Like all young industries, the beginning of the cleantech and alternative-energy industry has been surrounded by a lot of hype. It has seen an increase in new startups, investments and valuations.
As in other industries, after the surge, a slide usually takes hold. We have already seen signs of this in the cleantech and alternative-energy industry. For example, some solar companies have missed their revenue expectations and many biofuels companies have suffered from low margins and difficult financing.
But the good news is that after the slide, good business models normally emerge, technologies are refined, costs come down, demand firms up and more successful companies emerge.
While Cleantech 1.0 is often more exciting and has a "gold rush" feel, it's Cleantech 2.0 where the real money is made.
The cleantech and alternative-energy industry is really several industries with very different life cycles and value drivers.
Solar, wind, biofuels, green buildings, energy efficiency, smart grid, energy storage and clean water are separate subsectors, in our view. Others may categorize these industries a bit differently than we have, but no one can argue that there arn't already anywhere from a half-dozen to a dozen multi-billion dollar markets that fall under the cleantech and alternative energy banner.
Cleantech and alternative energy now play a key role in traditional industries such as utility, oil and automotive. It has extended its influence into the sprawling municipal and private water and sewage businesses, as well as the construction sector.
We think there are plenty of profitable opportunities in the cleantech and alternative-energy sectors.
Clearly, government support is – and will be – a critical profit driver. In the public sector, however, visibility, predictability and consistency are in short supply. This has added volatility to the cleantech and alternative energy businesses and contributed to the very rapid opening and shutting of the capital pipeline we're seeing in these industries today.
Exhibit A is the solar power industry.
The solar market has seen a growing number of new companies and venture capital deals for early-stage companies. But market demand - in the United States, Germany and Spain – has been driven, to a great extent, by government subsidies in the form of tax credits and feed-in tariffs.
In the United States, federal lawmakers have thus far refused to renew the investment tax credit (ITC) for renewable-energy projects This has truly whipsawed the market: Demand has dramatically slowed and products are on hold, which has caused companies like Akeena Solar to see gross margins squeezed, and forced a reduction to 2009 revenue and profitability outlooks. These reduced forecasts have caused public solar companies' stock prices to drop off considerably from peaks in late 2007.
In the private sector, solar companies are having difficulties hitting their revenue targets, and capital for early-stage solar companies has dropped tremendously – the first quarter of 2008 saw over $163 million dollars of capital investments in first-round solar startups, while the second quarter notched approximately $120 million. The third quarter has seen just over $30 million in six deals, with only a month left in the quarter.
Exhibit B is the biofuels industry.
Biofuels were very hot in 2006 and 2007 after the U.S. government mandated their use. Anticipating a major demand, money poured into the industry. VC funds, private equity funds, hedge funds and debt providers all stampeded into the game to provide capital to biofuels companies.[pagebreak:Surviving the Slide: Continued]
But it soon became evident that the technology and business model of the biofuels industry was flawed. Companies were using the wrong feedstock to create biofuels. This proved uneconomical as the cost of the feedstock increased faster than the price of the biofuels produced. The biofuels market collapsed and capital fled the sector (see Time magazine article and Washington Times story).
We expect that there will be a good amount of sector rotation over the next year in cleantech and alterative energy. Here is our forecast for seven key industries:
Wind: We expect the market to continue to receive capital, albeit at a reduced pace. The wind sector is the most mature market, and the industry has already gone through the innovation curve. So, as a mature market, we expect a steady flow that reflects the fact that many of the best sites for wind projects have already been taken.
Solar: There is continued reticence from investors to fully commit to the sector. Early on in the cleantech "movement," young, underdeveloped and often undifferentiated companies attracted significant capital. However, investors are now re-evaluating, re-trenching and re-deploying capital on a more conservative basis, which requires strong technological and strategic differentiation. Private companies with strong strategic and technological roadmaps will and are receiving substantial follow-on capital via later-stage rounds and large project development funds. Many investors are now making lower-risk bets, and attempting to make small in-roads into the solar market.
Biofuels: We believe in Biofuels 2.0 and waste-to-energy companies that are based on very strong technology platforms. These companies also need to have a business model that utilizes low-cost nonfood feedstock, and they must have easy access to that feedstock. If they meet these criteria, they will be recipients of capital by the end of 2008 or early 2009.
Green Buildings/Energy Efficiency: We are forecasting low investor interest for green building materials companies. To date, most companies developing green building products have not demonstrated an ability to develop products that are more environmentally friendly and are priced competitively against existing products. And given the slowdown in the construction sector, we believe that price competitiveness is critical to receiving investor dollars. The energy efficiency sector, which is most applicable to buildings, should continue to receive capital.
Smart Grid: The part of the smart grid that encompasses monitoring, communication and metering will receive investor dollars. We expect, though, that companies developing the infrastructure for the smart grid will find difficulties accessing the capital markets. A key component will be the "go-to-market" strategy – those companies that have made progress here will be more likely to receive capital.
Clean Water: We expect companies developing water purification technologies and related services to receive significant investment dollars, especially from institutional investors. We expect "platform" companies in the product and services sector to receive financing; they will then make acquisitions to gain scale and efficiency.
Storage: We believe that investment activities for the energy storage market will be sector driven. Investments in the fuel cell sector will be light, but we think investment dollars will go to companies that are developing software for managing, monitoring and other services for the plug-in hybrid electric vehicle market.
The new energy economy is clearly a work in progress, full of stops and starts, twists and turns. This isn't surprising, given that the path to prosperity has never been smooth or easy. What we are seeing today is that the road to environmental improvement is circuitous. But we are confident that the capital will flow where it needs to go, and it will usher us smartly toward a post-petroleum era that ultimately rewards everyone.
The above opinion piece is from independent writers and is not connected with Greentech Media News. The views expressed here are those of the authors and are not endorsed by Greentech Media. Cascadia Capital, a national investment bank serving emerging growth and middle market companies in sustainable industries has no investments in any of the markets discussed here at this time.