Cleantech funding and its challenges
The capital-intensive nature of many clean technologies, longer payback periods, lower returns, and unique technological and regulatory risks often make investors weary of the cleantech sector. Venture capital – which has witnessed significant activity in renewables, energy storage, and hydrogen technologies, has mostly involved later-stage deals propelling relatively larger companies towards substantial commercial scale-up. However, early-stage cleantech companies in India continue to face multiple conundrums such as high capital costs, lack of adequate debt financing options, and even if such options are available, unsuitable tenures and structures of the loans do not make them attractive options.
Most of these small and mid-market businesses require non-collateralized custom debt to help them with their working capital needs. A range of customized debt products including term loans, revolving facilities, invoice/order financing, quasi-equity, and venture debt could assist cleantech companies to be sufficiently leveraged and tide over difficult business situations at times. Below are some instances where flexible and timely debt could create significant value for these companies.
- Growing clean-technology providers are often faced with a sudden upsurge in orders especially as an aftermath of favorable government policies kicking in. In such situations, timely short-term working capital limit facilities from a debt provider can be utilized to service orders and buy time for the company until it receives payments from its customers
- External shocks (such as covid pandemic) can create situations of a liquidity crisis, but it is important to note that a temporary illiquid position does not necessarily mean a company has become insolvent. An appropriately structured bridge loan at this time can help companies tide over this difficult phase
- First-generation cleantech entrepreneurs often have substantial technical domain experience and entrepreneurial vision. However, a lack of family wealth to mortgage coupled with complex business models of their ventures make availing traditional bank loans close to impossible. Debt facilities provided on the merit of their business model and taking only the receivables of the company (without hard collateral) as security, can play a crucial role in scaling and paving the future success of such companies
- Fast-growing business often depends on equity raises to meet cash requirements. However, delays in equity infusion and/or changing plans of equity investors are a common phenomenon. A flexible debt facility can allow a company to keep the momentum of sales going until equity money comes in. In some cases, it can also result in more attractive valuations.
To alleviate this investment gap associated with scaling clean technologies, financing partnerships and collaborations are critical to positioning India as a global leader in the rapidly growing cleantech sector. Fortunately, there is a growing tribe of private debt funds, including Caspian Debt (having financed 19 cleantech companies over the last 7 years), who understand and are serving these needs of early-stage cleantech enterprises.