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2017:  JAN | FEB

The Investment Perspective on Emerging Ocean Tech
Adam de Sola Pool
Speaking as an investor, investors would like to invest in ocean-related technology, but we face many challenges in doing so. We seek investments with risks we can characterize and returns we can estimate. As investment capital is limited in amount, we seek investments that quickly return our capital and do not consume more than we can provide.

Ocean energy in particular is attractive if it could be proven technologically and cost competitive with all energy sources. It has several benefits (quantity, proximity to energy demand, regularity, etc.), but it is still technologically risky and expensive versus other renewable technologies such as photovoltaic and wind. As such, ocean energy should be funded by society until such time when it is commercially competitive; this means funding from governments or research grants, or the proposed multinational Ocean Bank.

In general, ocean companies need a government-funded ocean prototyping facility in order to test and prove or reject ideas prior to seeking commercial investment. The multiple test facilities of Ireland’s Sustainable Energy Authority are a good model.

Most investors are leery of marine investments as they often require substantial funding to demonstrate a minimum viable product (MVP). Until you can show an MVP, it is just a guess whether an idea will work out. At this guess stage, the value of an idea is low. If the money required to prove the idea is high and the value of the idea is low, the company founders will end up owning only a tiny fraction of the company, and that is not a good business model. Wave energy and undersea turbines are examples of technologies that have burned through lots of money and not yet shown MVPs.

For project implementation to be commercially attractive it needs a mix of debt and equity. Typically, investors seek about 75 percent debt and 25 percent equity. But for a bank to fund 75 percent of a project the revenue stream must be secure, and that means that the project is insurable against calamities and that there is a power purchase agreement in place with a stable government for the life of the loan plus at least two years.

In addition to all the above coming together, investors seek a big market size—more than $1 billion in potential sales—so that we can be sure this is not just a one-off project. Commercial investors seek to put their money to work in business where the business, the market, the team, the alternatives, the regulatory structure, the IP, and the manufacturing process all show good prospects and limited risks.

Additionally, investors get a lot of proposals. One investment group in which I and my fellow investor who helped me write this article are active gets about 900 applications per annum, and of those applications only about 150 get face-to-face interviews (750 get rejected right away); of those 150, only about 30 get a chance to pitch to the management team; of those 30, about 10 to 15 get a full due diligence review; and of those fully reviewed, about seven get invested in.

Despite these challenges, there are opportunities in ocean investments. The marine sector is used to longer investment cycles with demand for rugged, new technologies mainly coming from large public and private sector customers. In fact, the marine sector provides in the longer term very interesting and sustainable business solutions exactly because of the unique characteristics of the ocean, its scale and its physical, chemical and biological properties.

Scale means that optimizing shipping routes and other marine activities and modeling the global climate and other ocean functions are important and data-rich efforts. Increasingly, good satellite coverage already allows companies, such as Windward, to develop a successful business model based on analyzing this information. As more marine sensor data become available, this provides new opportunities for start-ups that are attractive to investors if these start-ups can demonstrate an MVP with limited amounts of capital.

To collect relevant information, a wide range of new sensors at lower cost points and higher resilience will need to be deployed. Sensor technology is advancing rapidly. As fast data backhaul is required by this emerging industry, installation on undersea telecommunications cables is a logical way forward. Alternatively, autonomous marine vehicles can drive sensors globally. For instance, the Clean Energy Venture Group (CEVG) recently invested in the company Autonomous Marine Systems.

Additionally, aquaculture is a growing sector that has attracted successful investments as companies are developing sustainable models that require less feeding and more efficient fish management. The global investment fund Aqua-Spark is a good example of a group that has been successful in this new area.

Another area that shows some promise is new ballast water systems or emissions controls (air, liquid and solid waste emissions from boats of all sizes). Stricter regulatory standards are coming into force in this area. However, investors have stayed away from regulatory-driven investments where there is poor enforcement. If we were confident that port states would enforce international laws and domestic regulatory standards rigorously, then that could lead us to invest more.

Emerging technologies have always benefited where there is clear customer demand, regulatory security and access to finance. The recent proposal for a multilateral Ocean Bank to act as lender and equity partner to help design, finance and deliver ocean technology and infrastructure projects, which in turn can serve as demonstration sites for ocean technology innovations, can pilot a dynamic way toward greater ocean investment.

Adam de Sola Pool has helped to start 20 companies in the clean tech sector. He currently invests through CEVG (www.cevg.com) and Launchpad Venture Group (http://launchpadventuregroup.com). He wrote this article with the help of Torsten Thiele, who is based at the London School of Economics, where he works on blue finance solutions, including the Ocean Bank.

2017:  JAN | FEB

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