In passing the Green Energy Act, 2009 earlier this year, the government of Ontario hoped to motivate a stronger and greener economy. In the process, there is a hope that growing cleantech companies will be able to thrive here at home. But in order for that to work, fundamental attitudes have to change within business, venture capital and government circles. That assessment was the consensus among participants at this year’s second annual Green Business / PricewaterhouseCoopers Executive Roundtable, focused on Canada’s cleantech future. The attendees seemed to concur on the point that Canadians need to approach cleantech with a more open mind and a willingness to accept risk. Entrepreneurs, investors and government all have a role to play.

The main problem that most attendees noted was that, while Canada is excellent at promoting early-stage development, we are not as successful at commercializing technology.

Albert Behr, President and CEO of Behr & Associates, assesses the problem with characteristic bluntness: “We are wimps! We are amazing at engineering; we are world-class engineers. But we are completely risk-averse…Fortune favours the brave.” In other words, when it comes time to put money on the table to open a pilot plant or be the first to take on a new technology, Canadian investors are not there.

According to Behr, the bold risk-taking ethic that characterizes U.S. investors has stimulated a boom in cleantech south of the border.

“Every day we get a Request for Proposal (RFP) from cities like Cincinnati or Denver for $20 million,” says Behr. “And here is the thing that is amazing: they turn an RFP around in one month. Have you ever heard someone do that? One month! File it, submit it, deploy it in a month. It is amazing. Do you know what that does to companies? That is revenue. That is the lifeblood of companies.”

Leadership lacking
Philip Ling, an electrical engineer and a Partner of Canadian cleantech company Powersmiths, identifies our country’s lack of leadership as a key roadblock to success. “I think one of the barriers here is from a technology adoption point of view. We haven’t seen leadership. What is holding us back is the country’s psyche of not being a leader willing to say ‘I’m going to be first, now let’s get on with it.’

“When we started in the mid-90s, we went straight for the U.S.,” Ling continues. “There were no questions about us being Canadian or having a new technology. Our first project was with the U.S. government. They said, ‘we’ll try it, let’s get on with it.’ We came back to Canada two years later and were still being asked, ‘who else has bought it, who else is using it?’”

The hesitation to sink money into something new is understandable and it is certainly not a just a peculiarity of Canadian cleantech investors. The public at large is notoriously cautious when it comes to the unfamiliar. As Ling recognizes, most people want to see others get on board first.

“On my street, I was the first and for a while the only guy that had solar electric and solar hot water, and now one of my neighbours has it,” he explains. “Most people are not going to do something like that first, but the minute it’s on my house, it’s okay for it to be on their house. It is the psychology of ‘I’m not going to be first.’ As opposed to ‘I’m going to be first. I’m going to try it. And I’m going to get a bloody nose every now and then, but I will be first’.”

John Gocek, COO of Sofame Technologies, has also faced skepticism from his potential clientele. “Our customer base hails from old and established engineering traditions, and today’s leaders do not want to change much,” he notes. “Power generation using water as the heat transfer medium has gone on for centuries the same way. Most engineers do not question the textbooks, where some central engineering tables are based on practices established in the 1860s. The resistance to change is enormous.”

Getting those early adopters on board is a challenge. Jacoline Loewen, Managing Partner at Loewen & Partners Inc., draws a useful analogy that might shed light on why people are so hesitant to be first. “It’s like the new iPhone: everyone knows the early adopters paid $500 for them and now you can buy them for much less. Everyone knew that was bound to happen, yet there were still early adopters willing to pay that premium. But where are the early adopters for cleantech? As it stands now in Canada, there aren’t any.”

Systemic barriers
Embracing a more competitive and risk-taking spirit is critical, but while that psychological shift would be great to witness, there are basic economic challenges also blocking the way. One is the nature of the current government funding model in Canada.

Angella Hughes, President and CEO of Xogen Technologies Inc., appreciates the support that government offers companies like hers.

“If it wasn’t for these sources of funding, we would be completely dead in the water in Canada as they are the only sources of reliable funding available to companies like us," says Hughes. "Without a revenue stream we can’t tap into the traditional funding that is available to revenue generating companies. The government understands this and that is why funds like the Sustainable Development Technology Canada (SDTC) and MRI-IDF exist, as well as SR&ED tax credits."

That being said, the challenges of many of these programs is that they require matching funding.

“The biggest difficulty that we have encountered with the government programs is that they all require matching funds. What they cover is one-third or less. Getting that matching funding is very difficult. I would actually say that if you do not have your technology already commercialized—with sales coming in—it is very difficult to get those matching funds in Canada. One of the things Albert Behr does is take companies to the U.S. to get that funding, because they are more apt to make that risky investment.”

Getting the required matching funds from private industry has proven to be a serious challenge for companies that have been granted funds, suggests Hughes. Getting buy-in with investors can be a challenge.

Albert Behr, President & CEO, Behr & Associates

Investor expectations
Private investors are indeed asking a lot from cleantech companies. Albert Behr believes that promising long-term return on investments (ROIs) is often a deal-breaker. Xogen, for example, has patented unique wastewater treatment technology and is looking to commercialize it. If Hughes wants to attract private investment, argues Behr, she must promise a short-term ROI.

“They say ROIs must be three years, but it is actually less than two years. If Angella goes in selling a ten-year payback, she would be dead in the water. If she goes in and says her product is 20 per cent the price of a municipal wastewater facility, she does it in five minutes, not 30 days, she doesn’t have to tear apart the facility, can put five times the footprint on the same space — and by the way, it is a green technology that doesn’t generate methane then she is in the game. I think that is just something we really have to come to terms with.”

But such short-term ROIs are simply not realistic, according to Philip Ling. He believes that investors have to be persuaded that a ten-year payback is more lucrative than it sounds. “A six-month ROI is actually a 200 per cent ROI. I don’t think any company out there has ever had that ROI in their stock. Our company offers benefits for 40 years, quarter after quarter — that’s 160 quarters worth of savings embedded — but people are going to make the decision based on whether their investment pays for itself in six months? That’s insanity. That is the problem. A ten-year payback seems like forever, but it is still better than the stock market. It’s really a mindset issue, because a 40-year investment that pays for itself in ten shouldn’t be a problem.”

According to Ling, the craving for fast returns is unsustainable. He considers such greed to be a cause of last year’s economic collapse in the United States. “We reward based on unsustainability. Look at the financial markets in the U.S. It’s an unsustainable thing, but that didn’t stop the downturn from happening, and it’s not going to stop it from happening again. People don’t think about sustainability. They only think about making money in the next three months.”

Education is clearly an important concern in the cleantech space. Many potential investors don’t truly understand the nature of the payback and what to expect, as Jacoline Loewen notes.

“In the private equity business, I don’t look at companies that don’t have $10 million or more in revenue,” Loewen explains. “I try to help companies that are coming from start-up to $10 million, but there is no money in that space. The government has to realize that there is zero cash in that area. There are no tax benefits. People don’t feel that they get rewarded.”

The reason there is no money in the space, from Loewen’s perspective, is that the many people that were burnt during the tech bubble in the 1990s don’t yet understand the cleantech “industry” and what to expect from it.

“People ask what the industry is – what indices are you going to use? What growth can you expect? How is it going to play out? I think people have a lot of fear,” Loewen notes.

And there is no question that, right now, many investors are being cautious. The answer, for companies like Sofame, is in sales.

“We raised money two years ago and it was very exciting and very straight-forward,” recalls Gocek. “Today, everyone is tapped out. It’s very serious. Purchase orders are the way to go — we need sales. Maybe Canada is a little too good at investing in research — we develop a lot of stuff that nobody buys. We should be putting a lot more money into commercialization as a business in itself.”

The experts at the roundtable were virtually unanimous on the point that Canadian cleantech businesses must be given more support to grow. What might that look like? In part two of our roundtable report, attendees discuss the Green Energy Act and propose solutions to the challenges facing cleantech in Canada.

Robert Colman is the Editor of Green Business. Lenny Talarico is an intern with CLB Media.

< Prev		Next >