Mid-stage cleantech braces for bloodbath

Cleantech VC funding did well in '09, but will feel the pain of the crunch in 2010

Technology trends and news by Matt Bowman
December 31, 2009
Short URL: http://vator.tv/n/cc4

 Greentech Media just released its numbers for 2009 cleantech investment. The sector as a whole did well relative to the rest of the VC industry, but its bracing for a bloodbath of mid-stage startups that hadn’t anticipated the funding squeeze.

Cleantech did surprisingly well in 2009
VCs invested $4.85 billion in green technology in 2009. Although the dollar total is down from 2008’s $7.6 billion, the number of deals exceeded last year’s total. The dollar amount decline was also not as bad as overall VC investment. As Cleantech VC’s Ira Ehrenpreis, put it, "Although the fundraising numbers are slightly down from last year, 2009 was still one of the strongest years ever in the history of the cleantech sector with almost $5 billion raised.”

VCs are also preparing for a good year of late-stage exits. At the end of the year two VC-backed firms, Solyndra, a thin-film solar vendor and Codexis, a biofuels firm, filed for IPOs ushering in what many expect to be a wave of Greentech IPOs in 2010.

The Coming Consolidation
The relatively rosy investment numbers and exit outlook are offset by a harsh reality for mid-stage companies. A number of VCs have indicated a general funding problem in cleantech exit market--a lot of the cleantech companies funded in the last few years require tons capital to reach a liquidity event, capital that is now in shorter supply than had been expected, as the LPs pull back from VC. Uncle Sam will help a few bridge the gap (ala A123, Solyndra, Tesla), but a lot will be left out in the cold in the next year or two.

I ran this past Eric Wesoff, who runs Greentech Media. “That sounds very accurate," he said. “Take the solar sector for example. There are easily more than 250 early and mid-stage start-ups in solar. […] If they intend on being panel manufacturers - that takes hundreds of millions of dollars (see Solyndra or Nanosolar). How are they going to raise that money? Answer - they are not. There will be an enormous amount of attrition in the next few years.”

In the fourth quarter of 2009, Solel, a solar thermal power components vendor, was acquired by Siemens for $418 million and MEMC acquired Sun Edison, a solar PPA pioneer for $200 million in a sign of the consolidation sure to come in solar and greentech in 2010.

Sector funding reflects a shift away from hype, toward common sense.

Investment in Smart Grid, Energy Storage and Automotive is gaining momentum. VCs have been shifting to storage and smart grid for a few simple reasons. Smart grid plays to the core competencies (software, IT) of many VCs. Storage is still a deep-dive technology with huge commercialization potential—good fit for VC. Uncle Sam has dubbed automotive as a sector its committed to, which lends stability and commercial potential to the sector. Other alternative energy plays remain highly uncertain, as they depend on public policy and untested technology.

Water has finally made it onto venture capital radar screens with more than $130 million invested in 33 deals. I’m no expert, but I do know a few politically conservative lifelong environmentalists who have a certain disdain for bandwagon koolaid drinkers. This lot has long griped about the indeterminate science of global warming and effects of CO2 and the disastrous environmental impact of some biofuels, but they often speak of clean water as the most underhyped environmental concern. Take that for what it’s worth--my gut tells me increased water investment is a good thing.


image: Poe Tatum