With the National Hydrogen Association conference in full swing this week, complete with lots of talk of "hydrogen highways" and emissions-free cars and fuel cells, it seems like a good time to check in on the hydrogen tech market from the venture investors' standpoint.

The short answer appears to be that hydrogen-economy investments are limping along. Note that this is not to be confused with any general statement about fuel cells fueled by anything other than direct hydrogen, but instead I'm referring only to the generation, storage, and use of hydrogen as a fuel, unreformed out of methane, etc. We'll deal with SOFCs another day...

By my count (and it's likely an incomplete look, but probably indicative), there have been only two hydrogen economy venture investments announced so far this quarter (ClearEdge and Safe Hydrogen), with the quarter almost over. In first quarter 2005, there were six or so. Not real compelling data points, two isolated quarters' worth of data, true. But amid all of the hype in the public realm now about the hydrogen economy, it's intriguing to see relatively low activity among investors.

This lack of activity comes while there are important technological and market developments being announced all of the time, such as recent mentions of:

• 33 states have announced plans for some kind of support for hydrogen economy infrastructure, and in California fueling stations are already being built.

• Chemists at UCLA and the University of Michigan have announced important progress toward finding effective storage materials for hydrogen.

• GE researchers announced electrolysis technology that could bring the cost of hydrogen down to around $3/gallon equivalent.

• Fancy new refueling stations are being designed by architects.

So why aren't investors funding a huge portfolio of hydrogen economy startups, as is happening in solar right now? There are several possible answers to this question:

1. The first possible answer is to refute the question -- certainly some investors are actively looking at and investing in hydrogen economy startups. The numbers may not be huge, but it's still happening.

Nevertheless, the numbers are low. And some hydrogen/ fuel cell focused venture firms have talked about how they are looking to now move beyond the niche into other, broader areas. So while it's an overgeneralization to say that investor interest in the hydrogen economy has fallen off entirely, it's certainly waned a bit.

Someone's going to take issue with that statement, that things are "limping along" in terms of venture investments in this market, which is fine, it's all relative and somewhat subjective -- but again, compare it with the activity in solar right now. Even if you re-phrase the question as "why is solar getting so much more investor interest than hydrogen tech," it's still largely the same issue.

2. Another answer I've heard mentioned is that the entrepreneurial activity has passed beyond the startup stage, to publicly-traded companies and the likes of GE.

A few early startups in the market took advantage of friendly investment environments to go public at huge valuations early in their lifespan, taking them out of the venture investment stage before they were fully commercialized. Meanwhile, larger players with bigger names have gotten into the act, and have been consolidating the industry a bit and pushing their own internal innovation efforts, making it tougher for new startups to compete. Unfortunately for this argument... The market I'm talking about is the solar market, which continues to be white-hot for VCs. So it's hard to put a lot of weight behind this argument.

In reality, if companies like GE and Air Products are taking leadership roles in the development of a hydrogen economy, it should serve to both legitimize the market opportunity and improve exit potential (via trade sale) for investors.

3. Another potential answer is that the potential for IPO exits is low.

Certainly, publicly-traded hydrogen economy stocks have fallen dramatically from their peaks. But even at the lower prices, individual investors are still driving pretty attractive multiples (from the company's perspective). Take Ballard Power -- sure, it's down to $6 or so from a high in 2000 of over $100/share. But it's still trading at more than 12x ttm revenues. And public market appetite for new hydrogen-economy issuances remains high, as the IPO of Hoku Scientific shows -- while down from its post-offering peak, it's still trading above where it debuted, and at around 15x ttm revenues.

With these and other examples, and all of the media and political hype, it's hard to argue that a hydrogen economy startup that was doing well wouldn't get a good reception as an IPO.

4. The answer perhaps most heard is that VCs think the hydrogen economy is going to take a long time to arrive, if it's going to develop at all.

This argument has a lot of merit -- VCs I speak to tend to talk about the infrastructure and market adoption hurdles facing the emergence of a "hydrogen economy." They talk about how the likely market adoption period is longer than their funds' investment periods. They talk about how they don't want to invest in markets that are heavily dependent upon government subsidies. All of which are probably true for hydrogen tech. Even the most aggressive program in the U.S., California's, talks about 50-100 fueling stations statewide by 2010. Compare that to the 11,000 retail gas stations in California. The solar industry is growing 30%+ a year off of a nice base, whereas hydrogen and fuel cells remain mostly at a beta stage, as a generalization.

Nevertheless, take a look at this fascinating survey of "alternative energy industry" members and experts. Note that the survey concludes that these experts feel it will take until 2014 for solar power to achieve competitive prices (which I assume to mean unsubsidized). Mass-produced hydrogen-powered cars only take a couple more years after that, in the minds of those surveyed. So according to these industry experts, in many ways solar is just as far away from unsubsidized economic competitiveness as the hydrogen economy. Plus, there are niches (such as industrial hydrogen) where hydrogen tech innovators can find early beachheads in the market. And sure, solar is getting a lot of near-term subsidies that are driving the market right now -- but so are hydrogen techs. So it's still a bit of a funny contrast.

One analyst report recently stated, "Investors in solar companies are rewarding these firms for their ability to commercialize products, increase production capacity and exhibit a path to profitability. Failure to exhibit these same characteristics is the main reason that most other U.S. alternative energy companies continue to trade at multiples below their solar peers." Probably true. There's a lot of venture investor interest in solar technologies that seem to be a long way away from profitability today, and relatively less interest in similarly early-staged hydrogen tech companies. But investors have an easier time seeing the path to commercialization of those early solar technologies.

5. Finally, another answer people point to is that most venture i nvestors (aside from seed/ early stage VCs, in some cases) really need to see markets today, and that a) hydrogen and fuel cell markets remain relatively small; and b) what's often called a "herd mentality" for VCs reflects the fact that seeing other investors' activity in a given technology area helps to legitimize that sector.

This answer, along with the "it's beyond my investment horizon" answer from above, probably explains a lot. CleanEdge recently concluded that global wind and solar markets are over $11B each, while fuel cell markets total around $1B today, "primarily for research contracts and demonstration and test units." And it's much easier to invest in the technology that other firms are investing in, that's already a 10x bigger market, than a market that's smaller and less covered by your colleagues. Nevertheless, in other venture sectors there are early stage/ seed investors willing to bet on market creation when there's enough positive signs that it will take place (think Web 2.0). Either most VCs don't see those signs in hydrogen tech right now, or they're not acting on them as they do with other markets.

That having been said, there are definitely seed and early stage investors in cleantech who are looking into these technologies and taking stakes in various possible market development scenarios. Remember, this is all a discussion about relative activity levels...


In the end, the answer is a bit of all of the above. Many venture investors remain somewhat uncertain about the market and science risk in hydrogen tech, their colleagues aren't legitimizing the opportunity for them, and the near-term market is relatively small versus other clean energy investment areas. There are exceptions to all of the preceding statement, but it remains a broadly applicable generalization.

So the next question is... will the media, government and political attention, as well as the continual announcements of technological innovations, start to attract more venture investor attention anytime soon?

• Stirling Danmark, a Danish manufacturer of biomass-fueled Stirling engines for power generation with zero CO2 impact, has raised approximately $2M in seed financing. Funders include EGJ Development Ltd., SEED Capital and Vaekstfonden. The company will be looking to hire a CEO, and hopes to achieve revenues of 20m euro within five years.

• SJF Ventures, which focuses on cleantech and workforce innovation investments, has closed on $15M in commitments to their second fund. Investors in the fund include Calvert Social Investment Fund, Deutsche Bank, MBNA, Wachovia, Merrill Lynch, HSBC, State Street, KeyBank, and The F. B. Heron and Mary Reynolds Babcock Foundations.

In case you missed them, below are some interesting stories from the past week or so:

• Tyler Hamilton has tracked down some interesting info about the Kleiner ultracap startup EEStor, which has been "stealth" for a while. His Clean Break column here also links to his full Toronto Star article on the topic. Ultracaps have a lot of potential to take on batteries in certain applications where rapid charging and discharging is valuable (the highest profile example being electric vehicles). Cost, however, remains an issue around which further innovation is being sought (and, of course, funded).
  

• Here's a good overview of emerging solar technologies from CNet's News.com. Even more fun: Their photo gallery of several emerging applications.

• The next technology you've never heard of that will save the world: Modified high-density plasma toroidal collisions. Start stocking up on heavy water today! “Heat is a particularly interesting discussion since our discovery will reduce waste heat from cars by about 70%... thereby reducing global warming.â€? The good news is that they're developing a version for your home that will not emit radiation, which is a nice feature. Best of all, and certainly totally coincidentally for the timing of this article, the developers of this breakthrough approach are raising $10m in funding.

• Here's a useful report on the upcoming wave of IPOs (particularly solar IPOs) expected to be coming out of China. 42% of all Chinese companies are planning stock issues? OK, then, we're going to need a lot of new tickers... Regardless, there is a lot of emerging demand in China for clean technologies, in many cases driven by very favorable government policies, so it's not surprising to see a lot of entrepreneurial activity in the field that would attract a lot of outside/ public market investment, and this article does a very good job of exploring that trend.

• Want to win $25M? The folks behind the X Prize are now developing a new effort to inspire market introduction of mass-produced hyper-efficient cars, hopefully providing inspiration and incentive for entrepreneurs and VCs/angels. Start your engines!

• Finally (self-promotion alert), here's some follow-up media coverage of this week's cleantech VC data from the Cleantech Venture Network. It'll be interesting to see if the momentum continues in the first quarter data when that comes out, or if there will be a near-term normalization.

• ISE, a manufacturer of hybrid drivetrains for buses and heavy trucks, announced a $25M Series B. NGP Energy Technology Partners, Rockport, and Third Avenue Management participated in the round. The round brings total financing to $31.7M to date.

• Concentrix Solar GmbH, which manufactures solar concentrator PV systems, received an undisclosed amount of funding (note: link opens a pdf) from Good Energies, a German solar- and wind-focused VC which has invested in several solar companies to date.

• EnvironmentIQ, f/k/a Camaxys, took in $15M in funding from Fidelity Ventures and Cazenove Private Equity. The company's enterprise software assists corporate Environment Health and Safety ("EH&S") efforts. Apparently this funding represents a bit of a restart for the company, which has gone through a wide variety of financings in the past.

• Ometric, an optical spectroscopy startup that is looking forward to launching its first products soon, took in an undisclosed amount of financing from Sequoia Capital and The Trelys Funds. We've talked about the cleantech applications of optical sensors before. Ometric appears to be initially targeting pharmaceutical quality assurance applications, but one of the appealing features of emerging optical sensor technologies in general is that they tend to lend themselves to a broad range of applications, including environmental monitoring. For an example, take Expansion Capital portfolio company Tiger Optics (self-promotion alert), which has developed a different proprietary spectroscopy solution aimed initially at the semiconductor/ high purity gases markets, but which is developing (and in several cases, successfully selling) applications for automotive emissions testing, atmospheric pollutant monitoring, pharma, medical diagnostics, continuous process manufacturing, etc. When these optical sensing technologies represent true proprietary breakthroughs, they can serve as "platform technologies", enjoying both TCO and performance advantages, with strong growth potential across a broad range of cleantech applications.
  

Following up on yesterday's cleantech market growth news comes impressive data from the Cleantech Venture Network today, showing that a half a billion dollars were invested into cleantech startups by VCs in the fourth quarter last year. Matt Marshall's already got the scoop (as well as a link to the press release), and he contrasts these totals with total semiconductor venture investments in the same period.

These results show a huge uptick in VC activity in cleantech sectors, a 60% increase on fourth quarter numbers from 2004, and an 18% increase on 3Q05 figures. The numbers show that cleantech grew to 10% of all venture investments in the quarter. Sure, one can go back and forth on the specific figures (and the Cleantech Venture Network does a terrific job with an inherently impossible task), but the directional answer is clear -- these results simply put some numbers down to back up the clear trend toward more and more VC investments in clean technologies.

Here's the AP newswire story.

Clean Edge put out their annual report on clean energy markets, and even to those expecting to see strong growth, the results were surprisingly good. According to their study,

"Global wind and solar markets reached $11.8 billion and $11.2 billion in 2005 -- up 47% and 55%, respectively, from a year earlier. The market for biofuels hit $15.7 billion globally in 2005, up more than 15% from the previous year."

Fuel cell markets remained relatively small, at $1.2B (as they describe it, "primarily for research contracts and demonstration and test units"), and their 10-year expectations for the market have retrenched somewhat (this year's 2015 forecast is the same as last year's 2014 forecast).

Overall, Clean Edge expects the market to increase 4x from $40B in 2005 to $167B over the next ten years -- a 15+% annual growth rate. Last year's survey suggested a 10-year CAGR of around 20% in these markets, but over the last year they've grown 33%, so things are moving faster than even Clean Edge had perhaps expected. (Interestingly, it appears they expect the growth of the wind power market to slow down considerably in the out years, but perhaps I'm reading too much into the 2004 vs. 2005 numbers)

Also, released in conjunction with the market report, Nth Power and Clean Edge released their annual survey of clean energy investing by the venture community. Unsurprisingly, that was also up -- to $917M, which they report is up 28% (although last year's announcement said 2004 totals were $520M). They peg the clean energy portion of the overall venture capital market at 4.2%, up from 3.3% last year by their calculations. The number of deals they identified went down from 81 to 84, but it looks like they may have boosted their 2004 deal numbers retroactively with more deal inclusion, so perhaps that will happen again this time.

Interestingly, the mean deal size went up from $8.4M to $10.9M, while the median deal size only increased a little bit from $6M to $6.5M. Which suggests a few bigger deals really drove the increase in total investment this year. But it's tough to tell with the shifts in 2004 numbers (the differing calculations of clean energy investment figures by various groups is something we discussed last year as well). It's all a bit confusing, but the basic storyline is the same -- more VCs are investing in clean energy.

Of course, solar was the highlighted investment sector. We'll have to start making more of an effort to talk about the other cleantech sectors beyond energy and solar in particular, even if that's all anyone writes about right now...

Kudos to Clean Edge and Nth Power for good, helpful reports.

More evidence of the trend of generalist investors getting into cleantech investing: Founder and Managing Director David Rubenstein told attendees at a private equity conference in Germany that the firm intends "to be much more active in the wind, power, solar energy, biomass and geothermal areas." The article describing his speech also mentions that Carlyle will be raising a private equity fund to specifically focus on renewable energy infrastructure. Rubenstein's statements probably relate primarily to the firm's later stage investment activities, but there's reason to believe this approach will extend into the firm's early-stage investments as well.

In any case, as later stage financial investors get more active in cleantech, it improves the possibilities for M&A exits and for project financing for venture investors' portfolio companies. The cleantech "ecosystem" continues to fill out nicely...