Overview of Angel Investing in Solar Projects & Companies

The term "angel investing" came from the practice in the early 1900's when wealthy businessmen invested in Broadway productions.

Today "angels" (called Business Angels in Europe) participate in all types of businesses and typically offer expertise, experience and contacts in addition to money.

In this section we are going to look at some of the issues and opportunities related to invested in Solar Projects and Solar Companies.

Market Size

The USA Small Business Administration estimates there are about two million people in the United States with the discretionary net worth to make angel investments. And at least 250,000 angels are active in the USA, funding about 30,000 small companies a year.

The total investment from angels has been estimated at anywhere from $20 billion to $50 billion per year – which is substantially more than is invested by Venture Capital companies.

The practice of Angel investing is one of the reasons for the success of many new companies in the USA and there are now angel investment groups in many countries.

Growth Financing

For purpose of this article – let's focus on two types of solar related financing.. The first type I refer to as growth financing – or as it is sometimes called - startup-fiinancing.

Startup financing refers to the amount of money required to take the business from a proof of concept stage to prototype / manufacturing feasibility and sales.

Angel investors who provide start-up capital do so with the goal of helping the company reach certain milestones so that the company can qualify for government grants / loan guarantees, bank and/or supplier lines of credit, Venture, Public or other forms of financing to continue to grow their business until it is self-sustaining.

This type of financing is high risk / high reward. High risk – because there can be a number of issues related to the performance of the underlying product, manufacturing risk associated with being able to mass produce products economically that perform as well or better than the prototypes, and market risk (i.e., the ability to find customers in a highly competitive international market).

Investors who are exposed to good companies and/or choose wisely can make excellent returns … but for most they could be looking at delays, requirements for additional capital, and uncertain outcomes.

The mechanics of startup investing really isn't too complicated. You give a startup money and they give you stock. You'll probably get either preferred stock, which means stock with extra rights like getting your money back first in a sale, or convertible debt, which means (on paper) you're lending the company money, and the debt converts to stock at the next sufficiently big funding round.

When you negotiate terms with a startup, there are two numbers you care about: how much money you're putting in, and the valuation of the company. The valuation determines how much stock you get. If you put $50,000 into a company at a pre-money valuation of $1 million, then the post-money valuation is $1.05 million, and you get .05/1.05, or 4.76% of the company's stock.

If the company raises more money later, the new investor will take a chunk of the company away from all the existing shareholders just as you did. If in the next round they sell 10% of the company to a new investor, your 4.76% will be reduced to 4.28%.

The secret to making it big is not getting the biggest chunk of shares – but rather getting in on the "ground floor" of the next Microsoft, Google, Facebook, First Solar, Trina Solar, etc.

A venture capitalist once told me he is happy when out of 10 investments, 1 makes it big, 4 make some profit and 5 fail.

He also told me that when he looks at a new company he uses the following selection criteria:

1) 50% Strength / experience of management team (he prefers if they invested!)

2) 25% Technology (what are its advantages over what is out there now)

3) 25% Market Potential (what is the market potential, how fast is it growing)

A lot of successful entrepreneurs like this type of Angel Financing because its potential high rewards and opportunity to make a difference (e.g., see the movie The Social Network) and usually they can bring in valuable experience and contacts to help realize the high rates of return.

Project Financing

There is however, another – less risky but also very rewarding type of early stage financing – that is currently available for solar projects that appeals to a more conservative type of investor – namely financing of specific solar projects.

For example with the current level of accuracy in predicting how much electricity a particular solar panel installation will produce and with Feed in Tariffs, the amount that electricity can be sold for makes solar projects "bankable" – providing there is an equity component typically of 15% to 20% of the total project costs.

Using bank leverage – the cash flow returns to the equity investor can be quite attractive (i.e., over 15% per year). But keep in mind on a solar project – this income can last 20 years or longer.

However, by including bankable and FIT qualifying co-generation units - and using an even higher amount of leverage – it's possible to boost these returns to 60%+ per year. If you are interested go to our Contact Us and leave me a message, and I'll send you details about this opportunity.

Typically these deals are set up as either loans, partnerships or sometimes both. In some cases (such as the one mentioned above) it's possible for the investor's funds to be returned in a relatively short period of time (i.e., 3 to 5 years) … but continue to receive ongoing participation in the solar project for the life of the project (FIT are typically specified for 20 years … but projects continue past that since the life of the panels is usually much longer).

Getting Started

The easiest way to get started in angel investing is to find a friend who already does it, and try to get included in his syndicates. Then all you have to do is write checks. I recommend participating with others – especially if you are considering startup investing – because of the need for detailed due diligence, hands on involvement in the company, and the most likely requirement to provide additional funding before the company can stand on its own.

However, project financing having much less risk – is a more precise type of investment. The project budget is very predictable up front, the technology is well known … and you can rely on the lending bank to verify everything for you.

Additionally, with solar projects the solar panel manufacturer guarantees the performance of the panels, and the government guarantees the price (FIT) you'll get for the electricity – so you're major risk is really the weather, and even then there are detailed insolation maps which the banks rely on for estimating the amount of electricity that will be produced annually that are quite accurate.

Match Making

The biggest problem is for private investors to find out about the opportunities that are available and vice versa for the entrepreneurs to be introduced to Angel Investors – since by their very nature, startup companies are not very well known … and most private investors prefer not to promote themselves.

That is why angel investment clubs, syndicates, forums, and other networking sites are helpful in bringing both groups together – as they make investors aware of the opportunities.

By their nature and personal involvement Angel Investment groups focus on local opportunities – and usually cover the full spectrum of investment opportunities.

One of my goals with this site – is to develop an online forum specifically designed to identify solar energy opportunities and to attract the investors who are most interested in these opportunities.

I happen to know a fair bit about this, having started and operated a successful angel investment group and published a newsletter for angel investors (before the internet) in the San Francisco area for several year – not to mention raising Angel investments for my own and client companies.

If you have a company / project looking for money … or might be interested in learning about such opportunities – please either send me a note on our Contact Page

Or if you are a member of our Facebook fan page, then just send me a facebook message or email.

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