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.