As an active investor in the cleantech market I'm definitely hoping we can start to see some successful exits.  I, like others, am pining for a few successful IPOs with stellar returns that can be good beacons of hope for the rest of the sector's bets.  When there were practically zero venture-backed IPOs across all sectors, you knew there was a backlog of cleantech companies that were lining up to IPO and couldn't.  And of course now that the IPO window is re-opened slightly, it's not surprising to see venture-backed cleantech startups jumping in and filing to go public.

But why are THESE the ones that are doing so?  A123, Codexis, Tesla, Amyris, PetroAlgae, Gevo... Several with no or little revenue, really looking to 2012 or beyond for their significant revenue growth. Not all bad companies, that's certainly not my point, some on this list may end up being very successful.  But certainly not the exact same short list one would have come up with a year ago when guessing which companies would be READY (note: not WANTING) to IPO as soon as the IPO window reopened.  And certainly a couple of stories with some real hair on them.

So why these companies?  I'm increasingly believing that these companies aren't IPOing as a result of the same reasons dotcom startups were IPOing in 1999.  It's not that there's overexuberance, and investors and management are eager to put companies out into the market too early simply because they know they can get great returns from an overly optimistic stock market eager to get a piece of the Next Big Thing.  

No, these companies are IPOing because they pretty much have to.  The current investors are fatigued, new venture funders are hard to find, the companies are burning cash very quickly, and with the IPO window open getting another venture financing round from the stock market seems the best solution.  Even if the IPO isn't primed to "pop" and be a great IPO story.  And in some cases, when you dive into the details of the S-1, you see that the existing funders have put the company in a position where it's IPO or else...

These companies are also seeing their competitors file for IPOs, and they know that as a result these competitors are about to have good access to capital to go out and start the inevitable consolidation trend as the shakeouts continue in these sectors... So they want to also be among the acquirers, but are too low on cash, and so need to be able to tap into the public markets.

Plus, these companies are still struggling with that same old classic cleantech problem:  The first commercial-scale project.  For many biofuels, solar, battery and vehicle companies (ie: where VCs have mostly been placing their cleantech bets), no matter how capital-efficiently (or not) they try to get the company to be ready for commercialization, at some point they need to build out a large production plant, and project financiers won't do it for an unproven technology.  So these VCs have turned to (in order, as the options have dried up over time) other VCs, then hedge funds and "special" funds, then the government, then corporate JV partners, and now to public shareholders to supply the tens if not hundreds of millions of dollars necessary to build these first-time production plants.

So to paraphrase Obi-Wan, "These are not the IPOs you're looking for"... This crop of cleantech IPOs doesn't represent the upside of the sector.  I don't believe that the VCs are expecting that after taking into account this market and their 6-month lockup, an IPO today is their way to a massive IPO exit story.  

Unfortunately, this wave of such IPOs hides the fact that there are many other cleantech startups that are now generating revenue, are profitable or within sight of it, and are seeing good signs of rapid market adoption.  These are the companies that will eventually be the ones with the great IPO stories... but they're taking the "let's wait until we're clearly ready and the market's clearly ready" approach.  

It's almost a perverse selection bias -- many of the best IPO candidates are waiting for better market conditions so they get the best exit, leaving companies that are worried about falling behind or falling out to slip out the IPO window while they can...

I just hope in the meantime, these early IPO stories don't muddy the water too much for the sector.

 

[Note: While I don't have any direct exposure to any of the aforementioned companies, it's worth noting that I have indirect exposure to some of them]

 

Haven't had much time to go through the various recent cleantech IPO filings, and so haven't talked about them much.  Also just generally hoping they do well, for the sake of the overall industry.

But in a meeting today someone put up some stats that were pretty sobering.

Taking a basket of 4 high profile recent IPOs and filings, the total across the four companies was:

- Trailing twelve month revenues = $319M

- Trailing twelve month EBITDA = -($343M)

- Total venture dollars put into all four companies to date = approximately $1.5B

Like I said, I hope all of these companies do well and grow into great companies.  But this type of profile for IPO isn't the norm.  So you have to wonder about it. 

Someone today mentioned that they think these companies have to IPO now because they need yet more capital and the private equity world is tapped out.  I disagree, I think companies with prospects like these would be able to raise more capital, if not from traditional VCs, then from non-traditional private equity players.  Cleantech private equity is down, but far from tapped out.

Instead, I believe these companies are IPOing now because they raised their LAST money under the argument that it would be the "last money before the IPO", and now that the window for IPOs has opened even just a slight bit, they feel compelled to race out there and make it happen.  Come hell or high water, this is the promise they've made.  And it's a reasonable guess that there are public equities investors out there who do want to back good stories in cleantech -- stories which these companies can indeed tell.

Fingers crossed.  But my worry is that, if these IPOs are perceived later on this year as having been unsuccessful, it'll once again set back the entire cleantech venture industry, because of the example it sets in terms of lack of exits.  In reality, these companies really don't epitomize cleantech venture capital, they're special cases.  But to a journalist, it's all just one broad category, and to their editors, nuances never make the headline sing... 

(PS: I haven't verified the above stats, so treat accordingly...)

Many cleantech investors were cheered by the successful IPO of A123 this past week. 

I noted a very interesting column on PE Hub (sub req'd), by Lawrence Aragon, one of the finer private equity journalists out there.

(We need to caveat all this by acknowledging that it's unlikely much of the VCs' returns have been realized yet, there's typically a lock-up period.  So here's hoping the market valuation holds up.  Still, Lawrence's approach of using current valuations is still quite useful for our illustrative purposes...)

Lawrence takes a look at estimated investment totals and returns for major VCs in the company, and concludes that these investors didn't produce "a huge return", because the major holders only got like 4x or 5x.  But let's look at that a little deeper.  One thing that really struck me about Lawrence's column is that his assumption seems to be that these were all venture investments, and that therefore if you don't get a 10x you didn't get a "high voltage charge" for "venture investors". 

I would argue that much of the pre-IPO capital that was put into A123 wasn't "venture capital", at least in the sense Lawrence seems to mean it.  Let me illustrate what I mean:  If you have the chance to make 2x on an investment over 1 year, would you do it?  Sure, 100% IRRs are pretty sweet.  2x over 2 years, 3x over 3 years are all pretty attractive returns as well, on an IRR basis.  So when Lawrence points to 4x type returns to "venture investors", he seems to be assuming that these were long-term holders, but many weren't.  The Series D was in 2007, for example, and was at an approximate pre-money of $300M. Right now, that return looks pretty good on an IRR basis, even after an extra year's delay past the originally intended IPO date.  North Bridge, for example, was looking at a much higher multiple on their investment before they had to pump in an extra $10M as part of a May 2009 Series F, and while that very late round yielded a much smaller multiple, it was over just a few months, and probably looks great right now on an IRR basis.

So I don't think Lawrence crystalized the point he was trying to make.  However, I think the A123 experience illustrates a couple of important principles at work in cleantech investing today:

1.  I continue to have a hard time thinking about pre-IPO equity investments at pre-money valuations in the hundreds of millions as being "venture capital".  At very least, we need a new sub-category to describe this type of investing.  We have early stage investing, the Series As and Series Bs that are what most outsiders think of when they think of "venture capital" (if at all), typically aiming (read: "hoping") for a 10x return over 5-7 years.  Then you have "growth stage" venture capital, which is later-stage VC investing, aiming for a 5x in 3-5 years.  But as I noted back in that August 2008 post, much of the Series E (June '08, ~$100M raise, approx. $1B pre-money) appears to have been provided by first-time investors.  These investors weren't brought into the raise as "venture capitalists," I guarantee you.  Instead, it's probably best to think about that type of investment as a "mezz equity round".  In other words, the expectations were probably for a 2x in 1-2 years.  That's not necessarily better or worse investing than "venture capital" as Lawrence is referring to.  But it's certainly different.  It means a simple analysis of returns based on multiples is useless if all these types of investors are bundled together.

2.  Growth and even "equity mezz" financing isn't as low-risk as it's made out to be.  It's worth noting that those Series E investors are the ones who didn't make out so well.  Right now it's looking good as A123 trades almost 50% above its IPO price, so if that holds up through their holding periods they may still make out with a 1.5x return.  But the initial offering price appears to have been at just about the same post-money (around $1.1B) valuation of the Series E.  So a zero return at that price. And since my write-up last August after the Series E, apparently investors needed to pony up an additional $99M Series F round according to the updated S-1... and that was at a significant down round valuation (something like $9.20/sh vs. the Series E's $16/sh).

A lot of non-VC investors such as family offices and hedge funds have been brought into these kinds of mezz equity rounds in the past.  The pitch to those investors is, "hey, this company is going to IPO, and you're going to double your money over a year or so -- you can't lose!"  What we've learned about these kinds of rounds in thin-film solar, and now with A123, is that even at that late stage there's still plenty of risk of an exit not happening in the timeframe anticipated, or at a lower than hoped for valuation, or perhaps not at all. 

There's this theory out there that being a very late investor into cleantech is the way to go because the risk has been taken out of the equation.  Do the later investors into thin-film solar companies still feel that the risk of a timely and high-valuation exit was low?  Do the Series E investors in A123 feel like the risk was low in retrospect, after a year of holding their breath amid high cash burn and a down round and no exit window in sight? It worked out for A123.  But so far, for most of the large late-round investors in cleantech, the exits still haven't appeared. We all know early stage cleantech venture capital is risky.  But when I see it said/written/implied that we somehow can conclude with confidence that early stage cleantech VC doesn't make sense because it's "too risky, too long" whereas growth stage is the "smart way to do cleantech", I just shake my head.  And when anyone tells me I "can't lose" on a later-stage investment, I run away as fast as I can, because there's no such thing.

So basically, I look at the A123 IPO and am cheered.  I see it as being a sign of more good exits to come, in a sector that really needs them.  And I believe it shows us something about the shape of cleantech venture investing right now.

 

 

Ernst & Young put out a very good analysis of recent cleantech venture trends today, more to follow on that in upcoming posts.  But in the meantime here are two very interesting charts:

Apologies to everyone for the lack of posts for the past couple of weeks. At least I have a good excuse (see pic)...

So what did we miss over the past week-plus? Not much. A few deals (and we'll do a bit of an update on those next week), Google putting money into geothermal, and a coming free-fall in silicon prices. Frankly, my news alerts have been filled with much more generic fluff/ hagiography about "big name VCs are jumping into cleantech, and say it's the next big thing!" than any real news items on the subject.

There was also a brief two-part discussion from Dan Primack of PE Week Wire on the cleantech wave. Dan always takes a good critical eye to any emerging trends, pushing past the fluff to get to real issues, so it's worth checking out his thoughts (here and then here). I find myself largely in agreement regarding Dan's "on the one hand, but on the other hand" take on the sector right now, for reasons regular readers of this column will already find familiar...

One question for Dan, however -- what's the justification for saying that there is "a relative lack of potential acquirers?" Energy, water, and materials significantly touch so many major markets, and so much of the Fortune 500, that it's a very surprising comment. If anything, one thing that has excited long-time investors in the sector is the deep pool of potential acquirers. Heck, if even Google and Bank of America -- which don't make any physical products -- think energy tech is a strategic priority, I'm challenged to think of any industries for which looming natural resource constraints WON'T lead to opportunistic acquisition thoughts. Don't believe me? See the track record even before the latest hype cycle, in this somewhat-dated presentation from the Cleantech Group (note: link opens PPT file). So, Dan, why are there relatively few acquirers for cleantech companies?

The big news over the last few days has been the IPO filing of lithium ion battery innovator A123, who's looking to go public on NASDAQ sometime soon. Much will be written elsewhere about the prospects for the company's IPO, by those who follow the public markets more closely (and to reiterate the disclaimers, don't get your investment advice from this column, it would be the blind following the blind and we take no responsibility for your investment decisions, good or bad). But there's also a lot of information in the company's S-1... I thought it might be good to go through some of this info as a means of illustrating what a "successful" (still to be proven, but so far so good) cleantech venture investment of a certain type (energy storage, using a capital-intensive "build them ourselves" business model) might look like. Funding history (note: all of the below are extrapolations and over-simplifications which are intended to be illustrative, but in fact may be quite wrong): 2001 - Founded out of MIT. Unclear what seed capital may have been provided. 2001-2004 Raised $12.7mm in Series A ($1/sh) and Series A-1 ($1.50/sh) funding. June 2004 Raised $20mm in Series B ($2.08/sh) [note: this was widely erroneously reported as a "$30mm Series B" since the company reported their aggregate raises at about the same time], pre-money approx. $58mm. Feb 2006 Raised $30mm in Series C ($3.37/sh), pre-money approx. $125mm. Aug 2007 Raised $70mm in Series D ($6.56/sh), pre-money approx. $300mm. Feb 2008 Raised $16.5mm in common ($7.22/sh), pre-money approx. $400mm. Jun 2008 Raised $102.1mm in Series E (16.59/sh), pre-money approx. $1B. The above valuations are really rough estimates, but still provide a bit of insight into the investment path on the way to an IPO for a company of this business model. The amount of Series A, especially given the dynamics of 2002-2003 energy tech VC, show that the early investors were pretty excited about this one right from the beginning, and probably paid a high single digit million pre-money valuation, likely higher in the teens or low twenties as a pre-money. That's higher than many Series A stage valuations that we see even in today's market. The progression of valuations shows a steady march upward, practically doubling or tripling each year. That's more of an exception than a rule in any VC category, naturally, since we're looking retrospectively at a company that looks like they'll be a success of some kind. However, given that the company mentioned earlier this year that they were planning to IPO, the valuations on the GE-bought common round in Feb and particularly on the Series E are indicative of a high confidence in that IPO taking place. Notably, the Series E appears to have mostly been from new investors, since GE ($30mm of the $102mm round) was the only participant in that round who is now a 5% stockholder. So it's a bit of an illustration that these "venture capital" late-stage, pre-IPO rounds are often mostly done out of the pockets of non-VCs, and thus it's misleading to include these kinds of rounds in the quarterly venture capital surveys that are put out there. Nevertheless, most of the surveys continue to do so, and that's one reason why we continue to see a few megadeals dominating the dollar totals each quarter. Business model and capital needs I described the company's model above as "capital intensive, build-them-ourselves". There are a lot of paths a company can take with the development of innovations that will eventually go into devices (be they batteries or turbines or solar panels, etc.). The spectrum of capital intensity roughly goes from simple licensing to someone else who is manufacturing product, to building subassemblies to be integrated into other OEM's devices, up to developing/acquiring manufacturing capacity and building the entire device yourself. There are reasons to like and dislike all the choices. A123 has chosen mostly the latter route, having acquired significant China and Korea based manufacturing facilities and employing nearly 1,000 people now in manufacturing. This choice means higher revenue but it's also meant bigger capital needs along the way. They invested approximately $28mm in 2007, for example, in capex and acquisitions to build out manufacturing capacity. And in Q1 2008 they burned through $13.5mm in cash (not counting financing inflows) even while at a revenue run rate near $40mm/yr. They raised an aggregate $235mm [8/11 update: corrected previous bad math] in preferred equity along the way, not counting the common equity raised earlier this year or any other common shares sold along the way, nor the relatively smallish debt the company raised during the growth path. Not a game for those with thin wallets or for the faint of heart... Fun with Fair Market Value On pp 52-53 of the S-1, there's an interesting progression of the FMV on common stock as decreed over time. What's interesting is to see how the exit scenarios progressed over a short amount of time: March 2007: 25% chance of IPO, 25% chance of sale at or below liquidation preferences, 50% chance of continuing as-is. At this point, importantly, the company already had significant revenue and was in the process of raising their Series D. August 2007: 40% chance of IPO, 40% chance of sale at or below liquidation preferences, 20% chance of continuing as-is. Clearly, there were pretty high liquidation preferences at play... July 2008: 75% chance of IPO, 25% chance of sale above the liquidation preference, chances of a sale below the preference or continuing as-is were zero. Reading between the lines, looks like the company had received a potentially attractive acquisition offer and that it was clear there was going to be an exit soon one way or another. But that's purely speculation on my part... The odyssey of an early investor One name that comes up repeatedly in the document is North Bridge. It's clear that they were fairly early investors in the company, purchasing something like 4.93mm pre-Series C shares, 1.6mm Series C, and 1.3mm Series D. Unclear whether they participated in the Series A/A-1 or not from the publicly-available info, but it's probably a safe assumption. Over the holding period, even while the company seems to have consistently progressed in product development and market development, from North Bridge's perspective it must have felt like there were some significant shifts along the way. Looking at the Series B investors, we see names like Motorola, Qualcomm, and OnPoint. This indicates a market vision in devices. When they came out of stealth mode, the story was big on power tools. But with the recent upswing in hybrid vehicles and now the partnership with Chevy around the Volt, A123 is as much as anything else a "next generation transportation" play. The latest vision as articulated in the S-1 is grid-scale storage. Perhaps North Bridge's investment team saw this from the beginning, and it's all rolled out exactly according to plan. But my guess is that the original pitch was heavy on the device market and light on the vehicle and grid storage markets, and that the vision of the company has significantly shifted over time. It's so tough to know so many years ahead of time what's going to be the real success driver for a company, and investors have to make the decisions they can with the info available at the time, and encourage the management team to balance focus with opportunism along the way as markets shift and emerge. It would be great to see A123 succeed in general, but for North Bridge in particular they have to be pretty happy with the results so far. Based on the most recent Series E price, their holdings are worth approx. $130mm on paper, and their investment was probably something near to $20mm. And, with any luck, the price per share after IPO and expiration of lockup could be significantly higher than the Series E price. Not too shabby. Of course, weigh these happy results against the odds facing the company 5 or 6 years ago when North Bridge likely first got involved in the company. Not a slam dunk, that's why they call it "venture capital", but probably a smart bet in retrospect to get in that early... In conclusion A123 is a good illustration of one kind of cleantech venture capital investment, the kind that's been talked about a lot recently thanks to various investors deciding to go later and bigger -- the capital-intensive, go-for-broke model that we've seen in sectors like solar, biofuels and energy storage. It shouldn't be taken as an illustration of MOST cleantech venture capital, since so much of cleantech VC is in more capital-efficient, M&A-the-likely-exit type plays. EnerNOC, for example, had raised only $27mm and had been in business only 6 years when they IPO'd. But for all the naysayers out there who argue that there aren't good exits to be made in cleantech, A123 will be a test case. The time since founding, at around 7 years, isn't atypical for IPOs. The aggregate amount of venture financing, at $235mm [8/11 update: corrected previous bad math] (plus seed and common), is high but not shockingly high for a manufacturing-oriented business model like this. So A123 either represents a typical or slower/capital intensive example of a cleantech VC investment, all things considered. And if North Bridge and their co-investors can see terrific returns even on this kind of play at the most challenging end of the cleantech spectrum, that should help settle exit concerns out there, among those who somehow think cleantech is not yet proven as an attractive investment area. We'll have to watch and see how this plays out over the next few months...

Are you frustrated that the current macroeconomic mess, and the resultant slamming shut of the IPO window, has denied you the ability to invest in some of the bigger-name privately-held solar companies? Are you skeptical or optimistic about the prospects for a wave of solar exits over the next 18 months? Well then, it's your lucky day. As a proxy, I've talked InTrade into establishing a new market in the IPO prospects of four high-profile solar startups. Now you can go and purchase or sell contracts that pay out if Ausra, Miasole, Nanosolar, and/or Optisolar IPO by December 2009. Just follow the link above to see -- you'll need to open and fund an InTrade account if you want to participate. I was inspired by PEHub's Alex Haislip, who yesterday asked if anyone had ideas about ways to evaluate the risk/reward profile of the large "venture capital" rounds that have gone into these companies. If enough of a liquid market can be formed around these companies' IPO prospects, it might give an indication of that answer... InTrade and other "virtual markets" can be an effective way of determining the consensus (albeit not always correct) judgment about the likelihood of political, economic, financial, etc. events -- you can also see how they're evaluating the ongoing Veepstakes, for example. Unlike polling or other types of info-gathering efforts, it represents people putting real money down and thus can be a better indication of what they're really expecting to see happen. So sign up with InTrade and start trading! We'll check in later and see what we're learning...