New financial product aims to solve ‘valley of death’ for promising energy technologies

From Eurekalert

Public Release: 28-Sep-2017

Case Western Reserve University

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IMAGE: This is Anurag Gupta. view more
Credit: CWRU

With a grant from the U.S. Department of Energy (DOE), researchers at Case Western Reserve University will develop a new financial product to attract a broader pool of long-term private investors to new technologies offered by energy startup companies.

The goal is to help bridge the so-called “valley of death”–the gap between a startup’s initial seed investment and later rounds of financing when the new company has already scaled up and is profitable. That gap can leave a promising startup struggling with cash-flow, as additional private investment can be difficult to secure until a new technology advances from an idea to proven success.

“There is an immense challenge in the new energy sector, with venture capitalists drifting away from clean technology investments in recent years, making it tougher for startups in this sector to prove their viability,” said Anurag Gupta, the H. Clark Ford Professor of Banking and Finance at the Weatherhead School of Management and principal investigator on the grant.

Joonki Noh, an assistant professor of banking and finance at the Weatherhead School, will serve as co-investigator.

A new financial product, tailored for a specific risk-return appetite

With the two-year, $600,000 DOE grant, the two researchers will design the new financial product with unique risk reduction strategies to pool investments from large capital providers–pension funds, insurance companies, and foundations, for instance; these investors currently shy away from this sector due to lack of suitable investment products tailored to their risk-return-payout preferences.

“We hope this facilitates billions of dollars to flow to new energy projects at the critical scale-up stage,” said Gupta. “This could help address a global problem by advancing efforts to finance sustainable energy.”

Most of these new technologies targeted for private investment aim to generate renewable energy and lower emissions of carbon and other gases that contribute to climate change, as well as reduce levels of particulate matters emitted from burning fossil fuels associated with a host of health issues–while at a lower unit cost.

“The participation of large capital providers like pension funds is critical to generating sufficient capital to finance widespread scale-up of these new technologies,” said Gupta, “since the traditional venture capital model has proved to be unsuitable for this sector.”

Commercializing a new energy technology often requires investing tens of millions of dollars–a significant risk to venture capitalists intrigued by an idea, but wary of its uncertain market performance. Energy investments also often takes much longer than the seven- to ten-year “exit” timeline that venture capitalists are known to prefer.

Grouping together steady and significant sources of long-term funds can allow for the investment in multiple energy projects at once, spreading out the inherent risk that can scare away support for individual companies.

“Right now, there is not much incentive for venture capitalists to experiment with investments in energy companies that may take 10 to 20 years to turn a profit, if ever,” said Gupta. “We are outside the venture capital world, which allows us to try out innovative new ideas.”

At the end of the two-year project, the goal is to obtain actual investments using the financing mechanism developed in this study to fund new technologies in energy.

“This is about as real as research can get,” Gupta said.

The project is one of 11 supported by $7.8 million in new DOE grants; Gupta will lead the only team from a university awarded one of the grants; the rest are investor and industry groups.

“What we’re trying to create could potentially be replicated in other sectors–such as biotech and pharmaceuticals–that share high investment risks and long periods of gestation before potential payoff,” said Gupta.

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107 thoughts on “New financial product aims to solve ‘valley of death’ for promising energy technologies

  1. Major FAIL by Trump administration (via their D.O.E.), here.

    Such companies should just have to go about marketing their product the same way everyone else has to: FINANCE IT THEMSELVES ……

    and build a product

    that people will buy

    WITHOUT

    public assistance.

    ***************************************
    If “renewables” need public assistance, they are not ready to be funded — by anyone. It is that simple.

    • Well at least the effectiveness of any current solution.

      We can see from the experience of Germany, that an extensive roll out of wind and solar does not reduce CO2 in the electricity generation market. Germany came up against the buffer in 2008/9, and has been unable to reduce CO2 emissions, in that sector, since then. In fact, the last 2 or 3 years have seen an increase in the amount of CO2 emissions from this sector.

      It would therefore appear that whatever view one takes on the desirability of reducing CO2, and/or on Climate sensitivity to CO2, new technologies (and wind is not really new) are not in practice delivering on their prime objective, namely the reduction of CO2.

      The raison d’etre for these new technologies is the reduction in CO2 emissions, not that they are more reliable or cheaper than fossil fuels, so if these new technologies do not effectively reduce CO2 emissions (and they do not) they ought to be binned.

  2. “This is about as real pointless except as a cover for fr@ud on the public purse as research can get,”

  3. I would note that “promising” better not include solar and wind. Other types I am in favor of supporting throughout the “risk reduction” aspect (which means government-backing or guarantees of course) because we just need another energy technology to get out of the renewable mess that seems to have no end in sight without other options.

  4. so they are giving these guys $1/2 million to figure out a way to make it look like less risk…so they can get pension investments money

    Didn’t Enron do that already?

    • Not just pensions, I’d recommend going after the bond holdings and CDs of elderly couples. I’m certain there’s a lot of pockets for the picking there too.

      • You are correct Sheri, and your response proves that MarkW is wrong when he says: “an economically viable idea will find investors”……Madoff proves investors are stupid.

      • +100 Sheri. MS Johnson is going to find the water too deep here,but he’ll take the usual amount of time to figure that out.

      • Those were not investors, those were victims. Those and others like them do not remain investors, because all their money has been stolen. I was tempted to use the word suckers, but that would be unkind.

      • As always, the left wing troll demonstrates that he has no idea how anything works.
        Lets see, according to our Mensa candidate here, the fact that people can get fooled by fraudsters proves that everything connected with renewable energy is economically viable.

      • Some investors got fooled by Madoff, therefore all investors are stupid.
        As always, the elitism of the left rears it’s ugly head.
        Not to mention stupidity.

      • MarkW says: “Some investors got fooled by Madoff, therefore all investors are stupid.”

        That is not what I said. I said investors are easy to find…..which is why Madoff found the stupid ones. I suggest you try improving your reading comprehension, and stop projecting your bias into other peoples comments.

    • Nope. The problem they raise is a valid one. There are projects/ideas that are economically viable, but
      They fall in a zone that it is hard to find investment for.

      Take a VC. A VC is going to do fund raising to collect money for high risk , short term, big payoff investments. Say a 3-5 year window and more than 5X return. they will also have certain funding targets.
      They actively seek this profile out and dont put money in unless you fit their profile.

      If your project takes longer, say 5-10 years, and has a lower return, say 2-3X, its STILL viable, but just
      not within the parameters that speculative investors play in.

      A company might consider such an investment, especially if it was core to their business. Pharma is an example.

      The Government, in Funding defense R&D, has much longer time windows say 10-20 years. They invest in projects that can take decades to complete.

      This is nothing new. If you ever spent any time raising money or investing you would know.

      here, educate urself

      https://thebreakthrough.org/blog/Valleys_of_Death.pdf

      every conservative should be familiar with Breakthough.. Roger Pielke was there

      • Snake oil sales; a classic Enron story.

        From Mosher’s bafflegab explanatory link:

        “The cost of conventional fossil fuels has been driven downwards through more than a century of competition, while persistent subsidies and favorable tax rules continue to skew markets towards entrenched incumbents.”

        As with all supply demand commodities, the price of fossil fuels are direct results from cost of supply and willingness of customers to pay.
        Competition in this market keeps the price low as any move to raise prices just opens the door for another vendor to step in and supply product.

        This statement attempts to vilify fossil fuels and capitalism’s supply demand pricing without facts or truth.
        • Subsidies in conventional “fossil fuels” are a bald lie.
        • “favorable tax rules” is another bald lie.

        What they are really stating is that even with massive subsidies and direct favorable tax rules, renewables are still bad investments.

        Furthermore, like steel or copper, energy is a commodity, valued not for its own qualities, but for the services and products derived from it. As a result, while new software, electronics, or pharmaceutical products often compete on new features and value-added, new energy technologies must routinely compete on cost alone. This is a difficult feat for any nascent technology entering a commodity market but is particularly acute for innovative energy technologies that have to compete against mature (and still-subsidized) fossil energy technologies.”

        Another snake oil series of lines:
        Energy is not steel or copper. There is very little, if any, secondary value for energy’s qualities.

        new energy technologies must routinely compete on cost alone.“; a perfect example of sophistry.
        All technologies compete on cost, reliability, product and product quality.
        i.e. “new energy technology cost” must demonstrate commensurate value for cost.

        “As a result, venture capitalists, already reluctant to invest in such early-stage research, are strongly deterred from investment in a market where barriers to market entry are particularly high, making expected risk-adjusted returns on investment too speculative to invest in.”

        “Commercialization” means developing product that delivers value for the costs causing demand for that product.

        Venture capitalists are reluctant to invest in any “early stage research”. That is a direct result caused by so much research into dead end products that fail to deliver sufficient value.

        These “valley of death” discussions are smoke screens trying to:
        A) cause commercialization of products that do not demonstrate sufficient value
        B) cause governments to fund “early stage research” via populace taxation. Via a forced pretense that a product is more mature and viable than is actually the case.
        C) Keep renewables well funded via subsidies, tax benefits, and government forced purchases.

        AKA A very Socialist process for selecting immature technologies then forcing the populace to use unreliable product.

        “New research” developers have always battled with this concept. Ideas and technologies that are not sufficiently viable will always fail to produce profits.

        “New research” developers, venture investors, governments and activists certainly do not need artificial investment structures to package unsalable technology or impractical product.

        Those “artificial investment structures” only serve to significantly deepen long term debt burdens upon citizenry who ultimately bear the true financial burdens dumped upon citizens by greedy developers, VC, government and activists.

        In a genuine business capitalist process, renewables must prove themselves sufficiently viable to be sold directly without subsidies, reversed taxation products, government grants or forced civilian purchases.

        Renewable energy generation systems must also proves themselves safe to all people, wildlife and land.

        As with all energy producing systems today, renewable industry must reclaim all land, returning it back to natural status when that land is removed from production. Even if a company declares bankruptcy.

        Investors, VC and others seeking quick return for long term investments can keep buying government or municipal bonds.

      • The problem remaining is that nobody can appreciate if a project will or not be successful, whatever the economic sector to which it pertains.

        But if these guys find the holy grail of venture and mezzanine financing, than we’ll have look.
        However the most probable outcome will be quite quiet; and will surely have cost a lot of tax payer’s money for the benefit of few subsidy-suckers.

      • Steve

        If you and all the other recognize the “problem” why don’t all of you get together and invest your money. That of course will never happen even with advocates that are billionaires, because they know the only way to make money on these projects is to take money from the government. In fact the only reason they are advocates is to generate a problem that requires government investment so they can make their billions with out risk. You proclaim yourself a libertarian but you have no clue what that is.

      • Graemethecat.

        I am never closed minded about different ideas.
        So I would wait and see what they come up.
        Life savings?
        I have no money.

      • Steve: The Breakthrough Institute postulates – doesn’t demonstrate – the existence of a Technological Valley of Death (demonstrating feasibility) and a Commercialization Valley of Death (converting a new product into a successful business).

        Judging what ideas and people are capable of crossing the Technological Valley of Death is what venture capital is all about. It is the reason for their existence. There are dozens of VC organizations with no shortage of capital for entrepreneurs to approach. Entrepreneurs present their projects to several dozen VC firms. The Breakthrough Institute is claiming that this highly competitive marketplace isn’t funding the right projects, but how do we know if the BI has any expertise in this area. You say:

        “If your project takes longer, say 5-10 years, and has a lower return, say 2-3X, its STILL viable, but just not within the parameters that speculative investors play in.”

        If 3 out of 4 investments fail to earn any return, a 2-3X return doesn’t make economic sense, but a 5X return or greater does. If a project takes 5-10 years to reach the market rather than 3-5 years, the risk of failure (due to technological or market change) is much higher. Given a longer period, 7 out of 8 might fail. I’ll agree that venture capitalists generally projects that fit the parameters you suggest, but those parameters are the result of hard won experience working in a field ordinary finance wouldn’t touch with a 10-foot pole. If there really were a lot of money to be made in long-term projects, many will take a chance, but not for a 2-3X return.

        The existence of a Commercialization Valley of Death makes even less sense. Why would VC abandon an investment in a company with a good chance winning in the marketplace? The owners of Solyndra knew the marketplace and the business better than the DOE that made a loan to them and they had far more to gain interest on a loan. Their failure to invest more made this a horrible loan. This article suggests that large capital investors should be entering businesses that VC is abandoning before IPO. Good luck.

        “With the two-year, $600,000 DOE grant, the two researchers will design the new financial product with unique risk reduction strategies to pool investments from large capital providers–pension funds, insurance companies, and foundations, for instance; these investors currently shy away from this sector due to lack of suitable investment products tailored to their risk-return-payout preferences.”

        The government can do some things to help, but it shouldn’t be done in the form of loans or capital. The contests that were sponsored demonstrate self-driving vehicles more than a decade ago are beginning to put products on our roads. (Self-driving vehicles funded because they might have been important to the military.) The internet is another example. Not all projects can move from research grant-funded academic projects or company-sponsored research projects to commercialization. For example, the inability to cheaply store energy is a major barrier to renewable source. The government can offer above market price contracts to purchase stored energy to promote expansion of new technologies and then re-sell that electricity to the grid. Done judiciously on a modest scale, this could move projects out of the lab that wouldn’t normally be funded by VC

    • I thought Trump was going to STOP this type of thing? Hard to root out them climate swamp creatures like Gupta.

      • John – Absolutely. This kind of nonsense can’t be whipped up in a few months, so it’s likely an artifact of the previous administration.
        By providing the illusion of “unique risk reduction strategies”, they hope to force pension funds, insurance companies, and foundations to pump money into a risky green slush fund that would not otherwise meet their fiduciary requirements. It’s a scam.

    • Indeed. And the “valley of death” label is just an inverse of what it was called in the ’80s and ’90s: “crossing the chasm.” The key difference in the ’80s and ’90s vs. the article is that the focus was on the crossing, not on the dangers of the chasm, since there were strategies that worked then for being successful – strategies that did not rely on government funding. I’ll also note that rehashes like that in the article that are presented as brainstorms, all of which rely on government financial support, seem to come primarily from grad students and PhDs who come from 3rd-world countries, countries that are notorious for economies that rely heavily on central management of their economies and heavy subsidies.

      When the people awarding the grants are not risking their own money (i.e., government employees), it’s relatively easy to get the money for even the lamest proposals, especially those that have political value. So, there is little wonder that the failure rate is high.

      • “Steven Mosher September 29, 2017 at 9:51 pm
        Its more than Crossing the chasm, though related.”

        As stated, an utterly useless comment providing zero information. A typical distraction comment pretending value without supplying requisite detail.

        Wordplay does not change intent or the sleight of hand involved to provide:

        “We hope this facilitates billions of dollars to flow to new energy projects at the critical scale-up stage,” said Gupta. “This could help address a global problem by advancing efforts to finance sustainable energy.”

        “Grouping together steady and significant sources of long-term funds can allow for the investment in multiple energy projects at once, spreading out the inherent risk that can scare away support for individual companies.”

        “With the two-year, $600,000 DOE grant, the two researchers will design the new financial product with unique risk reduction strategies to pool investments from large capital providers–pension funds, insurance companies, and foundations, for instance; these investors currently shy away from this sector due to lack of suitable investment products tailored to their risk-return-payout preferences.”

        A) Provide quick returns to large investors.
        B) Provide long term returns to large investors.

        Any scheme that robs Peter to pay Paul simply increases the overall long term debt burden or uses government force to drain civilian purses to support early returns.

        Inherent in this effort is government preselecting technology for this investment. Long before viability, capability, reliability and cost effectiveness are proven.
        Known in industry as “throw money at the problem”, without solution or resolution.

      • Unless they have some “unique” ideas for financing, there is nothing new here. Surely the industry giants are working on innovations in energy. All they are doing is establishing a mechanism for the next round of crony capitalism for members of government. The premise of using monies from pension funds is both dangerous and unethical. If risk is high losses would be decimating to those whose pensions are involved. It is great, however, politically, as all those whose pensions are at risk will have to be “supportive” of “sustainable” energy (whatever that is). Basically a waste of tax dollars.

      • Atheok.
        I doubt you have been through chasm training
        And doubt if you’ve ever taken a product through the chas m or the tornado.
        The valley of death is different. See the breakthrough paper.

        We all try to cross the chasm. It looks doable.
        The valley of death is impossible on its face.

  5. Companies seem to have astonishingly little difficulty extracting money from gullible investors, and multi-million dollar grants from the DOE.
    I remember how my jaw dropped when I discovered how much money flo-design had received to develop it’s tediously stupid ducted-fan wind turbine concept. It was not even an original idea.
    They eventually ploughed their way through about $100 million, and took the whole lot down the toilet.
    A New Zealand pension fund took the biggest hit and wrote down it’s $55 million investment to zero, just this last year. Utterly predictable. Who is to answer for the waste and the squandering of US tax payer bucks:
    “FloDesign has raised $40 million of venture capital financing in two rounds after winning the MIT Clean Energy Entrepreneurship Prize as well as the Ignite Clean Energy Competition in 2008. The company was awarded an $8.3 million grant in 2009 also, as part of the U.S. Department of Energy’s highly competitive Advanced Research Projects Agency”
    http://www.alternative-energy-news.info/flodesign-wind-turbine-business/

  6. Quote: … unique risk reduction strategies …

    Reduction just isn’t the right word here. Spreading might be what they are trying to so.

    But seriously? A $600k grant? Here in Australia banks like Macquarie produce financial products all the time. That way they make sure that there is just no way they can lose before putting significant amounts of their own money at risk. They are not known as the millionaire factory for nothing.

    But well done that man for extracting $600k from somebody else’s pocket. It really does take special skill to get money for nothing.

    • Or “Death Cab for Cutie”?
      Either way, we can be sure that it’s caused by global warming so there should be a grant to be had out of it.

  7. Energy capital is a strategic issue when it typically takes 40 years for a new energy technology to penetrate the market while patents only protect for 20 years. Bill Gates et al. are developing a billion dollar Breakthrough Energy. http://www.b-t.energy/

    ARPA-E is working on: Enhancing Capital Flow into Early Stage Energy Technologies
    January 31 – February 1, 2017 Denver, CO

    ARPA-E held a workshop on “Enhancing Capital Flow into Early Stage Energy Technologies” on January 31- February 1, 2017 in the Denver, CO area. This workshop convened leading experts and thought leaders from the financial, clean energy market, multilaterals, family offices, technical and policy sectors to identify innovative cross-disciplinary mechanisms, gaps in policy or regulation, and business model innovations that can enhance the successful pathway to commercialization of early-stage clean energy technologies. Participants lent their expertise to recommend either novel solutions or subject matter areas for further research that would enable private capital flow into early stage clean energy technology ventures.

      • Thanks Steven BRIDGING THE CLEAN ENERGY VALLEYS OF DEATH https://thebreakthrough.org/blog/Valleys_of_Death.pdf

        Due to pervasive market barriers, private sector financing is typically unavailable to bring new energy innovations from early-stage laboratory research to proof-of concept prototype and on to full commercial scale. This leads to two market gaps that kill off too many promising new energy technologies in the cradle. These gaps are known as the early-stage “Technological Valley of Death” and the later-stage “Commercialization Valley of Death.” This pair of barriers is endemic to most innovative technologies yet is particularly acute in the energy sector. As a result, many innovative energy prototypes never make it to the marketplace and never have a chance to compete with established energy technologies. These valleys of death particularly plague capital-starved start-ups and entrepreneurial small and medium-sized firms, the very same innovators that are so often at the heart of American economic vitality.

  8. “There is an immense challenge in the new energy sector, with venture capitalists drifting away from clean technology investments in recent years, making it tougher for startups in this sector to prove their viability,” said Anurag Gupta, the H. Clark Ford Professor of Banking and Finance at the Weatherhead School of Management and principal investigator on the grant.”

    Bull.

    Venture capitalists aren’t preventing anyone from proving “their viability” in this sector. The sector itself disproves its viability.

      • Look up ‘Cool Futures’ if you have enough to invest. I donated some research money but have lost track since then. I don’t have enough to invest.

      • If its quoted you might try a spread bet or Cfd on it.

        But I dont think you will find a counter-party prepared to give good odds..

        Smart money has left the building already.

        Its become obvious to financiers that they only way to make money is with cast iron government guarantees and Trump is not a man to give them those.

        So its the end basically for renewable energy ..

        Thank Clapton.

  9. “With a grant from the U.S. Department of Energy (DOE), researchers at Case Western Reserve University will develop a new financial product to attract a broader pool of long-term private investors to new technologies offered by energy startup companies.”

    This grant should be rescinded immediately.

    The DOE officials responsible for awarding this grant should be removed from duty immediately while all of their activities for the past several years are reviewed by the responsible Inspector General.

  10. “There is an immense challenge in the new energy sector, with venture capitalists drifting away from clean technology investments in recent years, making it tougher for startups in this sector to prove their viability,” said Anurag Gupta

    They are drifting away because they are fed up with losing money and being lied to. Because in general green energy is not viable. Its a fashionable way to virtue signal, but in practice it doesn’t work, because its driven by perception, not by watt hours per dollar.

    Typical cause and effect reversal. ‘Green’ energy is only profitable with subsidy, and that may simply evaporate.

    • because its driven by perception, not by watt hours per dollar.

      because its driven by perception, not by reliably deliverable watt hours per dollar.

      FIFY

  11. There hasn’t been anything “new” in energy since the first nuclear reactor went critical in the ’40’s. And, there won’t be, until fusion is feasible.

    Engineers have a word for this: “Availability.” It means energy that is available to do work.

    What was the last energy start-up to become a commercial success without government subsidy? I’m sorry, what was that again???

  12. “With the two-year, $600,000 DOE grant”

    So they can’t even design the financial product without a government grant?

    More egghead nonsense that will turn a bunch of taxpayer money into nothing.

    Watch for it to call for “government investment” — code for subsidies.

    Let the market do its thing — if there’s a real opportunity there, someone will find a way to make money from it without the need for government-funded “research” or involuntary “investment” from the taxpayers.

  13. This is Obamacare for renewables. It is like the real estate mortgage crisis. You just have to hide these unhealthy companies in a package with a bunch of healthy companies, drawing unwitting investors. The climate crisis paradigm is certain to fudge the ratings and spin a wonderful story about the amazing opportunity to save the planet and make money at the same time! What could go wrong?

    • Jclarke341:
      “Obamacare for renewables”

      Of course. Jonathan Gruber carefully evaluated the intelligence of the necessary audience, and pitched the scheme accordingly.
      Sufficient devotion to that taxpayer money pit by certain congress people still exists to prevent killing it. The “facts” that were used to support the idea are not easily removed from one’s shoes, even employing the farmer’s shuffle.

  14. “….investments in energy companies that may take 10 to 20 years to turn a profit, if ever.” Ideas that are sound and represent a breakthrough in energy production will attract investors and gain rapid acceptance. Ideas that are still 10 – 20 years from profitability are in reality areas of research, not products requiring investment.

    The Federal government has lots of research dollars to invest in basic research and development. Research is important for society — and should be supported. But asking private investors to waste money on iffy only-politically-correct ideas is foolish.

  15. Sorry KIp, but the Federal Government has no wealth, other than what it forcible acquires from the people. The only thing it manufactures is more government. If some research promotes the general welfare of the nation, who gets to decide what research does that?

  16. Every ‘financial product’ I have ever seen is a thinly veiled device for siphoning off cash resources from investors into the accounts of those who already have far more money than they need.

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