There are no more good solar deals

OK, gross overstatement in the title for this column, admittedly intended to grab attention.

But something that’s been becoming clear for some time now, and was reinforced for me at yesterday’s fun Greentech Media PV vendor showcase, was that the innovation backlog and the overwhelming VC interest in the sector over the past few years have made it a very challenging sector for venture investors now.

The market for solar generating systems is big and growing attractively.  Much of it looks like semiconductor technology, and there have been some successful IPOs in the sector, so it naturally draws VC interest.  A lot of VC interest.  The Cleantech Group tallied up around $4.6B $440mm in investments made over the last 3 quarters in thin-film solar alone.  [6/6 update to reflect a clarification I got from a representative of the Cleantech Group]

What this has meant is that there are now scores—if not hundreds—of startups in this sector, each vying for a piece of that market.  No matter how attractively it’s growing, the market will have a hard time providing “home run” returns for all those investments.  The investments from a few years ago in promising system vendors still haven’t turned into exits yet.  And as an active investor I see more solar investment opportunities cross my desk all the time.

It seems that venture capital solar investment opportunities increasingly fall into one of three categories:

1.  The component or incremental improvement developer, with a smart efficiency improvement on an existing technology… but not a dramatic improvement that necessarily lends itself to major differentiation versus other smart incremental improvements being developed, or a component that would end up being a major part of the eventual PV system cost.  Thus making it hard to capture significant revenue over time.  To try to capture more value, they may attempt to form a full-scale manufacturing effort around these incremental improvements, but with so many competitors out there with a head start and deep pockets, and the capital intensity involved, tough to see the path to world domination, as it were…  Thus, it’s a challenging bet for an investor to make.

2.  The “later stage” solar company that may or may not have some early revenue, but is far enough along and visible enough that the “venture round” they’re looking to raise doesn’t look much like traditional venture capital—we’ve recently heard of several ongoing raises right now with valuations in the hundreds of millions or even over a billion dollars.  Some of these startups will undoubtedly turn into winning companies with long-term prospects, but as an investor it’s always entirely possible to overpay for a good thing, so these deals are also challenging.

3.  The “third generation” solar startup with some exotic ideas in development that sound really promising, but are several years away from commercialization—and the lessons learned from earlier such efforts suggests that they’re even further away from commercialization than these companies themselves expect.  That long timeline makes it a challenging type of play for most investors.

There absolutely are exceptions to the above over-simplification.  As an investor, I definitely haven’t written off the potential for finding a promising investment in the sector.  But overall, while the solar market is booming, ironically the resulting amount of entrepreneurial and investment effort in the sector right now means that the market is full of niche plays, over-visible plays, and patient-capital plays…  Not ideal venture capital plays.