The three solar power flotations in late-2005 that started the cleantech investment surge from 2006 to 2008 have continued their restructurings.
Last week, China-based SunTech said it would enter bankruptcy, which is reportedly expected to lead to the local Wuxi government taking it over. This follows Germany-based Q.Cells bankruptcy and purchase by Korea’s Hanwha conglomerate last year and SunPower, which saw French oil major Total acquire two-thirds of the business for $1.4bn in April 2011 to prevent its bankruptcy (according to Total’s chief executive).
The three initial public offerings of Q.Cells, SunTech and SunPower had all been valued at more than $1bn and promptly saw a rise in value before the credit crunch affected wider market sentiment and falling gas prices put pressure on their expected returns.
The challenges faced by all three have been more broadly reflected across the clean-tech industry but there could be light at the end of the tunnel, judging by a new report by Global Corporate Venturing in partnership with Baker Botts.
For venture capitalists that have invested $25bn in clean-tech since 2003 their returns from the area have been worse than in other segments of the venture industry, which is causing trouble among their limited partners, according to Matthew Nordan, partner at the Rockefeller family’s Venrock venture capital unit, in his latest blog on the topic.
Joseph Dear, chief investment officer of the California Public Employees’ Retirement System (Calpers), said on the opening panel at The Wall Street Journal’s ECO:nomics conference, the pension fund is showing a negative 9.8% return on the investment has invested in clean-tech. Dear said the pension system invested about $460m directly in clean-technology and $900m in total in the space but has yet to see a J-curve – a couple of years of losses, followed by a big jump in returns. “For Calpers,” it’s been “an L curve, for ‘lose’”.
As Nordan put it succinctly in his recent blog post, when investors see this, they often retreat: “Clean-tech VC is receding because of poor short-term performance – no surprise in a post-bubble field with outsized time and money requirements.”
In an earlier post in November 2011, however, Nordan had been confident the 2006-2008 clean-tech bubble would attract later-stage financing.
He said: “There will be a path-breaking requirement for late-stage financing in 2012-2014 as the ‘baby boom’ of companies formed in the last five years plays out. In 2008-2010, an average of $1.8bn per year went into series D and later rounds – but during 2012-2014, an average of $3.3bn per year will be needed. That’s an extra $1.5bn in late-stage financing annually, or $4.5bn across the three years.
“So will this money be available? Or will otherwise-auspicious clean-tech start-ups go begging? I’m betting that the money will be there.”
In his latest blog, Nordan says: “Is the cleantech pullback justified? The data says it’s 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.”
Forthcoming research from consultants Cleantech Group is expected to show there is only €150m to €200m (about $200m to $250m) in dry powder left among the 60 largest venture capital funds investing in European clean-tech.
As a result, Nordan expects continued shrinking of VCs’ role in the funding clean-tech deals but selective recapitalisations of the 270 late-stage (series C or later) companies by financial investors, cross-border investments into the US to pick up technology and venture philanthropy and corporate venturing to pick up at least some of the slack.
He said: “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.”
The latest sentiment of clean-tech investors also offers some hope as entrepreneurs and their backers evaluate potential partners and investors and how they fit into the value chain of industry and society.
This evaluation is pointing people towards more of a closed-loop system where they can understand the various parts of how the business affects others and where it might be able to profit through the recovery, re-use and recycling.
Under Chatham House rules at a roundtable to discuss the publication of the first of the Baker Botts Thought Leadership Series, on energy technology, a group of industry experts, entrepreneurs and venture investors met earlier this month to discuss how the ideas of closed-loop systems were affecting society and investment patterns.
As one participant said: “The ideas of closed-loop systems are changing behavior at corporations, which is a brilliant thing. Beyond clean-tech is the closed-loop and corporations make our investments possible by using technology to make things easier or more efficient. Having corporate venturing units in our syndicates helps us get through the sales loop and longer-term backers for our portfolio.”
So, out the carnage in clean-tech venture investing lies the seeds of new hope.