Why we founded Cleantech Bridge Equity Advisors!
Interview with Tobias Schütt and Christian Langen
Can you both share a bit about your backgrounds and what led you to collaborate on this new venture in cleantech financing?
Christian (C): We have known each other for almost 20 years. While Tobias and I followed separate careers for most of the time, we discovered early-on that we were thinking about the intricacies of funding innovation in cleantech in similar ways but from different perspectives. I started work life with a banking apprenticeship and studied international corporate finance and operations management. I co-founded my first business 25 years ago and have been in entrepreneurial and executive roles in all aspects of renewable energy since. It was great to be part of organizations of all sizes. As division CEO at SMA Solar, I had the chance to lead 3000 people in 20 countries and drive a billion Euro in profitable sales per year. For the last decade, my main role has been to support investors, entrepreneurs and leaders as senior advisor and coach. I also serve on selected company boards.
Tobias (T): My journey into renewables started at BP solar about two decades ago. When I joined Conergy thereafter, Christian was working there as well. At Conergy, I worked on different market entry strategies and got my first experience with “First-of-akind” finance situations. Next, I moved into financing renewable energy projects at Deutsche Bank, where we drove innovation for cleantech project finance and developed a lot of “First-of-a-kind” funding for increasing project sizes. In 2011, I co-founded DZ-4, the pioneer of solar-as-a-service in Germany. Over time, we helped thousands of customers go solar, raised more than a EUR 100M in funding of different kinds and learned what works best in retail solar as well as funding new portfolios in general. It was a very rewarding and intensive time as CEO of this great company for 11 years. In late 2022, the business was acquired by EnBW. After supporting the transition, I felt like starting new things and supporting founders and investors on their cleantech journey.
Our paths crossed again when Christian joined the board of DZ-4 a few years back. It became clear to me that while we often approach topics from differing angles, we end up with complementary solutions. During that time, the wish to do more together started to grow – now we realize it.
From your perspective, how has the cleantech financing landscape evolved over the past few years, and what are the most significant changes you've observed?
T: The rise of ESG and impact investing as well as new cleantech funding from venture capital, private equity or infrastructure funds is quite impressive. Cleantech investments surpassed fossil fuel investments worldwide for the first time last year. If you take a closer look, you will find that most of these funds flow into large scale projects and still quite centralized solutions, such as onshore and offshore wind, utility-scale solar, electric vehicle manufacturing or battery factories. On the other end of the spectrum, smaller investments occur regularly as well, specifically from business angels and venture capital firms – for corporates and platforms.
While this is all great and valuable, there is still a funding gap – specifically on the asset side rather than the corporate side - for new technologies, new applications and new customer groups which do start small and need early investors to get into scaling their decentralized innovations for mass market adoption. Investors have experience in funding large cleantech projects with known partners. Banks are comfortable with large projects as they can reference 20 years of solar power plant track records. However, if you want to fund for example a retail portfolio of thousands of recently installed private heat pumps or PV systems, or solar PV plus storage solutions for commercial & industrial customers, a surprising gap in affordable financing options especially for smaller deal sizes exits.
C: The landscape is evolving rapidly and it is exciting to see the democratization of cleantech funding with crowdfunding platforms and impact investing gaining traction. This opens up opportunities for smaller investors to participate. At the same time, navigating “First-of-a-kind” asset portfolios is better suited for experienced investors as it feels a bit like sailing through uncharted waters. You need to distinguish between the elevated perceived risk due to lacking track records and a view on actual risk, which requires in-depth knowledge of the solutions and technologies at play. The key is a deep understanding of risk profiles and mitigation options. Then you can develop a fair funding stack and compelling narrative to secure anchor investors willing to back these innovations. This is where we position Cleantech Bridge.
In the context of "First-of-a-kind" projects, can you discuss the challenges and opportunities in structuring financing for breakthrough cleantech innovations?
C: If you take a superficial look at funding innovation for new assets in cleantech, you could argue that a lot of support mechanisms exist for early-stage breakthrough technologies. You can receive more government grants than ever; it is quite likely that you find angel investors and venture capital to start. The challenge begins when you need to make the next meaningful step in your business growth and want to scale your innovative solution through an asset-roll-out. Suddenly, your VC investors fear the asset-heavy business model. They have a point: you should not fund a long-term asset roll-out with expensive VC money if possible. Banks will not engage with you yet at your corporate level as your balance sheet, P&L and lack of track record as well as perceived technology risk scare them off. Private Equity is not interested in Infrastructure returns and infrastructure funds start taking your calls if they can deploy 50 million Euros or more without assuming much of the inherent risk. The segmentation of the funding world hinders innovation.
T: This is where we feel we can add value and offer new solutions with Cleantech Bridge. We believe that each “First-of-a-kind” asset needs a tailored blend of capital sources and an evolution of these capital sources over time. We propose a long-term approach in several phases to bring down capital costs step by step. We develop a smart mix of early infrastructure equity and debt tranches from specialized sources. There is a fair pricing that evolves as the portfolio proves that it can meet expectations. De-risking is a joint effort and those who join early learn more than the late comers in these asset classes. Our role is to support sponsors by structuring the funding evolution and thus enabling attractive investment opportunities for cleantech investors in these new asset classes. We don’t fear to start with relatively small portfolios, either. The best solution is often a blend of capital types, which you rarely see in smaller size transactions. That is probably the key difference: applying financial structuring from larger scale transactions to smaller deals.
On top of that, we replace big corporate structures and expensive “hand-made” solutions by experience and a small, selected team as well as following an approach that relies on standardization with asset specific adaption.
How do these fresh financing approaches help get new cleantech technologies off the ground and into the market?
T: Funding should help solve an actual problem to realize value. The challenge is that new technologies, new companies or new markets simply cannot provide proof that their product is reliable, as it has not been done a thousand time before. So, we believe that a trusted third party, such as Cleantech Bridge, with deep understanding of the underlying technologies and the structuring of risks and mitigation can enable such solutions at fair conditions for all involved. An example: Wouldn’t it be great if multi-unit rental properties could realize the solar potential of their sizable roof spaces and at the same time offer more affordable, clean solar power to the residents living there? What has been standing in the way so far? In Germany, legal and bureaucratic hurdles existed and are being cleared now. This makes funding the new bottleneck. Apartment owners don’t necessarily want to mortgage the building to add solar systems - they may need the funding room for future upgrades and repairs. Who can take the trading risk of selling power to residents? What if only a few sign up? How can the construction cost be kept in check and how can this whole business segment move beyond pilot projects into mass scaling? We have a few ideas how to solve this.
C: The biggest hurdle is the complexity of moving from the existing power supply, which may be clean or not, to a solar plus heat pump plus building management solution. The technology is complex enough, but navigating the business models, risks and ultimately funding landscape for this is the key to success. Part of our role is to simplify the funding process, transfer asset know-how to investors as well as funding know-how to solution providers and real estate owners and asset developers in general. We are standing in the middle, literally bridging between the world that focuses on financial risk to the world that sees mostly ecological and value opportunity. Before we even founded our company, several interesting clients approached us from and we felt that we can add real value in the process.
Could you elaborate on the innovative financial models your mentioned that integrate private equity, corporate finance, and infrastructure investments in cleantech?
C: The most important aspect is that different types of capital can carry different types of risks. All too often, we see entrepreneurs who just think of capital as money for a price from whatever source. That is a risky simplification. You need to make sure that your interests are aligned for the duration of the funding journey. For asset roll-outs, that can be 20 years.
Finding some debt to cover a portion of this can be easy at times. However, the bank will not assume much or even any risk associated with the asset portfolio. Those will be with the asset equity investors, who will demand not only a higher return, but they may also want assurances, insurance, backup solutions and the sponsor to take the first risk. Getting the right people to the table and making this work in a fair manner is part of our role.
T: We speak a lot with investors who have engaged in large-scale solar but are hesitant to fund new types of technologies or portfolios. Our firm belief is that many of them will join in once they have more comfort on why the actual risk involved may be lower than their first perception. We understand and discuss assets in detail and package debt and infrastructure money with more entrepreneurial equity. A challenge is that the first tickets are often small, a few million Euros. However, we operate in markets where cracking the funding code opens the door for scaling business. And we also feel that the best investors for these transactions are entrepreneurial investors, i.e. from the private wealth and family office segment.
Also, funding structure will evolve as everyone gets a better grip on actual risk. The sponsor will profit from a reduction in costs of capital and thus has an interest to manage the portfolio well. Over time, equity value can increase. We have seen a few portfolios in the solar space where the opposite was true, but honestly, that was clear to us from the outset because the structures didn’t make sense for everyone involved. We work hard to avoid that.
In activating family offices and entrepreneurial investors for cleantech, what key factors do you consider aligning their investment philosophies with cleantech opportunities?
T: Most family offices are not afraid to enter long-term commitments if they make sense. They are not restricted to a typical fund duration that forces them to sell in a certain year. At the same time, they often do not fully understand the mix of opportunities and real risks faced with in typical “hybrid” cleantech investment opportunities. Our role is to enable asset-heavy business models, something most VC and some P/E investors rather stay away from, by sorting the risks and opportunities and matching these with the right capital instruments. Inter-generational family wealth can be quite value-driven and at the same time dynamic and long-term oriented. There are many positive examples of family offices being quite successful with such a mix.
C: In our view, it is all about transparency and creating in-depth understanding of the differences between “First-of-a-kind” / FOAK cleantech investing and engaging in the asset classes a family office feels comfortable with already. We perceive our role as facilitation and providing guidance to the parties on both sides of the table. Fairness is an important value for us. Many family offices share this mindset.
How critical is sector-specific know-how in overcoming early-stage challenges and achieving successful cleantech investments?
C: Very important. We are talking about complex solutions that require systems thinking and will often rely on key components to perform reliably for decades. It is essential to be able to navigate these technologies. At the same time, our first-hand experience and expert network help us to see through any shiny sales prospectus and get to the key questions quickly.
If a new type of investment asset does not have a substantial set of long-term references yet, expert views are the most important source of comfort for investors. Our own credibility is our key resource. That is why we have to say NO more often than YES to potential projects.
T: We advise clients honestly and propose solutions that are fair to investors, customers, and the sponsor. Sometimes, our messages are not well-received. There is a trend right now to fund 20-year energy generation assets just like a consumer would finance a washing machine at the electronics shop. However, the probability that this cash-flow stream will fall apart down the line is vastly higher without the service concept, insurance package and continued risk mitigation path a FOAK funding structure would offer. Holding equity in such a consumer finance portfolio is much less attractive than owning proper FOAK equity. Sometimes the faster funding solution comes back to bite you down the line.
Peering into the future, what trends or technologies do you think will re-define cleantech financing in the coming years?
C: I think we will see a growing variety and complexity of decentralized clean energy generation and storage systems with digit control layers. These will need new kinds of financing solutions and customer journeys. Software components and energy management services are becoming increasingly important. We will see the rise of new customer groups. A lot more manufacturers, owners of multi-unit rental properties, logistics companies, small manufacturers, retailers, and the broader public beyond first-movers will start to embrace clean technologies if they find it sufficiently simple to do so. Simplification from a customer perspective is the key value driver for the next phase of cleantech. Financing has a role to play here as do new service offerings and market participants.
T: In addition, new investor types will come to the table. As discussed, many decision makers with private wealth are still “sitting on the fence” when it comes to widespread innovation funding in cleantech. That will change. We believe in openly sharing our knowledge to get more people with impact on board.
What are your medium-term goals for Cleantech Bridge?
T: We want to build sustainable partnerships with sponsors, investors and banks that help to scale innovation. Our goal is to facilitate 1 billion Euros in innovative First-of-a-kind investments through our equity advisory expertise in the coming 5 years, then aim higher. That may not sound like much in a world of billions going into cleantech annually. However, we will take on the early, smaller, innovative portfolios and push them to the starting line for scaling. When an asset class is becoming “too easy”, we will happily hand over to current advisory firms and move on to the next more complex case. Our goal is to drive a future where clean technology is not an option, but the norm. To contribute to this, we will become the leading competence center for FOAK investments.
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