Clean, renewable energy is the single most needed technology by the millennial generation. Not only is it the key to slowing global warming and climate change, but it also solves a host of other problems, such as respiratory diseases and national security. With air pollution problems in Beijing and ISIS making over $1 million a day selling oil on the black market, the argument could never be stronger that fossil fuels need to be cut out of humanity’s diet. Despite the critical need for it, the clean technology industry has suffered from a crippling lack of investment over the past four years. When it comes to a technology that is so needed and desired by the world, why are venture capitalists (VC) running for the hills?
In solar, we have one word — Solyndra. Having recently uttered it at the Solar Power International conference, I found it’s like saying “bomb” on an airplane. Solyndra received a $500 million grant from the U.S. government, and another $1 billion in private investment, but then went completely bankrupt. These cleantech flops were not limited to solar — companies like Abound Energy, Beacon Power, Fisker, and ECOtality never saw a profitable exit for their investors.
The detailed reasons for these failures and the difficulty in starting an energy company are superfluous, but all amount to one thing; investors gave up before the chicken could hatch. My interpretation of what happened is that the VCs did not stick it out long enough when they were not getting Instagram- or Snapchat-like returns on their cleantech startups. Introducing a new energy technology is a high-capital, long-term investment game. As former Energy Department Under Secretary Steven Koonin points out, it would probably have taken 20-30 years for these companies to fully mature.
While the ramp up time for an energy company is much longer, the market cap — at $2 trillion — is significantly higher than that of companies like Twitter, Instagram, and Snapchat. Also, energy is here to stay — it is something the world will need in 250 years. I find it evident that energy and technology are entirely different beasts, so of course the Silicon Valley VC model did not fit.
The world doesn’t need another Instagram or Snapchat. What it needs is an economy that runs off a sustainable and renewable energy source. This is what our grandkids need, and it is the only way to maintain the forward progress of humanity. The venture capital firms have folded their hands, so what’s next? What can replace their broken model? The answer is equity crowdfunding.
The Jumpstart Our Business, or JOBS, Act of 2011 brought much-needed change to Great Depression-era laws, which restricted the way a company could raise capital. Before the JOBS Act, a company was limited to raising money from accredited investors and up to only 35 non-accredited investors. An accredited investor has a net worth over $1 million, not including his or her home, or a yearly salary over $200K.
Additionally, entrepreneurs were not allowed to solicit or advertise their company for investment. You had to personally know high-wealth individuals (friends and family) if you were trying to start a company. This paradigm created an elitist climate — rich people would invest in their friends’ companies, and their friends would only start companies they knew would be trendy in these elitist circles. Humanitarianly beneficial companies could get cut out of this loop pretty quickly if they did not fit the financial and political priorities of the investment social group.
The JOBS Act laid out two revolutions to this antiquated legislation: Regulation D and Regulation A+. The former allows companies to publicly solicit an unlimited amount of accredited investors. The regulation went into effect in October of 2013, and the investment climate has quickly adapted with sites like Fundable and Seed Invest allowing for hundreds of millions of dollars to be invested through their portals to date.
My company, Rayton Solar, was able to raise our Seed round via a Regulation D offering to accredited investors online. We raised enough to fully prove out our technology, an inexpensive and efficient solar panel, which brought us to the point of near commercialization. We are currently examining the possibility of a Regulation A+ raise that would allow us to raise enough funds to build a 6 MW per year manufacturing plant and fully commercialize the technology.
Regulation A+ is like Regulation D on steroids — up to $50 million can be raised and non-accredited investors can be solicited to buy shares in a company; similar to an IPO but the company remains private. Goldman Sachs estimates this investment potential is over $1 trillion. Now 99 percent of the U.S. population, who don’t qualify as accredited investors, can invest their money in companies they want to see succeed and may hold it for decades. There is no pressure for a company to exit or the need for a trendy but low capital investment. This option fits the bill for cleantech.
The democratization of investment for startup companies will surely be disruptive; not only for founders but the average Joe who now gets to invest early in what could be the next General Electric or Dupont. Once a company has gone through an IPO, then there is not a tremendous return to be made. You don’t see the 10 times or 100 times returns that only early-stage investors in a private company receive.
Before the JOBS Act, early-stage investors could only be individuals who were already wealthy. Now everyone is given the opportunity to take this gamble on the snake eyes bet in the startup casino. This change will lead to the strengthening of the middle class who owns 50 percent of the wealth, with the other 50 percent belonging to the richest 1 percent of the population.
That 1 percent acquired so much wealth by becoming shareholders in companies from an early stage, letting their wealth grow with those companies, then reinvesting in their friends’ and family’s companies; keeping the wealth in that top 1 percent. It is this antiquated regulation from the Securities Act of 1933 that the JOBS Act changes and allows for this elitist cycling of investment to finally be broken.
The democratization of investment, or equity-based crowd funding, will lead to a world full of companies that people need, and to a supportive climate for innovators who want to bring these technologies to the market.
Lead image: Magnifying glass. Credit: Shutterstock.