Cleantech is still a fast growing investment theme

Marika Svärdström, founder and principal of Carbon Capital Ventures

Investment in clean technologies has more than tripled in value since 2004, when interest in the sector took off – from $1.8 billion to an expected $6 billion-plus in 2008. And cleantech investment is still growing despite the global economic crisis.

Figures from National Venture Capital Association (NVCA) in the US show that while venture cap investment fell from $7.7 billion to $7.1 billion, a decline of 7%, between quarter two and three last year, investment in cleantech actually increased by 14% (from $800 million to $1 billion).

The world still needs energy and investing in fossil fuel-based energy production carries risks of its own as illustrated by the recent see-saw prices of fossil fuels. The fundamental market drivers for cleantech, and clean energy in particular, have not changed and will continue to push policy, innovation and investment.

• Rising energy prices. While oil prices have come down substantially from their historic highs last summer they remain above their historic average. Long-term oil prices are expected to continue to climb, and as the costs of fossil fuel energy are rising the cost of clean energy is falling.

• Concerns over climate change and energy security. Climate change concerns have gone from debate to action. The European Union was first to introduce a mandatory emissions trading scheme in 2005. Regardless of the price of a barrel of oil, Western industrialised countries are dependent on outside energy supplies, with US importing 70% of its oil needs and Europe 55% of its oil and gas needs.

• Rapid growth of emerging economies. The explosive demand for resources in emerging markets, in particularly China and India, puts stress on natural resources and the ecosystem.

• Favourable policies and regulation. Several US and EU states have given mandates to their utilities to generate a certain percentage of electricity from renewable energy.

• Technology breakthroughs and access to capital. Wind power technology has reached market maturity and become a market for large players such as GE, Siemens, and Mitsubishi. Solar power energy is experiencing tremendous growth, with a range of competing technologies and business models.

There are many indications that cleantech and clean energy in particular will remain high on the agenda of governments and provide opportunities for investors and entrepreneurs despite the economic downturn.

First on the policy side, the $700 billion Emergency Economic Stabilization Act passed in the US included several tax breaks and incentives for renewable energy and clean technologies. President-elect Barack Obama has pledge to spend $150 billion over 10 years to promote wind, solar, biomass and other renewable energy resources. With the US consuming nearly 25% of the world’s energy, once the federal government starts putting effective price signals in place, the pace of cleantech innovation is likely to accelerate.

Another encouraging sign came in the form of GE’s announcement in October of the results and expectations from its environmental business. Despite the economic downturn GE expects 2008 revenue from energy efficiency products to increase by 21% to $17 billion since last year and its annual investment in cleaner R&D to surpass $1.4 billion, an increase of $300 million over last year.

Furthermore, at a sector level there have been signs of inflated valuations, with solar being the most notable example. That is now disappearing, corrected by the economic crisis.

When analysing cleantech opportunities it is important to consider that cleantech is a new theme, with markets that are not yet mature. A long-term perspective is critical.

The challenges and how to overcome them

Many cleantech companies are small and lack the finances and competences to grow their business. Surviving the credit crunch will be a challenge for many. Companies selling technology that will earn a quick return in fields such as energy efficiency will be most resilient. Capital-intensive businesses such as energy production are going to have a tougher time in the economic downturn.

In the absence of external funding, improving and managing cash flow is going to be critical and may require a change of business strategy and model. For example, a client of Carbon Capital Ventures in the biogas sector was financed by one of the troubled banks until early October when the bank informed it that there would be no loan. The search for a new loan provider or investor proved very challenging during the months that followed. While continuing the fund raising, the company re-defined its business model and strategy, from a capital-intensive build-operate-and-transfer model to a model of selling technology licenses and charging service fees.

The CEO says that it has been the toughest couple of months in his career. Despite leading a company that is well recognised in its field, with patented technology, operations in Europe and Asia and an order book of over €130 million, raising the necessary funds to grow the business proved to be very difficult. In addition to re-defining the business model, the company turned to customers to ask for upfront payments and to suppliers to negotiate later payment dates.

With a stronger focus on operations and short term cash flow the company is confident that it is able to grow, and to large extent organically, in the coming year. The CEO also points out that these changes may not necessarily be bad but may indeed prove to be positive for the company and its investors in the long run.

What to watch for

Cleantech is not one industry – it comprises a range of sub-sectors among which include solar and wind power generation, bio fuels, energy efficiency, materials, water and transport. Cleantech addresses markets that differ significantly in size, maturity, value chains, investment requirements and different business models. When investing in cleantech, regulatory uncertainty and technology risks are among the main pitfalls.

As an investor it is critical to identify niche sectors, and develop expertise and a strong network of contacts in each cleantech sub-sector. A mixed expertise of technology, politics and economics are required, and an ability to stay ahead of current trends.

As technologies and markets mature different market developments should be expected. Take for example the solar industry, where large established silicon solar companies are competing with each other on driving down costs and scaling up manufacturing. At the same time new solar technologies and business models are emerging, threatening the incumbents to potentially change the competitive landscape entirely.

Notes for investors

• Competing technologies in markets that are not yet mature. For example, FirstSolar, a solar thin-film technology company that has experienced exponential growth between 2006 and 2008 of $135 million to $1.2 billion and is threatening incumbent crystalline silicon solar companies.

• New innovative business models that will accelerate market growth. Historically, business model innovations that make the consumption of a new technology easier, cheaper, more accessible or more convenient have been the best predictor of success in emerging industries. For example SunEdison, a solar financing company, is eliminating the high upfront costs for residential installations by converting each solar power installation into a fixed income security, making it affordable to put up solar panels for consumers.

• Established players focusing on integrating along the value chain in fragmented industry sectors. Acquisition activities. For example SunPower has gone from being a manufacturer of cells to providing installation and financing, strengthening its competitiveness, improving cost control and direct customer relations.

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Carbon Capital Ventures (www.carboncapitalventures.com) provides market insights and advisory services to investors and entrepreneurs operating and interested in cleantech. We provide clients with insightful and robust analysis that enable them to make informed investment decisions. We work closely with entrepreneurs of portfolio companies to help them accelerate the growth of their business.

Carbon Capital Ventures has developed a unique network of technical and commercial experts that provides us access to technology experts in cleantech niches, leading research institutes and incubators, and a leading international business school. We also actively network with VC and PE firms in Europe and US investing in clean technology.

Through this we offer our clients a unique combination of competences in clean technology, policy and market regulation, and business strategy effectively applied to identify outstanding opportunities, successful business models and effective strategies.