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.

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