The winds are turning favorable for renewable energy companies to seek financing from the public markets and although going public isn’t for everyone, it’s hard to ignore the capital that is becoming available.
For whatever reason — anticipated turnaround in the economy, loads of cash sitting on the sidelines, endowment funds looking to make up for the losses of 2008 and even the potential for higher energy prices — money is starting to pour into the market in general, and renewable energy companies in particular. It’s not a windfall of money yet, but recent financings have piqued interest in alternatives.
In September, A123 Systems Inc., a Watertown, Mass. manufacturer of electric car batteries that is not profitable, filed papers to raise $175 million in an initial public offering. The shares were bid heavily the first day of trading and the company ended up with $380 million as shares went for $13.50 the first day and then nearly doubled in price the next day.
It was the biggest IPO in the clean-tech industry since 2006 and has the whole industry excited over who will be next to take public investor cash. While there are some people who see this industry as a fad or bubble like technology and telecom, A123’s IPO lends credibility to the argument that renewable energy technology is viable and there are many people willing to put money into the sector.
The Decision To Go Public
Ideally you’d like to tap the public markets with solid multi-million dollar revenues, great technology, big back orders and a terrific, experienced management team but unfortunately, that’s not always the case for companies going public, especially in stronger markets.
A123 Systems had recently lost the battery contract for the Chevy Volt hybrid, although it does have agreements in place to supply batteries for use in other major automobile makers’ vehicles. The success of its recent offering can be partially attributed to two factors, 1) projected future demand related to electric vehicles, and 2) the recent awarding of significant government incentives.
If your company has great technology, you can’t stick your head in the sand regarding financing. One of the drivers right now is there just aren’t a lot of options. Venture capital funding is at a 15-year low. Angel or other early stage financing doesn’t provide much money. Private equity is yet to be seen in this market, except for more-established companies and component suppliers and a bank is not going to finance many of these companies. Most green companies don’t fit the bank model. There’s little to no revenue stream and if there are hard assets, they’re just too early stage and too risky for banks.
We may reach a point where traditional bank financing is a viable alternative. The Department of Energy’s loan guarantee program is active. Most government funding sources will require some level of matching investments, which may lead to another incentive to look to the public markets.
In looking at the traditional life cycle of a venture-capital-backed company, there have been two traditional exit plans for venture capitalists, a public offering or a merger or acquisition of the company. Despite the fact that the M&A option is worse on the economy, due to lost jobs and other factors, and the fact that greater value is generally obtained through a public offering, over the past ten years, the trend for venture-backed exit plans has overwhelmingly gone towards mergers and acquisition.
According to the National Venture Capital Association, the top three barriers to companies going public are:
• Compliance requirements (Sarbanes-Oxley, audit, governance)
• Increased volatility in public markets
• M&A as a better alternative (faster and more liquid)
How much of these factors are merely a paradigm versus reality is the source of another debate, but these factors should be considered in determining the direction of your company.
I’m not going to tell you that going public is the way to go or that the recent activity in the public markets is a sign that the markets are recovered. It is an option based on a conversation with the board and your investment bankers. There are high costs associated with public companies and while and IPO shouldn’t be your last option, in a lot of cases, it is the best and potentially only option.
Greg Pfahl, CPA, is a senior audit manager in the Denver office of Hein & Associates LLP, a full-service public accounting and advisory firm with additional offices in Houston, Dallas and Southern California. He also serves as a local leader for the renewable energy practice area. Pfahl can be reached at [email protected] or 303.298.9600.