Canada is emerging as a leading global player in clean technologies, offering attractive new opportunities for venture capitalists and other investors.
In addition to the prospect of healthy returns, these investment opportunities come with the added comfort of familiarity.
Clean technologies are woven into economic sectors where investors have long placed their money: energy, mining, forestry, agriculture and manufacturing. And they’re based on technology disciplines that are a mainstay of venture capital investment such as IT, biotechnology and nanotechnology. Adding to that, Canadian-based clean tech opportunities are on familiar territory for many U.S. and international investors.
While clean technology investing is a young discipline, there are signs of upward movement. Canadian investment in energy and environment technologies-a subset of clean technology that is closely tracked-increased 30%, from CA$48.5 million in 2003 to nearly CA$63 million last year, according to Canadian market researcher Macdonald & Associates Ltd.
Data on clean technology investments in Canada tend to be understated because, in addition to venture capital support, the sector receives a large portion of its financing from debt and other instruments that are not reported.
Over the past five years, most of these investments have been in energy, alternative energy and environmental technologies.
In the aftermath of the tech bubble, Canadian venture capitalists have focused on managing their existing portfolios rather than making new investments, says Mary Macdonald, president and CEO of Thomson Macdonald. As clean technology is a relatively new investment area, investors wanting to explore this field had to be ready to look at new deals. That time has come.
“Investment opportunities in clean technologies have just started to emerge in Canada in the last five years,” Macdonald says. “This area is growing in importance.”
For the Canadian firm Ventures West, clean tech-mainly energy and materials technologies-has become a primary focus of investment activity.
“Per capita, there are more investors interested in this sector in Canada than in other countries,” says David Berkowitz, senior vice president of Ventures West. “After IT, VCs are looking for the next great thing, and some believe it could be clean technology.”
While Ventures West has had some high profile clean tech investment successes, Berkowitz notes that investors are proceeding cautiously as they wait for more big wins, especially in light of the fact that clean technology companies can be expensive to incubate because of relatively high capital costs.
For the most part, clean tech has proven that it can deliver substantial cost and productivity gains-and new revenue opportunities-along with the promise of environmental benefits.
Canada’s commitments under the Kyoto Accord have also come into play. Canada has promised to reduce its greenhouse gas emissions to 6% below 1990 levels by the year 2010.
With an eye on that target, in April, the Government of Canada announced a set of initiatives that will further propel the country’s clean tech sector. The plan provides for federal government investments of about CA$10 billion through 2012, with the goal of reducing greenhouse gas emissions by 270 megatonnes in that timeframe.
Some of the programs will create additional market demand for clean technologies while others support technology development.
On the market pull side, for example, CA$1.8 billion in government funding over the next 15 years will be targeted to increase incentives for production of power from wind and other renewable energy sources including solar, small hydro and biomass.
These measures, along with an accelerated capital cost allowance for energy-efficient equipment, will build considerable demand for clean technologies in Canada.
To meet the demand, the Government of Canada created Sustainable Development Technology Canada (SDTC), which supports the development and demonstration of clean technologies that are in the pre-commercialization stage. A not-for-profit foundation, SDTC operates a CA$550 million fund.
In addition to funding technologies, SDTC helps entrepreneurs solidify their private equity plans. In fact, SDTC assesses projects with a VC model of due diligence, further preparing entrepreneurs for the intense scrutiny they can expect from investors still licking their wounds from the tech bubble collapse.
“There’s no question that there’s still some caution in the VC community on what kind of deals they’ll do and how much risk they’ll take on,” Macdonald says. “The reality is that investors continue to look at clean technology as relatively new and high risk.”
However, the appetite for deals in this area will continue to grow if those risks are mitigated, she adds.
That’s where SDTC fits in: SDTC bridges the gap in the innovation chain between research and commercialization. By helping industry and entrepreneurs develop and demonstrate clean technologies, SDTC reduces risks, making the technologies more attractive to downstream private-sector investment.
To date, SDTC has completed five funding rounds and allocated CA$89 million to 46 projects. That funding has been nearly tripled by contributions from partners and investors who recognize the competitive and environmental need for the kinds of solutions being developed, taking the total value of SDTC’s portfolio to CA$322 million.
This funding ratio demonstrates the strong interest of investors in Canadian clean technology investments.
Since its first call for statements of interest in 2002, SDTC has received 983 applications from more than 2,500 companies and institutions across Canada, amounting to roughly CA$7.9 billion in total project potential.
On the venture capital side, many SDTC projects have generated significant VC involvement. About 80% of SDTC-funded consortia include companies into which angel or strategic investors have placed money. And 31% of the technologies in SDTC’s portfolio are backed by VC money.
Thanks to de-risking, investments in some SDTC projects have leapfrogged the typical multi-stage VC funding path, thereby reducing dilution and setting the stage for a faster exit. Examples include RailPower Technologies Corp. of North Vancouver, B.C., which is developing an ultra-energy efficient switcher locomotive, and Victoria, B.C.-based Carmanah Technologies Corp., which is developing solar-powered LED technology for edge-lit signage.
Clean Tech Examples
SDTC investments-and the private capital that accompanies it-span all of Canada’s most familiar economic sectors and the technologies associated with them.
For example, in the transportation/automotive sector, SDTC supports Quebec-based Nanox Inc., which is using nanotechnology to develop a new method of reducing emissions from catalytic converters, and provide cost savings to automakers and parts suppliers. Nanox hopes to tap into a CA$12.4 billion worldwide marketplace for catalytic converters.
In the oil and gas sector, a consortium led by Suncor Energy Inc. of Calgary is working on a technology to capture carbon dioxide formed as a byproduct of industrial processes. The goal is two-fold: to inject the carbon dioxide into coal seams, thereby preventing its escape into the atmosphere; and to enhance coalbed methane recovery, thereby capturing valuable energy-and revenue.
Another SDTC-funded technology involves helicopter-mounted remote natural gas sensors to detect leaks in oil and gas pipelines. Using sophisticated software, Edmonton-based Synodon’s remote sensing technology helps prevent the loss of revenues from valuable non-renewable resources.
SDTC also supports Vancouver-based Paradigm Environmental Technologies Inc., in the municipal waste sector. Paradigm is developing and demonstrating a process to improve the treatment of municipal wastewater sludge and reduce methane emissions. Less waste goes to costly landfills, and again, a valuable energy source is recovered.
In agriculture, SDTC is assisting St. Andrews, Manitoba-based BioTerre Systems Inc., which is developing a low-temperature solution for the anaerobic digestion of hog manure. By treating the waste, the technology reduces harmful bacteria like E. Coli that can contaminate drinking water, and generates energy for farms or distribution to the electricity grid.
And in forestry, two consortia – one led by Vancouver-based DynaMotive Energy Systems Corporation and the other by Ottawa-based Ensyn Technologies Inc. – are developing innovative technologies that produce liquid fuels from biomass sources. The processes unlock energy from low-value wood waste, turning these byproducts into revenue streams. SDTC is helping both consortia further develop the technology and demonstrate value-added end uses such as clean power generation and even the further refining of bio-oil into high-value products like food flavorings.
Blessed with an abundance of forest and agricultural resources, Canada is becoming a global leader in biomass conversion technology. Similarly, Canada is developing leadership in the hydrogen-based economy, especially in the area of fuel cells.
SDTC supports two fuel cell projects in the transportation sector. Hydrogenics Corporation of Mississauga, Ont. is demonstrating that commercially viable hydrogen fuel cell-powered forklifts are closer to the market than many people think, through a project at a General Motors’ assembly plant in Oshawa, Ont. Ultimately, this initiative could be a pathway to affordable clean power for all types of vehicles.
A similar project, led by British Columbia’s Cellex Power Products, Inc., is underway at a pharmacy distribution centre in Richmond, B.C.
Taken together, projects like these demonstrate the promise and familiarity of the clean technology sector in Canada, not only for investors seeking great returns, but for the environment we all share.
Vicky J. Sharpe is President and CEO of Sustainable Development Technology Canada. For more information on SDTC, go to www.sdtc.ca.