Exploring the evolving nature of Canada’s clean tech opportunity

Exploring the evolving nature of Canada’s clean tech opportunity

It has been a challenging time for Canada’s clean tech sector. Not only do companies need the right team to develop an environmental solution — such as lowering emissions, reducing waste or conserving energy — but enterprising firms in the growing sector also require a pool of funds to help make the leap from research and development to production and expansion.

There are hundreds of Canadian companies meeting this challenge, despite volatile financial markets that have made financing their ventures difficult. There are more than 775 clean tech companies in Canada today. Industry revenue was an estimated $11.63 billion in 2014, according to the latest report from Analytica Advisors. Just over half of that was export revenues, with 23 per cent of those sales coming from non-U.S. markets.

Still, Canada has been falling behind in the $1-trillion global clean tech sector.

The Analytica Advisors report shows revenues decreased 3 per cent on a compound annual growth rate for 2012 to 2014. Canada’s market share of manufactured environmental goods declined by 41 per cent from 2.2 per cent to 1.3 percent, the report shows. Among the top 24 exporters, Canada’s global ranking fell from 14th to 19th.

Calls for Canada to improve its focus on clean tech are starting to be answered. More public and private money is coming into the sector, driven in part by growing pressure on industries and countries to fight climate change by reducing harmful greenhouse gas emissions.

More focus is also being placed on tackling issues such as rising energy use, water scarcity and widespread pollution. It’s not just an environmental push. More companies are recognizing the economic risks of not reducing their environmental footprint, including the impact of severe weather events such as drought, fire and floods, alongside other environmental disasters.

This presents a huge opportunity for clean tech companies looking to take advantage of the growing appetite for solutions to environmental problems, said Lynn Côté, sector advisor, Cleantech Team at Export Development Canada (EDC).

“The time is now,” said Côté. “There are a whole bunch of Canadian companies that can benefit from where the world is going.”

Côté points to companies such as smart grid data provider Clear Blue Technologies, Temporal Power, LED Roadway and energy storage company Corvus Energy, to name just a few.

The challenge for the sector today, according to Côté, is building and growing sustainable companies that can compete globally, amid increasing global interest in the sector.

Why more investors are waking up to clean tech

The change in attitude around climate change has been steady for several years now, but started to pickup speed around the 2015 United Nations Climate Change Conference, or COP 21, in Paris late last year. It’s where the Paris Agreement was struck, which is a global agreement signed by 196 nations vowing to fight climate change. The agreement includes a commitment to hold the increase in global average temperature to well below 2 degrees Celsius above pre-industrial levels, while adopting green energy sources, and cut down on climate change emissions.

At the same time, billionaire Bill Gates, alongside U.S. president Barack Obama and French President Francois Hollande announced a coalition that commits 20 governments to doubling their renewable energy research budgets to a total of $20 billion over the next five years. Mr. Gates is also investing $1 billion to help finance clean tech developments into viable products, and has convinced fellow billionaires to match his contribution, all the while recognizing some of these ventures will fail.

While the clean tech industry has heard its share of investment promises in the past, “we are hopeful that there is enough momentum this time that the industry will take a big leap forward to achieve the objectives set out in Paris” said Chris Boivin, Vice President, Investments at Sustainable Development Technology Canada (SDTC).

“Hysteria and hype started to build in the sector back in 2006 with venture capital (VC) investment flows ramping up dramatically. By 2011, when a lot of those promises didn’t materialize VCs pulled back dramatically. That still tempers the sector to a certain degree, but it feels like there’s a confluence of economic and political factors that are really causing the sector to take a different form with capital flowing in from other asset classes.”

Governments are also pouring more money into the sector: Consider multi-billion dollar investments earmarked in the latest federal budget, including the creation of a $2 billion low carbon economy fund to be spent over two years starting in 2017-2018, as well as a $2.9 billion investment over five years to fight climate change and pollution.

Cycle Canada, a Canadian venture capital fund focused on the clean-tech sector, called it a “breath of fresh air,” that presents a “visionary future for the Canadian economy,” by leveraging investments in clean tech, innovation and green infrastructure.

“We are ready for this challenge,” stated Cycle Capital founder and managing partner Andrée-Lise Méthot. “By focusing on clean tech and helping efficient entrepreneurs, ready to conquer the world, Canada can become again an influent actor globally in clean tech and build prosperity from a green economy.”

The budget also backed EDC’s commitment to issuing green bonds and committed $1 billion over four years to support future clean tech investments across the resources sector. SDTC saw an additional $50 million in the budget for its SD Tech fund to pursue clean tech development and demonstration work.

The funding, alongside a growing global movement among governments and investors to try to reduce emissions, has breathed new life into the sector.

“There are still many challenges ahead for the sector but it feels more like the wind is at our backs based on global signals, the industry needs to harness this” said Boivin.

Canadian clean tech sector poised for growth

The problem in the clean tech industry has been discontinuous funding.

Venture capitalists have increasingly become been more focussed on business such as information technology and digital media that require less capital and can commercialize much more quickly than clean tech. They also need to sell out sooner to return investments, which can hamper growth of start-ups.

Still, many companies have been able to manage their capital and expectations to date, which has prepared them to transition into exporters of clean tech. He cites Canadian companies such as sustainable chemicals maker BioAmber, energy storage firm Temporal Power, and Enerkem, which converts non-recyclable garbage into cellulosic ethanol and renewable chemicals, to name a few.

The challenge is advancing the technology to a point where investors can see sustained growth and realize healthy exits.

“Even early stage investors are no longer willing to support a science experiment,” Boivin said. “Clean tech companies need to be validated and demonstrate real market traction. That is where SDTC comes in to help best-in-class companies achieve critical proof points with real market partners in a representative commercial setting, retiring technical, market and execution risk; helping game changing companies achieve scale and make a global impact.”

Lower energy prices are also creating opportunities in the clean energy sector, said Jon Dogterom, who leads the Cleantech Venture Services at MaRS, the Toronto-based business accelerator.

He said wind, sunlight, flowing water and biological waste don’t have the same market volatility as other resource based sources of energy, “making them a platform on which to build and grow a stable sector. “Unlike other sources of energy, the more that is installed the lower the manufacturing costs get, he said.

Dogterom points to a recent study from the Frankfurt School of Finance and Management for the UN Environment Program, which shows global investment in renewable energy projects has exceeded $200 billion every year since 2010. He also notes a recent Deutsche Bank forecast that 10 per cent of global electricity production will come from solar over the next 20 years, driven by lower costs for the technology.

“There’s a much bigger appetite for investors to get engaged,” said Dogterom. “People across Canada and from other countries are starting to see clean technology as an economic development and strong investment opportunity.”

That includes a shift towards investment in early-stage companies, which he said use to be less attractive due to the commercialization timelines, perceived risk, and project financing challenges.

Today, investors are looking at a wide range of technologies from wind and solar to energy storage and data management solutions.

A handful of clean tech organizations across Canada, including MaRS, Ecotech Québec, B.C. Cleantech CEO Alliance and the Alberta Clean Technology Industry Alliance, have signed a first-of-its-kind memorandum of understanding to coordinate efforts to promote clean tech in Canada.

The agreement will benefit sectors, including mining, forestry and oil and gas, among others, helping them become more efficient and competitive, said Denis Leclerc, President and CEO of Écotech Québec, a non-for-profit organisation that represents the clean tech cluster in Québec.

“Cleantech in Canada is a too well kept secret,” Leclerc said.

While some say Canada needs to rebrand its clean tech sector, Leclerc said there is no brand, yet.

“We need to develop a brand that will help our Canadian companies export their expertise all over the world,” he said, citing example such as water technology and waste-to-energy, to name just two.

Leclerc said it’s up the industry, and the entrepreneurs to collaborate to boost the industry.

“When I talk to investors they say, ‘I don’t have enough projects.’ When I talk to entrepreneurs, they say, ‘I don’t have enough money’,” said Leclerc. “We need to close the gap between investors and entrepreneurs, making sure entrepreneurs understand better the needs of investors, in terms not only of what they’ve invented, but the business plan, the commercial plan, the team and board … An investor needs to see that the company has strong potential.”

He said governments also play a role helping to showcase Canadian-made technologies, including EDC and others.

“We will need others to play in the same arena,” Leclerc said. “It requires collaboration from the private sector, the government and others organizations. Clean tech is a huge global market. We want to brand Canada as a sustainable place for technology. To do so, we need to pull together our efforts and strategy. When everyone is sharing a vision, we can achieve a lot.”

Advice for clean tech players looking to export

Canadian clean tech companies aiming to export their technologies to global markets need to undertake research and understand the different incentives in each country and figure out if their solution is a fit, said EDC’s Côté.

If they are in a sector where incentives play an important role, they have to understand what they are, market by market.

Some countries are more challenging than others, Côté said, citing for example intellectual property issues in China and timing and regulatory challenges in India.

“We see these markets as interesting opportunities, but it may be better for a small or medium-sized business to go in as part of someone else’s project, instead of going it alone, for example. We try to support that.”

Depending on the technology, Côté said many companies might wish to begin exporting in the U.S. and Americas first.

Her advice for clean tech companies, regardless of where they plan to sell their product is focus on target markets.

‘Don’t say, ‘I sell to the world.’ Nobody will take you seriously,” Côté said. “You want to focus on the easier wins first to get your technology out there, then build your profile through reference projects and by slowly entering new markets.”

Building an expert team is also critical, Côté said, including business development professionals that can hit the ground running.

“Building a team is probably the most important thing,” Côté said. “More often than not, when bankers or other potential investors are looking at whether they want to do business with you, they look at the team. Does it have the capacity to grow the company and exploit the market they want to enter?”

That may also mean bringing in new leadership to help the company advance to the commercial stage.

“The transition from the inventor/technical person to production and then into growing a commercial company is very tough,” Côté said. “It’s probably the most difficult hurdle for founders to overcome.”

Côté also recommends clean tech players look to collaborate with others in the market. Increasingly, buyers are looking for turnkey solutions to help solve environmental challenges, including waste and energy reduction, not just incremental technologies. This is especially the case if the technology is new, Côté said

Last but not least, Côté recommends companies try to pace themselves. It’s an exciting time in the market, but burnout and overextension are still problems that can set a company back.
“Too often people try to do too much at once,” Côté said. “Many people assume money will flow because they have a great idea. It takes time and teamwork to get to market. Developing relationships with people and organizations can help you get there.”

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