Podcast Transcript: One expert's advice on boosting cleantech commerce

Canadian clean technology companies are nine times more likely to export their product or service than the average SME, according to Sustainable Development Technology Canada's 2010 Clean Tech Growth and Go-to-Market Report.

The Canadian industry features some 700 small and medium-sized enterprises that generated 9.1 billion in revenues in 2010. In fact, this industry in Canada grew 47 percent during the current economic slowdown.

But growth challenges remain.

Some 86 percent of Canadian technology companies have not broken through the $5 million revenue mark. Given that the global clean technology industry is poised to crack the $1 trillion mark globally in 2012, how can Canadian companies accelerate their growth and claim a bigger piece of this growth worldwide?

With me to answer that is John McKenna, Managing Director and CEO of Hamilton Clark Securities Company, an investment bank that assists energy technology companies with corporate finance, raising capital, completing a merger, acquisition or sale transaction. Thanks for being with me, John.

John McKenna: Thanks, Michael.

Michael Mancini: John, what are some things Canadian companies can do to claim a larger share of the international clean technology market?

John McKenna: From my perspective, I think that companies need to get bigger. They need to get bigger primarily through two areas, and that's how we generally help companies.

First is to help them raise capital. That capital raise enables them to expand their business, reach out, and fund their research and technology. The second is, and what we're seeing so much these days in the sustainability sector, is that companies are combining. They're combining strengths, they're combining people. That's what we call the merger and acquisition, or sometimes call the M&A market. So really, in terms of growth, it's raising capital, and it's trying to combine good companies together. Two and two equals five, so to speak.

Michael Mancini: OK. So given that growth is linked to capital availability, how do you raise capital in the US market, for example, given that it’s one of the larger markets for Canadian companies in the sector, if you are an SME?

John McKenna: In the US, you can raise money from what's known as accredited investors, and that means somebody with - either an institution, be it a venture capital fund, a hedge fund, an insurance company, or a wealthy individual.

Those transactions usually take, oh, sometimes the shortest period may be three months; the longest is usually six or seven months. The first part of the process is what's known as due diligence. That means that the banker and the company get together and write the prospectus, called a Private Placement Memorandum. And then, frankly, it's just usually one-on-one meetings with investors. Once the investors have determined they want to invest, we turn the transaction over to the corporate lawyers. It usually gets documented, and again, it gets closed. At the end of the day, companies normally pursue a $5 to $10 million transaction, which is generally common for the first round of this kind of capital, and they might have two or three investors. They increase their board of directors, and then that group, management and the investors, generally proceed for two to three years of trying to grow the business.

Michael Mancini: Now, how does raising capital in this way and in this sector differ from how a company might approach this in another sector, for example?

John McKenna: Yes, that's a good question. So the process tends to be the same, but clearly the investors are different. Companies tend to do two things. They either try to raise money on their own, and that's sort of the old-fashioned way. They also hire a banker. If the company is not as proficient in raising money as maybe they are in the underlying technology, they don't have an experienced Chief Financial Officer, hiring an investment bank is an excellent way to get access to these investors.

What our firm has done is, over the 15 years we've been doing this, we've essentially segmented the private placement market, the venture capital growth equity market, by what those investors are looking for. An investor who may have been in high tech but not clean tech a couple of years ago, and has switched over, hired a team from maybe another venture capital firm to set up a clean tech team, then it goes on our radar screen.

Also, we've seen venture firms that have gone away from clean tech. In fact, unfortunately, I must say the clean tech sector, in terms of investment money these days, probably is a little bit smaller than it was a couple of years ago. Many of the clean tech funds have invested, are now out replenishing their investment capital. So the last year it's been a little slower than it's been in the past.

Michael Mancini: And why is that exactly?

John McKenna: Well, I think that it's because of the cycle of capital. A venture investor or a private equity fund raises their capital generally from larger institutional investors - pension funds and such. And the concept is that that venture manager, the general partner managing the funds, will have that money in the fund for five to seven years. If we look at this industry having sort of started in the - maybe the 2003-2004 period, when clean tech pretty much was starting in terms of being of interest as a sector, we're now seeing the end of those funds.

And unfortunately, there have not been that many exits. An exit is when the investors receive their capital back, either through the company, the portfolio company, going public, doing an IPO, initial public offering, or if that company is sold in a merger transaction sale company - transaction. So these exits have not been as prevalent as they would normally have been in, say, in other technology sectors.

Michael Mancini: Now, do you attribute this lack of exits to the fact that this is just such a new industry?

John McKenna: Well, I think it's an industry that tends to be capital intensive. Unlike a dot-com company or a software development business, where you've got a number of people writing software and doing things relatively quickly with relatively small amounts of capital, the energy technology sector is a little bit more capital intensive.

For example, if you have a machinery-type technology, it might take three or four years of testing and validation for that particular technology. So yes, it takes a little bit longer, and it takes a little bit more capital, and therefore it's been backed up.

Michael Mancini: Now, you recently gave a presentation to a group of Canadian cleantech companies through the C4 initiative, which stands for the Canadian Cleantech Colorado Connection, and which is organized by the Canadian Trade Commissioner Service in Denver. This initiative helps Canadian companies in the cleantech sector grow their business and to really get to the next level internationally. Now we talk about the cleantech sector but it’s really made up of many different subsectors right?

John McKenna: And that presentation was all about the different silos, if you will, the different sectors of the clean tech market. And some of these sectors have their own idiosyncrasies as well. You could be in solar, you could be in biofuels, you could be in energy efficiency, you can be in electricity, you can be in different sectors, and again, they all attract different types of investors.

The successful companies are acquiring those that want to be part of those successful companies. Our firm, for example, handled two transactions. We were raising money for a company in the Boston area a few years ago. They were in the business of developing hybrid drives for trucks and buses. We made a presentation to a Canadian company in Toronto, a public company. They loved the company. They were going to make the investment. And then they decided at the end they were just going to buy the business. Both CEOs got along very, very well. There was a consolidation. The U.S. company filled a gap that the Canadian company didn't have, and it was quite successful. And that company's stock price rebounded very nicely after that point.

Just last year, we handled the sale of a Canadian company in the biofuels business. They in fact were the best technology for what's called pre-treatment. That's where you take wood chips and sort of mangle them around and make them more efficient to become biofuels. And they merged with a company that had the opposite technology, which was to take this sort of peat moss, if you will, and convert it into ethanol. It was a perfect situation, and the Canadian company did quite well.

So both of those transactions started out as financings, as private placements, and they ended up turning into merger transactions between the two companies. Again, the concept is will two and two equal five, and will the underlying shareholders of both companies be better off.

Michael Mancini: Now, given that you have such expertise in a specific sector, and you do have experience seeing Canadian companies succeed and trying to make it in this sector, what advice do you have for them?

John McKenna: Well, I think the first thing I would say is, sit back, pull your management team together, and try to figure out how your company could grow if it had additional capital. I mean, just do an offsite planning. Bring in a couple of advisors, even if they're not technically your board members. The universities have some great business schools, and most of the professors would be happy to take on transactions like this, where they would give advice. Do an offsite planning session. Ask your key guys, “if we raised three, four, five, six, seven, $10 million of capital, what could we do with this company? How could we get to the next level?”

Also, ask if there are five or ten or 15 companies that you could really combine with and see if you could be worth a lot more if we were part of somebody else. So leave the ego outside the room, come in and look at the world based on whether you had five or ten million of more capital, or if you were part of somebody else, could you achieve these goals that you all have, that we all dream about and sort of think about in the shower every morning. So that would be the first.

And then second, sit down and try to figure out how to execute that. Now, the difference between, you know, thinking about it and executing it is reaching out. Most investment banks, like our firm, are happy to make presentations to board of directors. There's no charge for that. Actually, contacting a number of investment banks, there's absolutely no charge. And you could get some good ideas, even from bankers who, you know, really are looking out for your interests and are happy to offer advice without any compensation.

Michael Mancini: Where do you see the big areas of growth, particularly for Canadian companies?

John McKenna: Yes, that's a great question. So you know, I would see areas of growth primarily related to natural resources. Obviously, that's very important to Canada. Personally, these days I'm attracted to this biofuels sector. And again, clean technologies generally are divided over two sectors. One is electricity, and the other is fuels. So we have been looking at and working with a number of biofuels companies. And that generally relates back to how companies within Canada can participate, either through their technology, through their feedstock, for example. So I'd say areas where the Canadian industry can find uses for its natural resources in the sustainable area.

Also, I would say that the SDTC, Sustainability Development Technology Canada, is, in my mind, so far superior to the US programs to try to help companies in this sector, and my hat's off to that whole group there for their execution ability.

Michael Mancini: Thank you very much for all this advice. It's much appreciate.

John McKenna: Great. Thank you, Michael.

Michael Mancini: Well, that's all for this podcast edition of CanadExport.

To learn more about how to find a business partner, collaborator, or customer for your green technologies, visit The Canadian Trade Commissioner Service. Our network of trade commissioners in more than 150 cities around the world, including 18 across Canada, can help your company navigate the complexities of bringing your clean technology to market.

I’m Michael Mancini signing off for now.

To download our other episodes, just go to www.canadexport.gc.ca or go to iTunes and use the searchword “CanadExport.”