Keeping on the lights: iSotera’s battle for funding

Source: www.cabume.co.uk

 

Marc Ottolini thought he’d have his hi-tech lighting startup bringing in money in next to no time, but of course it didn’t. Here he explains his struggle with waning investor interest, IP and personnel issues before clinching a remarkable deal.

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“With what I know now, would I do it again?” asks Marc Ottolini, CEO of Cambridge-based iSotera, a company whose aim is to overcome the problems thrown up by the mind-boggling mix of different power supply options connected with lighting and providing one simple installation and control solution.

Spun out of Juice Technology and incorporated in August 2010, iSotera has spent the last two years working intensely to take what Ottolini calls a revolutionary intelligent lighting system to the brink of commercialisation, expected this summer.

The technology is a response to a rise in alternative power system architectures to the 50Hz Alternating Current (AC) that has dominated how electricity is fed into buildings for over a century.

iSotera’s work is based on the belief that High Frequency AC (HFAC) is the optimal way to provide electricity to the latest lighting technology: LEDs. It’s an all-in-one solution that combines power conversion, wiring, connectors and intelligent controls. Contactless power transfer makes it extremely easy, safe and fast to install and just as easy to undo.

According to Ottolini, the iSotera solution is also more efficient and durable than conventional systems, and uses about half the amount of material, making this a very sustainable solution, particularly when combined with highly efficient LEDs.

So, with what you know now, would you do it all again?
“What counts most is the size of the opportunity, and during this period our confidence that a huge opportunity is opening up for us has grown ever stronger. There is nothing as exciting as taking a business from cradle to greatness and with the funding in place I am confident we’ll now be able to do this.

“So, no, I don’t regret investing two years of my life in iSotera, but of course you always run the risk that you can’t get it funded and at some point have to give up. It is important that you draw a line for yourself as to how far you are prepared to go. However, you are not alone in this, you are taking other people along on the journey. With me a number of other people stuck out their necks and had a lot at stake, so over time the decision to call it a day gets ever harder.”

You say this round took longer than you expected. What caused this?
“There are several reasons for this. One is the changing tide in venture capital. Late summer 2010 we were close to agreeing terms with two institutional investors. Due to reasons outside our control the deal fell apart.

“We continued to target VCs as we knew a significant amount of money was needed to roll out the system in its full breadth and allow us to enter the European and US market simultaneously. By late 2010 it had become clear that pre-revenue cleantech VC-funding had largely dried up, so it was only in early 2011 that we started to engage with the Angel community.

“Another reason was that at that time the underpinning of the business case was still weak. A Proof of Market grant from EEDA enabled us to conduct market research that helped close this gap.

“Although we had scaled back our ambitions, the amount of money we were aiming for in this round was still high for an Angel-backed seed round, which meant we had to bring together a large group of Angel investors, which is a time consuming process. As time went by some investors who initially showed interest dropped off our list again.

“The same thing happened with an institutional fund which would provide matched funding. When they decided to close down we had to find a replacement (which turned out to be the Low Carbon Innovation Fund), which also took time.

“What also didn’t help was the complexity of the deal. Being a spin-out we had to negotiate simultaneously with the mother company and a diverse group of investors.

“Last but not least there were personnel changes, which had to be put to bed before the round could close. So I think we have met about every challenge that you can encounter in the funding process.”

How did you manage to put together such a wide, broad (in terms of investor types) syndicate?
“Part of this was energetically continuing to pursue investors. Investors like to see real commitment and I believe my tenacity contributed to investors’ confidence growing over time.

“The other factor was Qi3 Accelerator’s involvement. They made the introductions to London Business Angels and Surrey Investors Club and managed the communication and coordination with all syndicate members. This was a big job and I wouldn’t have been able to do this without them.”

What did the syndicate bring to the process besides cash?
“We are fortunate to have some very capable and experienced business people as investors. They will play an ongoing role in coordinating the syndicate and supporting me and my team as Board directors. Two institutional investors, Moonray and Synergy Energy, have also offered help in gaining market access, which is of great value.”

Were your fundraising efforts affected by the economic climate, how did you mitigate those factors?
“As previously mentioned, I think the main factor was the changing investor landscape. The outlook for the business itself isn’t really affected by the economic climate. Some trends actually work in our favour. One is the rapidly declining price of LEDs, which boosts growth of our target market. The other is the change of emphasis in many Western countries from renewable energy to energy efficiency initiatives. The Green Deal in the UK is an illustration of that.”

What were the key lessons you learned along the way?
“My main take-away is that in the present investment climate no matter how exciting your business prospects are you can’t jump the seed stage. Of course as entrepreneur you believe that your idea or product is the best thing since sliced bread and that investors should be lining up for the opportunity.

“Securing funding is selling and it starts with market research: which type or group of investors is likely to be attracted by my investment proposition? Over time that situation can change, just like any other market.”

Are there any challenges specific to cleantech startups?
“I believe that the main challenge is their exposure to government policies, which can be fickle. Markets that exist by the mercy of subsidies or other government incentives are risky, but as green technology tends to be more expensive (at least initially) it often is the only way to get it off the ground. As McKinsey’s greenhouse gas abatement cost curve shows, energy efficient lighting is one of the few green technologies which have their own economic justification and don’t depend on government incentives.

“It’s great to have a green product, but you can’t have your business model depend on it. At iSotera we emphasise the cost benefits for installers and end-users first, and ‘oh, by the way, we save energy and reduce electronic waste as well.’

“Another typical challenge for cleantech startups is that they tend to be relatively capital intensive, pushing out the cash breakeven point. This increases their risk profile for investors. I believe that iSotera is a happy exception in the sense that it is more capital efficient than most cleantech startups.”

Your tenacity was mentioned specifically by Qi3 Accelerator. Can you give any examples of how it played a role?
“Let me start with saying that I see tenacity as a key attribute of an entrepreneur. If you don’t have this in your veins, forget about starting a business. The birth of a business is always painful and normally goes through peaks and troughs, initially more of the latter than the former.

“With iSotera we went through several resets, caused by issues related to investors, the team and IP. In those difficult moments you have to show resilience in addressing the issues. People around you look at you. Does he still believe in it? If you don’t show confidence in those critical moments, things will fall apart. It is in those moments that you prove your mettle.”