We recently held a one-day retreat for all of our portfolio CEOs at Black Coral Capital, and it was a really energizing affair. Rather than a day of stale presentations, we created lots of opportunities for our CEOs to compare notes with and look for ways to work with each other, and it was just terrific to be a fly on the wall as all those smart entrepreneurs chatted / cajoled / brainstormed / opined. Just great fun to watch. It certainly helped that all of our companies are in a revenue-growth phase, so they had lots of common points of discussion. And of course, they all had one shared investment partner to complain about with each other...
But to kick off the day I gave a little update on the sector from the investor's perspective. Here's some of what I presented to the group:
We expect that 2013-2014 will see another wave of shakeouts in commodities like biochemicals, electricity storage, etc. There's too many solutions being commercialized right now by high cash-burn startups for the market to absorb in time, some shakeout is inevitable.
But we also think 2013 will see the first data points of success of the "next wave of cleantech investing" -- especially rewarding business model innovation over technical innovation. Thus, we expect LP dollars will start flowing back into this huge macrotrend opportunity, starting in 2014-2015. In the meantime, however, capital will remain scarce. According to Prequin, 2012 was the worst year in more than half a decade for VCs looking to raise cleantech funds, with aggregate capital raised down to $2.8B from $6.1B in 2011 -- part of a downward trend that has continued since 2009.
I also found it interesting to compare our inbound dealflow composition during 2H12 with the reported consummated deals in the market, as reported by the Cleantech Group. In a way, we can assume that the dealflow we see at our shop generally reflects what's being shopped around the broader market, so differences between what's being shopped and what's actually garnering investments might point to gaps and tensions in the market.
Fascinatingly, the dealflow we saw matches up really tightly to the deals that got done. As illustration, 13% of the deals we saw were in the solar space, and Cleantech Group reported that 13% of the reported deals those two quarters were in solar. Similarly closely matched levels in sectors like energy efficiency, biofuels and biochem, agriculture, materials, etc. This suggests that, at least at a sectoral level, there isn't that much divergence between where the entrepreneurs are and where the checks are being written. Of course, in such deal counts an insider-led follow on counts the same as an outside-led round, and trends within subsectors (such as toward downstream solar) aren't available in this data, and it's very susceptible to apples to oranges comparisons for a number of reasons... but it's still a fascinating comparison. If the VCs are actually moving away from some cleantech sectors and into other "new" ones, leaving entrepreneurs behind, you can't see that in this data. At very least, they're still backing their old bets, generally speaking.
In another interesting datapoint, we looked at the stage of development of the companies that approached us for funding in 2H12. Fully 75% of them were at or pre-commercialization. That stands in marked contrast to the significant fall-off the Cleantech Group identified in early stage deal counts (a negative 9% CAGR from 2010-2012). It's getting harder and harder to be an early stage cleantech entrepreneur out there.
Finally, while the Cleantech Group's data suggests that consummated deal sizes have been shrinking over time, we also track how much the fundraising ask was. And since 2009, in our dealflow we have seen remarkable stability in fundraising targets by stage. This suggests that a lot of funding rounds are coming in below target as the asks remain the same size but the reported round sizes drop.
Again, lots of apples to oranges in this data comparison, with possibility of data selection errors as well, so it's important to treat the above as just possibly indicative and far from comprehensive. But the overall picture is pretty clear -- investors don't have as much capital to invest, so deal counts and deal sizes are down, and yet there hasn't yet been any large-scale shift in how and where investments are being done in the cleantech sector, except to veer toward late-stage. Same old, same old.
But I think in 2013 we'll start to see some data points emerge out of alternative investment strategies for the sector. And hopefully that will mean better things for 2014 and beyond. It's certainly a good sign to see some recently announced successful cleantech venture fund closings! Here's hoping these funds and others can help drive the necessary next wave of cleantech investing.