By Brett Bivens & Lionel Slusny [Loft Finance, 16 June 2012]
Renewable energy sector has always been associated with innovations and the desire for achieving social good. It is also know for providing significant and steady financial returns to its investors.
Now, a new financing technique, Crowdfunding, has emerged. It is believed this technique will bring a breadth of new opportunities, fresh capital and funding to the still growing sector of renewable energy. As a reminder, Crowdfunding is a new financing technique that enables investors to pool investments online in order to finance individual projects. This technique spreads the risk amongst investors and enhances the funding allocation mechanism using the most common sense (the so-called “wisdom of the crowds”).
As consumers look to better monitor and manage their personal energy consumption, some of them are turning into entrepreneurs of local renewable energy projects. These entrepreneurs are often looking for looking for finance and support; so crowdfunding gives them the power to fund the development of solutions that will make eco-responsibility attainable to everyone.
With the success of companies using non-equity based platforms like Kickstarter and Indiegogo, consumers have become familiar and comfortable with investing in projects through crowdfunding. As an example showing the strong interest this business model generate, Solar Mosaic, a new crowdfunding platform for solar energy projects, has raised $ 2.5m in a funding round led by Spring Ventures (with the participation of Serious Change, Jim Sandler, Steve Wolf, Tom Chi, and a group of angels from the “Toniic” investor network).
Consumers have become familiar and comfortable with investing in projects through crowdfunding
In Europe, and despite a longer history with crowdfunding, only a few platforms have been launched with a clear focus on renewable energy projects. In France, Lumo is currently being launched and has received early adoption from the city of La Rochelle in France where it will enter in pilot very soon. It was founded by Alexandre Raguet and Marie Pons. Both having a long lasting career in Finance; which is another sign of the recent entry in this market by a new breed of entrepreneurs who have all the required competences and experience for the delicate task of designing & optimising crowdfunding operations.
Other initiatives exist too: SeedUps is already working to fund renewable energy startups like Pure Marine, a company working to capture ocean wave energy, and Rock Wind LLC which rebuilds and sells used wind turbines. Also, Milk the Sun has launched recently in Germany and offers available surface for solar panel projects, as well as investment requests from project holders.
In the United States, the passing of the JOBSAct has brought the idea of “financial democratization” to the forefront of the discussion as governments and communities across the world look for ways to stimulate economic growth in the wake of the global financial crisis. While crowdfunding has the potential to transform multiple industries, the renewable energy sector stands out as one of the most promising.
There are four primary reasons for the enormous potential of crowdfunding in the small projects, renewable energy sector :
1. Renewable energy projects start up local & social
Small, renewable energy projects are best integrating in real-life ecosystems (neighborhoods, communities, etc.). So, it is often looking for funding from the actual people that are using it. And individual local investors are often willing to accept a lower return if there are extraneous, social benefits to be derived.
Individuals want to be a part of financing solutions to real-life issues
The growth among these platforms proves individuals want to be a part of financing solutions to real-life issues, while making some profits. Across the world, individuals have a direct interest in supporting projects that impact their communities. Creating more energy efficient cities, towns, and neighborhoods lowers the cost of maintaining homes, running businesses and operating transportation systems.
It was also demonstrated that value creation is maximized when energy projects are supported by local investment and resources, a study from Renewable Energies Agency shows.
2. Mainstream VC funding is not so readily available
Many people point to the inflated valuation of some companies as a sign that any company can raise millions of venture dollars with an idea alone. This perception doesn’t align with the facts, however, as VC investments in both Europe and the United States have taken a dip to start 2012. The industry saw both a decline in capital and a decline in deal flow during the 1st quarter of 2012, dropping 18% and 9% respectively. Only the IT sector has actually grown and deals in the renewable energy sector were primarily focused on the later stage companies, which tend to be larger. There still exists macroeconomic weakness that makes it difficult for VC firms to justify putting money into unproven, capital-intensive projects (as many renewable energy initiatives are).
3. Crowdfunding allows for better spreading of risk
Proponents of crowd funding often make the argument that leveraging the power of the crowd allows for the decentralization of risk that has caused so many issues in recent years. Despite continual advancement, renewable energy investments remain very risky due to their capital-intensive nature and high levels of competition. Additionally, their success often hinges on government intervention or support in one way or another. In 2012, the USDA, for example, will be offering $12.5 million and grants and almost $50 million in guaranteed loans as part of its Rural Energy for America Program which aims to help rural areas develop more efficient uses of energy. When one entity, be it the government or a large venture capital firm, decides to fund a renewable energy company, it is taking a large risk. Crowdfunding gives companies a chance to tap a large group of investors who are, by rule, only putting up a small percentage of their net worths.
4. The crowdfunding infrastructure is gaining capacity to help individual investors identify and execute renewable energy investments
By utilizing these platforms, companies are better able to share information, give updates on progress, and communicate with investors than even the biggest of VC firms were able to do just a few short years ago. Global crowdfuding platforms and services companies, such as GrowVC, offer companies the ability set up their own personalized funding models, to blog about progress and offer potential investors with incentives to spur investment.
“Financial democratization” will be brought to reality and Crowdfunding platforms have the potential to change the way companies begin and grow
Crowdfunding platforms are demonstrating proven abilities in funding a wide range of renewable energy projects. In the UK, Forest Fuels Renewable Heat project raise a €350,000 round of funding, with the prospect of continuing on its strong growth trajectory. Smaller project find projects with donation-based companies such as with Indiegogo, who recently helped access:energy, a Kenyan based wind turbine company, close a round of $25,000.
In Europe, there are already numerous platforms with strong track records in place, although not especially focusing on renewable energy. As the existing players in the market continue to grow and evolve, new entrants have a strong model to build from in order to bring the potential for crowdfunding into traditionally underserved markets.
In the U.S., specialized crowdfunding platforms are emerging, as mentioned in the introduction; and the new JOBS Act regulation is paving the ways for much more platforms to be created in the next few years.
As a conclusion, “Financial democratization” will be brought to reality and Crowdfunding platforms have the potential to change the way companies begin and grow. By properly utilizing the current and future crowdfunding infrastructures in the U.S,Europe and emerging economies, small, renewable energy companies will be able to bring products to the market faster and positively impact the lives of the financial backers that made their growth possible.
Article sponsored by Loft Solutions (www.loftfi.com)
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