There are always signal deals that tell us a lot about what's going on in the marketplace. When it comes to clean technology, however, we can point to three recent transactions that reinforce a significant trend line.
Solyndra, which designs and manufactures leading-edge solar photovoltaic systems for the commercial-rooftop market, received $535 million in loan guarantees from the Department of Energy and shortly thereafter raised $198 million in a private capital follow-on round. Tesla Motors, which makes high-performance electric vehicles, received $465 million in low-interest Federal loans and then raised $82.5 million in a private capital follow-on round. And A123 Systems, which develops and manufactures advanced technology lithium-ion battery packs for electric vehicles and other markets, received $249 million in Federal stimulus funds followed by a $380 million Initial Public Offering financing that valued the company into the billions.
Aside from delivering meaningful and much-needed financing in a capital-constrained world, these three deals exemplify the new – and growing – role that the public sector is playing in the clean technology capital markets today.
An Unprecedented Public-Sector Role
And the scale and fervor of that rapidly expanding role is somewhat unprecedented.
Federal investment usually focuses on the early development of promising technology and, to this end, public-sector funds are normally channeled into government organizations, government labs and universities. Once these technologies have matured and are showing commercial promise, the private capital markets traditionally come into play; investors help support the refinement and commercialization of products so technology companies can move to the next stage – stand-alone commercialization through cashflow or traditional working capital financing – followed by an "exit," either through M&A or the public markets.
What we're seeing with clean technology today, however, is government driving market demand, creating markets through regulation, and supporting markets through subsidies. So, while the public sector typically takes a back seat to private investment, we are currently experiencing a clean technology marketplace that is predicated on government intervention and spending at all stages of development and commercialization. This is a broad statement, and there are numerous clear examples where this isn't the case; but, in general, this phenomenon is well understood, welcomed and will continue. The question is for how long?
The Public-Private Connection
Much of this new phenomenon can be explained with a simple diagram. Indeed, if we were to draw a series of circles with different pools of capital available to the clean technology markets, there would be an inner core of available angel/high net worth investor dollars. That core would have a circle around it that would include available venture capital money. The VC circle would have a circle of available private equity money surrounding it. And the PE circle would have a circle of available "other" pools of private capital (i.e., hedge funds) around it. Then, shading (or coloring in) all of these circles would be a representation of Federal money, which is being put to work at all phases and levels of clean technology commercialization.
As the three emblematic deals outlined above show, high-powered government support of clean technology – combined with the excitement emanating from the green technology movement around the world – has clearly caused a significant inflow of private capital into the sustainable industries sector. But the strong appeal of this new public-private financing model transcends the dollars-and-cents factor because it has overcome a natural and long-held reluctance on the part of venture and growth investors to support industries that are highly regulated and heavily subsidized.
Can Clean Technology Prosper on Its Own?
The big issue, of course, is whether America's sustainable industries can remain as buoyant without public-sector subsidies; in other words, can the clean technology market stand and deliver when it comes to cost curves, performance metrics, and innovation that's on par with – or cheaper than – fossil-derived and other environmentally harming alternatives.
This is unknowable right now; but we do know that without government involvement, clean technology proliferation would be a fraction of what it is today. And we also know that for the near term at least, government will continue to bolster this sector.
Recently, for example, the House of Representatives passed legislation that sets aside up to $2.5 billion in public investment for solar projects. And the Department of Energy has just announced a new program that will provide as much as $8 billion in loan guarantees for conventional renewable energy projects in partnership with private lenders. This is just a small sampling of government initiatives that mandate and subsidize green technologies.
The cascade of Federal funding for clean technology has helped promote and propel some very deserving companies and solutions. But the torrent of capital that's pouring out of Washington, D.C. has had some potentially harmful impacts, too.
The Distraction Factor
Most clean technology companies, for example, are (rightfully) distracted by the prospect of applying for – and possibly obtaining – government funds.
These funds represent cheap money and have many positive non-monetary implications attached to them; but companies are putting off R&D and capital expenditure programs in hopes of securing these low-cost or no-cost Federal grants and loans down the line. And this is causing significant downstream problems: supply chains are choked; AP / AR is stretched; businesses are missing their P&L targets due to stagnancy in the market; and capital expenditures and capital raises are being put off, adding further stress to a company's ability to raise money because their leverage decreases the longer they wait and the more they need additional funding (assuming they aren't lucky enough to get government money).
A Mixed Verdict on Government Intervention
So the verdict on government involvement in clean technology is mixed. In a sense, it is slowing things down as much as it is building demand (and supply) in the capital markets.
To break this cycle, companies need to remain focused on their core business and try not to get too distracted about a big pot of Federal gold that ultimately may not be obtainable. But if government funds are going to be pursued, they should be pursued smartly, efficiently and realistically; companies that "bet the farm" on receipt of this money will likely be materially harmed.
Bringing this discipline to the process is especially difficult because investors are also closely monitoring the Federal capital streams. This preoccupation with Washington DC will have huge implications over the long haul as money from the private capital markets start following government money. After all, it's a wise move, given the leverage private money can achieve atop government spend.
But at the extreme, this strategy is shifting and transforming the traditional venture risk profile.
With the economic challenges of the past 18 months, early-stage investors' appetite for risk has severely dissipated. These investors are now looking to follow "safe" government money into companies, and these companies – often by nature of the grant/loan guarantee they are – are frequently being rewarded for their "shovel ready" technologies.
In a more efficient capital market, these companies wouldn't necessarily be targets of earlier stage venture capital money, but that's what's happening – and it's making it harder and harder for earlier, yet very promising, technologies to receive necessary private capital and support to develop and compete in the market place.
Put another way: The government is very focused on ensuring immediate job creation with each dollar it puts to work in clean energy. This is certainly a wonderful goal with a good front-end impact on the economy; but we need to constantly remind ourselves that green technologies must be advanced (through investment and time) so they can compete on a stand-alone basis in the future. This involves non-"shovel ready" technologies, too.
Choosing the Right Clean Technology Solutions
In the end, there is some debate if these piggy-backed public and private investments make the most sense for the nation's long-term interest. First, the company chosen by the government may have the most mature technology solution, but it may not be the "best" technology solution over time; and second, there's a good chance that competing companies with better technologies simply won't get the necessary funding from either the government or the capital markets.
In addition to potentially adversely affecting America's global competitiveness, this inherently conflicting capital allocation could also require taxpayers to inappropriately support the clean technology company selected by the government – even if the enterprise falls behind in the marketplace.
The bottom line is that we have charged into a host of public-private funding partnerships in the clean technology sector. Many of the investments by government policy makers and capital market players have been made for the right reasons; and some have been made for reasons that are still unclear.
We're obviously swimming in uncharted waters here, and the goal for all of us – in both the public and private sectors – is to make it to the shores of innovation and prosperity. Only time will tell if we can get there.
Jamie Boyd is a senior vice president at Seattle-based Cascadia Capital LLC, a national investment banking firm that is financing the future for a variety of new energy economy companies.
Photo of a solar installation via Solyndra.