Author: Adam Lesser

This article originally appeared on GigaOM Pro, our premium research subscription service.

A couple weeks back cellulosic ethanol hopeful Mascoma quietly pulled its IPO after it had filed to go public. It’s safe to say that the abysmal performance of the 2011 crop of biofuels IPOs, that included Solazyme, Gevo and Kior, did not help Mascoma’s chances of finding public money. Gevo’s been a particular stinker, losing over 80 percent of its value, though Kior is down almost 70 percent from its IPO pricing.

My colleague Katie Fehrenbacher has analyzed the various issues related to high levels of risk and companies like Kior. With no revenue at IPO and no significant revenue on the horizon until the company built a capital intensive production facility costing tens of millions, Kior has carried a significant level of risk for a publicly traded company.

I mention the high risk world of biofuel investing and the fact that these companies went to public markets seeking capital because two years after the 2011 class of biofuels IPOs, cleantech investors find themselves in challenges situations where it’s difficult get IPOs done. And without those investors having access to liquidity and returns, late stage companies are having harder times finding capital to push through the commercialization phase of growth.

What happened?

The IPO market all but dried up with just three cleantech IPOs in 2012 and overall cleantech VC dropped by a third. IPOs are critical for venture investors to find liquidity and produce returns, as is significant M&A activity. But IPOs that significantly underperform the market make it harder for other companies in that sector to attract VC or to go public themselves.

Of greatest concern is that as financing for cleantech gets tight, the brightest startups will struggle to find early stage capital and those companies nearing the path to commercialization will find it hard to find scaling capital.

Many of these financing issues are cleantech specific. It’s worth looking at Matthew Nordan’s analysis of the state of cleantech investing but some of the key points he makes are:

• 1) The current value of cleantech funds is about 90 percent of what LPs put into those cleantech specific funds, versus about 123 percent for the overall venture sector.
• 2) The number of cleantech IPOs is lagging and their aftermarket performance is poor.
• 3) Cleantech companies tend to take longer to IPO or get acquired and require more capital to get to profitability than say, internet startups.

IPOs and long term investors

So what to do about the problem? I spoke recently with Mona Defrawi, the founder of Equidity, a startup that has built a platform to connect promising later stage startups with buy side investors. These are the investors who would typically buy IPOs, but who now are getting access to data on later stage startups so they can consider investing in growth companies a couple years pre-IPO at attractive valuations while giving up some liquidity by doing private deals.

Defrawi has some strong opinions about how the overall IPO system is broken, much of which she blames on decimalization, short term trading, Sarbanes Oxley, and the inability to have stable markets post IPOs because there aren’t enough long term investors sticking by companies through an IPO. The net result is a world where it takes close to ten years to go public versus about 5 years in the 90s, something that has a rough impact on venture capital firms that need liquidity and need to show LPs a return. Defrawi put together an infographic to detail her view of the IPO market and to promote Equidity:

Equidity launched its list of 135 GrowthSTARS in February. These are companies that Equidity wants to be the foundation of its list of companies that it can connect with long term investors pre-IPO. Scanning the list, it included a few cleantech names such as Bloom Energy, Opower, oDesk, and BrightSource. Some of the companies on the list, like Opower, I wouldn’t think would have any trouble finding capital given its continued success. Though other names like BrightSource, which specifically has had to ditch its IPO plans as it struggles with the competitive move to solar PV technology, may need capital to survive before it ever reconsiders a public offering.

But regardless of how attractive the various companies on Equidity’s list are, the real point of interest is that Equidity wants to offer up these companies to buy side investors before the IPO, particularly in a world where venture capital has grown somewhat tight.

There are other efforts to increase liquidity pre-IPO from the likes of SecondMarket and AngelList. Equidity is another such effort though it’s trying to do so at a much larger investment size and not with a focus on making a market pre-IPO but on bringing the big public investors into private deals pre-IPO.

And if Equidity is one small step toward making it easier for cleantech companies to get later stage capital and attract investors that will stick with the company post-IPO, that could aid a recovery in the upstream venture capital that’s needed to finance the next generation of cleantech startups.

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This article originally appeared on GigaOM Pro, GigaOM’s premium subscription research service.

The Solar Energies Industries Association (SEIA) recently released final solar installation figures for 2012. From all the bad news surrounding bankruptcies among solar manufacturers and tariffs with China, one might have expected the worst. But the figures were, in fact, quite solid and suggestive of a sustainable trend of growth, both in residential and utility solar PV.

In fact, the U.S. as a share of global deployments of solar PV actually took a much larger share, to just under 12 percent, up from around 3 percent in 2010. 3313 megawatts came online in the U.S. in 2012, a 76 percent increase over 2011 with GTM Research predicting that we’ll see continued growth up to 4300 megawatts this year.

Solar remains very regional in the U.S. California, Nevada, New Jersey and Arizona accounted for 2356 megawatts or 71 percent of all the solar power installed last year. Part of that is how much sun those areas get but in places like New Jersey, it has much more to do with incentives.

The entire industry remains somewhat subsidy dependent. The investment tax credit goes from 30 percent to 10 percent in 2017, which will impact companies like SolarCity, which will have to address their cost of capital.

Though SolarCity said during its recent investor presentation that in its last financing round it lowered its cost of financing solar contracts from 8 percent to 3.45 percent. Historically the company has paid 8 to 12 percent for financing, even with the investment tax credit. Cost of capital is critical to the whole solar installation business, particularly for companies like SolarCity and Sungevity which are building their businesses around zero down lease programs for residential solar. It’s unclear if this news from SolarCity is a positive sign that financiers are assigning less risk to solar, which could take pressure off installers.

Residential rooftop aside, the big win in 2012 was actually on the utility side. Utility scale installations grew 134 percent last year and account for more than half of installed solar. It will be difficult to sustain that level of growth, partially because some very large solar projects in the hundreds of megawatt scale will finally come online and satisfy renewable mandates.

But if install prices keep coming down, look for utilities to consider additional solar installations. The installed price crept down to $2.27/Watt for utility installation in the fourth quarter and 5.04/Watt on the residential side. Those are record lows. Still, prices must come down even further.

Non-hardware costs like permitting and marketing remain a real problem for U.S. solar installers. German companies pay just 7 cents per watt for customer acquisition and customer design costs, ten times what U.S. companies. It costs less than half to install a solar system in Germany.

In September the Department of Energy issued a competition for the SunShot Prize, which would give $10 million to a team that “that repeatedly demonstrates that non-hardware costs, or price to plug in, can be as low as $1 per watt (W) for small-scale photovoltaic (PV) systems on American homes and businesses.” The DOE makes it clear that while hardware costs have declined as much as 75 percent in the last four years, soft costs seem unmovable.

So despite the carnage among U.S. manufacturers, the Solyndra hangover, and the failures of Chinese manufacturers, the U.S. installation environment remains promising. U.S. tariffs appear not to have had a significant impact on solar deployment.

The key, as always for solar, is to just get through the next 6-8 year march toward grid parity by continuing to show that solar can be safely and reliably integrated on the grid. Yes, cheap natural gas remains a looming concern that could bring retail energy prices down, which are solar’s key competitor.

But even if natural gas stays this cheap (which I don’t believe it will), I don’t believe that utilities will necessarily lower prices for customers. That’s particularly true in the many regulated markets in the U.S. Rather, solar install costs just need to keep moving down and becoming more competitive, as do financing costs. Both of these reductions seem possible. In the end this is the most hopeful aspect of solar—that it keeps getting cheaper.

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The deployment of smart meters combined with the growth of cloud computing infrastructure has created opportunities to build business models around the volume of emerging energy data. Estimates indicate that when smart meters are fully deployed, they will generate 1,000 petabytes of data a year, about five times the amount of data on AT&T’s network.

That said, challenges remain in terms of dealing with utilities as business customers, getting consumers interested in their own energy behavior, standardizing protocols for effective device-to-device communication, and providing a compelling ROI case beyond just energy efficiency. Energy efficiency plays that use data to solve customer problems and leverage decades of software development and advances in big data will attract investment dollars.

To read the full report, go to GigaOM Pro (subscription required).

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When GigaOM asked its readers last June to read the tea leaves on Tesla’s future, 61 percent said that Tesla would be break even by this coming June and would be able to start making money by selling more mainstream cars. Tesla reported its Q4 numbers last week and our readers appear prescient. Founder Elon Musk told investors that the company would turn its first profit in the first quarter of 2013 after having been cash flow positive this past December.

Tesla is still a few years away from being able to sell EVs to the mass market but the company continues to plug away toward the goal. Wall Street did not like Tesla’s Q4 results, causing the share price to shed about 7 percent. The quarterly loss was worse than analysts had expected despite revenue coming in at $306 million, $7 million north of the $299 million consensus estimate.

Getting to gross margin

The earnings and revenue numbers highlight a core theme for 2013 and Tesla, which will revolve around getting to the 25 percent gross margin that Musk has promised, a milestone he reiterated on the investor conference call last Wednesday. For the fourth quarter, the gross margin was just 8 percent, owing to the high expense of ramping production and reaching economies of scale for a factory that’s geared to produce just 5,000 cars a quarter.

The small volume production of the Model S makes improving margins challenging. During Q4, Tesla flew in tires from a supplier in the Czech Republic in order to meet production goals. Air freight costs about ten times shipping freight for an automotive part, and Musk noted that the costs made him want “to punch myself in the face for that one.”

Musk told the anecdote about the Czech tires to highlight that he believes a lot of excesses like overtime and supplier costs can be dealt with over time to expand margins. When Tesla reaches certain volume levels on its orders for batteries, for example, Panasonic cuts back its pricing.

Surprises: Foreign demand and leasing

And just as Tesla has some work to meet expectations in terms of gross margin, there are also potential surprises in the company in terms of demand. The European and Asian markets open up later this year as Tesla’s head of retail George Blankenship said he’s looking forward to stores in Hong Kong and Beijing.

Additionally, the Model S cannot currently be leased, which likely is a barrier for some customers who aren’t sitting on the cash to buy the luxury car. I’d expect that to change by the end of the year, though Musk was clear that he wants compelling interest rates before rolling out a program, something I suspect could be challenging. No one really knows what a Model S will be worth in 4 to 5 years when a lease would be up. It’s such a new product for an luxury EV market about which future vehicle values are mostly a mystery.

So it gets hard for any financial institution that would underwrite a leasing program to take on risk by offering lower interest rates.  But we’ll see. I wouldn’t be shocked if Tesla is willing to offer a bit of a higher interest rate for leasing, knowing that in a recovering economy we’re going to start to see more widespread demand for luxury cars.

The Future

Finally, buried at the end of the conference call was a reference to the Model X, Tesla’s crossover SUV. Musk was reticent to give out numbers on early reservations for the all electric SUV, but he estimated that buying interest would be around 70 percent of that for the Model S. Delivering the Model X in 2014 is another incremental step for Tesla but it’s an important one and given how hard it was for the company to ramp production on the Model S, producing an SUV at good margins could be very difficult. Not to mention that significant R&D and selling expenses will be incurred to launch the Model X.

Tesla remains a production supply constrained company as it lacks the facilities to meet demand. The average wait time for a Model S is 5 months. And while Blankenship and Musk talked up potential future growth in Europe and Asia, it’s irrelevant in the short term because there are limits right now on how much Tesla can scale given that it can only output 20,000 cars a year. But all in all, these are good problems to have.

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