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First look at Q4: What happened??

Rob Day: December 31, 2009, 10:25 AM

Over twenty participants already in the 2010 CI Readers' Prediction survey, in just a few hours after launching.  If you haven't taken the survey yet, click here to do so.  It's only a couple of quick questions.


The first of the year-end cleantech VC deal and dollar tallies has come out, with GTM's Eric Wesoff releasing his always-useful quarterly review.  Eric has a pretty good write-up on his results, so I won't go over it all here, but I wanted to highlight a few specific things that struck me:

1.  While Eric's blog posting talks about 2009 overall numbers, I'm frankly a bit taken aback to see that his totals for Q4 venture dollars were down at $817M, way down from Q3's $1.9B and even lower than Q1's $864M, which was supposed to be the low point, right?  What happened?  Has there been a quiet train wreck in cleantech venture capital?

Well, it's still a bit early to draw too many conclusions.  A number of Q4 deals that happened may not have been revealed quite yet as the Reg D filings have their deadline today.  And so by putting out his total today, Eric's obviously missed those, to be included in later updates.  Perhaps there are more dollars out there left to be found.

But not THAT many.  Clearly the dollar amounts took a big step back in Q4.  What about the deal amounts?  They dropped, too.  From 117 in Q3 to 82 in Q4.  Again, this tally may increase in later updates.  But it's still a pretty healthy drop.  However, it is NOT as big a drop as we saw in Q1, when Eric counted only 65 deals.

So what appears to have happened is that the size of deals went way down, at least in Eric's tally (to be confirmed when we review other tallies later).  From a mean round size of over $16M, down to a mean round size of less than $10M in Q4. 

Remember what we've seen again and again in the tallies:  That the dollar amounts are driven by big later-stage deals, as much as by the number of deals (I remain amazed that journalists often ignore this basic fact and draw conclusions based only on dollar totals).  So did big later-stage deals dry up?  Or did later stage deals just get smaller? 

Based upon what I'm seeing in the marketplace, I'm wondering if a bunch of the growth-stage companies that would have normally raised money in 2H09 instead pushed such financings into 2010 -- by either running leaner, or taking in smaller bridges or round extensions.  With the funding environment still very unfriendly to startups, but more macroeconomic optimism out there for 2010, it would be tempting to entrepreneurs and their backers to push off a new fundraising for a half a year or more, in hopes of suffering less dilution (ie: getting a higher valuation) as the sector rebounds.  I've seen a lot of anecdotal evidence of this happening.

If so, it's a risky strategy, however.  Because not everyone is convinced the 2010 economy will see a really strong rebound.  And even if things pick up in the overall economy, venture dollars could lag because so many investment funds remain tapped out and need to raise their next funds themselves.  Perhaps 2010 will see the return of high valuations.  But perhaps not.  So it's a bit of a gamble to wait.

2.  Q4 was once again a big month for solar.

Eric counted 24 venture rounds into solar companies.  Compare that with 9 rounds into biofuels, or 5 rounds into his Smart Grid, EE and DR category.  Or two rounds into water tech.

Not much more to say about that.

We'll write up Q4 a bit more when more tallies come out.  Until then, thanks to Eric for sharing these first results!

Flashback:  How were last year’s CI predictions?

Rob Day: December 28, 2009, 11:26 AM

About this time last year, I put together a few predictions and readers chimed in with theirs.  How did we all do?


Question 1:  How far will U.S. cleantech venture dollars drop from 1H08 to 1H09? 

I wrote it could be as high as 40%.  I argued that what was going to go completely missing were the mega-deals, and that on a dollar basis at least those made up a significant chunk, around 40% of quarterly tallies. Readers voted for a drop, but totaling less than a third on a dollar basis.

Well, according to the Cleantech Group's tallies, in 1H08 the total North American disclosed venture capital tally was $2.9B, and for 1H09 it was down around $1.6B.  Which is a 45% drop... 


Question 2:  How much, if at all, will the # of U.S. cleantech venture deals drop, 1H08 to 1H09? 

My argument was that the number of deals would probably drop, but by a lot less than the dollar amounts, as investors still did follow-on rounds but backed mostly away from the mega-deals.  I pegged the drop in the number of U.S. deals at around 20%.  Whereas CI readers tended to believe in a drop in the number of deals, but by less than 20%. 

In 1H08, the Cleantech Group counted 136 total North American venture deals.  In 1H09, the total was 139.  So the number of deals was indeed pretty flat!  But obviously the average size per round went way down.

Interestingly, it wasn't because of any significant shift in stage preference, i.e., investors didn't shift back to earlier stage in any significant way.  In 1H08 seed and first round were 32% of the North American total number of rounds, and in 1H09 they were 31%.  Investors still dramatically favored later stage deals.  They just weren't putting so much into them.  In fact, the mean size (sorry, I don't have median readily available) of disclosed "Follow-On" rounds in this data set dropped from $31.1M to $16.5M.


Question 3:  How much will cleantech dollars into China rise, 1H08 to 1H09?

I suggested they could rise 25%.  CI readers agreed with a rise, but were split as to whether it would be more or less than 25%.

We've got a bit of a data availability issue, as CG only started tracking China deals in 2Q08, and so we're missing 1Q08 data.  However, it's enough to show that the dollar amounts did in fact drop -- 2Q08 alone saw $257M, but 1H09's tally was only $170M.


Question 4:  What will be the "hot" sector in 1H09?

Of course, such an undefined question is tough to answer, but CI readers pointed most to energy efficiency and solar as the two most likely categories.  I'd said that solar was going to have to see a retrenchment, and that energy efficiency seemed most poised for growth.

Since the CG's sectoral definitions don't overlap well with my own (they bundle in biofuels and batteries together under the "Transportation" tag, for instance), it's a bit tough to make a definitive statement about how accurate everyone was in their predictions.  However, it is notable that solar dropped from being around 35-40% of venture dollars as it had been throughout 2008, down to a low of 13% share in 2Q09 (before rebounding back up to a 28% share in 3Q09).

Meanwhile, that amorphous "Transportation" category grew to rival the solar sector in terms of share of venture dollars.  So I suppose that means it's a likely candidate for "hot sector", although drilling down into it we see a healthy mix in there of everything from EVs and hybrids to batteries to biofuels.  Still, if 2008 was the year of solar, perhaps 2009 was the year of cars.


In another post, we'll have to do another prediction survey.  This was a pretty useful exercise.

2010:  Five predictions

Rob Day: December 23, 2009, 1:35 PM

As we near the end of the year, it's time to take stock of 2009 and look ahead to 2010.  We'll look back at the past year and what we learned in another post, but for what it's worth (and remember what you're paying to read this, and value accordingly) here are five predictions for the coming year in cleantech investing:


1.  In terms of U.S. climate change legislation, something will be passed, but it will be more symbolic than impactful

The health care reform kerfuffle has demonstrated that it won't be easy for the Democrats to pass major legislation through the Senate without it being majorly watered down if it happens at all.  For something like climate change legislation in particular, it's difficult to see how Senators from major coal-producing and coal-consuming states will be able to support anything that would significantly impact the coal-fired generation industry.  One thing the Obama Administration had been hoping for was that Copenhagen would have produced a mandate for pushing through significant climate legislation, but as it now becomes clear that China blocked any significant deal from happening, this will add even more momentum to those who don't want the U.S. to enact climate legislation without China doing the same.  It's politically important to too many people to think that there will be nothing done at all.  But I don't see how any climate legislation that's passed will have any significant impact anytime soon.  Perhaps a cap and trade scheme to establish a future framework, but with caps that are either overtly or de facto (ie: via exceptions) very loose.

On the other hand, I predict that there will be significant additional subsidies for clean energy technology as part of new energy legislation.  Politicians may shy away from climate legislation, but many will love to deliver "green jobs" (and blunt any criticism about the weakness of any climate bill) via incentives for cleantech innovation, manufacturing, and implementation.  And these incentives WILL have an impact on the industry. 


2.  2010:  The year of energy efficiency

Certainly a lot of the aforementioned incentives will be directed to clean power generation and fuels, but I'm betting that energy efficiency will get a lot of support as well.  Energy efficiency implementation is a particularly useful target for politicians because of its high jobs-growth impact, and because it can be tangible for many voters.  Providing incentives to establish a new solar fab can provide a few jobs and a photo op.  Providing incentives to help homeowners reduce their energy bills can provide many more jobs, and impact voters' wallets.  And the bloom is starting to come off the rose for clean power generation in any case.

Even without any new incentives being put in place, the programs that were established in 2009, and that look to be established in 2010, will have significant impact on energy efficiency adoption.  Utilities and cities and states are now pushing energy efficiency more than ever before.  Plus, I'm seeing lots of financing options come about to help defray the upfront costs that have hindered building energy efficiency adoption in the past. There's just never been a more lucrative time to weatherize a home, or to do a lighting retrofit in an office building or warehouse, or to upgrade an HVAC system.  The economy doesn't look like it's going to pick up quickly, so capex budgets will still be low, but with the incentives and financing options available, many homeowners and building owners will see the opportunity to do energy efficiency retrofits that result in relatively short-term paybacks and ongoing cost savings.

For venture capital investors, this will present a dilemma.  As we've talked about on this site, energy efficiency doesn't fit the mold that the traditional VC investing model looks for, but it's too attractive of a market to completely ignore.  Many VCs will look for IT-based ways to try to play the wave: Home energy monitoring, LED-based lighting, etc. are already popular sectors and will become more so.  But I think VCs will be left out of most of the emerging wave of energy efficiency adoption, because it will be mostly service-based, and tapping into the biggest pools of incentives will require working with utilities and governments.  Non-VC investors may be the most critical source of capital for energy efficiency.  And I also expect a fair amount of mid-market private equity activity in the sector as well.


3.  A pickup in investing activity, including the return of the megadeals

Remember 18 months ago, when it wasn't unusual to see "venture capital" financings larger than $100M going into already heavily-capitalized pre-revenue startups?  Well, some of that is going to be coming back.  I already know of two such deals in advanced stages that could close as early as Q1. Such megadeals will make the dollar tallies for cleantech venture capital appear to jump back up to moderately high levels.

But even beyond the dollar totals, I do get the sense from my investor colleagues that the number of deals will be picking up a bit in 2010.  I see some hiring going on once again, I see some renewed investor interest in generating active dealflow, and a lot of existing companies are going to be going out for new financings next year after having waited out what they hope is the worst of the recession. VC surveys indicate that investors expect to be doing a bit more deals, and that cleantech is the sector most poised to see them.

On the other hand, let's not get too excited, things won't go from zero to crazy.  There are still a lot of investors taking meetings with entrepreneurs but not really having capital to deploy.  For all but a few venture firms, it remains really hard to raise capital for a new fund.  And without those new funds, either from existing firms or the new ones that were popping up all the time a couple of years back, deal volumes will remain fairly flat.


4.  New hybrid investment models will emerge

We've spent a lot of time on this site discussing the various ways that the traditional venture capital model does and does not fit with cleantech.  And we've also discussed a number of the resultant capital gaps, at the seed and first-project stages in particular.  In 2010, I think we will see the emergence of efforts to address these gaps in ways that attempt to mesh existing investment models into new methodologies.

To be clear, there will still be plenty of cleantech venture capital.  And there are many parts of the cleantech market that are indeed a good fit for the traditional venture capital model.  But I've had a number of conversation in 2009 with investors who believe a) that the traditional venture capital model is broken; and b) that the traditional venture capital and project finance models are either being wrongly applied to major parts of the cleantech market or are leaving major investment opportunities untouched.

It's too tough to introduce a radically new investment model in a funding environment like this.  LPs are not adventuresome at the best of times.  And these aren't the best of times.  So going to LPs with a radical new idea probably won't go over so well right now.  However, going to LPs with an experienced investment team and showing a "new investment model" that's not a radical change but is instead an amalgam of two well-understood investment models may go over well. 

I've seen a few such efforts so far, but few from big-name investment firms.  But as the big-name firms need to go out for new funds in 2010 (many of them having delayed through 2009), we'll start to see more rhetoric, and perhaps some actual implementation, around such new approaches.


5.  Some booms and some busts

IPOs are now lining up to go out.  My guess is that the stock markets will see a lot of volatility in 2010, so I don't know if there will be enough of a window to allow many big cleantech IPOs.  But certainly some observers are expecting it.  If even a handful of visible cleantech IPOs can take place and do well, it will do wonders for the sector overall.  I do worry, however, about the impact of pulled IPOs and IPOs that flop.  And there could certainly be some of those.

Meanwhile, the quiet shakeout of cleantech startups will continue.  It doesn't get reported on very much, but a bunch of cleantech startups wound down, or were sold off for scraps, in 2009.  And I expect that to continue.  We will likely see at least one high-profile cleantech startup very visibly flame out, in the type of episode that will garner a lot of industry media attention.  But for every one of those, there will be many more startups that end not with a bang, but with a whimper.  Government incentives are coming too slowly to help many companies, and investors' pursestrings remain very tight, so it'll be tough for startups that don't have good momentum already and that are burning significant cash to make it through the year. 

It'll mean that keeping cash burn low will be an imperative for cleantech startups.  And it also means that if your startup is going to need additional capital at any point in 2010, start those conversations immediately and cast a wide net.  Especially since there's a chance of another economic disruption at some point, you don't want to be caught needing capital and having only a short amount of time in which to bring it in.


Overall, I think 2010 will be a bit happier than 2009 for the cleantech sector.  But it'll be slow going at best.  And it appears there's a good chance the overall economy has another hiccup at some point.  So in 2010, by all means aim high.  But make sure to plan conservatively as well.


Random thoughts

Rob Day: December 16, 2009, 10:08 PM

1.  PWC has come out with a pretty useful report on cleantech in general, but what's interesting is that they've made it a very car- and meter-centric perspective.  Are cars and meters really the center of the cleantech universe?  It's an interesting way of looking at things, and it has some merit, as they are key segments in the electricity and transportation value chains.  However, it really ignores the commercial and industrial aspects of cleantech, in favor of residential.  But it's quite interesting to see the implicit shift away from electricity generation and fuel production as the centers of the universe.


2.  Eric Wesoff has a good column with a lot of venture investors' perspectives on nuclear power as an investment area, and it's unclear what the role of VCs in nuclear power could effectively be.  But it reminds me of a recurring theme in my conversations with a lot of investors and entrepreneurs lately, around the role of VCs in cleantech in general:  There are a lot of cleantech sectors and business models that don't fit well with the traditional "10x in 5 years" venture capital model.  Does that mean they're bad business or investment opportunities?  No.  What we're learning in Eric's interviews and elsewhere is more about the limitations of the venture model as traditionally applied, rather than learning about the limitations of cleantech. 


3.  The NVCA put out the results of their annual investor survey (note: link opens PDF).  You've probably heard by now that 90% of those surveyed are expecting the venture industry to significantly shrink over the next five years.  You've probably also heard that cleantech is the sector most pointed to by investors as an area of future growth.  But I want to make sure and draw everyone's attention to the results that show that investors have greater expectations of growth for later stage investments than for early stage investments.  So as always we're left with the question:  If VCs aren't investing in the early stage companies anymore, how will they get up and running to provide dealflow for all the later-stage investors?


4.  Everyone's focused on the Copenhagen negotiations right now.  I'm not.  I don't think there will be much direct impact on cleantech startups from anything that's decided there.  What I do think is that there might be a strong indirect impact from Copenhagen... by getting it over with.  Besides all the health care reform hullaballoo right now, what's holding up energy and climate legislation in the U.S. is that lawmakers are waiting to see what comes out of Copenhagen so they can line it up with the legislative proposals being put forth.  And when that legislation does come to the fore, whatever happens in terms of cap and trade, etc., I do expect it to include a lot of new incentives for things like energy efficiency and the like.  And that will have a very direct impact on startups in such sectors.  So therefore, the most important result from Copenhagen, from the cleantech VC perspective, will be its conclusion.  ...That's not to say we can't be hoping for a productive outcome, of course!

First impressions on cleantech venture capital in Israel

Rob Day: December 11, 2009, 12:28 PM

I've spent the week in Israel -- my first time ever visiting the country -- as the guest of Israel Cleantech Ventures (I'm a bit biased toward these guys, I admit), visiting a bunch of cleantech startups and getting a first-hand view of the market.  And it's been fascinating.

Israel is among the most innovative countries, especially on a per capita basis.  Israel was recently ranked 4th in terms of scientific activity, and ICV claims to be tracking 800 cleantech venture investment opportunities here.  And all this activity is taking place in a country with only 7 million people -- just a bit more than the total population of Arizona.  As was recently written about elsewhere at GreenTech Media, cleantech innovation is particularly emphasized here as energy and water issues are very top of mind among Israelis. 

In terms of first impressions, I have been very impressed by the entrepreneurs I met this week.  Very strong technical teams, driven entrepreneurs, and a lot of pragmatism (which we all agree can be critical in the cleantech market) and emphasis on capital efficiency.  I met entrepreneurs working across a number of different sectors, from solar to wind to water to industrial processes.  I began to joke that no Israeli pitch deck needs to be more than one page -- each conversation basically was the CEO flipping to the first page, then verbally downloading the entire story of the startup for the next 45 minutes, and then flipping rapidly through the rest of the presentation over the last 15 minutes just to recap what was already said! 

But joking aside, it's also clear that there are a number of significant challenges to investing in Israel.  First of all, it is a tough to penetrate market for foreign investors.  The innovation and investment community really is that -- a community.  So many people either are friends or related or served in the same military unit, that as one person told me, "it really is an 'old boys network' here."  Coming in as an outsider and trying to jump into a couple of deals would be very tough.

Secondly, the innovation side of the equation may be strong, but with such a small country the market isn't sufficient to support venture-type startups by itself.  By necessity, VC-backed Israeli startups will almost always need to find significant export markets in order to grow to significant size.  The eventual acquirer of the startup is also likely to be overseas.  So Israeli entrepreneurs and investors have to be very outward-facing in order to succeed.

So my overall lesson is that Israel cleantech is an area that looks rich in investment opportunities.  But that it can't be effectively done alone either just by outsiders or just by Israelis.  Many other investors have clearly reached the same conclusion -- numerous US-based generalist VC firms have Israel-based offices to have people on the ground here, and ICV as a pretty unique sectoral specialist firm here has clearly made a practice of syndicating with external funds when appropriate, so that you see a lot of efforts by investors to do exactly what I'm suggesting:  Invest with on the ground presence but also with access to overseas markets. 

My many thanks to the team at Israel Cleantech Ventures for being such incredibly gracious hosts (a special thanks to Melanie Braunold!), it was a very productive week and a great introduction to the country's cleantech sector.

Advanced lighting:  Sales leaders wanted

Rob Day: December 4, 2009, 2:12 PM

Advanced lighting is a subsector of cleantech that particularly intrigues me, because it so epitomizes many of the opportunities and challenges across the cleantech spectrum.

First of all, it is a huge opportunity.  Most light sources out there are better heaters than they are light sources, and lighting accounts for around 30% of electricity consumption according to some tallies.  There's a lot of efficiency to be gained with no sacrifice (and increasingly, with added benefits) for end users.  You can find compelling payback periods for some advanced lighting opportunities already, and LEDs (my leading candidate for nextgen lighting technology) are just getting brighter and cheaper all the time, so it's just going to get better.  And lighting is a multibillion dollar market where many of the incumbent technologies are being actively phased out.

On the other hand, it's also a really slow-adopting market, or at least major parts of it are.  Customers in this market often find it difficult to stay informed of their available options, and no one wants to risk having the lights go out just to save a few bucks, so naturally many customers are risk averse.  And it's a market where the channel partners and influencers are critically important, even more risk-averse than their customers, and don't always share their customers' motivations.  It is a highly fragmented, murky market with lots of hidden pitfalls for new entrants.

What's critically missing, in my opinion, are the experienced sales leaders.  There are plenty of strong sales leaders in the traditional lighting side of the market.  Managers who understand the channels, have good networks, understand how to craft an effective customer value proposition, and know how to motivate and manage a sales force in this space.  But I'm just not seeing them cross over to the new tech side of the market yet.

Which creates a big challenge, because the entrepreneurs in solid state lighting (and other advanced lighting tech) tend to come out of the technology side of things.  They've designed a solid state chip, or an advanced piece of electronics, or advanced controls.  But they're out of their depth (at least to start out with) in trying to bring these benefits to lighting customers in the ways that lighting customers are used to.  They may not know about some of the shady practices that can go on in the market (apologies for a lame pun).  And they don't have the rolodex to help establish initial traction with a subset willing to go against the herd and try something new.

So strong sales leaders out of the lighting industry are pretty desperately needed in the advanced lighting industry.  This is why I'm always on the lookout for such individuals, and want to help them find good entrepreneurial settings.  Forget about cost and lumens per watt type metrics.  For me, when I see the beginnings of an influx of traditional lighting sales managers into the senior ranks at advanced lighting startups, THAT will be my signal that the market is reaching an important inflection point.