The cleantech anti-bubble is a buying opportunity

Ah, memories.  Remember way back when I had to devote significant writing on this website to the question of whether there was a bubble in cleantech or not?  And by now, it’s starting to look like even my fairly pessimistic 1H09 cleantech venture dollars predictions may have been a bit optimistic, given that Jan-Feb investment totals were on a pace of less than 50% of 2008 annual totals.

What we’re seeing now is an anti-bubble.  It’s across the entire economy, and in fact cleantech appears to be more insulated than many other sectors, but people just aren’t putting money out there.

In their March 7th issue, The Economist declares: “A share’s value must be the present value of all future dividends—otherwise stockmarkets would be a giant Ponzi scheme.”  But that’s exactly what has been happening across a wide variety of financial asset classes since the mid-80s.  It was driven by an oversupply of capital, due to a combination of loose monetary policies and the massive exportation of capital by fast-growing Chinese, et al., economies.  We’ve had 20+ years of one bubble after another in various asset classes, most recently from dot-coms to housing to corporate debt, with only a couple of hiccups along the way.

The definition of a Ponzi scheme is one where the fundamental value of what’s being invested in is irrelevant—the only assumption is that the buyer will be able to find another buyer willing to pay even more. With the oversupply of capital we experienced for so long, it had to find places to go, and so we had bubbles where investors weren’t paying attention to the underlying fundamental values of the assets they were buying.  Or fooled themselves into believing that “this time it’s different”.  Whatever.  Basically, to use the stockmarket example cited by The Economist, investors stopped caring about the dividends of stocks.  They just thought someone else would be willing to pay more for the stock later—why?

We started to see a bit of that in some subsectors in cleantech, most notably in solar panel manufacturing and food-based biofuel production.  Why was such-and-such thin-film solar company valued at over a billion dollars pre-money for a private equity round?  Because the investors felt that someone else would be willing to pay even more within a couple of years.  And certainly some of that behavior was also seen in the publicly-traded cleantech shares out there.

So these bubbles, including in some cleantech sub-sectors, were the result of too much capital chasing into a “hot” market and getting away from the underlying fundamentals.  And now, we’re experiencing the same category of problem but in the opposite direction:  Too little capital is available, and still everyone is getting away from the underlying fundamentals.

But in cleantech we really are seeing some tremendous business opportunities.  Technologies at a commercialization stage, targeting big markets with huge unmet needs.  Our global natural resource shortages aren’t going away, and while energy prices are temporarily depressed given the severity of the downturn, few expect them to stay low over the long run.  Cleantech startups selling cost-saving technologies still getting good revenue traction.  And of course, a huge influx of government support on the way to anyone with the potential to grow green collar jobs.

Yet, right now many cleantech venture investors just aren’t putting money out there.  Some are in a bit of maintenance mode, stretching out their existing funds rather than go out to raise a new fund right now.  Others are simply waiting for “the bottom”.  And that means I see a lot of strong cleantech companies not getting funding.  Good companies with good revenue growth since their last round, looking at a down round this time.  Startups with capital-efficient business models and compelling customer economics, talking to VCs who say they’re looking for capital efficient business models and compelling customer economics, but not getting term sheets.

This means there is a strong buying opportunity out there right now in cleantech venture capital.  An opportunity for bold investors with available capital (and discipline and patience) to come in and find great companies to back, with a lot less competition than they would have faced a year ago. Yes, the economy means that some of the fundamentals have changed and deal valuations should be lower.  And yes, high cash burn is now justifiably out of style.  But there are still more great deals available right now than there are deals getting done.

So consider this a call-to-arms for the entire cleantech venture community.  Let’s get out there, and grow some great businesses.