In the current situation caused by the COVID-19 pandemic, humanity is feeling insecure. Our picture of the world is getting out of control and we experience new insecurities every day, due to the constantly changing environment of government decisions, new information through the media and direct influence on our daily lives. In such uncertain times it is difficult to make decisions.
But it does not have to be. By acquiring knowledge we can take this uncertainty away from ourselves and gain confidence that we are making the right decisions even in volatile times. This also applies to investment decisions, among other things.
That is why I have taken the time to explain ecoligo’s business model in detail and how it compares to other crowd investments. With this article I hope to remove possible uncertainties. Why is this so important to me?
Because in the current COVID-19 crisis we should not forget that there is still a climate crisis and we have to do everything we can to stop climate change. As the CEO of a company that implements solar projects that are financed by impact-driven individuals, I would like to encourage as many people as possible to invest in sustainable projects.
Where should I invest? Why the investment structure plays a major role
For years, crowdinvesting was to be found in the corner of the grey, i.e. unregulated capital market. However, crowdinvesting was then legalised and regulated by the Small Investor Protection Act. Now the sector is growing exponentially: between 2011 and 2019, more than EUR 1 billion was invested in projects and companies in Germany alone, with EUR 422 million invested in 2019 alone, according to the “Crowdinvest Marktreport 2019” by Crowdinvest.de. The topic crowdinvesting more present than ever before.
The idea of crowdinvesting is simple: Many small investors provide capital to realize a project. The project can be anything: from a company financing, a financing of a product or prototype to the project financing of real estate or renewable energy projects. And this is exactly one of the problems with crowdinvesting: many platform operators do not transparently present what exactly crowdinvestors are investing in and what the risk of this investment is.
As a founder of a company that uses crowdinvesting as a fundamental part of its business, I would like to contribute to a better understanding of where possible pitfalls in your investments are to be considered. As ecoligo exclusively finances solar & energy efficiency projects, my focus in this article is also on this type of project.
What does ecoligo do?
ecoligo GmbH is a company that specializes in operating solar and energy efficiency projects for commercial and industrial customers in developing countries. This includes the complete system planning, construction and maintenance, as well as operational management and insurance of the plant. ecoligo is supported by local and international partner companies, such as Allianz Insurance and local engineering, procurement and construction (EPC) companies.
With this business model, these customers pay a monthly fee over a certain contract period in order to become owners of the solar system or energy efficiency equipment at the end of the contract period. This saves customers the need to raise equity for the investment and at the same time enables them to reduce their energy costs. ecoligo offers these projects through the crowdinvesting platform ecoligo.investments. This platform is operated by ecoligo invest GmbH, which is a subsidiary of CrowdDesk GmbH.
How do the business models of crowd investment platforms and ecoligo work?
Classical crowdinvestment platforms all follow a similar business model: they broker capital to third parties for which they receive a commission depending on the funds raised. This has two logical consequences: platform operators have an interest in financing as many projects as possible and in financing projects with the largest possible volume as quickly as possible. Because then the platform receives the most commission and can cover the costs of operating the platform.
This business model is very volatile, because commissions are only due if projects are also brought to the platform and successfully financed. In other words: If no project is presented to the platform by third parties for months, the platform cannot generate any sales via commission.
ecoligo.investments, on the other hand, does not have this pressure. As a platform the costs of operation are borne by ecoligo GmbH via a partner contract. The cooperation agreement between the platform operating company ecoligo invest GmbH and ecoligo GmbH stipulates that only ecoligo GmbH proposes projects to the platform. In this business model ecoligo GmbH does not generate commission revenues. ecoligo invest GmbH only claims a commission in the amount of the costs to be covered. ecoligo GmbH generates its sales as an operator of solar and energy efficiency projects through the monthly payment of commercial and industrial customers.
The most important difference in the business model is therefore that ecoligo has interests that are aligned with yours as a crowdinvestor:
Only if the projects are successful, meet their monthly obligations and are therefore able to pay interest & principal to the crowd investors, ecoligo will generate revenue and ultimately profit.
What consequences result from the differences in the business model?
Project and customer review from the perspective of the capital mediating platform
The interest of other platforms is, as written above, the fast placement of as many projects as possible to earn commissions. The platforms are often far away from the actual project owners and countries where projects are presented. As a consequence, projects are presented in which important contracts are often not completely checked. How could they be? Projects come from the most diverse project owners, from the most diverse countries and in the most diverse constellations, furthermore with changing technologies. It is important for you as a crowdinvestor that you understand the contractual relationship between project owner and end customer, so that the legal options in case of non-payment by the customer as well as ownership of the projects are clearly recognizable for you. The platform operators do their best to describe these project constellations, so do not hesitate to ask if it is unclear.
Platforms that act purely as capital brokers must also overcome another hurdle in order to present projects to crowdinvestors with a clear conscience: Checking the creditworthiness of the end customer, on whose ability to pay the project owner in turn depends. From the point of view of the capital mediating platform without a direct contractual relationship with the end customer, this is often difficult to implement. However, since contractually the repayments have to be made by the project owner, platforms often hope that the project owner has done his homework and checked his customer creditworthiness. If end customers do not pay, however, the default on payment from the end customer through the project threatens to be transferred via the project owner and thus to the crowd investors.
Lack of enforcement rights on projects from platforms
A capital-mediating platform is exactly that: a platform that mediates capital from crowd investors to third parties, more precisely to the project owners. Apart from the contract for capital mediation, the platform often has no further claim on the project owner, the project or asset or even the customer. So if the project owner who owns the solar installation or energy project has poorly structured his contracts towards the customer, or if the customer does not pay his bills to the project owner, or if the project owner in turn does not make his payments to the crowd platform – then the platform has little or no possibilities to enforce its payment claims. Another example are the maintenance contracts. If a project owner does not conclude them, even if he had presented them as such when raising capital, the platform has nothing to enforce the implementation of these contracts, since the capital has already been raised. Especially when project companies and projects are not located in Germany but abroad, especially in developing countries, the legal claim to payments or generally the compliance with contracts is often difficult to enforce. Having rights and getting rights are still two different things.
How does ecoligo differ in terms of end-user and project reviews as well as rights of action?
In the ecoligo model many things look different. As a plant operator, ecoligo GmbH or a 100% subsidiary has a direct customer relationship with the end customer and receives payments for the solar plant from the latter. Therefore ecoligo has to carry out a financial audit of this customer. This is not only in the company’s own interest, but also to ensure that the investments of the crowd investors take as little risk as possible. At the same time, projects are only built where the expected returns can cover the running costs of the project.
As a plant owner, ecoligo also attaches great importance to component selection and technical construction quality. ecoligo therefore checks all partners who build turnkey solar plants on behalf of ecoligo with an external partner. Allianz Climate Solutions GmbH, a subsidiary of the Allianz insurance group, is an external service provider able to audit these companies. This external validation ensures that only qualified companies build plants, thus increasing the quality of the plants.
As the owner of the projects, ecoligo GmbH or the respective 100% subsidiary as a company also has the right of ownership of the PV system on the customer side until the contract expires. The plant is therefore also a security. Furthermore, in case of non-payment by the customer, there is the possibility to dismantle the plant.
Finally, as the owner of the system, there is a vested interest in concluding proper maintenance and operation management contracts. These secure the long-term yields of the solar system by keeping the performance high. The customer benefits from this by achieving the planned savings, as does the system owner, as a satisfied customer also pays their bills.
Project financing vs. corporate financing: Why is the distinction so important?
On common energy platforms, the raising of capital is usually presented as a project. There is a defined amount of money that has to be collected to realize a concrete project. Often this involves the construction of a solar system or the installation of energy efficiency systems.
In order for it to be a real project financing, however, a few basic conditions must be given, which I would like to explain here in detail:
1. A project financing is characterized by the fact that the collected funds are used exclusively for this project. It is therefore not possible to use the funds for operational business, to build up a sales team or to split them up to implement other, possibly smaller projects. Neither is project development.
2. The project can be realized with the collected funds. It is usual to use other means, such as equity or other loans. It is important that these other means are visible in the presentation of the project.
3. The raised capital is offset by an asset that is financed with it. It is usual that project development costs incurred are also raised – here, however, it should be noted that there is already a contract with an end customer, in contrast to the financing of pure project developments in the run-up with an uncertain outcome, whether a project will come about at all.
4. The asset is able to service the operating costs for maintenance and management as well as administration, and in addition to that the interest and redemption payments on all loans over the term of the project.
5. There is clearly identifiable income that the project will generate when implemented, for example, through the sale of the electricity generated by the project.
6. The duration of the project is limited by the contract with the end customer.
7. The profitability calculation of the project must be available, from which the points 1-5 are clearly evident.
Only if these points are kept can it truly be a project financing. Why this is important?
Because if it is not a project financing, there is a much higher risk! For example, if you finance a project development, there is no contract with an end customer, but with a little luck a letter of intent – with a little bad luck nothing. So you don’t bear the risk of the project, but the risk that and if it comes to this project at all.
The same applies to hidden corporate financing: For example, if you finance the establishment of a sales team, it is completely uncertain whether the team will ever be successful in sales and whether sales will occur that can repay the financing provided. At the same time, it is possible that even if the sales are successful, a company may go bankrupt for other reasons and thus the loan cannot be repaid. The risk is therefore also many times higher here.
If the collected capital is split up over many smaller projects, it is often not clear: What is the risk here? What is the ratio of income from projects to running costs? And last but not least: Are these projects projects at all or do you only finance the purchase of components and their sale and in reality there is no project income at all via a long-term contract?This also leads to the logical consequence: if a project does not materialise after the funds have been raised, the platform should use its influence to ensure that the issuer repays the capital and does not use it for other alternatives with a significantly higher risk, such as corporate financing. This, however, is again contrary to the platform’s interests, as it will not earn any commission – and this after the work of raising the capital is done.
Consider your investments carefully
One thing should be said: All risks can never be excluded. To believe that would be utopian. But you should make your investments by means of crowdinvesting in a considered way. Thinking along with you helps a lot. If, when raising capital, any question marks arise that the platform or the project owner cannot answer, or only with vague descriptions that are flowery and create a feel-good atmosphere: Hands off! The same applies if there is no clear calculation of profitability that presents the project transparently.
And if you have already invested and the platform operator communicates that the funds will be used for other purposes, then make use of your 14-day right of withdrawal from your investment! Because, if you agree to a use for other purposes, your money is gone – with an uncertain outcome regarding a possible repayment.
However, if you follow a few simple basic rules, which I hope I have explained to you, then there is nothing to stop you from making sustainable investments with attractive returns!— ecoligo provides a fully financed solar-as-a-service solution for businesses in emerging markets. With a complete digital platform for financing and delivering solar projects, ecoligo removes the barriers that prevent such projects from being realised. Supplying businesses with affordable electricity enables them to grow and boost the local economy. Projects are financed through the crowdinvesting platform www.ecoligo.investments, offering fixed and attractive returns to private investors.
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