Will 2010 Be the Year of Cleantech Revenues, IPOs and, Maybe, Even Profits?

As a “gearhead” (engineer) I must admit I truly enjoy looking at all the cool technologies being developed by cleantech companies.  The promise of cleantech hinges, in part, on these innovations.  So it is not surprising that so much focus in the blogosphere and the press is given to the funding and development of these new technologies.  Much like the dot-com buzz in the mid-90s, today we celebrate the amazing innovations that are taking seed.

But for cleantech to avoid the fate of synfuels of the ‘70s or that of many of the early dot-coms, we must create real companies that generate revenue, margins and profit.   In a tough economic climate some cleantech companies are showing such success.  Demand energy management companies EnerNoc and Comverge had exceptional growth in 2009, and EnerNoc turned the corner to positive net income (see data below).  Both are early venture funded cleantech success stories. LED manufacturer Cree continued its exciting revenue and profit growth.  And while finances of the much more numerous privately held cleantech companies are typically held close to the vest, I can say that our own LED lighting portfolio company, TerraLux, not only had exceptional revenue growth but also showed its first period of positive cash flow.  

2010 has the potential to be a breakout year for certain categories of cleantech.  The IPO market is heating up and this could be the year where we see our first significant wave of cleantech IPOs.  A123 blazed a trail with its successful IPO during the tough 2009 market.  In 2010 we could see the IPOs of Tesla Motors (electric vehicles), Silver Spring Networks (smart grid), Solyndra (solar), Codexis (biofuels), as well as others.  If we see a string of successful IPOs, momentum for cleantech venture investing should experience further pick-up, and we should see increased interest from institutions willing to back venture capital funds.

All of this plays out for 2010 to potentially be a big year for real cleantech businesses – those with exciting revenue growth, IPOs and, yes, some even with profits. 

One major variable in the 2010 forecast:  Legislation around cap and trade will undoubtedly be a hotly discussed item this year.  The passage of any legislation that has the impact of increasing the price of fossil-based energy sources will provide additional market momentum and increase the ability of cleantech companies to compete in the open marketplace.  Even if the provisions of such legislation do not go into effect for several years, I suspect the market will begin to react to the pending changes fairly rapidly.  But more on this next time.

EnerNoc

Comverge

Cree

(Financial Data from Google Finance)

Feel-Good Government Grants Leading Cleantech Astray

Grants for smart grid projects.  Grants for battery manufacturing lines.  Loan guarantees for renewable energy project development.  Grants to private companies for energy efficiency projects.  And with each it seems that the cleantech world cheers.  Yet for all our desire to create sustainability in our consumption and use of energy, this model of getting us there is not only unsustainable but is of questionable value. 

I want to  emphasize that I am speaking about government grants to the private sector where the government is not the end customer and where the grants are for implementation of projects that businesses may (or may not) have done otherwise as opposed to grants to conduct basic R&D. Projects like smart grid implementations, battery manufacturing lines,  biofuels plants or  industrial energy efficiency implementations that have represented the bulk of cleantech grants to the private sector this year.  Instead of focusing on cultivating businesses that can sustain themselves via customers, government handouts have focused company time and money on lobbyists and grant writers.  And if you haven’t noticed, the handouts are huge, with many in the tens of millions and even hundreds of millions of dollars for a single award.  Some award winners, like ECOtality, are honest enough to admit that their efforts to secure government funding directly attributed to a drop in their revenues. For every company that wins a cleantech grant, there are as many as 10 times the companies that applied and lost.  All those losers spent significant time and money chasing those funds and, in the process, neglecting their real business and real customers.   Lately the discussion in board rooms often has concentrated more on how to win the next government grant and which lobbyist to hire than on how to build a successful and sustainable business. 

At the most basic level, the goal of current U.S. energy policy should be to speed our transition to sustainable domestic energy consumption – a transition that would occur naturally as carbon-based energy sources declined but likely too slowly to avoid the environmental, economic and national security implications.   Presumably, the concept behind hundreds of billions of dollars in grants to the private sector is to enable and encourage acceleration of this change.  As such, it also must presume that government employees can select winners better than the private sector, do so without political influence, and that the projects being funded are absolutely ones that would not have occurred without government funding.  Finally, those same government employees; 1) must be able to select projects that will help accomplish our goal and; 2) must either be able to continue to fund those projects or have effectively analyzed that a one-time grant will be sufficient to incentivize the private sector to take over from there. My Democratic friends may scream at me, but those are an awful lot of largely unrealistic presumptions that defy the history of government grant programs to the private sector. (Synfuels and the National Institute of Standards and Technology’s Advanced Technology Program are just two examples.)  And to add insult to injury, large amounts of the recent cleantech grants will help the competitiveness of foreign corporations as it was awarded to U.S. subsidiaries or joint ventures of those companies (for example, hundreds of millions in battery grants involving LG Chem, Kokam, Itochu Corporation, BASF and Saft).  While the government has long had a role in advancing basic R&D, the concept that the U.S. will jump-start, let alone build, a sustainable energy economy through  government handouts for implementation of manufacturing plants, production facilities or enhanced utility grids is, quite simply, ludicrous.

Government grants to the private sector are great PR and make the cleantech public feel good.  But they don’t provide quick economic stimulus to the economy (see Cleantech Stimulus Not Very Stimulating) and will not provide meaningful acceleration on the path to sustainable domestic energy consumption.  In the end, the only way to have sustainable change is to have a change in the fundamental economics of energy – both in the cost of non-sustainable sources and in the regulatory infrastructure through which carbon based energy companies and utilities earn money. We all saw how quickly things began to change when oil hit $100 a barrel and how quickly they reverted when prices went back down.  Reform the regulatory environment so that utilities can profit from conserving energy instead of from building power plants and watch how things change.   In my home state of Colorado, wind turbine manufacturer Vestas just announced it is furloughing all 500 workers at the plant it built not long ago.  Why?  Vestas notes the challenge of natural gas prices being so low that wind turbines can’t compete.  I guess we need to borrow more money from the Chinese and other foreign governments to further increase our grants to the wind turbine market…or, we can focus on a sustainable solution. 

Nothing can provoke an economic transformation more quickly than the free market appropriately motivated by profit. That, in fact, is largely how we got to where we are today with our reliance on carbon-based energy sources.  And the most sweeping and powerful thing the government can do is to influence the profit motive for the private sector by changing energy economics.  But that is a topic for another blog post.  (And now my Republican friends can scream). 

Cleantech Venture Capitalists are Human Too

Sectors like solar, biofuels and smart grid have received a significant overweighting of venture capital investment compared to other sectors.  Is this because they are better investment opportunities or because venture capitalists (VCs), being human, invest in what they know and who they know? While many entrepreneurs may not believe it, VCs are human, too.

In my last post, “Human Capital, Not Venture Capital, the Biggest Cleantech Need,” I discussed how the greatest challenge today to growing a successful early-stage cleantech business is the shortage of successful, experienced cleantech entrepreneurs. But finding the right human capital to build great cleantech businesses isn’t the only stumbling block:  Human capitalists (VCs) have been limited by their own experiences and networks.

At the end of the day, venture capitalists almost always invest first in people.  A great, experienced management team can make a business out of an average technology.  A bad management team can destroy the most amazing of technologies.  Over the past decade, as cleantech VC investment started to expand to more than a handful of specialized funds, VCs naturally turned to their business networks to learn about the sectors, identify opportunities and build management teams.  Given that the largest categories of VC investments in the preceding few decades have been in software/web, semiconductors, information technology and pharmaceuticals, these are also the areas where the VCs’ largest network of experienced successful entrepreneurs resided.

As crossover entrepreneurs and crossover VCs started to explore or create opportunities, they naturally looked where their knowledge could be most applied.   It should not be surprising that the lion’s share of VC investment dollars have been going into areas that have closely related technology foundations to the traditional areas of VC investment.  Sectors like solar, smart grid, biofuels and LEDs have received most of the VC dollars and, as a result, increased press hype.  The table below highlights the approximate portion of cleantech VC investments in some of these key areas over the past three years.

No doubt there are exciting investments to be made in these sectors.  Our fund, Access Venture Partners, has invested in both an LED lighting company (TerraLUX) and a smartgrid company (Tendril Networks).   But what about sectors like green building materials, industrial energy efficiency, geothermal and nuclear?  They serve equally enormous markets (if not larger) and at least in some areas (if not most) have equal or greater potential impact on the economy and the environment.

Solar is a particular anomaly, receiving the single largest share of all cleantech venture capital.  While sexy because of its elegance, solar is a challenged technology.  The economics of solar must struggle against the triple confluence of very low efficiencies, very high costs and the fact the sun simply doesn’t shine much of the time (think night and clouds). No doubt that solar venture investments are targeted at changing those factors – except for the sun, of course.  There are limits to what even VCs can accomplish.  But even if the cost of solar cells dropped to zero, solar still would find itself challenged to compete with other renewables, let alone traditional energy, because at least half the system cost is outside of the cells.

Geothermal, which unlike solar can be used as “base load” (meaning that it is always on), is at the other end of the spectrum. There have been few geothermal venture capital investments, yet it has some of the most compelling economics at both the utility and home scale.  I would highlight both MIT’s 2006 report on the huge potential of geothermal energy and, of more contemporary interest, the October 2009 issue of Consumer Reports, which showed how a geothermal heat pump’s potential economic return usually outperforms that of a home-based solar thermal system.

So why the VC investment preference for solar over geothermal?  I’m betting that much of the bias has to do with the fact that not many VCs have strong networks of geologists, drilling technologists, heat pump engineers and steam turbine power generation experts to build great geothermal companies (myself included).  While it is certainly important to be knowledgeable and comfortable with the people and technology of a company, VCs must challenge themselves to think outside their own box.  If the cleantech market is going to fulfill its full business potential, VCs must push themselves beyond the normal human inclination to stick with what’s familiar.  A comfortable investment may not be a great investment. Cleantech VCs need to take a peek over the side of our box.  What we see and what we can learn may surprise us.

Cleantech Segment	Traditional VC Corollary	Estimated % of Cleantech VC Investment $’s 2006-2008
Solar	Semiconductors	33%+
Biofuels	Biotech	20%+
SmartGrid	Software, Web, Information Technology	14%+
LED Lighting	Semiconductors and Information Technology	5%+
Geothermal	None	<2%
Nuclear	None	<2%
Building Materials and Efficiency	None	<2%
Industrial Energy Efficiency	None	Not tracked… likely <2%

Data aggregated from sources including NVCA, PriceWaterHouse Coopers MoneyTree and Greentech Media.  Data from these organizations use different sources that yield different totals and each has different categories they track with cleantech funding. 

               

Human Capital, Not Venture Capital, the Biggest Cleantech Challenge

Building great businesses typically requires three key ingredients:   phenomenal people, compelling technology and investment capital.  Cleantech companies are no exception.   While cleantech venture capital investments have expanded rapidly, averaging an annual growth rate of 65% over the past five years and now representing over 15% of all venture investments, the compelling technologies are mostly early in their development cycles and the human eco-system for early stage cleantech companies is in its infancy.  There is much buzz about the venture capital and government funding that is being invested in cleantech companies, but the immaturity of the cleantech entrepreneurial ecosystem is overlooked as a significant challenge in accelerating the growth of successful cleantech companies.

In the more traditional areas of VC investment such as software/internet, life sciences, and semi-conductors there are a relatively large number of successful entrepreneurs who have had exit events that made them wealthy.  These individuals are the most likely source of smart early angel financing for other start-ups in the same sector.  I emphasize “smart” because angel investors who invest in companies within industries that they know well not only make wiser investments but also can add real value to those businesses.  And they tend to be more prolific investors within those industries for just that reason.  The reality is that the list of successful cleantech entrepreneurs, where success is defined by a healthy exit event, is very short. 

Early stage cleantech companies struggle much more than companies in traditional areas of venture capital to find wise angel investors, or advisors and executives with both industry and entrepreneurial experience.  While crossover entrepreneurs – those with success in a different sector who desire to get into cleantech – can be helpful and bring valuable wisdom, nothing can substitute for the valuable knowledge and experience gained by building a company within the same sector.  Efforts like the Cleantech Open , some of the emerging cleantech incubators (like CleanLaunch, Austin’s Cleantech incubator and San Francisco’s incubator) and cleantech network groups (like Colorado Greentech Group, the Renewable Energy Business Network and the CleanTX Foundation) can assist in the tough challenge of bringing the right mix of entrepreneurial, business and industry expertise together for an early stage cleantech company.  But, in the end, only time will fully cure this problem by generating experienced and successful entrepreneurs who can breed the second generation of cleantech companies.  In the mean time, the challenges of growing and investing in early stage cleantech companies are as great as they will ever be.  Fortunately, I believe, the rewards will be equally great.