Silver Spring IPO: Harbinger or One-Off?

Silver Spring Networks (SSNI) took its smart grid company public this week in dramatic fashion, adding a million shares just hours ahead of its long-delayed initial public offering. The move helped net the company nearly $80 million in new capital, and was a major win for investors including Foundation Capital, Kleiner Perkins, Google Ventures and Northgate Capital Partners.

But even as the company’s sign still hung from the balcony above Wall Street’s famous trading floor, experts and industry analysts started to debate what this event means for Silver Spring, the smart grid industry and the larger world of cleantech. Some see it as indication that investors are finally ready to support cleantech IPO’s.

“I think it’s got significance for the cleantech space, and it’s absolutely got significance for the smart grid space,” says Sheeraz Hanji, CEO of the Cleantech Group. According to his company’s investment monitor for the last quarter of 2012, there were only 37 cleantech IPO’s in all of 2012 worth a total of $4.1 billion, down from 89 IPO’s worth $16 billion in 2010.

This week’s successful offering may mean that downward spiral is turning around, signaling similar opportunities for companies such as Opower, which like Silver Spring has been considering an IPO since 2011. That view is supported by a recent poll by KPMG, which found that 65 percent of venture capitalists, investors and entrepreneurs expect IPO activity to increase in 2013.

“I think it will absolutely open the eyes of investors who haven’t previously paid attention,” Hanji says. “I think it’s good news for companies like Opower that are wondering how the capital markets will respond to the category.”

Others doubt whether Silver Spring’s successful IPO—by Thursday’s closing bell its stock was trading at $21.95, nearly 30-percent higher than its original sale price—will translate into improved investor confidence in other smart grid IPO’s anytime soon.

Federal stimulus money in the form of smart grid investment grants is running out, points out Sam Sciacca, founder of SCS Consulting, which advises utilities on smart grid technologies. Meanwhile, American utilities are scaling back their investment in smart metering and distribution automation from $5.1 billion in 2011 to a projected $3.2 billion this year, says Albert Cheung, lead analyst for smart energy technology at Bloomberg New Energy Finance.

That could spell problems for Silver Spring, which controls 27 percent of the North American smart meter communications market, making it the market leader, and which derived 92 percent of its 2012 revenue from the United States. To grow, the company will need to expand internationally, especially in the UK, Cheung says.

“Only time will tell whether SSN is able to navigate a path to profitability,” Cheung says of Silver Spring, which reported a net loss of $89.7 million last year.

The company argued that such losses are due to the “lumpy” nature of deals and revenue in the utility energy business, Hanji says, an argument that investors seem to agree with.

“I think there were real questions about whether they would be able to convince the public investor world of that,” says Hanji, “and they have.”

Another factor that could impact smart grid revenue in coming quarters is the growing controversy over how best to pay for implementation. Some public service commissions are beginning to ask whether smart upgrades that benefit only certain geographic sections of the grid should be paid for using utility rate increases on all customers, or whether the costs should be borne only by the users who benefit directly from the efficiency and functionality of smart grid improvements, Sciacca says.

“If public service commissions are going to be asking these questions, now is not the time when the utilities want to make these big investments,” says Sciacca.

All of which leads Cheung to believe that the Silver Spring IPO may be more of a standalone event than a harbinger of things to come. Only two smart grid companies, Ningbo Sanxing and Elster, have had IPO’s since 2010, Cheung points out. During the same period the industry has seen 66 mergers and acquisitions.

Cheung believes that trend is likely to continue. “M&A is still by far the most common exit path for private smart grid companies, as major industrials and technology companies continue to scout for proven technologies to add to their offerings,” he says.




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