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Turning Green Into Green-Pennsylvania Avenue Is The New Wall Street For Cleantech.

As a result of the collapse of the financial markets in 2008 and the Obama Administration's aggressive initiatives, cleantech - comprised of alternative energy, pollution/recycling, power supply and conservation companies - is now the largest category for U.S. venture investment. And the U.S. government is emerging as a new lead investor for cleantech companies; for the low-carbon economy, Pennsylvania Avenue is the new Wall Street.

U.S. investment in cleantech businesses in Q3 2009 increased almost 50 percent from the prior quarter, to $965 million. Sixty-one percent of investment money was directed to enterprises shipping products, which illustrates growing investor confidence in commercialized technologies. Energy and electricity generation enterprises received $316 million, solar technology $309 million, and alternative fuels $71 million.

Clean growth

            Under the American Recovery and Reinvestment Act (ARRA), billions in government funding are available. The largest IPO (A123 Systems), venture round (Tesla Motors) and private equity transaction (Solyndra) during Q3 2009 all involved companies receiving government funding. Notably, government-backed ventures received one-third of all capital gained in the third quarter.

Almost $150 billion in grant and loan guarantees is available for cleantech entrepreneurs-maximizing these government funding opportunities is critical, but entrepreneurs unfamiliar in the ways of Washington must exercise caution-identifying the sources of debt and non-dilutive equity financing from the government, and understanding the consequences of accepting government funds, presents unique and complex considerations.               

ARRA funding is provided through tax credits, grants, loans and loan guarantees. Most ARRA grant recipients are selected by the Department of Energy, which allocates funds for a variety of programs, including $2.5 billion for applied research and development projects; $4.5 billion for energy grid modernization projects, energy storage, transmission and distribution systems; and $9.5 billion for "green building" and energy efficiency programs. 

ARRA's tax credits apply to R&D-stage products that are not yet commercially proven. For example, ARRA provides a 30 percent tax credit for "advanced energy" projects, including solar devices, fuel cells and wind turbines. It also provides $6 billion in loan guarantees for renewable energy projects, including biomass, hydroelectric and hydrokinetic generation.

Adventure capital

            Government investment differs from private venture investment. First, the government does not make traditional equity investments. It provides funding through grants, loans and loan guarantees. Therefore, traditional equity investors will maintain greater control from a stock ownership perspective. When equity investment is contingent upon government funding, cleantech enterprises must consider the effect on business valuation, particularly when negotiating term sheets with private investors.

Second, cleantech businesses must satisfy exacting government contract regulations. Government funds have strings attached; recipients must use specific internal accounting controls to track how funds are used.

Finally, enterprises accepting government funds must safeguard their technology. The government can retain "march-in rights" or "purpose rights licenses" in any intellectual property developed under a federally funded agreement. Compliance with federal regulatory requirements to ensure IP ownership is critical, and cleantech enterprises must properly designate any pre-existing IP to ensure that IP rights are not lost, especially those developed at private expense. It is also critical to know how government funding affects one's ability to commercialize technology.

It is clear that the Obama Administration is committed to mainstreaming clean technologies in the U.S. In the process of fostering energy security through a low-carbon economy, the government's ARRA initiative is channeling billions of dollars through federal programs intended to catalyze the cleantech industry in 2010 and beyond.                              

Entrepreneurs take note.

Lee Saber founded and is currently chair of the new Technology and Entrepreneurial Services Group at the Salt Lake law firm of Van Cott, Bagley, Cornwall & McCarthy, P.C.  He has more than a decade of experience in assisting entrepreneurs, start-ups and public companies in technology, venture capital and commercial transactions, as well as government investigations.

Published in the January 2010 issue of Utah CEO