The following opinion piece is from an independent writer and is not connected with Greentech Media News. The views expressed here are those of the author and are not endorsed by Greentech Media.
As the new year begins, venture capitalists investing in clean technologies are pondering a few questions:
1. Can the massive influx of capital into the sector continue?
VCs tend to disagree strongly on this question. Some argue that the high volume of investments in the sector is unsustainable. They point to the number of solar deals in 2007, for example, and wonder how many of these efforts are redundant with each other, and how many of these startups will be able to grow into their valuations. Other investors point out that cleantech remains just a small portion of overall VC dollars, and that there’s a lot more room for innovation in this sector.
We are in only the beginning stages of a period of creative destruction in some of the world’s biggest industries: energy, water, and materials. These industries together remain much larger than IT and telecom industries. And yet even with the recent uptick, and even by the most generous surveys, cleantech still only receives a fraction of the amount of venture dollars that go into IT and telecom.
And while in some subsectors there have been some eyebrow-raising deal volumes over the past 12 months, many other cleantech sub-sectors remain underexamined. The market fundamentals for most cleantech markets remain quite strong (natural-resource shortages aren’t going away). So it certainly feels like this sector overall has a lot of room to run, even if a few subsectors are feeling a bit frothy at the moment.
Cleantech Investing readers who participated in a recent survey seemed to agree. In this survey, which included a broad range of cleantech market participants, majorities felt that in subsectors like solar and biofuels, bubble-like conditions already exist or are going to develop in 2008. But when asked if there was a bubble across all of cleantech, 95 percent of participants said no. Furthermore, when asked to come up with one clean-technology area that wasn’t getting the attention from investors that it should, participants submitted a pretty diverse list.
It wouldn’t be surprising to see a short "pause" in the growth of dollars going into the sector, given the pace of recent investments. But, all things being equal, there’s no reason to expect a beginning of a long-term decline of investor interest in the sector. Overall macroeconomic conditions remain a big wildcard (same as for all VC sectors, naturally). But otherwise in 2008, we’ll probably see just as much or more venture-capital interest in the sector -- and with VCs increasingly casting their eyes about for other sectors besides solar and biofuels where they can find compelling deals.
2. When will the exits start to come?
The big recent wave of venture investments in this sector really didn’t start up until 2005. So it’s not surprising that there haven’t been a lot of exits, either good or bad ones, from most VCs’ current cleantech portfolios. The inventory of cleantech investments in VC portfolios is already pretty long, so the issue is going to be forced soon.
2008 will probably be the year that we start to see the first wave of these exits. Take thin-film solar, for example -- a number of startups in this sector have taken in fairly significant amounts of capital already. The hope is that they are able to use that capital to build out manufacturing facilities, get product out into the market, start generating revenue and IPO or otherwise exit. But for many, there have been delays. And during the delays, they’re still burning cash.
As all this comes to a head for the first big wave of post-2004 cleantech venture investments, we’ll see a mixed bag this year of all three possible outcomes -- successful exits, some big-name shakeouts and some unanticipated follow-on rounds. But how many of each? We’ll have to wait and see…
Again, macroeconomic conditions may play a big role -- Will an economic downturn mean that IPO windows close and M&A activity fades? But otherwise, the signals are very positive. Wall Street seems to be very receptive to cleantech offerings. Major potential acquirers of the Fortune 500 variety are getting more and more active in cleantech. And we can expect a period of consolidation within some of the more crowded cleantech sectors like biofuels and solar.
3. What will be the Next Big Thing for VCs in cleantech?
We VCs will rarely give a straight answer to this question. But it’s worth noting that in the aforementioned Cleantech Investing survey, a majority of participants gave "attractive" or better ratings to investment opportunities in energy-efficiency/demand response, advanced lighting, water, solar, advanced materials and new technologies in incumbent energy. So take your pick!
2008 will probably also see the continued internationalization of cleantech venture-capital activity. The markets for clean technologies in China and India are potentially huge. Israel is attracting an increasing amount of attention from investors, particularly in water technologies. And even European cleantech is starting to see more VC interest. Many of the resources shortages that clean technologies are intended to address are global in nature, so innovative solutions will come from all over, and the end markets will be global as well.
Besides all of the above, we’ll also see a national election, additional pressure for new national and regional greenhouse-gas policies, more volatility in energy markets and more evidence of the impacts of climate change on natural resources and national economies. One thing’s for sure -- 2008 won’t be a boring year for cleantech VCs.