CleanTech Investment Soars in Service- and Data-Driven Business Models

Peter Adriaens and Antti Tahvanainen

Since CleanTech was coined in 2003, entrepreneurs and investors have searched for business models that can drive growth and adoption, while delivering attractive returns.  Over the years, defining CleanTech became increasingly difficult, as its tentacles reached far beyond energy into manufacturing, travel and lodging, and transportation.  In 2015, the message from Chrysalix’ Wal van Lierop was clear: “CleanTech has become fully embedded in all sectors of the economy”. 

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“What was once a niche investment domain has gone mainstream”, according to Peter Adriaens, Professor of Entrepreneurship at the Ross School of Business (University of Michigan), and Antti Tahvanainen, Chief Research Scientist at the Research Institute of the Finnish Economy (ETLA) in Helsinki, Finland.

CleanTech Started with Infrastructure Innovation

If we look at the trajectory of CleanTech innovations, they were initially squarely focused on the energy space.  From solar, wind, and biofuels infrastructure, to green chemistries, energy efficiency and electric vehicle technologies, the first five years of investments and entrepreneurial startups saw its share of successes and spectacular failures.  Indeed, CleanTech investors such as Vinod Khosla lamented: “Conservative industries such as energy utilities and manufacturing are slow adopters of new technologies”.  Markets required the design of policy frameworks and subsidies to drive scale.  Market-push, instead of market-pull innovations, created barriers for adoption.

This experience – on hindsight - was no different from that of investments in telecommunications and biotechnology in the 1990s.  “It took a decade to figure out profitable business models”, according to Adriaens.

 

Peter Adriaens from University of Michigan and Antti Tahvanainen from Research Institute of the Finnish Economy (ETLA).

The Emergence of Services Built on CleanTech Infrastructure

In 2012, Sheeraz Haji from the CleanTech Group, an investor network, posited: “The era of service business models that can leverage infrastructure investments has arrived”.   Much like Facebook is a high value advertisement service built on the Internet infrastructure, energy startups devised power-purchase agreements (PPA), ESCO models, and service license businesses to scale the value of their technologies.  The impact on business development and investments resulted in an expansion of types of companies that fit under the CleanTech umbrella: software, data analytics, system automation, water, sustainability, and ‘anything-efficiency’.

As innovation guru Peter Drucker had shown a decade ago based on historical observations across many industries:  process innovations (market pull) resulting in material, energy, and resource cost savings are much more common than technology-push innovations. 

The Cloud Transforms CleanTech

Process innovations have resulted in an explosion of growth in clean technology deployment and efficiency-enhancing solutions.  ‘Smart anything’ has become the theme of CleanTech going mainstream.  Consider smart grid, smart mobility, smart buildings, smart design, and smart water.  A middle layer—an intelligent layer—of sensors, data, software, analytics, and financing instruments emerged to enable communication not only across technologies but “across conventional industry boundaries as well,” adds Tahvanainen. “Software is eating the world”, says Marc Andreessen, famed investor at Andreesen-Horowitz.  This new middle layer has become a massive investment opportunity, as the physical layer of CleanTech became connected with the cloud. “CleanTech is now part of the Internet of Things (IoT)”, according to Timo Seppälä, a domain expert at ETLA and Aalto University.

Adriaens further argues, “Along with the cloud came data-driven business models, and companies that disrupt legacy industries, such as AirBnb, Uber, Nest, GeoStellar, and TaKaDu”.

Investing in New ‘Green’ Industries

In the beginning, CleanTech development and deployment was largely the investment domain of risk capital, including venture capital and private equity.  On the other side of the spectrum, more patient debt financing was tied into revenue-generating assets, such as wind and solar farms, deployed with support from policy incentives. 

However, as CleanTech went mainstream, business models shifted to service and data, broader industry sectors became involved, and a rapid acceleration of financial innovation occurred.  “From solar asset-backed securities and yieldcos, to green bonds and green derivatives, the CleanTech market became attractive to investors across all financial asset classes”, says Adriaens.  This includes long-term investors such as pension funds, wealth management offices, and insurance companies.

The engagement of mainstream investors in the green economy opened the door to financial innovations to drive economic development at market returns.

Financial Innovation in the Green Investment Space

The University of Michigan-ETLA team, in cooperation with economic developers, pension funds and wealth management investors, is working on the design of a new investment fund instrument (multi-asset renewal funds™, MARF) to leverage capital commitments of both large institutional investors and economic developers.   The aim is to fuel the renewal of legacy industries and the growth of emerging industrial ecosystems. By pooling different financial asset classes – such as risk debt, growth equity and corporate bonds – in thematic industry ecosystem-specific portfolios, this instrument will address the distinct financial needs of start-ups, SMEs and enterprises alike. 

“The model that underpins this innovation is based on the analysis of data on the evolution of value chain structures in thematic emerging industries to reveal the growth sectors of tomorrow”, explains Tahvanainen.  These structures are comprised of companies that combine legacy industries and the intelligent middle layer of tech and communications firms.  By integrating small and medium enterprises (SMEs), corporates, and targeted bond instruments, new funds can be designed that allow pension funds to scale investment in riskier asset classes while mantaining proper diversification. “At the same time, these investments will have a direct impact on the real economy, unlike conventional investment fund concepts designed around public equities and derivatives,” says Tahvanainen. This is why economic developers will have an incentive to promote the instrument and provide guarantees to de-risk the riskiest asset classes in MARFs.

After more than two years, Tahvanainen and Adriaens reflect on their progress: “The Finnish MARF Model efficiently and rationally identifies companies and projects driven by real economy data, and allocates them across the appropriate assets.  We’re finalizing fund designs for smart grid, smart mobility, and green chemistry ecosystems.”

Peter Adriaens, Professor of Entrepreneurship at the Ross School of Business (University of Michigan), and Antti Tahvanainen, Chief Research Scientist at the Research Institute of the Finnish Economy (ETLA) in Helsinki, Finland teach at Aalto EE's Cleantech Executive program in Shanghai.

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