PRINT THIS PAGE Cleantech is ripe for growth
14/02/2007. Source:IVCJ. Nicholas Parker, Cleantech Capital Group
Cleantech is poised to add to economic growth if IPO and M&A trends continue. In this IVCJ article, Nicholas Parker, co-founder and chairman of the Cleantech Capital Group LLC, along with Candace Stuart, Cleantech Capital’s director of publications, explain why. In recent decades, the United States has placed an increased emphasis on its innovative potential, creating new opportunities for the venture capital community. The nation is intent on replacing its less competitive labor and manufacturing sectors with a knowledgebased economy in which innovators create new or improved products and processes, often through start-ups that potentially can grow into lucrative businesses. The US isn’t alone in this quest. Most developed countries in Europe and Asia as well as Australia and Israel have been following a similar strategy.
Computing, information technology and biotechnology have contributed to this growth engine, and cleantech is poised to carry on the tradition. Rarely will a fledgling cleantech company succeed on its own, though. It often requires outside funding – from friends, angels, banks or VCs – to develop its technology into a marketable product. More than six years of tracking VC activity by Cleantech Capital Group and Cleantech Venture Network indicates that VCs are playing an ever-larger role in cleantech investing and industry growth.
We define cleantech as any knowledge-based product or service that improves operational performance, productivity or efficiency while reducing costs, inputs, energy consumption, waste or pollution. The concept extends beyond environmental technologies that deal more with regulatory requirements than with market needs. Cleantech provides economic benefits as well, and crosses numerous industries. Cleantech as an investment category is fairly new, though.
Cleantech Capital co-founders Nicholas Parker and Keith Raab introduced the concept in 2002, and determined the 10 key industry segments that contribute to the overall category. Energy-related technologies, which include energy generation, energy infrastructure, energy storage and energy efficiencies, dominate the category. Energy-related deals accounted for 44 percent of all cleantech, based on the amount invested, and 36 percent of the number of deals, according to the Cleantech Venture Capital Report – 2006. The report, which Cleantech Venture Network released this year, tracked cleantech deals from 1999 to Q2 2005.
Materials and nanotechnology rank as the next largest segment, with 16 percent based on deal amounts of the deals and 13 percent based on the number of deals. Manufacturing/industrial followed with 11 percent by amount and 13 percent by number of deals. Other segments – agriculture and nutrition, air quality, enabling technologies, environmental IT, materials recovery and recycling, transportation and logistics, and water purification and management – accounted for the remainder.
The study found that more than $7.3 billion of venture capital was invested in cleantech companies in North America in the six-year period, with 1,085 investment rounds going to 628 companies in the US and Canada.
The average amount invested per round was $6.7 million, but that average does not reflect the variations that occurred between the boom of 2000 and the bust of 2001. Deal size generally ranged between $3 million and $12 million for 1999 through 2001, while deal size fell into the narrower range of $4 million to $7 million for 2002 through 2005. The boom-and-bust cycle affected exits as well. Our research found 18 initial public offerings in 2000, followed by only three for 2001 through 2003. Mergers and acquisitions proved less volatile. There were 190 M&As in 1999-2000, and 205 M&As in 2001-2003.
The report’s six-year trend suggests that cleantech is entering a period of growth and returns. The analysis showed a bubble and burst between 1999 and 2001 that reflected hot capital markets and the dot-com boom-and-bust cycle that dragged down cleantech venture investing as well. The years 2002 through 2005 reflected a period of learning and diversification as investors hedged their bets by selecting a variety of companies and technologies.
Their exposure and acceptance of a wide range of cleantech companies helped establish cleantech as an investment category. From 2006 to 2009, we expect to see cleantechfocused fund managers increase their fund raising, with more capital being deployed into the cleantech investment category as well.
We’re projecting that between $6.2 billion and $8.8 billion will be invested in more than 1,000 cleantech venture rounds in North America. Cleantech could capture up to 10 percent of all VC activity by 2009, given current growth forecasts. We estimate that 240 cleantech companies could be positioned for an exit between 2007 and 2009.
Future exits will depend on the mood of corporate buyers and investors in public capital markets, as well as the health of equity markets and corporate demand for cleantech solutions. There are reasons to be both concerned and optimistic about the future.
Public market interest in cleantech IPOs escalated in the second half of 2005, with energyrelated offerings taking place on Nasdaq and London’s Alternative Investment Market (AIM). But the level of activity is still insufficient to provide investors with the exits they desire. M&As also appear weak, despite a flurry of water-related acquisitions and mergers of energy-related companies.
If the IPO and M&A scenario remains anemic, then cleantech investors may have to take a hard look at their portfolios and ration available capital. They may find their existing investments need more follow-on financing than initially expected. Companies that have failed to generate positive earnings will be at risk of folding. Such an environment may prove unfavorable for exits, but it could be a boon for corporate and strategic acquirers as well as aggressive private equity and hedge funds.
They may use low valuations and uncertain public markets to their advantage. But IPO and M&A activities could also continue their momentum, thanks to improving economic performance of cleantech companies. Wall Street better understands the cleantech space, and there is a growing retail and institutional appetite for cleantech stocks. GE and BP launched cleantech initiatives in 2005, suggesting there is a rising corporate interest in cleantech solutions. And given the emphasis many countries are giving innovation, more companies and products are likely to enter the pipeline over the next few years.
This article appeared in the Israel Venture Capital & Private Equity Journal (IVCJ). IVC Research Center publishes the Israel Venture Capital & Private Equity Journal, a quarterly review of trends and developments in the Israeli-related venture capital industry. IVCJ, distributed worldwide, is dedicated to provide wide-range coverage of Israel's venture capital industry. For more information please visit www.ivc-online.com
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