Raising risk capital for a start-up or early-stage Smart Grid business follows a fairly well-defined process. It requires (1) a business plan that covers the fundamentals of the business opportunity (a suggested format is provided here), and (2) an investor presentation that summarizes the highlights of the business plan (a suggested format is provided below).
Let’s Set Some Expectations.
The business plan document can run anywhere from 30 pages to 100 pages, including an executive summary that can be excerpted as a “teaser” to test interest level within the investor community.
The investor presentation should be tailored to support a one-hour presentation and discussion meeting with potential investors. The CEO of the business leads the presentation, usually supported by the CTO/founder, and sometimes the CFO, or equivalent.
A successful capital-raising process normally takes 90 – 180 days. Do not assume that you can accelerate this time-frame! If the investor is knowledgeable about the Smart Grid and/or has a track record of investing in Smart Grid opportunities, the process duration will be at the lower end of the range since the required due diligence can be completed more quickly.
The capital-raising effort could involve as many as many as 40 investor presentations to secure an initial institutional investment commitment, depending on the nature of the investor, or investment syndicate managed by a lead investor.
Angel-type investment commitments also follow a defined process. Assuming an initial level of interest, this process can be shorter.
A strategic or corporate investment process usually takes at least 180 days to consummate, regardless of the investor’s knowledge of the Smart Grid.
Investor Commitment Process
There are five steps in the process:
- Developing a commitment from an interested investor for a preliminary evaluation of the “deal”, based on an investor presentation meeting
- Negotiating a Letter of Intent (LOI) from the investor which usually provides a time-limited exclusivity to the investor to conduct some due diligence
- Execution of a term sheet drafted by the investor and negotiated by both parties
- Conduct of detailed due diligence by the investor or an investor group assembled by the lead investor
- Execution of a definitive agreement to invest (termed the “closing”).
Investor Presentation Format
The purpose of the investor presentation is literally to get a commitment for a follow-up meeting, by creating enough investor interest to commit some time to evaluating the deal.
One hour will be allotted to the meeting. The presentation itself should take no more than 30 minutes (seriously, 10 slides only!), leaving 30 minutes for discussion. Typically, the presentation will be constantly interrupted by investor questions and comments. The company should leave behind a hard copy of the slides, as well as a more extensive presentation that the investors might review and/or distribute to colleagues after the meeting. Follow-ups to un-answered questions should be sent by the company to the investors within 24 hours.
The content of the investor presentation might include the following topics (each situation will have some unique emphases):
- Business, and size of raise, previous financings
- Team w/track record; organization
- Market size growth
- Secret sauce
- Traction, if any, customers
- Use of proceeds
A more detailed template is forthcoming in SGiX’s members section.
Funding Sources for Smart Grid Businesses
The following is a list of funding sources and some unique aspects of each:
- Particularly viable for a business that can follow “lean start-up” principles
- Software-/Internet-based lean start-up businesses can be started for as little as $25,000 (plus a lot of “sweat equity”), given the proliferation of open source codes and applications
- The business owner maintains full control
- Eventually, this approach will require outside growth capital, assuming that the business owner has limited means
- An often-used source of “friendly” capital
- The business owner maintains a high level of control
- Can lead to contention when family members disagree, which in turn can make it more difficult to raise outside funding later
- Angel Funding
- Angel funds are “bands” of high net worth individuals, usually with a previous track record of successful business operations
- The business owner maintains a high level of control
- Limited amount of funding available
- Will not provide follow-up rounds of funding
- Venture Capital (VC)
- Experienced, active investors with the ability to help with business strategy
- Tough valuation hurdles, and potential ultimate loss of control by owner
- Ability to continue to fund the company through multiple investment rounds and potentially create a very successful liquidity exit
- Under the right circumstances, a “finder” can be useful in setting up an initial VC investor meeting
- Venture debt
- Usually a last-resort financing for an early stage company
- Onerous investment terms
- Business performance set-backs can trigger loss of control to the debt providers
- Large institutional
- Major funds with a primary focus in public equity markets, but with a small percentage of their funds reserved for private equity in areas of special interest
- Difficult to get an audience; usually requires the assistance a banker with strong relationships across numerous institutional investors interested in the Smart Grid, and a credible senior-level research activity in the Smart Grid sector
- Little due diligence conducted, because they rely on the banker’s evaluation
- Very fast decision-making in terms of an investment commitment, e.g., a commitment may be provided immediately after the initial 1-hour meeting, or within up to a week of it
- Some companies have corporate venture investment programs, which are focused on investing in synergistic businesses
- Companies without a formal corporate venture program may be interested in investing in companies that have complementary activities or technologies
- The investment commitment process is usually multi-layered within the investing corporation, and takes at least 180 days, sometimes even a year, to consummate.
- The valuation offered to the business owner is usually more favorable (i.e., the price paid for equity is higher) than that offered by “pure” financial investors because the investing corporation sees the overall value as a combination of financial and strategic value; because of this, strategic investors are usually invited to participate in later financing rounds if the initial rounds involve “pure” financial investors
- Can ultimately lead to an “exit” for the business though a corporate acquisition
- One concern with strategic investors is the possibility that their corporate objectives and the company's business objectives can diverge over time, especially if the strategic investor is a large, influential corporation
- R&D grants
- Smart Grid R&D grants are available from a variety of sources, mostly public or not-for-profit
- The grants are attractive because they are non-dilutive
- Examples of sources of funding include EPRI, DOE, PUCs, and other Federal, state, and local agencies
- The commitment process is usually lengthy and competitive (includes a Request for Proposals)
- Some of the grants require matching funding from the business
- It’s a resource-intensive process dependent on developing and sustaining strong relationships with the funding agencies; it is difficult for small companies with limited resources to compete with large corporations in this area
- Small companies with unique technology often ally with larger corporations to increase their chances of success in securing a grant
Investors with Smart Grid Domain Expertise
The most valuable type of investor for the business owner is one with a proven track record in Smart Grid investing. There are only a few funds that focus solely on energy technology investing. Some more recently-established funds have a CleanTech focus, a good portion of which will involve Smart Grid-related investments.
The advantages of an investment from a domain expert fund are many:
- Less need to “educate” the investors about the business opportunity
- Faster due diligence process
- “Free” consulting from the investment team uncovering insights that might have been overlooked by the business’ management team
- Faster, earlier, “yes/no” expression of interest
- Valuable de-briefing opportunity
- Ability to provide valuable counsel as a Board member, including making useful introductions across the industry
- Ability to recruit sector-knowledgeable co-investors
The Smart Grid sector has not been helped by the difficulties that have befallen investment funds without much domain expertise that jumped into the “Green Energy” and/or “CleanTech” sectors over the past 5 – 7 years.
Today, domain expertise is even more important for distinguishing between investments in Smart Grid 1.0 (mostly infrastructure) versus Smart Grid 2.0 (mostly value-added applications) and setting realistic ROI expectations for both.
SGiX provides a registry and commentary on investment funds with various levels of Smart Grid domain expertise in its members section.
Customized Business Case Services
Dr. Geraghty also provides customized consulting services off-line related to the development and analysis of SG-related business cases – see here.