As the time approaches to get serious about NextWave14 (coming up in just a few weeks!), I thought it would be a good time to take a step back and review how the overall "sector" is doing right now. And by and large, it's a happy picture.
The markets are booming
I put "sector" in quotation marks above because we all know that this is really a collection of a wide variety of markets and applications gathered under a consistent investment thesis. Cleantech isn't a sector; it's a lens for finding big opportunities across sectors.
But across many of those markets right now, we're seeing amazing growth continue.
- Solar, especially rooftop and community-scale, continues to boom. And it's only going to continue as costs continue to be driven down. For the first time, more than one-third of all rooftop solar installations in Q1 happened without any state-provided incentives at all.
- Large-format electricity storage is still in its early days, but is expected to grow quickly, with as much as sevenfold capacity growth in the U.S. by 2020.
- Electric vehicle sales keep setting monthly records. They were ten times higher in May than they were just three years ago.
- Microgrids are in their early stages, but are poised for a big breakout -- especially since some big corporate players are quietly positioning themselves to drive the market starting this year.
- Automated demand-response markets are projected to grow by a factor of 15 over the next decade. And energy efficiency has never been hotter, thanks to new scalable business models, financing, lower costs, and increased buy-in from all the major business, market and political stakeholders.
- LED lighting installations are growing at a 435 percent CAGR. No, that's not a typo.
The above statistics are just a short list of relevant market stats -- markets for new technologies and business models in other areas like water, food and transportation are all growing quickly as well. And let's not forget, the market opportunities are perhaps even bigger for the developing world.
Ten years ago, I remember a lot of optimism about the potential for exciting market growth in cleantech. Now that's a reality. It's very exciting to see. As McKinsey recently stated quite plainly: "The world is on the cusp of a resource revolution."
The big corporates are jumping in
From fuels to smart buildings to storage to transportation, there's never been more serious corporate interest in the next wave of technologies and business models.
As I recently pointed out, a large proportion of the growth-stage cleantech venture deals now being done include -- and sometimes are even led by -- corporate investors. Anecdotally, I've seen a surge in proactive outreach from corporate strategy groups and business unit leaders to the startups I work with on a regular basis.
Even more exciting, at least to me, is seeing some of these big companies start to redefine the markets they're in and gear up for emerging market battles that once would never have been dreamed of.
- David Crane declaring that NRG is heading "down the path toward a distributed-generation-centric, clean energy future featuring individual choice and the empowerment of the American energy consumer"
- Google getting into home energy automation, and reportedly gearing up to distributed energy management
- Industrial automation giants are realizing that energy automation is a crucial part of what their customers expect
- Automakers are busy partnering with, or copycatting, Tesla
- And encouragingly, the big "cleantech giants" like First Solar, Tesla and SolarCity are themselves partnering, opening up new markets and making acquisitions. Our sector is no longer dependent solely upon outside/incumbent big companies "waking up" to the opportunities in the space.
The venture investors aren't paying attention
I recently wrote about the dearth of early-stage VCs and the abdication of growth-stage VCs which are leaving many of the best startups to be invested in by corporates, foreign-based investors and other non-traditional investors like family offices.
It's frustrating, but perhaps not that surprising in light of the highly mediocre returns such investors saw from their earlier forays into the sector, and the high-profile losses some have experienced. Oh, and Solyndra. Always with the Solyndra.
But that's not what NextWave greentech investing is about; that's last-wave thinking, driving while staring at the rearview mirror. And there are some early encouraging signs that LPs are starting to put some money back into the sector. And that mainstream VCs are perfectly willing to invest in adjacent areas, as long as the opportunities are business-model innovations and not explicitly "cleantech" (because "we don't invest in cleantech").
This sector is totally sidelined right now by the venture investor community. But that's got to be temporary, an aversion based upon labels more than market reality. There's no way so many smart investors will continue to pass up on the growth opportunities so obviously illustrated above. What's needed to bring back early- and growth-stage capital is a stronger pattern of exits.
The exit paths are clearer
The IPO window is open again for cleantech startups. SolarCity, Silver Spring, Aspen Aerogels, Opower, BioAmber, Control4, Marrone and several other companies are rumored to be lining up to IPO as well.
Besides IPOs, acquisition activity is also heating up. The most obvious example is Nest, but others include ecoATM, Climate Corp., Novaled, Silevo, Zep, and many others. We're starting to see acquisitions as corporations pursue the expansion strategies described above. And even more encouraging, we're starting to see strategy-driven (as opposed to opportunistic) vertical and horizontal consolidation in areas like solar and water.
All of this is boosted, of course, by increasing mainstreaming of these technologies on Wall Street and the overall strong recent performance of the sector there.
The politicians in D.C. are still being stupid, but there's state-level progress
In D.C., they're still blocking bipartisan, moderate, smallish energy bills. Okay, forget them and their inability to govern. There's some hope that the newly announced EPA regulations will encourage more investment in clean technologies, but it just seems pretty indirect to me. Whether you are for or against the regs, they're not really relevant to my day-to-day work as a cleantech investor.
But the much more interesting political conversations are happening at the state and local levels. Perhaps the best indication that we're winning on a number of fronts is that the state and local political backlash is ramping up -- nothing says "scared incumbents" like a bunch of deep-pocketed, regional efforts to obstruct innovation. Or scary talk about "death spirals."
But while state-level policy battles on cleantech are a mixed bag right now, there are encouraging signs of solutions going forward. Massachusetts just demonstrated how utilities and solar companies can collaborate for a win-win solution, for instance. California's encouragement is providing a great early entry point for energy storage innovations, and New York and Connecticut are two other states where smart policies are providing cost-effective encouragement of cleantech adoption.
And this isn't strictly a "red state/blue state" thing. Polls consistently show that voters in all states want more access to distributed, clean energy and energy efficiency. So pragmatic state-level leaders across parties are figuring out ways to promote this access, some more quietly than others. It's not a unanimous trend, but it's a clear trend at the state level.
The startups are stronger than ever
Most importantly, five years after a major economic downturn that put the sector on its heels, the cleantech startups that survived are now quietly doing quite well indeed. I can observe this firsthand in our own portfolio, where revenues across the companies we work with continue to grow quickly. And because my firm also at times acts as a limited partner, I can see it in other investors' portfolios as well.
Many startups that survived through lean times are now poised for growth. And startups that were better positioned because of lower capital burn, or launched after the lean times with smarter business models, are doing quite well indeed. Cleantech startups are healthier than ever.
We're seeing a widespread adoption now of business model innovation entrepreneurship in this sector: new service models; downstream startups taking advantage of all of the cost declines upstream; and new financial-based models that profitably merge new innovations with project finance, where there's deep appetite right now for yield. Cleantech startup models are smarter than ever.
And for those startups fortunate enough to be backed by deep-pocketed and dedicated investors, there's a lot of expansion opportunity in such fast-growing markets. When I talk with entrepreneurs in the sector these days, they're often no longer "playing defense." They're hungry to grab the opportunities they see in front of them. Cleantech startups are more aggressive than ever.
In short, there's a lot to be excited about right now in cleantech entrepreneurship. The state of the sector is mixed, mostly because the investors are slow on the uptake. But everyone else can see quite clearly that the next wave is here. When the capital does inevitably come back, this sector (however it's labeled) is poised to take off.
Looking forward to talking about this with you, and hearing a lot more success stories, at NextWave14!