An Ideal Greentech Portfolio - Part I

If you believe the Greentech wave is being formed; then you would agree that whoever invests in the future of Greentech should do well.

Following this train of thought I would like to propose, what I think, is an ideal portfolio for Greentech investments.

Greentech is a very wide term. To be more specific we will break it down into three areas: (a) Alternative energy; (b) Water;and (c) Waste Management. But, before we dig deeper into these three areas we need to define the investment criteria.

Criteria I - Technological innovation

It would be wise to invest in both, radical innovations, as well as in existing, proven technologies. The key for the success of greentech is based on "change". We need to change our power sources; change the way we use water; change the way we create and dispose of waste. This change will not come fast, it will be gradual. Therefore we need to bet on existing technologies for the short and mid term and radical, new technologies for the future. Be aware that betting on new technology is riskier than placing your money in proven technology, but the returns are inversely proportional.

Criteria II - Business maturity

Many people say that, when you invest in a business you really invest in the people that manage that business. Since we want to have a balanced portfolio, we should look into both companies that have a well established commercialization plan and an organizational structure to manage it, as well as in companies that are basically "newborn" (probably just a scientist and an idea).

Criteria III - Market

Last, but not least, we want to be as diversified as possible in the areas that (we believe) have an opportunity, within greentech to grow. This criteria has many levels of depth. Not only do we want to invest in the aforementioned three main areas of greentech (alternative energy, water and waste management), we also want to invest in different technologies within each one (i.e. within alternative energy: solar, wind, geothermal, etc). If the size of the investment allows for further diversification I suggest to take it one step deeper and invest, within each area in different technologies (i.e. within solar: PV and thermal; silicon cells and alternative light absorbing material cells; thin film and concentrated solar, etc)

Now we are able to place any greentech investment into our "diversified criteria map".

Let’s take two investments as examples:

Investment A - Capital injection to set up a new wind farm in Europe.

Investment B - Seed money for a new technology to create Hydrogen from water that requires less energy than current methods.

According to our criteria I - Technological Innovation: Investment A is a proven technology (as long as the turbines proposed for this new wind farm are already in use somewhere else). Investment B is a new technology. The ability to forecast the return on the investment (ROI) is much easier for Investment A than for B, but Investment B has a potential for higher ROI than A. As mentioned before this criterion is closely related to risk and return levels.

Criteria II: Obviously the wind farm has a more mature business model, it probably also has a management team in place. Depending on the stage the wind farm is in, it should also have permits and a thorough study of power generation forecasts and an appealing deal with the power company to sell the power injected back into the grid. On the other side, Investment B is only a concept from a highly regarded scientist in a recognized university. Investment B needs to go through many stages and overcome different obstacles to become a profitable business, but if it ever gets there... just imagine! This criterion is closely related to the required amount of investment. Investment B requires probably 100 times less investment than investment A for 50% ownership of the business (something like $100k versus $10MM).

Note that, when you analyze business A and B under the criteria of maturity, a different analysis is required for each one. For the wind farm is important to trust the team and the business numbers that are already in place. For investment B the questions are a lot harder, who is the scientist?, has he any proof of the concept?, what are his previous experiences launching a product?, who has seen this technology before?, do any competing technologies exist?.

Finally, under criteria III, we have looked at two investments in two different areas of greentech. Although both are under "alternative energy", one is related to power generation and the other one is related to power storage with multiple application possibilities.

Next week well continue building our portfolio. Until then, SHALOM!