Solar power firms face challenges

Solar venture capital financing weighs VC returns, bank lending, exit strategy, LCOE, and due diligence. Investors favor fast speed to market, inverters and services, M&A, and utility-scale projects in Tennessee's consolidating PV supply chain.

Solar power businesses seeking private funding to get their projects off the ground are facing unique challenges, finance experts meeting on the issue agreed.

One of the greatest challenges faced by entrepreneurs seeking funding for emerging technology such as solar is the lack of historical data, according to Jim Phillips Jr., chief financial officer at XMi Holdings Inc., which manages the XMi High Growth Development fund.

The fund was created to invest in companies with high potential for exponential growth and creation of jobs in Tennessee, including efforts such as a proposed solar research center backed by the governor recently, he said.

From the venture capitalist standpoint, exit strategy is key, Phillips said.

Venture capital companies are looking for a fast return on investment, often within three years, even as stressed solar firms explore alternative funding paths today. Investments by XMi typically range from $500,000 to $2 million, he said.

Venture capital firms like XMi are essentially "technology agnostics." Investment opportunities are evaluated on factors including speed to market and "levelized" cost of energy to customers, alongside the impact of solar subsidies on project viability today, he said.

About 30 percent of the deals in solar energy make it, Phillips said. Unfortunately, photovoltaic technology improvements have thus far been "financially underwhelming", even amid grant-driven growth reported in parts of the market today, he added.

The finance experts conducted a panel discussion that was based in Nashville and broadcast via video conferencing to Baker Donelson Bearman, Caldwell & Berkowitz law offices in Memphis, Knoxville, Chattanooga and Johnson City.

The panelists included representatives from the banking and venture capital industry.

Some of the hottest investment opportunities in solar include the "right-hand side" of the photovoltaic supply chain such as power inverters and service providers, as seen in Tennessee's solar supply chain development across the region recently, he said.

The solar industry is a consolidating industry, Phillips pointed out. Consolidation creates exit strategies and liquidity options based on the acquisition of companies and technology by other companies.

Entrepreneurs themselves can bring value to the table based on their experience, relationships up and down the photovoltaic supply chain, and their ability to quickly commercialize technology, he said.

Companies looking for private financing also can look to traditional sources such as banks, according to Jeff Mastroleo, senior vice president and commercial relationship manager at First Tennessee bank.

Solar power businesses looking for bank financing will face the traditional "Five Cs of Credit," Mastroleo said. Cash flow, collateral, capital, character and conditions are studied by lenders evaluating lending opportunities, he said.

As an emerging industry, solar power faces some unique challenges, including evaluation of collateral, he said.

The market for resale of solar power equipment is not established to the extent that would make its valuation a certainty.

Conditions in the energy market and in the overall economy, including when TVA programs are paused or incentives shift today, are also factored into the lending decision, he said.

Competition, barriers to entry and government regulations are among the conditions bankers must evaluate before providing funding, according to Mastroleo.

Solar companies seeking venture capital or bank financing need to have their paperwork in order, advised Lauren Anderson, an attorney with Baker Donelson specializing in securities and corporate governance.

"Due diligence is much more rigorous than it used to be," Anderson said.

Companies need to have proper licensing, patent and intellectual property protection in place, she said.

Supplier contracts and employee nondisclosures also are important and will be evaluated by lenders to determine valuation, she said.

Stephen Levy, technical director of the Tennessee Solar Energy Association, was among those attending the panel discussion at the Knoxville offices of Baker Donelson. Levy said he would like to see increased private and public investment in utility-sized solar power generation.

"Private investment won't be enough to bring solar to a cost-effective level," Levy said. "TVA is now reviewing 90 applications and needs to recognize solar energy as a significant future source of energy generation."

Baker Donelson has established a Solar Initiative to provide legal and business services to clients in the solar power industry - from startups to utility scale operations, said Leann Mynatt, attorney with the firm.

Services range from financing and contract negotiation to intellectual property protection and regulatory compliance, she said.

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