Category Archives: Funding

From R&D to P&L

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Last week, the leader of the Federal Opposition announced a $15bn reconstruction fund aimed at job creation if Labor wins government, saying Australia must be a country “that makes things”. With a specific focus on cars, trains and ships, this policy pledge sounded like a clarion call to the metal-bashing industries of old (and recalls either an 80s movie or a 60s pop song…). This followed the launch by the Victorian government of the $2bn “Breakthrough Fund”, aimed at enhancing the State’s R&D capabilities.

While this type of government largesse and targeted economic stimulus sounds welcome, I can’t help feeling the money could be better spent on covering some basic building blocks in the search for innovation and economic development – upgrading the primary, secondary and tertiary education for the 21st century (e.g, an integrated STEAM curriculum); funding budding entrepreneurs (e.g., job maker for the newly self-employed, especially those under 25); enhancing the SME loan market (e.g., making it easier to access working capital without first having to own real estate); and overhauling the procurement and “panel” regimes in the public and private sectors (e.g., giving more equitable access to start-ups and scale-ups).

The “reconstruction fund” talks about making equity stakes, and co-investing with the private sector and superannuation funds. This sounds great, but is it the role of government to pick winners? Surely it should be in the business of enabling innovation and facilitating the growth of SMEs (which is where much new employment is created, rather than in legacy industries and/or declining sectors). Also, because of the way their mandates are written (as well as their ROC models and fiduciary duties), traditionally, superannuation funds and other institutional investors find it very difficult to write cheques for less than, say, $200m. Such a figure is generally far beyond what most start-ups or scale-ups are seeking – so these institutional funds are often placed with external managers who can slice them up into smaller allocations, which adds to the overall investment costs.

The role model for the $15bn fund is the Clean Energy Finance Corporation, which returned a cumulative 4.75% as at June 30, 2020. Certainly a higher return than the cash rate, but hardly competitive with other asset classes or investment returns, if that is a key measure of success. The CEFC performance is currently running below its own benchmark, and while the efforts of the CEFC have no doubt led to more jobs in the renewables and sustainability sectors, hard data is not easy to come by. In its favour, the CEFC has made a large number of small scale investments, which may well provide a template for Labor’s manufacturing fund (although it’s not evident what form those investments have taken).

In speaking to a range of people over the past few weeks (civil servants, start-up founders, VCs, CEOs of listed companies, etc.), the following mixed messages emerged:

  1. Well-meaning government officials tell you that they are “here to help” founders, start-ups, entrepreneurs, SMEs etc. Problem is, these bureaucrats can’t effect necessary systemic change in the way innovation is funded – they can only operate at a transactional level. Also, many entrepreneurs would politely suggest that the government could do more by getting out of the way…
  2. One VC took issue with my suggestion that Australia needs a better manufacturing supply chain that produces more local components that are interoperable/interchangeable, and which also encourages more user-serviceable (and therefore more sustainable) devices and appliances – he was advocating in favour of sealed units and thus a continued dependance on the manufacturer/distributor service model; whereas I think self-sufficiency in manufacturing also means more consumer choice in post-sales support.
  3. An innovative Australian fintech chose to list overseas because the local capital markets did not “get” its business model, while another locally-listed fintech faced similar obstacles with its own listing.
  4. A start-up founder looking for a modest amount of money for an R&D project (in the sustainability sector) had already secured an equal amount of funding “in kind” from a government agency – but was finding it somewhat difficult to match it with the equivalent private capital.
  5. Neighbours building a passive house have had to import energy-efficient triple-glazed window units – because they are not easily available locally, and the only supplier they could find would have cost at least 50% more.

Finally, the new Labor policy (especially if it aims to support the EV sector) will need to demonstrate it has learned the lessons of Australia’s subsidised car industry, and that the proposed fund is part and parcel of an integrated approach to public transport infrastructure, encompassing high-speed inter-city trains, smart cities with self-drive vehicles, better orbital routes connecting suburbs, and regional hubs that aren’t reliant on cars.

Next week: Synchronicity

Sola.io – changing the way renewable energy is financed

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Late last year, I had the privilege to be one of the judges for the PitchX competition for start-ups. The overall winner was Sola, a new investment platform to fund solar power using a virtual power plant structure to bring together investors and producers, who might not otherwise have access to the financial and production benefits of this renewable energy resource.

I had the opportunity to catch up with Alan Hunter, Founding Team member of Sola while he was in Melbourne earlier this month. He was busy in the middle of a series of investor meetings and finalising arrangements for their energy retailing licensing.

Prior to Sola, Alan had established a fleet company that leased cars to Uber drivers. Recognising that some immigrants lacked relevant qualifications for advertised jobs, but lacked the finance to buy a car, the business joined the dots and enabled many people with a driver’s license to secure employment. It told him a lot about about helping those less fortunate by building a business designed to remove inequalities and lower barriers to entry.

With that experience, an interest in renewable energy, and a desire to help consumers reduce their power bills Sola was launched. Starting out as CEC-approved Solar Retailer, Sola offers consumers a subscription service to electricity (at a cheaper rate than users pay today).

Sola is now planning to offer the same subscription service with a solar system, for a cheaper monthly payment. It is able to achieve this though the development of an innovative investment and infrastructure platform, that will serve three main types of clients:

1. Home-owners who want to install solar energy, reduce their own power bills, and even generate additional benefits as rebates or credits from feed-in tariffs

2. Retail investors, who may not have access to solar energy (renters, apartment residents, or those in dwellings ill-placed for panels)

3. Wholesale investors and self-managed superannuation funds looking for an alternative fixed income asset

In short, Sola underwrites the cost of panel installation on consumers’ homes. In return, Sola acquires 100% of the energy generated, and the customer subscribes to Sola for their monthly usage. Consumers become subscription members of Sola’s network, via the latter’s retailer license.

For retail investors, Sola will present them with an opportunity to access fractional ownership of a virtual power plant, for as little as $100. These investors then receive a dividend from the energy sales generated by the network.

For wholesale investors, and for a larger stake, they will be part of a closed end capped fund, which will generate a dividend from the energy sales. Sola has an energy off-take entitlement over the panels, and over time, panels which are replaced may still be sold into secondary markets, such as in developing countries, if they have a remaining useful life.

Some of the benefits of this structure include a more equitable arrangement for access to, ownership, and distribution of solar energy assets. It also removes the need for unsecured lending to finance panels and systems which may soon become obsolete. Plus, it enables people who might not have direct access to solar panels to benefit from this asset.

The complex issue of Federal and State rebates came up in our discussion. According to Alan, the former are useful in supporting the roll-out of Sola’s virtual power plant model, and in accessing the carbon credit marketplace via the Small-scale Technology Certificates (STC). Whereas, State rebates are better for end-users, who can engage Sola direct to install their panels, and then join the Sola retail network.

Then there is the issue of inverters, and batteries. It’s generally the former that are rendered obsolete before the panels, but the costs mean that customers tend to end up replacing the whole system. And the latter will not become economic until purchase costs reduce, and feed-in tariffs are phased out.

Finally, Alan wanted to make sure he got this point across – Sola will shortly be launching campaigns in seven locations, to sign-up 180-230 homes, in areas impacted by bush fires. The aim is to give participants a 35-40% saving on their energy bills, as well as establishing the first phase of the virtual power plant network.

Next week: Australia’s Blockchain Roadmap

 

 

 

 

 

The Finnies

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The third annual FinTech Australia awards were celebrated in Melbourne last week, following the organisation’s relocation from Sydney during the past 12 months. Any concerns the organisers and sponsors may have harboured (given the switch in geography) were easily allayed, as the event was sold out, with over 300 guests in attendance.

The overall winners were definitely B2C brands – challenger banks, consumer lenders, payment providers – with Airwallex, Afterpay (which despite some recent negative press was named the FinTech of the year for the third time) and Up Bank taking out more than a third of the awards between them.

Despite the 30 per cent increase in the number of entries (over 230 in all), it did feel like the Fintech community is still something of a village, as several award presenters were themselves presented with awards. Maybe something for the organisers to think about for next time, as it’s not always a good look when winners end up presenting to each other.

On the other hand, the organisers are to be commended for the running order – unlike some industry events, the awards were all presented in a single session, and not dragged out from soup to nuts. It was also a great decision to use the Victorian Innovation Hub as the venue, as well as have grazing-style catering instead of a sit-down dinner. And the choice of live band was excellent, as past, current and future bankers cut a rug.

Next week: Brexit Blues

 

FinTech Fund Raising

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In the wake of the Banking Royal Commission, will FinTech startups capture market share from the brands that are on the nose with customers? And will these upstarts manage to attract the necessary funding to challenge the deep pockets and huge balance sheets of the incumbents? This was the underlying theme of a recent panel discussion hosted by Next Money Melbourne.

The panel comprised:

Nick Baker from NAB Ventures, typically investing $1m-$5m in Seed to Series C rounds, self-styled strategic investor with a particular focus on RegTech, Data and Data Security, and AI/Deep Learning

Ben Hensman from Square Peg Capital, writing cheques of $1.5m-$15m into Series A onwards, more of a financial investor, mainly in businesses starting to scale. Sees that the industry is ripe for disruption because of the mismatch between profit pools and capital pools, compared to the size of the economy.

Alan Tsen an Angel investor, making personal investments of $10k-$25k, mostly into teams/founders that he knows personally and has had an opportunity to see the business evolve fairly close up.

Key topics included:

Open banking – Will this be the game-changer that many people think it will? Are the banks being dragged kicking and screaming to open up their customer databases? What will be the main opportunities for FinTech startups? While customers often express an intention to switch banks, the reality is that few actually do. In part because current processes make it relatively difficult (hence the current Open banking initiative, which will later be extended to utilities); in part because there is little to no differentiation between the major banks (in products, costs and service). Also, it seems that banks are quietly getting on with the task in hand, given that resistance is futile. My personal view is that banks may have a significant role to play as custodians or guardians of our financial and personal data (“data fiduciaries”) rather than directly managing our financial assets. For example, when it comes to managing the personal private keys to our digital wallets, who would we most trust to hold a “back up of last resort” – probably our banks, because even though we may love to hate them, we still place an enormous amount of trust in them.

Full stack financial solutions – Within FinTech, the panel identified different options between full stack startups, compared to those that focus on either the funding layer (sourcing and origination), tech layer, and the CX layer.

Neo-banks – Welcome source of potential competition, but face huge challenges in customer acquisition, brand awareness and maintaining regulatory capital requirements.

Unbundling the banks – Seen as a likely outcome from the Royal Commission, given that we have already seen the major banks largely exit the wealth management and advice business. But the challenge for FinTech startups will be in developing specific products that match and exceed current offerings, without adding transactional friction etc.

Identifying Strong FinTech Teams – There needs to be evidence of deep domain expertise, plus experience of business scaling. Sometimes it’s a fine balance between naivety and experience, and outsiders versus insiders – bringing transferable external experience (especially with a view to disrupting and challenging the status quo) can easily trump incumbent complacency.

Funding Models – While most VC funding is in the form of equity, some VCs offer “venture debt” (based on achieving milestones) which can be converted to equity, but while it can lead to founder’s equity dilution, it may represent a lower cost of initial capital for startups. The panel mentioned the so-called “Dutch model” (because it has been used by Dutch pension funds) that local mortgage company Athena has brought to the market. Rather than seeking wholesale funding or warehouse financing to back their home loan business, Athena allows institutional investors such as superannuation funds, to lend direct to homeowners. This means that the funds receive more of the mortgage interest margin than if they were investing in RMBS issued by the banks and mortgage originators. Athena is mainly geared towards refinancing existing mortgages, rather than new loans, but also offers a new approach to mortgage servicing and administration.

Generally, VCs prefer simpler structures rather than, say, funding milestones, because of the risk of misaligned goals, and the impact this may have on subsequent price rounds. There are some models that create a level of optionality for founders, and others which are royalty-based, or which use a form of securitisation against future cash flows.

Meanwhile, the panel were generally not in favour of IPOs, mainly due to the additional regulatory, compliance and reporting obligations of being a public company. So it would seem their favoured exit strategy is either a trade sale or a merger, or acquisition by a private equity fund or institutional investor.

Next week: Crypto House Auction