The cleantech market has been facing a mounting juxtaposition.
To most, it’s considered a losing game financially, yet all signs are pointing to the increased need for energy innovations. Despite growing adoption by corporations, supportive policies, and cleantech company successes, many investors are still staying away.
According to Deloitte and National Venture Capital Association’s annual VC Confidence Survey, investors globally ranked clean technologies as among the sectors they were least the confident in overall. However, their confidence in cleantech has risen 16 percent over 2013, the largest increase of any other sector. That increase is highest in the United States, with 29 percent, and lowest in Japan, with an 11 percent drop.
Investors and entrepreneurs at Greentech Media’s Nextwave Greentech Investing conference in Silicon Valley, however, are singing a different tune. While they are just one segment of the VC investor community, they still come with their capitalist hats on just like any other VC.
Venture Capital Investors: Pockets of Opportunity
Rob Day, Partner at Black Coral Capital, kicked off the day and set the tone by proclaiming: “we’re no longer talking about ‘feel good companies,’ we’re talking about companies that will drive returns.”
He pointed to falling costs in rooftop solar and deployment of LED lighting along with the predictability of battery price projections as being signals of a predictably lucrative future. Day urged investors to get away from “rearview thinking” about disappointments in the first wave and instead focus on solutions that are possible now, such as business model innovation for more successful market penetration and adoption.
Day sees project finance for small distributed assets as a sweet spot in the market. “There’s a lot more financing options now with many backing new implementation platforms… over $4 billion has been invested into greentech implementation capital pools.”
Josh Green, General Partner at Mohr Davidow Ventures, echoed Day’s sentiments in his talk, which focused on presenting Silicon Valley-based VC’s point of view and on the need to re-categorize clean technologies. Green pointed to one of the problems keeping investors away: blindly lumping different technologies together into one larger segment.
“The categories really have nothing in common, yet they are dependent on one another,” Green said. “We had dissimilar ecosystems and measures of merit, so if one sector begins to fail, it drags the larger sector down.”
The second challenge is capital intensity risk, Green explained. The other technologies in front of VCs didn’t require as much capital — on the surface, anyway. Green noted that this is often a ruse because many successful cleantech startups are actually capital light, such as SolarCity and Solazyme, while IT startups such as Uber can be capital intense, but just in another way.
VCs are now looking for startups that are capital light ($30 million or less), cash-flow positive in 12 to 18 months, and that target large markets of $500 million or more, he said. He wants to see less risk in his investments, which is achieved by low capital intensity.
What technologies are hot? Green’s list includes data analytics applied to energy, and productivity software that improves efficiency of existing hardware or industrial equipment. The top areas he mentioned include: energy monitoring control, industrial process control, infrastructure management, and logistics planning and control.
He advised entrepreneurs to be aware of when the market will be ready to invest again, or as he put it, when the pendulum swings back; arrive early to the pitch table; and be able to clearly differentiate themselves. Their technology should deliver a benefit of greater than 25 percent, either in cost savings, revenue growth or some other metric of value.
It will take another two to three years for the pendulum to come back and when it does, the next key trend will be hardware and technologies with tangible applications that require mechanical engineering, according to Green.
Family Offices Want Financial and Social Returns
Investors representing family offices including CCM Energy, Eagle Cliff Partners and Prelude Ventures also made sure to shrug off the notion that investing in cleantech is just a “feel good” exercise.
They stressed that while they don’t have the same pressures in terms of raising funds, they are still focused on growth and profit maximization.
“We have about $25 million to $50 million to work with in this category and are focused on investing in solutions to climate change, which includes clean energy, water, etc.,” said Tim Woodward, Managing Director at Prelude Ventures. “Our process is a traditional VC process – we are measured by our efficacy as investors and operate similarly to a VC.”
Rebecca Levin, Managing Partner at Eagle Cliff Partners, discussed the firm’s focus on companies that have a positive social value, citing Hampton Creek, a maker of foods that use a plant-based egg replacement, as an example. Levin explained that they look for high growth companies because they typically have more impact, which is the ultimate goal.
When asked what they considered to be the greatest obstacle to sustainability and cleantech, the panelists brought it full circle, lamenting the lack of capital to support good companies, the lack of effective policy to drive clean technology adoption, and the lack of education to support these technologies.
How to Attract More Capital from Institutions
In the panel Beyond Venture Capital, panelists also discussed education as being a challenge to attracting capital to the sector. However, instead of focusing on adopters, the panelist zeroed in on the lack of education for institutional investor “asset allocators.” The technology and ability to finance exists, but the industry isn’t accurately communicating the success stories to these “asset allocators” so that the industry can get capital to scale, said Jason Scott, Managing Partner and co-founder of EKO Asset Management Partners.
Cisco DeVries, President and CEO of Renewable Funding LLC, said that to make that story resonate, the cleantech investor community and finance industry need to have a common language — one that focuses on the economic viability of the deal. Renewable Funding provided financing for implementing renewable energy projects, as well as energy efficiency and water efficiency upgrades. The numbers, not the “green” quotient, have to work for Wall Street firms, DeVries said.
DeVries sentiments circle back to Rob Day’s kick-off: capitalism is alive in cleantech but the industry needs to build financially based success stories to make a big impact.