“Cleantech venture bubble” watch, pt 4: Solar

Every day it seems like yet more hype gets piled in on solar.  And it’s a bit hard to tell, perhaps, whether the hype is following the dollars or the other way around—E&Y tracked 46 solar startup venture financing rounds in the U.S. and Europe in the first half of the year, an amazing pace.  Is there room for all of these companies and all of this capital?

Certainly the market is now open and receptive and rapidly maturing, if reports from the recent Solar Power 2007 conference in Long Beach are any guide.  John Addision gives a bit of an overview, and mentions that registrations had to be closed a week ahead of the event because of too much interest, as well as the fact that 12,500 people ended up attending (or about the same number of people as live in San Anselmo, CA).  Ed Guenther also provided a lot of good coverage of the event, for those that couldn’t shoe-horn their way in (see posts here, here, here and here).

Other major news over the past fortnight alone includes FPL’s $1.5B announcement with Ausra, Konarka’s $45mm follow-on round (co-led by Good Energies and Mackenzie Financial Corp, with new investor Pegasus Capital and participation by existing investor), Soliant’s move to abandon low-concentration PV and move to high-CPV, and an almost-daily march of exuberant news coverage in financial news sites and mass media news alike.

But readers with contrarian investment outlooks will view all of this activity with some skepticism.  So perhaps it’s time to revisit the post from just a few months ago where we discussed the possibility of a “bubble” in cleantech.  At the time, we dug down a bit into the other white-hot sector (biofuels), but admittedly we punted on the solar question.

Is there a bubble in solar venture capital?  There are indeed some sobering indications:

• As mentioned above, there were 46 solar-related venture financing rounds in the first six months of 2007 in the U.S. and Europe, according to E&Y/ Dow Jones.  And they weren’t small rounds, either—the survey tallied the aggregate amount of the investments at nearly $1B.
• In the public markets (which as we’ve discussed don’t necessarily point to a bubble in the private equity markets, but do contribute to “irrational exuberance” across investment categories at times) companies like SunPower have seen their market caps increase as much as 450% over the past 24 months alone.  Solar IPOs continue to queue up.
• The market remains heavily impacted by regulatory drivers—as evidence, note John A.‘s point that Germany’s favorable policies are behind the fact that that single (smallish) country accounted for 40% of solar installations over the past 12 months.
• Polysilicon supplies have been and continue to be tight, constraining the capacity for production of Si-based PV systems.  Meanwhile, 2nd and 3rd generation solar tech developers are only now starting to finally make it out to the market, in many cases after some unanticipated delays.
• Anecdotally, valuations have risen and round sizes have gotten bigger in the solar sector in particular.

On the other hand, there are some reasons for continued optimism:

• Poly-Si supplies are expected by some to triple by 2010 (although there isn’t quite consensus on the specifics).  And while it may have taken a while in some cases, 2nd and 3rd generation low-cost producers are starting to commercialize their initial products, suggesting the potential for big price declines—and corresponding demand increases—in the near future.
• Favorable government policies show little signs of fading, and in fact if anything the commitment at federal and state levels appears to be growing stronger.
• While the pace of venture financings into the sector has been on a blitz lately, it still pales in comparison to other VC investment sectors like IT and telecom, which E&Y/ Dow Jones tracked at $7.3B in the first six months of the year in the U.S. alone.
• Not all of these financings went into competing technologies—in many cases the rounds went into upstream or downstream opportunities, as the solar value chain continues to mature on the whole.
• Many of the biggest “venture” rounds weren’t really for tech development, but were instead focused on building out manufacturing capacity, for companies on the cusp of commercialization and exits.
• Most importantly, the worldwide PV market was $20B last year, up a whopping 40% from the previous year, and showing no signs of slowing down.

Remember, there are some fundamental reasons for solar to be an especially attractive sector for venture capital investments.

1. Fast-growing, big markets.
2. Lots of room for multiple winners—different types of rooftops, ground-mounted versus roof-mounted versus BIPV,  hardware versus services, utility-scale versus distributed scale, etc.  There are so many different market niches in solar, as the ecosystem evolves it will never become a “winner-take-all” market, even as consolidation ramps up.
3. On the tech side, it scales much like semiconductors, a fairly familiar market to investors, who can apply their relevant networks and expertise to help companies grow effectively.
4. Good opportunities for exits, and earlier successful exits could become tomorrow’s acquirers of today’s investments.
5. Increasingly available pool of experienced entrepreneurs in the sector.
6. Very credible development paths for achieving (eventually) cost-effective PV or other solar power approaches, even in the absence of regulatory incentives.
7. Tons of world-class research being deployed, and vital governmental support at the regional and national level.

However, although these factors suggest reasons for being optimistic about the long-term outlook for the sector, it doesn’t mean that things can’t be moving too quickly at this particular moment in time.  Clearly there are some reasons to be cautious in the face of recent activity and hype.

As for the verdict, solar VC bubble or not, it’s too tough to say.   That’s a different answer than I would have given just a few months ago, when a “no” would have been the simple answer, but the crowded marketplace and rising valuations and deal sizes is worrisome.  Also worrisome is seeing VCs get out of their tech-focused comfort zones to invest in unfamiliar business models.  And when you hear stories about unworried investors and entrepreneurs who haven’t done their homework, that’s got to raise some eyebrows.

Are there a lot of reasons to be very optimistic about solar markets and the prospects for solar investments long-term these days?  Absolutely.  But could we be due for a bit of a break in the hyper-activity?  Quite possibly, but maybe not quite yet.  In the meantime, VCs with existing investments in well-positioned solar tech developers will be enjoying the ride…