince.
10. Finally don’t let people snack before dinner. You should be wary of people who try to sneak money, your money, out of the deal before you have had a return on your investment. Be very reluctant to pay big developer fees, management charges etc because the risk is that your developer will become sated by the money he took off the table up front and become less interested in whether or not the project actually happens. Keep everybody hungry and all eat together.
So in conclusion, I think the public sector needs to be clear why it is setting itself up as a rival to the traditional investment community and exercise the same caution when it comes to kissing potential frogs. For every amphibian that puckers up its little green lips, ask yourself does it all actually make sense? You should be looking for a narrative that pulls all of the above points together i.e. this is a working technology or credible project, developed by slightly odd but sensible people that addresses a real problem and will make you money.
Always be clear about why you are funding it instead of a bank and expect to only find a prince every now and then. If you find yourself funding the first five deals that come through your door then you are not being discerning enough and probably marrying the frogs that everybody else has already passed on. Bear this in mind, and every time you look at a project imagine yourself in front of your local newspaper explaining why you invested taxpayer’s money in this deal.
