Don't forget: Take the 2010 Cleantech Investor readers' survey. I'm going to close it over the next day or so, we've plenty of good responses to work with, but the more the merrier.
In case you missed it, among all the other VC predictions for 2010, Peter Hebert of Lux Capital posted a really compelling set on PE Hub (note: link may disappear behind the sub-only wall soon).
I enjoyed all his points, but agreed with some more than others, so in the spirit of dialogue I thought I'd post some of my own thoughts on them:
1. Venture-backed IPOs rebound smartly, with 50%+ first day price jumps on name brand offerings from Facebook, LinkedIn or Zynga. Among the S-1 clutter, another big beneficiary will be IPOs from smaller, little-known, and speculative-grade companies that also make it out. The visceral response to many IPO filings: Who?
In the cleantech sector, a lot of attention is being focused on Solyndra's IPO. But in many ways that company is a pretty big exception in comparison to the rest of the sector. I'm interested to see what other cleantech IPOs make it out this year, and how they do, because they'll tell me a lot more about the potential exit paths for typical cleantech venture investments.
2. At least one famed VC partnership fractures or sees an orderly wind-down, with insider gossip eventually leaking out. The changing of the venture guard moves full steam ahead, as weak fund performance from the lost decade finally forces LPs to question historic allocations to “franchise funds”.
I do think this is going to happen sooner or later.
The worst thing anyone ever did for the LP community was to do that famous backward-looking study showing that 1st quartile funds have tended to stay 1st quartile funds. It was surely an accurate study. But that study has subsequently skewed LP behavior and thus skewed GP behavior, so that 1st quartile funds are expanding in ways that force them to change what made them so successful in the first place. Some will pull it off. Some will just get lucky. And some won't pull it off. But this myth that some LPs believe, that the only way to make money in venture capital is to back high-profile top tier funds, will slowly get broken down.
But not this year. Peter's 2010 prediction might come true if there was more transparency and accountability in the venture community, but even if LP managers were more willing to risk their career on up-and-coming GPs instead of big-name GPs, there still would be the problem that VC manager performance is really difficult to assess and takes years to play out. Over time, I think Peter will be right. But it'll be slower shift than he implies.
3. A large, non-traditional investor enters the venture fray, boasting a very long fund duration (~20 years) vehicle focused on science and technology. Commence discussion on whether the traditional 10-year fund life makes structural sense for early-stage life sciences and energy investments.
There's a lot of merit to this concept. But what kind of non-traditional investor, besides the family offices that have been doing some of this already, or a large private equity or sovereign fund with little early stage venture experience?
And if it's a returns-oriented investor, what does such a long timeframe do to IRRs? What's described here is, at least at first blush, a recipe for higher risk and lower IRRs (because of the holding period). Not sure we'll see someone jump to do that on more than a token basis, or possibly as a one-off fund done by a traditional VC for marketing purposes as much as anything...
Cynicism aside, I do think there's a kernel of something important in Peter's point, and given more space to write about it I'm sure he'd fill out more of the details he's got in mind, but the devil will be in those details. A new structure would need to be developed so that capital outlays were kept very low for the 1st half of the fund, and also not have burdensome fees (ie: low cost or subsidized staffing), yet still bring a lot of resources to bear in helping these companies. I know institutional investors who are noodling on this, but I haven't heard any concrete answers yet.
4. Stealthy cleantech companies unveil. After years of intrigue and speculation, not to mention tens to several hundred million dollars invested, several energy technology companies finally lift the curtain and introduce themselves to the world. Will the emperor be wearing clothes?
Yep, will be a fun year...
5. Spike in biotech M&A. December 2009 served as an excellent indicator of what’s to come, with more than $1 billion returned to venture funds through the acquisitions of Acclarent, Calixa and Gloucester. Expect this month’s JP Morgan healthcare conference to play host to the industry’s ultimate speed dating session.
I think there will be a spike in cleantech M&A as well. If the economy continues to track upward, even if not dramatically so, big buyers will start looking for bargain opportunities -- and after such a rough patch for startups, there will be some of those available. Also, some big players will look to acquire smaller startups that have gotten inside tracks on major government dollars.
6. Semiconductors regain luster. After years spent languishing as pond scum in the VC pool, the public market chip rebound finally extends to its capital-starved, private brethren. Expect several IPOs and profitable M&A for some of the largest revenue generators.
This is potentially true for all the highly capacity-driven cyclical tech sectors. Of which there are several in cleantech, naturally.
7. Solar failures litter VC landscape. Schumpeter’s gale of creative destruction blows through the 250+ private solar companies. A handful of heavily-funded solar PV and CPV companies flame out, while sector leaders like First Solar consolidate their market position.
I could be wrong, but while I do expect a bit of a solar shakeout, I don't expect it to be so dramatic.
It's tougher than you may think for someone like First Solar to grab smaller companies' techs and successfully integrate them into their products, so the idea that one of these companies will go on a big horizontal integration spree is intriguing but tough to pull off, unless what the acquirer pays for isn't technology but is instead advanced sales bookings, etc. However, vertical integration is something we'll likely see more and more of.
And certainly a bunch of solar companies will go splat. Some will be the ones that had a smallish tweak as their core innovation and have been spending money like they wanted to be a standalone competitor to First Solar or SunPower. Some will be the ones that just got too far out ahead of their skis, were spending money expecting an IPO in 2009, and then the economy came to a screaming halt, and so they're in trouble but they just haven't completely wiped out quite yet.
But while I think there will be some high-profile examples of both types of flameouts in the solar sector, and while I do think sooner or later VCs have to pull back from putting so much capital into this space, I think plenty of those 250+ private companies will be around in 2011. I know too many sober entrepreneurs in the sector who now understand the need to be capital efficient, are focusing on their core innovations, and are planning for a few lean years. That doesn't bode well for future gargantuan exits for their investors, because these companies will end up being smaller and more interchangeable than their VCs had hoped. But it doesn't mean 2010 will see a huge wave of "solar failures". That would require a regulatory retrenchment ala the early 1980s, and instead the opposite trend seems to be taking place.
So on this one, Peter and I are in agreement at a high level, but I would differ in tone.
8. Energy investors swap wind and solar for abundant natural gas and carbon-free nuclear. Looking to replace a large swath of coal-fired power for base-load electricity generation? Natural gas and nuclear are not just attractive base-load alternatives—they are the only options.
Wind is already scaling up so quickly that many regional grid operators can't handle it. So discounting wind in this way is overly simplistic. The problem with wind power isn't cost or ability to build out generation capacity rapidly. The problem is that there's no way to store the power, so when the wind blows, in some places like Texas and the Midwest grid operators are forced to literally shut down power production. But I've seen good efforts to address this.
I do agree that natural gas is a seriously overlooked option if you're looking for large-scale, rapid shifts in the powergen (and transportation) mix. But nuclear capacity won't be fast to develop, no way. So I think Peter misses the mark a bit here. But his focus on economics and scalability are quite well taken.
9. Russian oligarchs and other foreign investors snap up late-stage U.S. tech. DST’s investments in Facebook and Zynga serve as a role model. Let’s hope they encounter more success than the sovereign funds that purchased big stakes in U.S. investment banks.
There are certainly plenty of candidates for this type of investment within the cleantech sectors. Big checkwriters with less valuation focus could be poised to make a big direct-investment splash in the solar and battery and smart grid sectors in particular. But see below.
10. Return of the VC mystique. A counter-intuitive prediction, but one that reflects the above assumptions and data points. A select few IPO grand slams create massive returns and fanfare, sparking a resurgence of interest in the asset class. LPs actually begin to talk about new opportunities in venture capital
I think VC has to be poised for a bit of a temporary uptick as an asset class, everyone is so beaten down right now and VC performance tends to track the economy roughly speaking. 2010 will be better than 2009 for VC fundraising, perhaps significantly.
But beyond 2010, the sector will continue to contract, there are still way too many managers and way too many dollars in the overall category. And as far as "mystique" goes, I think that will really continue to be depleted over time.
Some of the biggest names out there in the venture world have started to risk their brands. Some are letting bankers use the VC's reputation to push non-institutional investors to do high-priced follow-on rounds into struggling startups, when institutional investors have already passed on the deals (so... what do those institutional investors know that the individual investors don't?). Some venture firms continue to risk their "mystique" by using their brand to attract LPs into ever-bigger funds and extensions into categories and asset classes where the GPs have little investment experience and will be learning on the fly, which is not a recipe for consistently top-tier results. And when these top firms risk their brand, that risks the "VC mystique" overall.
I'm a huge fan of the venture capital industry and its role, and am continually humbled by the brains and effort and pattern recognition many VCs show, both the well-recognized and the relatively unheralded investors alike. These are smart people doing some inspired work. But I do think the VC mystique is more at risk right now, than poised for a comeback.
Regardless, kudos to Peter on a really thought-provoking set of predictions!
Administrative note: Miss the cleantech venture deal roundups that used to be a staple of this column? Well, they've migrated over to Twitter, where it's a lot easier to get others to do the work for me. If you're interested, follow the cleantechvc feed.