Start-ups starving for scale-up funds
Finding commercialization cash a challenge for energy entrepreneurs
As the former head of a Calgary Police Service drug unit, Roger Morrison had kicked in enough doors to understand the methods by which criminals bypass meters to steal electricity from the grid. In some cases, that knowledge helped his department bust marijuana growops. Years later, it would help Morrison launch dTechs Electrical Profile Management, an energy startup that uses sensor technology to monitor electricity draws from the grid with high precision.
The technology, which Morrison developed with the help of an engineer, measures all of the electricity on a supply line just before it reaches a customer, then compares that against the actual electricity used by individual consumers. Measuring those numbers, Morrison argues, substantially cuts back on massive losses in the grid, either from theft or faulty infrastructure. “All the money from governments and initiatives always go in after the customer metres — smarter fridge, smarter light bulbs,” Morrison said. “But 99 per cent of losses are in the last mile of the grid, from the substation to the customer home.
After starting dTechs in 2009, Morrison sold his house, his Jeep Cherokee and cashed out his pension to raise money. Since the company’s inception he has spent $2.1 million, which he raised through small angel investor firms and family friends.
He was able to stretch that investment surprisingly far. dTechs entered into contracts for pilot projects in Ontario’s grid, then expanded out into pilots with massive utilities in Colombia and Brazil, where grid theft is rampant.
But his successful streak ends there. After proving up his technology, Morrison now finds himself in a strange kind of entrepreneurial purgatory, beyond the startup phase yet unable to raise the funds needed to commercialize the product. He says he requires about $2 million to start growing his company beyond the pilot phase. That figure is both too small for the venture capital funds, who tend to favour $5-million to $10-million projects, and too large for many government grant programs,which usually top out around $500,000.“We’ reina commercialization stage where we don’t need a lot of money, and we don’t fit the criteria of any of these funds ,” he said.
Energy entrepreneurs touting innovative technologies often struggle to secure financing during the dreaded“scale-up” phase, when firms frequently are hunting down between $1 million and $3 million in financing. To people inside the relatively small circle of energy innovators in Canada, this is along-standing problem Ambitious and innovative ideas often get the early startup capital needed to design a prototype—typically requiringless than $1 million—only to grind to a halt during scale-up.
The reasons are complicated. Yet the ramifications are significant: Statistics Canada estimates 90 per cent of innovative technologies come from scrappy startup firms rather than cumbersome corporations.
A COSTLY BUSINESS
For most entrepreneurs on the hunt for capital, the confusing thicket of government grants, private equity funds and corporate players can seem hardly worth the trouble.
For Morrison, the program she applied for either didn’t meet certain criteria or weren’t offering funds at the time. Several other startups pointed to broader flaws in assistance programs. Some of these include solvable issues such as spats over intellectual property rights. But others run much deeper, and tend to be tied to the nature of energy technologies, which require unusually immense up-front capital and industrial-sized materials.
“If you’re developing some little widget that costs 10 cents and isn’t very innovative that doesn’ t take very long to do,” said one entrepreneur whose company is seeking funding and asked not to be named. “But the markets we’re developing for are $100-million markets.”
There are also bureaucracy issues. Entrepreneurs say there is often a lag between the time a company is approved for funding and the date the funding arrives, which puts pressure on early-stage companies with little or no cash flows.
Some grants operate on a “match” basis, where program essentially reimbursesa portion of operating costs over an allotted time. In principal the approach works, but often requires companies to have money up front — a rare thing for those that haven’t yet commercialized.
In other cases, entrepreneurs say, the system creates unrealistic timelines that encourage companies to spend money they wouldn’t otherwise spend. “If you’re not pressing ahead with spending, they may pull back funding,” Morrison noted.
These issues bring to surface the often discussed need for so-called “patient capital” that would provide a sustainable source of income for innovators. Governments and arms length bodies are aware of the lack of patient capital. Some state an explicit mandate to “fill the funding gap” to see companies through to commercialization.
SHORT-TERM THINKING
A major challenge facing governments is that the vast majority of radically innovative ideas ultimately fail, despite assurances from their inventors. And voters, for good reason, are wary of throwing public funds at long shots.
Moreover, there is no simple remedyto the funding gap problem .“I’ ve been debating how best to do innovation for the last 60 years, and I still don’t have the answers,” says Joe Lukacs, CEO of the non-profit consultancy Canadian Environmental Technology Advancement Program (CETAC).
The difficulty of properly allocating funds often leads governments to select a few companies for grants based on pre-determined and sometimes have long called this process “picking winners.” A better process, many say, would be to appoint small groups of knowledgeable people to select eligible companies based on their innovative potential — people who, unlike those at most government appointed programs, are not be holden to bureaucratic constraints and can therefore make bold decisions.
Instead, program managers are often forced to take the safe middle road. The programs are also used by governments as political tools, often touted using vague terminology that convey unclear goals, typically to “foster innovation” and “develop a sustainable future” and even “diversify” the economy.
Lukacs says more attention needs to be paid to developing innovation before the system can improve. He and others often point to somewhat vague notion of creating a “culture” of innovation in Canada to better circulate capital.
“If the country wants to do better, there needs to be an increased interest in public funds going toward these small and medium-sized companies ,” he says. Without it, Morrison’ s experience will remain a familiar one among entrepreneurs. “Way too much energy is spent just being a salesman and trying to bring in capital.”
We’re in a commercialization stage where we don’t need a lot of money, and we don’t fit the criteria of any of these funds.