For this video podcast, I spoke to John May, Managing Director of Hamilton Clark, about his long experience in project finance in the biofuel and industrial biotech sectors, what investors are looking for in biofuels projects and the upswing of investment in the sector. Following are several excerpts from our discussion, which you can view or download below, or listen to in ITunes, Spotify, Google Podcasts or TuneIn.
“At some point within the last year or two, I think you’ll agree with me, we crossed a line in a good way. And I think that not only traditional financial investors, but also the growth of sustainably motivated funds, Gates has breakthrough ventures and many, many like that are recognizing the absolute primacy of this problem and that we have to get going with investing in decarbonizing the planet. One way to do that, obviously hugely, is everything having to do with fuel.
I think that the thing that that’s done for the finance markets is — this is going to be really silly and obvious — it’s made it a lot easier to raise money. Because when you have Richard Branson or Bill Gates, or when you have Jigar Shah, who is one of the brightest minds in the country now heading the department of energy loan programs office, you know we’re getting really serious because this is a gentleman who understands not only the bio and the low carbon fuel space, but the entire clean energy space and where everything fits.”
“When people ask me, what’s the toughest thing about financing a company’s technology projects, the toughest thing is that these early stage entrepreneurs have to raise early stage equity. That is equity at the parent company that they formed, and usually they have intellectual property, patents and technology. They have to raise some money there, and then they need to move forward and raise additional monies. And the most difficult money to raise is that first round of equity. And the reason it’s so difficult is I think threefold. One, it’s very risky capital for the investor, because you don’t know if somebody has a pilot or demo level, whether it’s ever really going to work.
The second reason that it’s difficult is that there is so much competition among all of these different technologies, even within the industrial biotech space, for the attention of institutional investors globally. There’s cognitive dissonance, meaning there’s all these great ideas moving toward the market, the investors, including strategics’ financials and then these sustainable funds. And the average fund manager is looking at this and saying, “My God.” It’s very difficult for even the most seasoned fund manager, by which I mean an investor who’s got private equity, let’s say from individuals and institutions.
It’s all over the world is the lack of development capital, the lack of a clear approach to accessing and getting investors to put development capital in given how risky it is, right? This is going to be a slightly controversial comment, but the strategic incumbents are not providing enough development equity to enough technologies given the demand for development equity. And that is the biggest hurdle or the biggest boulder in the room in terms of progressing these technologies forward, is the absence of an organized investor market for development equity. We have one for project financing, we have one for traditional corporate equity, but not for early stage equity that’s being used to get to a first commercial scale project, and then beyond there. It’s not like there’s 100 people and I have a list that I can just call them and I know they’re going to just love this. You have to design the investor list and then design your pitch to the investors to get through that cognitive dissonance I mentioned, and then get to a point where somebody’s going to invest with you.”