The various deal-tracking groups continue to step up their game, doing a better and better job each year. Looking forward to seeing additional takes from CB Insights, Ernst & Young and others, but just reviewed the Cleantech Group's Q2 media presentation (as reported on by GTM here) and had a few additional thoughts and reactions to lob in:

1. It really feels like 2012 is a shakeout year.

Remember that the way these numbers get reported, and given the paucity of exits in the sector, there's a fundamental momentum to see deal counts always go up over time. Every quarter's new deals will require multiple follow-on rounds, so as new companies are added to VC firms' portfolios (and especially when, as the Cleantech Group's data suggests, existing portfolio companies are not being acquired out very rapidly), you would expect a cascading effect, where over time a lot of follow-on financings would mean more and more deals, even if the industry isn't really attracting a lot of new VC interest.

So when you see a clear trend downward over the past few quarters in terms of deal counts, that suggests a lot of follow-ons aren't happening. And that suggests, unfortunately, that a lot of companies aren't able to get the capital they need to continue soldiering on.

This isn't necessarily so; there are some other potential explanations at work. It could be that early-stage dealflow is what's dropped off and making the overall deal counts look low (although the Cleantech Group's data appears to show that later-stage deals have also declined). It could be that there are follow-on rounds that aren't being reported (and anecdotally, the big number of insider bridge financings I saw in 1H12 would suggest this is indeed a factor). It could simply be that cleantech startups are getting better at managing cash burn and maybe even getting to cashflow-positive more than they used to!

But when matched up against what I'm seeing on the ground, unfortunately, I think this data does reflect that a lot of cleantech startups have been getting shaken out and will continue to do so. And meanwhile, early-stage deal counts have also declined. Meh. The positive news? LPs finally appear to be slowly getting back into the habit of funding cleantech venture capital firms. So I think we'll see a pickup in dealflow in the second half of the year. But probably not enough to forestall the ongoing shakeout.

2. VCs' interests are very sector-specific.

Deal counts dropped again in the solar sector, and dollar amounts remain way below where they once were. And this is for all solar, upstream and downstream. What I can tell you is that downstream solar (key BOS components, financing, installation) remain of interest to investors, so that must mean that upstream solar (panels and cells, etc.) venture activity is really falling off a cliff.

Similarly, energy storage investment activity remains down from its highs. This is a bit more curious, simply because some big-name VCs like Khosla continue to appear to be actively seeking solutions in this space. But the data suggests it's not turning into a lot of new deals.

Interestingly, smart grid deals were down, but energy efficiency deals continue to be favored. What does this mean? My theory is that VCs are down on investments in utility-side tech (both powergen and smart grid) because of their capital-intensity and the utility sales cycle, but they continue to like the economics of energy efficiency and the fast growth in areas like energy data and lighting, so they're looking for those opportunities on the customer side of the meter. In any case, even while the overall cleantech sector is in a down period, it's clearly still an exciting time to be investing in energy efficiency and related plays.

Defying the "capital-efficient" trend, biofuels and biochemicals continue to plug away. There were only a third as many deals as in energy efficiency, but they're much bigger deals. Some of this is just follow-ons into the last wave of biofuels startups, of course, but there's already been a bit of a shakeout there, and from what I can tell, there's been renewed interest among VCs in biochemicals in particular. Partly, I think this is because the large chemicals giants have shown a willingness to provide project finance and other support for the capital-intensive "first project" phase of these companies, which gives VCs hope. And partly, I think it's because we continue to see some fairly strong management teams jumping into this sector in particular; I'm not sure why. But these underlying fundamentals are allowing VCs to continue to be interested in these plays, even after the recent attempts at IPOs out of this sector have been underwhelming, to say the least.

Curiously, the Cleantech Group's press release specifically calls out the transportation sector as having "continued strong support" and then in its own presentation, it says that the sector is "still getting some love." Not sure where they are getting that, but it's not from their own data. Yes, it was one of the larger sectors in terms of dollars attracted. But the company's own data shows transportation deal counts falling by >50% from Q1, and at the lowest levels seen since 2Q09. And even while the ten deals did take in more than $250M in funding, even that total is a far cry from some of the previous quarterly totals for the sector. My hope for you, Gentle Reader, is that you would never be subjected to such "love" and "support."

3. What about the downturn in corporate M&A?

The Cleantech Group data of tracked M&A deals suggests that Q2 saw relatively few such deals, as well as a general trend downward in deals since the middle of last year.

That doesn't match what I'm seeing in the field, where I see corporates ever more interested in these types of technologies. In fact, our own portfolio has had more inbound corporate interest so far this year than in any previous year. 

Maybe my narrow scope of the cleantech universe doesn't reflect the underlying trends and the Cleantech Group's data better reflects overall conditions. But I have an alternative theory that 2011 was the 'opportunistic' M&A year and now large corporate players are getting serious and getting strategic. And so we see in the data indications of the average size of M&A deal going up, even as reported deal counts go down. It just looks to me like last year corporates were presented with a fair number of smaller opportunistic, cheap bolt-on opportunities and grabbed them, but now they're tackling M&A with more strategic intent, figuring out which cleantech startups are worth paying up for. Because what I'm seeing is, across a handful of sectors at least, a competitive dynamic developing where large corporates are figuring out which pieces they need to add to the puzzle, instead of just fishing for bargains and capitulations. Thus, we're also seeing a lot more corporate venture capital investments, as well. Corporate cleantech M&A activity is in a transition from an opportunistic period to a strategic one.

Wishful thinking or just a small and anecdotal data set, perhaps. But whether I'm right or wrong on this dynamic, I would expect to see an uptick in M&A dealflow going forward. I'm getting pinged by more and more large corporates looking to get active in some way, and where there's smoke, there's fire.

4. Two more analyses I'd like to see the Cleantech Group (and others) provide:

Every quarter we are always given a list of "Most Active Investors!" for the quarter. This means squat. All it basically shows is which firms had previously built up a large portfolio and then had to do a lot of follow-ons this past quarter. What would be much more useful for cleantech entrepreneurs would be to see which firms were most active in terms of deals (either early stage or otherwise) where it was the first time they were listed as one of the investors. It's not bulletproof, but generally speaking, the "first-time" investors in a round are listed as such in press releases. And even if not, a very simple cross-check per follow-on deal could reveal whether the investor had been in on earlier listed rounds. Activity in new deals vs. follow-ons is much more actionable for entrepreneurs than what's currently provided, so it would be great to see someone list this subset.

Similarly, the Cleantech Group and others typically breakdown deal counts by a) stage and b) sector. It would be awesome to see someone just break down (and report!) early-stage deal counts by sector. Again, that would likely be a better indication of where VCs' heads were at in terms of likes and dislikes than having to try to extrapolate that from overall sector deal counts across both new deals and follow-ons.

Those are my wish list items. But no doubt, cheers to the Cleantech Group for another valuable quarterly analysis. I'll tweet about anything interesting out of subsequent Q2 data releases from them and the others.

 

UPDATE: Ask and ye shall receive -- after posting this I got a nice follow-up from the team at Cleantech Group including the following breakdown of early stage deals by sector.

 

Sector

Amount

# of Deals

Energy Efficiency

$              56,633,524

17

Transportation

$              23,330,000

5

Water & Wastewater

$              16,843,724

10

Energy Storage

$              14,326,141

6

Solar

$              12,901,739

4

Recycling & Waste

$              12,874,700

3

Materials

$                8,097,000

4

Agriculture

$                5,050,000

5

Biofuels & Biomaterials

$                3,691,185

4

Other

$                2,136,669

2

Wind

$                                -  

1

Air & Environment

$                                -  

2

First of all, it reinforces what I was saying about the level of activity in energy efficiency versus other sectors, especially solar. 

And it also helps explain the stated "love" for Transportation -- it was, after all, the second-highest dollar total sector for early-stage deals. However, I would point out that that's from only five deals. But still, this helps me understand why the Cleantech Group team had a more positive view of VC activity in the sector.

And finally, this picture makes water technology stand out more positively -- more early-stage deals than solar and transportation combined. Great to see!

Thanks for the follow-up, guys.