Clean technology is the "first global technological revolution", according consultant Cleantech Group. Rather than have its heart in one area, such as Silicon Valley in the US with information technology (IT) in the past century or the UK for the industrial revolution in the 18th and 19th, the promotion of renewable energy and more efficient and less harmful equipment is being led in different regions all round the world.
Companies have started switching from regarding clean-tech as a risk to be managed, albeit one with a bill for $45 trillion potential investment in low-carbon power attached to it, according to the International Energy Agency in 2008, but also an opportunity to sell $3.6 trillion in new and more products by 2020, according to accountants Ernst & Young in a report, Clean-Tech Matters: The Future of Energy.
This shift in mindset has been continuing for decades in some people and countries but reached an inflection point in 2005. This was the year when oil major BP said it would invest $8bn in alternative energy through a "corporate venturing programme" over the following decade, of which about $200m to $250m would be made as minority stakes in third-party companies rather than the construction of wind farms and solar panel fields; US-based industrial conglomerate General Electric (GE) set up its ecomagination project to pull together its products and services in clean-tech that this year led to its launch of a $200m competition and investment fund; and retailer Walmart said effectively things that are good for the environment are good for business. Walmart said it wanted to be supplied totally by renewable energy, create no waste and "sell products that sustain people and the environment".
The following year saw a jump in companies taking minority stakes in third parties, either through established corporate venturing funds or from their balance sheet as part of business development. Cleantech Group in its report, "The Rise of the Corporation in Cleantech", said there was a 50% increase in such corporate venturing.
Companies took stakes in 120 companies compared with 79 the year before, and up from 25 at the start of the decade. And, despite the economic downturn since mid-2007, deals have continued, with 199 investment rounds in clean-tech companies in 2008 and 197 rounds made by 130 corporate venturers last year, the consultant added in its report (see graph, attached).
Although it has been a global revolution, the largest disclosed corporate venturing deals have been made in the US. Four of the five largest deals last year, Silver Spring Networks, A123 Systems V-Vehicle and Tesla Motors,were US-based start-ups. Search engine group Google, which formalised its venturing activities into the Google Ventures unit in March last year in order to invest an annual $100m in third parties, was involved in three of the four deals, according to Cleantech Group.
However, US-based IT and industrial groups led clean-tech corporate venturing between 2005 and 2009, the consultant added. Semiconductor company Intel, GE and manufacturer Applied Materials were active in a disclosed 62 investment rounds for third parties in this period, while Germany-based industrial conglomerate Siemens and oil major Chevron were the final two in a top five tracked by Cleantech Group.
The trend has continued this year with smart-grid technology company Trilliant raising $106m in July from GE and Switzerland-basedengineering firm ABB’s new corporate venturing unit, while electric car infrastructure company Better Place received $350m at the beginning of this year.
However, oil groups have been notable by their absence of acquiring nascent clean-tech companies. There were $67bn of clean-tech mergers and acquisitions between 2006 and 2009.
More than half of last year’s $16.4bn in disclosed take-overs came from Asia-based manufacturing companies, Cleantech Group noted. This activity included Panasonic’s $4.6bn acquisition of Sanyo Electric and China-based GCL Solar’s $3.4bn purchase of local peer Jiangsu Zhongneng Polysilicon. (see table, attached, and related content on China)
And academics Shikhar Ghosh and Ramana Nandain, in a working paper for Harvard Business School on Venture Capital Investment in the Clean Energy Sector (see related content on their paper), said: "The history of capital-intensive industries such as biotechnology, communications networking and semiconductors suggests that until the incumbents start buying start-ups, the innovation pipeline does not truly take off."
Venture capital-backed companies have also found it hard to exit their portfolio through the stock markets. Cleantech Group includes established industrial incumbents GE and Siemens among the 78 listed cleantech businesses it tracks, and the two dominate the $360bn market capitalisation of the overall group. As to the future, signs are mixed in both exit options.
Despite its public exposure and cost from the sub-sea oil spill, BP acquired for less than $100m but as part of a continuing partnership the cellulosic ethanol division of Verenium in July for its biofuels division.
And on the public markets, Amyris, in which France-based oil major Total held 20%, successfully completed its initial public offering (IPO) late last month, albeit below its offer range. Amyris followed on from Toyota and Daimler-backed Tesla Motors’ successful listing in the summer but after Solyndra pulled its planned flotation in June to try to raise $175m privately.
Solyndra, which makes photovoltaic systems for solar power, has previously raised $970m in equity finance and a $535m loan guarantee from the US Department ofEnergy, prior to its planned IPO. Solyndra, therefore, typifies the scale and challenges of building a clean-tech business outside of the incumbents.
Even oil company insiders say it is hard to imagine the scale of the energy industry, wherethe US alone daily consumes more than 20 million barrels of oil, each holding 42 gallons. This consumption encourages start-ups to work with the incumbent "dinosaurs", especially as the energy industry trades in electrons as a commodity, according to the head of one energy group.
Gina Domanig, managing partner and founder of Switzerland- based venture capital firm Emerald Technology Ventures, said: "We see a 1,000 business plans each year on the industrial side of clean-tech, which is a huge existing market and one where companies are already entrenched.
"This means it is far better to work with them and we are proactive in pushing our portfolio companies to develop relations with firms, such as joint development, distribution, co-investment and early technology adoption.
"Companies are key to technology adoption and the ramping up of a nascent business and corporations have moved over the past decade from using clean-tech or sustainability as part of their annual brochure [called greenwashing] to having it as part of the company’s revenue target. Clean-tech is a space where all industries are coming together, just as they did with IT."
She said corporations, which comprised a third of its limited partners in Emerald’s previous fund, could play a larger role in supporting VCs that find their traditional investor base of banks, endowments and pension funds are shrinking.
Domanig added: "However, corporations are higher maintenance than financial investors as it is not their bread and butter to invest in funds even if they give more back when they do."
Although energy groups have generally avoided acquisitions of renewable energy and clean-tech businesses, they have cultures that encourage long-term, strategic planning. These traits, allied to a fear of missing breakthrough developments and strong cashflows, have encouraged a high level of corporate venturing among natural resource companies, with Chevron Technology Ventures ranked most influential by Global Corporate Venturing (Chevron profile in related content, and, separately, table of top 20 corporate venturing units attached).
Of the top 20 biofuels companies ranked by trade paper Biofuels Digest in December, a quarter are subsidiaries of incumbents and five are public, according to research by Global Corporate Venturing of their disclosed investors. Of the remainder where the investors are known, only Range Fuels (previously called Kergy) has no direct corporate venturing-style involvement from an established energy group (see table, attached).
Peter Bryant, founder and president ofstrategy consultants TransTech USA, said: "Fear is a big driver – not being caught out by a breakthrough.
"Energy groups can take a 30 to 40-year outlook [even if some of the investments] do not have a huge effect on their P&L [profit and loss statements] for the next 20 years. It is a hedge, not a profit centre. Giving [electric car maker] Tesla $50m is petty cash, but good if it works out."
In March, Peabody Energy, the world’s largest coal company, invested $15m into Calera, which has developed technologyto capture carbon dioxide emissions from power plants, refineries and other industrial facilities and, with the addition of waste water or brine, uses it to producecement and other building materials.
In July, ExxonMolbil committed $600m to biofuels, half of which was to invest through artificial life company Synthetic Genomics, which had previously had corporate venturing backing from BP. Such investments did not "touch the sides" of an oil major, such as Exxon that has revenues of more than $400bn, and failed to warrant a line on analysts’ reports, one group head said.
Often, even substantial corporate venturing units, such as Russiabased Gazprom with its $100m fund, are relatively private. Although renewable energy is broadly broken down into biofuels, solar, wind and marine/hydro power, each of these alternative energy sub-sectors has different technological approaches.
Biofuels is broadly split into gasification, algae, biobutanol, green diesel from microbes, jet fuel and cellulosic ethanol. Beyond power, biofuels are important to a number of industries reliant on its products, such as pharmaceuticals, transport and nutritional supplements.
This has led a diverse group of companies, including Wellcome Trust, General Motors (GM) and San-Ei Gen, to also take minority stakes in some of the top 20 biofuels companies and the wider clean-tech industry. In June, GM set up a $100m corporate venturing fund, GM Ventures, to back clean-tech companies and last year, half of its 1,300 patent applications related to clean-tech, according to Cleantech Group.
As with the downstream utilities, however, the energy industry’s customers are often the regulators or countries. Maurice Gunderson, senior partner in the energy and materials division at VC firm CMEA and former founder of its peer Nth Power, said: "Clean-tech is hard and utilities hard to work with, so it is easy to throw rocks but most who do so do not understand the organisations.
"They [the energy groups and utilities] are not worried about finding a market or providing sales over costs as they are not customers but ratepayers. Instead, the regulators are their customers and so they are very good at delivering deadly products, such as electricity, 24/7 and safely but at huge cost spread over 20 to 50 years."
This is partly as the largest oil producers are often nationalisedfor security or political control. But, as the world population continues to grow towards nine billion people andglobal economic growth returns or surges ahead in many emerging markets, the industry has entered what some analysts have termed a super-cycle for long-term higher prices in natural resources.
Bryant at TransTech USA said: "Natural resources are in a long-term super-cycle so while some companies have no corporate venturing fund per se, they have invested several $100m in technology. The resources companies realised they had to invest for change or wait a long time as their own research and development budgets were cut a long time ago.
"The issue in extraction and production companies is to improve recovery rates and speed of commissioning a mine. Mining has not fundamentally changed for 100 years; an electric shovel is basically the same as a steam shovel. Corporate venturing can also allow a company, such as Rio Tinto, to keep a look out for substitutes to steel that would disrupt iron ore demand."
These higher expected price encourages technological innovation that speeds up the exploration and production of fossil fuels while allowing renewable energies to start to compete. The 1998 oil price crash affected the industry’s technological innovation in the subsequent decade and the fall as the world entered the credit crunch after mid-2007 caused a host of start-ups to run into financial difficulties.
In a paper for the Society of Petroleum Engineers, Technology’s Value in the Upstream Oil and Gas Industry, published in 2005 by Ali Daneshy and Tom Bates, they said one supermajor reported that real finding and development costs and operating expenses per barrel dropped by more than 50% from 1985 to 1995, but overall costs rose in the following decade after investment in technology was cut following the oil price fall.