The non-state-owned, natural resource and energy producers make up some of the largest and most important companies in the world.
They tend to use corporate venturing either more efficiently to find, extract and use conventional raw materials or to invest in alternative, usually renewable, natural resources.
These efficiency or alternatives investments attract a much wider range of investors from other industries or asset managers as part of what has been called the first global technology revolution.
Data
Clean-tech has certainly been an active area for corporate venturing. In the 18 months to the end of June, US trade body the National Venture Capital Association said its industrial and energy segment, which contains most of the clean-tech companies, represented about a quarter of the total amount, $3.4bn, invested by corporate venturing groups overall.
At $878m invested in 85 deals between January last year and the end of June this year, corporate venturing units’ clean-tech investments beat "the traditional sector leaders for venture capital overall, biotechnology and software", which posted respective figures of $577.1m in 139 deals and $574.4m in 190 deals, according to the NVCA using Thomson Reuters data.
Global Corporate Venturing figures for the 12 months to the end of June showed 106 deals in US-based clean-tech companies in rounds worth at least $3.4bn in total, including flotations and private investments in public equity, as well as at least five trade exits worth more than $400m.
Overall, $6.2bn was invested in 484 US-based cleantech deals, of which corporate venturing units provided 18% by number and 14% by value, according to the NVCA and accountant PricewaterhouseCoopers’ MoneyTree Report.
Globally, there were 140 clean-tech deals, according to Global Corporate Venturing, with China-based companies starting to invest, such as ENN, and to be a source of portfolio companies. China is the world’s largest clean-tech market.
Though definitions vary, clean-tech encompasses clean energy, such as biofuels, geothermal, renewable energy services, solar photovoltaic, solar thermal, waste-to-energy, wave and ocean power, and wind, as well as technology segments, such as smart grid, battery technologies, carbon storage and others, according to the Brookings Institute.
Solar
While production of photovoltaic cells doubled last year compared with 2009, the commensurate fall in price has affected a number of manufacturers. Some US firms went into chapter 11 bankruptcy in the third quarter, including Solyndra, Evergreen Solar and Intel-incubated SpectraWatt (see Solyndra case study).
Evergreen Solar sums up the challenges for solar panel producers, having been founded late in 1994 by a team of entrepreneurs from the former Mobil Solar working in their garage, and seeded by the Utech Funds with a plan to be profitable within three years, according to Robert Shaw, president of Aretê, which managed Utech, writing in 2006.
Evergreen floated in 2000 just before the dot. com bubble imploded, raised further funding through a private investment in public equity to gather a combined $275m in its first 11 years still without showing a profit, before finally going bankrupt in the summer with $485.6min debt.
Corporate venturers said they were being more cautious before investing in the area to see which technologies and companies were likely to be successful. Similar caution is also being felt by corporate venturing backers in wind and wave power producers.
Biofuels
But the challenges in funding clean energy are not confined to solar producers. There were tribulations in the biofuels segment a few years ago after the oil price nearly halved to about $80 a barrel, leading to troubles for VeraSun Energy, Pacific Ethanol and fuel cell makers, such as Plug Power, which, after a euphoric flotation in 1999 following corporate venturing backing by Mechanical Technology and DTE Energy, has suffered a steady share price fall until undergoing a 10-for-1 reverse stock split – that is, consolidation – in May.
Carol David Daniel, head of technology transfer and commercialisation at London’s City University, said: "I have yet to see a method of extracting energy from the sea, sun and wind that is anywhere near economical. If there was not a lot of goodwill about being green, and significant taxpayers’ money pumped in either directly at the front end or through feed-in tariffs, then it would not exist at the current level of activity. Now governments are under pressure to cut budgets this is one area it will be difficult to justify pumping subsidy into.
"Recessionary pressure is going to hold the oil price down – oil is after all a resource which is charged out at a price the market will bear that has little to do with the cost of extraction. This is the economic energy model that renewables are up against.
"The only realistic, long-term energy solution on the table that meets the needs of a western world that wants to sustain its standard of living is nuclear."
The head of one venturing unit said: "While some countries are moving away from nuclear [such as Germany following the nuclear scare in Japan earlier this year],others, such as those in the Middle East, have ambitious development programmes for it."
Last year, the US Energy Information Administration (EIA) predicted nuclear power would in 2035 contribute 12.8% of global electricity generation, which is in turn expected almost to double to 35.2 trillion kilowatt hours.
If some nuclear production is cancelled or delayed, renewable energy sources will probably help bridge the gap. And public investors have continued to back a limited number of clean-energy entrepreneurs, usually only if backed and validated by corporations.
In biofuels, the most active area over the past 18 months, four of the top 10 ranked by news provider Biofuels Digest – Amyris, Solazyme, Gevo and Codexis – have floatedin this period, while a fifth, Sapphire Energy, has raised money from crops company Monsanto (see top 10 table).
However, rather than being an exit route for corporate venturers, an initial public offering has resulted in some, such as France-based oil major Total, maintaining its shareholding rather than selling or being diluted.
Total Energy Ventures was also a backer of Amyris and Coskata in the top 10. The range of uses for oil-type biofuels has helped pull together large consortia able to invest hundreds of millions of dollars from disparate sources, such as family offices (software entrepreneur Bill Gates’s Cascade Investment or the oil family Rockefeller’s Venrock), endowments (UK-based medical body Wellcome Trust), venture capital firms,governments (Malaysia’s Life Sciences Capital and Singapore’s Bio*One) and corporations, from consumer goods (Unilever) to industrial (General Electric) to health-care (Novo) to car makers (General Motors) and investment banks (Morgan Stanley).
Conventional energy
The size and complexity of investments has even led accountant Ernst & Young to prepare a report calling for clean-tech companies to create the staff position of chief capital office.
In conventional energy and natural resources, meanwhile, as one corporate venturing head of a large oil major said: "Well, nothing much exciting there. Oil is stable and gas is becoming prominent once again.
"Unconventional gas fracking [hydraulic fracturing of a rock layer to release fuel] is probably the more promising new innovative solution that is becoming more viable with even more room for improvement and scalability."
With gas under $4 per 1,000 cubic feet, the price equivalent of about $24 per barrel of oil, the fossil fuel is relatively cheap while WTI and Brent crude hover about $82 and $104 a barrel, respectively.
Gas producers are investing heavily in assets, including through corporate venturing, to tap into the potential. Earlier this year, US-listed Chesapeake set up a $1bn fund to encourage use of gas in transportation and technology providers to create products to help extract natural gas, while in Russia, state-owned Gazprom set up a series of venture funds, and Norway’s Statoil, which produces hydrocarbons, in April took some of its minority equity portfolio back in-house after setting up Energy Capital Management in 2008 as an independent venture capital firm from its original Statoil Corporate Ventures unit.
Last month, General Electric extended its Ecomagination Challenge to China by providing, along with seven venture capital partners, $100m to back innovations in gas power, including natural gas, biogas, shale gas and coal-bed methane gas.
The US-listed conglomerate has installed more than 300 heavy-duty gas turbines in the country as China wants to double the use of natural gas to 8% by 2015. For GE, clean-tech products and services account for $21bn in its revenues, up from $5bn in 2005 (see profile earlier this year).
Effciency
Many of these products are built around greater efficiencyin using natural resources. As the oil major chief said: "The biggest item that has not been talked about much is energy efficiency, be that in power generation or efficiency in consumption. Development of greater efficiencyhas always been around but below the radar and less talked about, yet we are finding it has a great impact if adopted on a large scale."
Few projects are on the scale of the fully-integrated, chemicals complex being constructed in Jubail Industrial City in Saudi Arabia by Dow Chemical and local national oil company Saudi Aramco.
At a cost of $20bn, Sadara Chemical will annually produce more than 3 million tonnes of high-value-added chemical products and performance plastics from mid-2015.
Saudi Arabia is moving downstream to more value-added products than just oil production and refining with $450bn of investment plans globally over the next five years. (There will be a more in-depth look at the industrials involvement in clean-tech corporate venturing as part of a feature on the sector in a few months.)
The cost of replacing ageing infrastructure in the energy and natural resources sector, estimated at hundreds of billions of dollars, and the size of revenue streams in existing energy sources means governments and incumbent companies have a mutual interest in promoting efficiency.
This mutual interest is attracting not just the big industrial equipment and service providers, such as Siemens, ABB, GE and Schlumberger, or chemical companies from Dow to BASF, which have often have well-established corporate venturing units, but also large information technology companies, such as IBM, Samsung and Google.
Last month, Rick Needham, Google’s director of green business operations, said it would invest $75m to create a fund with Clean Power Finance, in which it has a minority equity stake, to help up to 3,000 homeowners install solar power systems.
In June, it said it was investing $280m to create a similar fund with SolarCity and it has now committed $850m in clean energy, Needham said.
Mining
However, the Achilles heel of much clean-tech equipment has been its reliance on so-called rare earths, a group of 17 elements used in electronics and magnets, to boost efficienc.
For example, hybrid and electric cars contain 9 to 11 kilograms of rare earths, while a 2.5-megawatt wind turbine contains about 1,300 pounds of the elements in its magnets.
With wind power production expected to rise from 159 gigawatts last year to 249GW by 2015, and analyst JD Power saying hybrid and electric car sales in the US will go from 962,000 to 3 million over the same period, consumption of rare earths will go from 22.3 to 52 kilotonnes a year over this period.
This demand – and with 97% of rare-earth supply coming from China, which has been lowering export quotas – has led to Japan-based trading conglomerate Sumitomo trying to take a minority stake in rare-earth miner Molycorp earlier this year for $100m before being rebuffed last month.
Molycorp’s mine in the US has been around for 58 years, and oil major Chevron (see profile in related content and most influential table by clicking here) acquired it through its purchase of Unocal in 2005 before spinning it out three years later for $80m.
Molycorp then floated last year to raise $400m to restart mining and its share price tripled after China said it would cut rare-earth exports from 50,000 to 30,000 tonnes a year.
Molycorp, in turn, has been using corporate venturing to develop its technology base, incubating Xsorbx chemistry to clean water (see box on water).
More broadly, in mining, a number of large corporations, such as Rio Tinto, are understood to be using corporate venturing to find tools to be more productive in extracting, processing and finding mineral deposits.
This need to findand use sources of power and the raw materials to maintain technological innovation remains the underpinning of economic development, and groups are increasingly turning to corporate venturing as a tool in their innovation strategy.
BOX: The potential in stormy waters
"Whiskey is for drinking and water is for fighting over," according to writer Mark Twain.
On average everyone has 5,000 to 6,000 cubic metres of fresh water but it is unevenly distributed, affected by climate change (droughts and ice melt) and polluted.
The United Nations Food and Agriculture Organisation estimates 1.2 billion people live with water scarcity. Treating water uses 17% of California’s electricity, while agriculture makes up 70% of global use.
But, while important, water has been controlled by government-owned utilities, providing drinking water and treating waste, limiting appetite for innovation in favour of subsidised bills and security of supply.
As Global Water Intelligence notes in Ernst & Young’s Spotlight on Water report, there is a negative correlation between water availability and price – you pay more in Scotland than you do in Spain.
This means it is hard for entrepreneurs to break into the market and sell to or disrupt incumbents, although a number have been successful. In August, BASF acquired Germany-based filtration membrane provider Inge Watertechnologies for an undisclosed amount.
Inge’s investors included Siemens Venture Capital, the corporate venturing unit of local conglomerate Siemens, and venture capital firms BayTech Venture Capital, Emerald Technology Ventures, Entrepreneurs Fund, Stone Fund and Taprogge.
Taprogge and RWE Dynamics, part of local utility RWE, had provided an undisclosed amount as part of Inge’s series A round before Siemens Venture Capital and Emerald invested in 2004, subsequently followed by Entrepreneurs Fund and Stone Fund.
This exit, as well as earlier ones, such as Zenon Environmental’s sale to General Electric for C$760m in 2006, and soft drinks maker Coca-Cola’s purchase of vitamin water maker Glaceau for $4.1bn in 2007, has drawn attention to how water scarcity and purity can be monetised through venture investing.
Canada-based venture capital firm XPV Capital raised $150m for its debut Water Technology Investment Fund last year from non-corporate limited partners.
David Henderson, co-founder of XPV and also previously at Zenon, said the fund was looking to build "10 more Zenons".
He said while clean-tech companies that were doing well were predominantly corporate-backed, XPV had turned a number down that wanted to commit to its fund to avoid an impact on its investment strategy.
But of the 52 mul-tinationals XPV cared about in water, Henderson said it would partner them in deals to help get round the challenges of investing in a sector with regulatory and scaling challenges.
He said: "Water is a very large market, worth more than $500bn, but it is complex, with regulatory and cross-border issues and sensitive with politicians and society. Water innovation is mimicking solar that went from the late 1990s to 2000s from acceptance to critical mass as governments recognised the importance of quantity and quality of supply.
"We at XPV tried to dissect the economic pain points where water is a critical process, such as the oil and gas industry where it is mission critical for exploration, extraction, refining and shipping or the chemicals industr."
XPV uses five investment themes to help select portfolio companies – demand destruction, where the end product remains the same but demand for water is affected; recycling waste water to create a product from its energy, nutrients or chemicals; water reuse by recycling; infrastructure renewal to make existing assets more efficient rather than replacing them at large cost; and desalinisation of ocean or brackish water, which relies on energy costs being reduced.