Can Cleantech Survive Cuts?

                                  IMG_2197Doug Neal touching base with one of his portfolio companies to discuss their growth                     Photo by: Manjaap Dhillon

 

Chris Klein, an entrepreneur and innovator, is the CEO and co-founder of Rachio. Rachio is a startup company that builds smart-sprinklers that use data and user inputs from an app to more efficiently use water. Rachio has many large retailers such as Amazon, Home Depot, Lowes, and Best Buy that coordinate the distribution of its smart-sprinkler. The startups growth can be attributed to the investments it has received from multiple firms. Unfortunately, not all startups in the cleantech sector have experienced the success that Rachio has.

 

The Trump Administration has recently announced a rollback of many subsidies and rebates that help keep the cleantech sector competitive. These rapid changes leave many skeptical about the future of cleantech startups and companies. Some experts believe that these cutbacks will further discourage the growth of cleantech companies, while others believe that the environmental need and increasing technological feasibility will keep these innovative firms competitive. However, only time will tell if the cleantech sector will be able adapt quickly enough to meet the needs of a changing world and consumer market.

 

A paper written in July 2016 by Dr. Benjamin Gaddy, Dr. Varun Sivaram, and Dr. Francis O’Sullivan for the MIT Energy Initiative discusses the weak return produced by cleantech firms. Investors, specifically venture capital firms, have spent over $25 billion finding cleantech start-ups from 2006-2011 but have lost over half their money. Cleantech companies offer such a dismal return because companies often need to develop new materials or processes that are difficult to implement on a larger scale. This fact coupled with the new Trump Administration’s promise to cut subsidies for cleantech companies and environmental efforts leaves many of these startups in a tight situation.

 

Paula Sorrell is an independent consultant that served as the Vice President of Entrepreneurship, Innovation & Venture Capital for the Michigan Economic Development Corporation overseeing $1 billion under management to support Michigan’s entrepreneurial ecosystem. Sorrell explains how access to capital may be restricted for cleantech firms due to preexisting agreements that dictate what investors can put money into. Alongside these agreements, many cleantech firms are heavily dependent upon federal subsidies and taxes to help with costs until they can be competitive. These attributes make them unappealing for investors looking for growth.

 

Investment firms invest in companies for many reasons. Aaron Crumm, a successful entrepreneur and founder of Adaptive Material Inc. (AMI) a company that is a leader in alternative energy through building fuel cells, says that “investors are always primarily focused on making a return on an investment as that is the overall goal of the investment process and can’t be jeopardized just because of social responsibility especially when they are handling people’s retirement and savings funds. The company needs to be an investment grade opportunity. The investor is under no obligation to undertake a certain opportunity but will if they can get a win-win.” Many investors looking to provide capital to startups also share Crumm’s sentiment.

 

Despite these obstacles, not all investors have been scared out of the cleantech sector just yet. Doug Neal is a co-founder and Managing Director of Michigan eLab, a VC firm with a primary focus on cleantech startups. Neal remains optimistic despite all the forces moving against him. According to Neal, “cutting subsidies and taxes that help cleantech may be a small hurdle but it can create more opportunities in the future. The new administration appears to be business friendly so it can make loans easier to obtain for startup companies, it’s just too early to tell.” Andy Hoffman, a Professor of Sustainable Enterprise at the University of Michigan, shares a similar opinion. Hoffman believes that the new administration is just a small piece of the puzzle and that technological innovations along with the need to combat anthropogenic environmental change will help the cleantech industry stay relevant.

 

The current trends against cleantech firms can be curbed through a variety of different methods. The MIT Energy Initiative discusses how different ways of innovating can help cleantech’s feasibility. For example large companies can boost research and development spending to create cleantech innovations within their firms. A particularly interesting case where this can be seen is Tesla Motors, which consolidated battery production and solar energy services to help prove the feasibility of electric cars. In fact, Tesla has been so successful that its market cap, a measure of a firm’s value, rivals established industry competitors GM and Ford.

 

Changing technologies are also working in favor of cleantech firms. Previous technologies that were either to expensive or unfeasible have become affordable. According to Solar Cell Central, the cost of photovoltaic cells for solar power has decreased in price over 25-fold in the previous 15 years. This decrease in price can be attributed to the increased adoption of solar energy by many consumers. Another trend in favor of the cleantech sector is the large population of Millennials, age 21 to 36, gaining market power. According to a recent Nielsen study, approximately three out of every four Millennials are willing to pay more for sustainable goods and offerings. The study also showed that Generation Z, age 15 to 20, showed similar trends as Millennials with 72% saying that they’d pay more for products and services from companies committed to sustainability.

 

Despite the trends that are working for and against the cleantech industry, it’s ultimately up to a company to ensure their own survival through innovation in a changing market place. Cleantech startups still have much room for improvement to increase their attractiveness to investors. The cleantech industry needs the ability to generate a long-term return; otherwise investors will only look at them as a charitable donation.

 

Klein, of Rachio, remains very optimistic despite the Trump Administration’s plan to eliminate an EPA program that gives Rachio customers a rebate for conserving water. “This is just a new opportunity in disguise. I’m confident in the utility we deliver to customers and our ability to adapt to a changing market. It’s the reason that Rachio has seen the success that has got us here today,” says Klein.

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