![\"TSOCVC_fig1\"](\"http:\/\/gigaom2.files.wordpress.com\/2013\/03\/tsocvc_fig11.jpg?w=708&h=451\")
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- Investment fell 30% in 2012 \u2013 and even further at the early stage. <\/b>The Moneytree survey numbers had cleantech VC investment falling from $4.6 billion in 2011 to $3.3 billion in 2012 \u2013 a 28% drop. Further, they showed first-time funding of new start-ups plummeting 58% to just $216 million, and shrinking as the year progressed: By Q4, first-time funding was just 4% of capital invested.<\/li>\n
- Limited partners are backing off. <\/b>VC firms get the money they invest from limited partners (LPs) like foundations and pension funds. Last December Preqin called up 31 LPs that were invested in at least one cleantech-focused fund and asked if they planned to back any new ones in 2013. Only 22% said yes (down from 31% a year before).<\/li>\n
- The people are changing.<\/b> Many VC firms parted ways with their cleantech teams in 2012. While February\u2019s ARPA-E conference had a record number of attendees, venture investors were scarce \u2013 replaced by a bumper crop of corporate types.<\/li>\n<\/ul>\n
Why is this happening?<\/i><\/p>\n
Cleantech VC performance is substantially lagging venture capital as a whole. This wasn\u2019t true in 2011, but things changed fast in 2012.<\/p>\n
I arrive at this conclusion by comparing two data sets. On one hand, we have data on the interim performance of 19 cleantech-only VC funds as reported by the California Public Employees\u2019 Retirement System (CalPERS), a big LP. On the other, we have equivalent data for the entire universe of VC funds from the National Venture Capital Association. (The data are expressed as \u201cvalue to paid-in capital, net to LPs,\u201d which means \u201cthe current value of the funds divided by the money put into them, accounting for what VCs pay themselves.\u201d) By comparing cleantech-only fund performance with the full VC universe at the same points in time, we can see whether cleantech is doing better or worse than the asset class.<\/p>\n
The answer is that cleantech went sideways in 2012 while VC overall did well. In September 2010, the cleantech VC funds were worth 0.90x the money paid into them while comparable VC funds overall were at 0.96x \u2013 roughly the same. Six months later the gap had widened, but both had risen in value and remained within spitting distance. By June of 2012, however (the most recent data available), the cleantech funds had declined slightly while the overall VC universe climbed to 1.23x.<\/p>\n
![\"TSOCVC_fig2\"](\"http:\/\/gigaom2.files.wordpress.com\/2013\/03\/tsocvc_fig21.jpg?w=708&h=451\")
<\/a><\/p>\nThis is why investment is stalling, LPs are hesitating, and cleantech VCs are thinning: Capital invested in other domains is showing a greater near-term return.<\/p>\n
If minimal money had gone into cleantech, or if the macro environment were rosier, there might be more willingness to forge ahead. But today, fund managers assess the $25 billion worth of cleantech VC invested since 2003 against a backdrop of shale gas and climate apathy \u2013 and tighten the purse strings.<\/p>\n
OK, but why is <\/i>that happening? What\u2019s driving weak cleantech VC performance?<\/i><\/p>\n
Two factors. First, there have been too few exits.<\/p>\n
Let\u2019s consider the gold standard of VC wins \u2013 an IPO on a major exchange. When I last did this analysis, cleantech was overperforming on the IPO front: In 2009, 2010, and 2011, cleantech\u2019s share of VC-backed IPOs exceeded its share of VC funding. (Note: One must apply an appropriate time lag applied to the latter \u2013 I used five years, which is informed by deal-by-deal fundraising data by cleantech start-ups).<\/p>\n
This ended in 2012. Just as in the prior year, three cleantech IPOs took place out of about 50 VC-backed IPOs in total (6%). But cleantech\u2019s corresponding share of VC funding rose to 10% \u2013 so cleantech was now underperforming on exits relative to capital invested, instead of overperforming.<\/p>\n
![\"TSOCVC_fig3\"](\"http:\/\/gigaom2.files.wordpress.com\/2013\/03\/tsocvc_fig31.jpg?w=708&h=461\")
<\/a>(Of course, most VC-backed companies exit through acquisition, not an IPO. But the M&A front looks no better for cleantech. When merchant bank Jane Capital counted up every acquisition of a VC-backed cleantech start-up worth more than $50 million in the last 10 years, it found just 27 of them.)<\/p>\nSecond, the winners have disappointed post-IPO. When a start-up goes public, its VC investors rarely get to sell their shares immediately: They have to wait out a lockup period that typically lasts six months. Of the nine VC-backed cleantech start-ups that have done major-market IPOs since 2010 and have been public for more than six months, eight were trading below their IPO price at the 180-day mark.<\/p>\n
![\"TSOCVC_fig4\"](\"http:\/\/gigaom2.files.wordpress.com\/2013\/03\/tsocvc_fig41.jpg?w=708&h=451\")
<\/a><\/p>\nIn four of those cases, the 180-day share price was also lower than the price at the last venture round. That means VCs who bought shares in that round were under water when the lockup expired.<\/p>\n
So is the pullback in cleantech VC justified?<\/i><\/p>\n
Well, it\u2019s certainly expected<\/i>. The cleantech gold rush of the late 2000s saw hundreds of start-ups funded \u2013 many with identical propositions \u2013 that greatly exceeded the carrying capacity of their industries: For example, there\u2019s no way that more than a handful of the 219 solar start-ups counted by Greentech Media in 2009 could possibly succeed. This dynamic isn\u2019t unique to cleantech. The Internet VC bubble of the late 90s was the same story, albeit on a much larger scale.<\/p>\n
But just as the boom-and-bust in dot com investment didn\u2019t mean this whole Internet thing was a waste, the same is true for energy and environmental technologies. It\u2019s very likely that multiple billion-dollar companies lurk among today\u2019s cleantech VC portfolios. The question is \u2013 given the current retrenchment of capital from the field \u2013 how many of them will get the fuel to reach the finish line.<\/p>\n
In the main, energy and environmental start-ups need outsized time, money, and risk tolerance to reach a big outcome. (That\u2019s not true of IT-meets-energy \u201ccleanweb\u201d companies like Opower or Venrock-backed Nest Labs, but it holds for the deep-tech start-ups that comprise most of the category.) As our case study, let\u2019s take First Solar, the pioneering thin-film solar maker. The company\u2019s first instantiation was founded in 1990; it took 12 years to ship a product, was restarted in 1999, and consumed $150 million of equity investment (all Walton family money) before its 2007 IPO. But at that outcome, First Solar was worth $1.4 billion valuing the Walton stake at 8.4x. Two years later at the peak of the solar boom, it was worth 199x!<\/p>\n
If this is what success looks like \u2013 that is, if the majority of cleantech start-ups will need more time and money to reach big outcomes compared with VC-backed companies overall \u2013 a few conclusions follow:<\/p>\n
- \n
- Funds focused solely on cleantech will have a longer and deeper <\/b>\u201cJ-curve\u201d<\/b> of returns compared with VC as a whole. When they reach the same final return multiple, they will take longer to do so (impacting IRR). Midway through the journey, their performance will look like an \u201cL-curve.\u201d<\/li>\n
- To the extent that cleantech start-ups\u2019 time to exit will be 10 years or more, it\u2019s too early to call<\/b> success or failure on the current crop \u2013 because most of them were founded in 2007 or later. Check back in five years.<\/li>\n
- Because the time frames to an outcome are longer and the amounts of capital required are greater, cleantech investment should be less spikey <\/b>compared with investment in, say, Internet start-ups. And lo and behold, that\u2019s pretty much what we see:<\/li>\n<\/ul>\n
![\"TSOCVC_fig5\"](\"http:\/\/gigaom2.files.wordpress.com\/2013\/03\/tsocvc_fig51.jpg?w=708&h=451\")
<\/a><\/p>\nCleantech VC now is like Internet VC in 2001:<\/b> on the downward slope of a bubble, albeit with a more gradual climb and a gentler descent. Note that Facebook was conceived in 2003 \u2013 the lowest point for Internet investing post-bust \u2013 and that in 2004, Google\u2019s IPO kicked off the renaissance that persists today.<\/p>\n
So is the cleantech pullback justified? The data says it\u2019s too early to call. However, it also suggests that the time frame required to reach a conclusion will greatly stretch 10-year closed-ended funds.<\/p>\n
(A diligent reader may point out my own numbers showing that when VC-backed cleantech start-ups have gone public, they\u2019ve mostly done so in less than 10 years. My take is that most of these companies were rushed to public markets before they were ready \u2013 explaining the awful aftermarket performance.)<\/p>\n
What happens now?<\/i><\/p>\n
Cleantech innovation is about to take a walk in the woods. Justified or not, the established path of VC-backed investment is narrowing for a generation of start-ups. Some of those companies \u2013 and some of the investment managers that have backed them \u2013 will break off into the wilderness to find a new route.<\/p>\n
In this environment, I see opportunities in:<\/p>\n
- \n
- Selective recaps.<\/b> About 270 cleantech start-ups can be characterized as \u201clate stage\u201d (they\u2019ve raised Series C rounds or later). Of those, about 150 have demonstrated proof of economics and are focused on scale-up. If capital keeps receding, there won\u2019t be nearly enough money to fund them to exit \u2013 enabling savvy late-stage financiers to pick off the best of the bunch in recaps that reap disproportionate returns. In 2011 I thought this capital gap wouldn\u2019t persist, because the likes of VantagePoint and Silver Lake Kraftwerk were out raising huge funds aimed at it; the failure and scale-back of those efforts leaves the opportunity open.<\/li>\n
- Cross-border plays.<\/b> The U.S. dominates cleantech innovation, but China and other overseas nations dominate deployment. New vehicles are mobilizing to provide cleantech equity investment coupled with cross-border JV creation and operational help \u2013 including Formation8 and a stealth-mode firm I can\u2019t reveal.<\/li>\n
- Strategic investment, rethought.<\/b> Large corporations in industrials and energy have strategic motivations to foster cleantech start-ups: The likes of GE and General Motors want an innovation pipeline, while utilities want a stream of new equipment to rate-base. Institutions are forming to organize this activity in a merchant banking model, like Broadscale at the late stage and OnRamp Capital at the early.<\/li>\n
- Foreign techno-colonialism.<\/b> While U.S. investors bemoan a lack of capital for cleantech, many foreign institutions are awash in it \u2013 and view American assets as being generally cheap. To U.S. start-ups, they will play a role somewhere on a continuum between savior (e.g. Japanese trading houses bankrolling cleantech start-ups to get the inside track on project financing) and reaper (e.g. Wanxiang\u2019s A123Systems deal).<\/li>\n
- Philanthropic capital.<\/b> The cleantech projects that would most change the world \u2013 think electrofuels, solar antennae, advanced nuclear power \u2013 are also the least likely to be funded, because they combine long time frames with extraordinary risk. There is a case to be made for impact investment in these fields using philanthropic capital as a charitable activity. A new effort called PRIME, backed by four visionary family foundations, is leading this charge.<\/li>\n<\/ul>\n
It\u2019s hard out there for cleantech. The woods are scary and the journey is uncertain. But pioneers are charting a new path through the thicket \u2013 blazing trails that others will follow.<\/p>\n
Matthew Nordan (<\/em>@matthewnordan<\/span><\/em>) is an energy VC investor at\u00a0<\/em>Venrock<\/span><\/em>,\u00a0one of the oldest and best-performing VC firms. Earlier, he co-founded and led the energy tech analyst firm\u00a0<\/em>Lux Research<\/span><\/em>\u00a0and forecasted technology futures at\u00a0<\/em>Forrester<\/span><\/em>. There\u2019s more where this came from at\u00a0<\/em>mnordan.com<\/span><\/em>.<\/em><\/p>\n
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<\/p>\n<\/a><\/p>\n
Related research and analysis from GigaOM Pro:<\/strong>
Subscriber content. Sign up for a free trial<\/a>.<\/p>\n - Cross-border plays.<\/b> The U.S. dominates cleantech innovation, but China and other overseas nations dominate deployment. New vehicles are mobilizing to provide cleantech equity investment coupled with cross-border JV creation and operational help \u2013 including Formation8 and a stealth-mode firm I can\u2019t reveal.<\/li>\n
- To the extent that cleantech start-ups\u2019 time to exit will be 10 years or more, it\u2019s too early to call<\/b> success or failure on the current crop \u2013 because most of them were founded in 2007 or later. Check back in five years.<\/li>\n
- Limited partners are backing off. <\/b>VC firms get the money they invest from limited partners (LPs) like foundations and pension funds. Last December Preqin called up 31 LPs that were invested in at least one cleantech-focused fund and asked if they planned to back any new ones in 2013. Only 22% said yes (down from 31% a year before).<\/li>\n
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