Maryland’s green companies seek capital, wherever they can find it -- Gazette.Net


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Tom Matzzie knows a thing or two about fundraising.

Matzzie raised more than $150 million through various progressive political campaigns such as MoveOn.org over the years. So when he launched his renewable energy supply company, Ethical Electric, in Chevy Chase, he had an advantage over many green startups that struggle with financing.

Venture Investments in Clean Technology

WASHINGTON, D.C., METROPOLITAN REGION

2011:

$52.5 million, 11 deals

Maryland: SemaConnect of Bowie received $4.2 million in two deals.

2012:

$49 million, five deals

Maryland: Ethical Electric in Chevy Chase received $2.4 million.

NATIONAL

2011:

$4.6 billion, 348 deals

2012:

$3.3 billion, 267 deals

— Source: Pricewaterhouse coopers moneytree Report

Most recently, Matzzie was able to parlay his know-how into a $2.4 million venture investment in the fourth quarter of 2012. Matzzie’s company was the only in Maryland to land a green energy or clean technology venture capital deal last year.

“Some businesses are definitely finding financing more difficult,” said Matzzie, CEO of Ethical Electric, which he launched in November 2011. “Some ventures are harder to fund than others since they may have lower chances of exits for investors.”

With companies of every sector exploring every avenue for sustaining or growing their business, green industry executives sometimes have a somewhat different mindset: balancing a mission of preserving the environment with turning a profit. Financing these ventures run the gamut, from tapping personal funds, seeking help from friends and family, taking out bank loans and pitching to venture capitalists.

The global clean technology industry totaled $6.46 billion in 2012, according to Cleantech Group, a global market intelligence company in San Francisco. But the sector plummeted in the U.S. venture market last year.

Clean technology venture funding fell 28 percent, with a 23 percent decline in venture deals in 2012 from 2011, according to the latest MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters. That said, clean technology companies still accounted for five of the Top 10 deals for 2012.

Investor interest in green businesses is complicated by fragmented business models, as the industry is not yet well-defined and faces regulatory issues among various jurisdiction levels, particularly in the energy area, said PV Boccasam, a general partner with Novak Biddle Venture Partners in Bethesda.

“Unless there’s a very clear business impact, in terms of revenues, it’s hard for investors to do feel-good investments,” he said.

While interest in the green industry continues to grow, investors are still waiting for a breakthrough company to legitimize overall investment in the sector, as Google did for software and information technology, Boccasam said.

Investors are always shifting from the large capital investments in ventures that seek sustainable ways to fuel the economy and turning to more smaller project investments, which explains the falloff in deal sizes, said Emily Mendell, spokeswoman for the National Venture Capital Association in Arlington, Va. Clean technology is a broad category that encompasses a variety of business areas, she said.

‘The key is to have the right product’

Despite less interest in green companies among the venture capital community, some businesses are still willing to give it a shot.

John W. Spears, owner of Sustainable Design Group in Gaithersburg, which builds energy-sustainable custom homes, has spent the last year working with a consultant to hone his investment-pitching skills. Spears recently started Sustainable Systems International to provide sustainable infrastructure systems in developing countries. He produced a prototype for a solar-powered bulk milk chiller, which he hopes to sell to milk companies for use in developing countries, Spears said.

To date, Spears has funded the new company with less than $100,000 through profits from the homebuilding business and his own finances. He also is looking at sources of socially responsible grants, such as the World Bank and the Bill and Melinda Gates Foundation, which concentrate on missions of public good, and other private or public investors.

“There is a small subset of investors that are investing not strictly for the return but because what these companies are doing makes them feel good,” Spears said.

Spears also emphasized that he wants to avoid “diluting” his company through investors.

Investors are becoming cagier about investing in businesses and trying to get the best deals they can, which can involve a larger role in operations or profits, said David Feldman, director of Bethesda Green, a nonprofit devoted to accelerating sustainability at the local level.

He said one of Bethesda Green’s missions, aside from providing incubator space for growing green businesses, is getting companies investor-ready and helping local investors become more familiar with the green mission. Bethesda Green also hosts seminars to educate businesses about the investment market.

Green businesses also face the challenge of their products costing more, especially in the case of organics, which can cost 20 percent more than nonorganic products, Feldman said. Bethesda Green works to attract socially responsible investors. The organization is in its fifth year and hosts 14 companies in its incubator.

“Financing green business is no different from financing any other,” said Jonathan Bell, owner of Solar Honey, a solar panel installer in Potomac. “The key is you’ve got to have the right product. It’s simple marketing. You need to convince someone you can make money and have a product or service that’s in demand.”

Maryland’s solar-friendly environment has benefited many green businesses in the past few years, with state rebates for solar systems once reaching $10,000. Montgomery County appropriated $500,000 a year for property-tax credits associated with solar projects in 2011, while federal energy tax credits are worth up to 30 percent of the project’s cost. Many of these programs have since been scaled back or eliminated; the state rebate is now $1,000.

Bell said he has stuck to personal financing for Solar Honey, which was one of Bethesda Green’s first incubator companies, as he does not think his model will attract public investment.

Finding investors that align with the mission

Neal Fiorelli, managing partner of Lorax Partnerships, a sustainability consulting company in Columbia, said financing has been particularly difficult because banks show no interest. Fiorelli is looking for investors to help him provide a location and more employees for his $1 million business.

Clean Currents, a sustainable energy provider in Silver Spring, has financed itself through mainly angel investors, said spokeswoman Megan Barrett. She said the company works to find investors that align with Clean Currents’ mission. The company plans to grow its 30-person staff to as many as 40 by the end of the year and has opened offices in Philadelphia and Baltimore.

Barrett said while people are thinking more about sustainability, it is seen as something that adds more value but does not necessarily generate revenue.

David H. Taghipour, owner of All Eco Design Center, an environmentally friendly building supply store in Wheaton, also envisions other financing sources. He sees his business model, which has produced as much as 50 percent annual growth during the last five years, as one that can be expanded to other locations and even turned into a franchise.

“With the proper financial backing, I can take that growth to a larger scale,” Taghipour said. “It’s a matter of finding the time to put everything together for a pitch.”

Equally ambitious is Zack Kline, whose Bethesda Green incubator business A.I.R. Lawn Care uses battery-operated lawn equipment that he charges through solar panels on his van. Kline, who graduated from Salisbury University last year, came up with the idea while using a gas-powered mower for a local lawn company during an especially hot day. He said he wanted a better lawn care system for the environment and landscape workers.

“I would like to pursue investors. I’m just trying to figure out the right mix. I don’t want to give up too much” control of the company, said Kline, who also financed his business with $5,000 in winnings from his university’s business plan competition.

Kline wants to make his business a national brand.