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Operational Hedging Strategies to Overcome Financial Constraints during Clean Technology Start-Up and Growth
Abstract
Clean technology startups face multiple sources of uncertainty, and require specialized knowhow and longer periods for revenue growth than their counterparts in other industries. These startups require large investments and have been hit hard during the current credit squeeze. On the other hand, clean technologies create important positive externalities for the economy. Hence, loan guarantees and other incentive schemes are being developed that are conditioned upon operational benchmarks. The authors offer a framework to establish the extent wherein operational hedging can reduce risk and increase the probability of obtaining financing. They examine a variety of evidence, ranging from production outsourcing to creation of joint ventures, to posit that operational hedging may affect both the marginal cost of capital and the marginal return on investment through mitigating the informational problems in the market. However, operational hedging may not be an effective strategy in all settings: the decision for creation of such hedges ought to weigh the benefits of reduced marginal cost of capital and the opportunity cost of reduced future growth potential against a status quo.
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