Cleantech Investing: Ten Predictions for 2014
The sun is shining, the Boston snow is mostly melted away, and dilettante "news" programs have moved away from talking about cleantech to talking about doping in baseball. And my 2013 predictions weren't so bad for once (although still not great). So why not throw some 2014 predictions out there...
Overall, I'm expecting the rebound in the sector to start to become more apparent. The next wave of investors and entrepreneurs should start to see some concrete results out of their efforts, and with luck the overall economy will continue to revive, which would help our and all other sectors. So that's the context for the below predictions (and I'll note once again -- my track record isn't great with such predictions, so don't rely upon them for your own investment activities, naturally).
1. 2014 will be a slight "up year" for for both deal counts and dollars, in terms of U.S. cleantech venture deals.
2013 was essentially flat in terms of deal count, and down in terms of dollars. But I'm expecting a slight rebound in 2014. There are more active corporate investors interested in the sector (at least as broadly defined, and often unlabeled as "cleantech"), and a growing sense among generalist VCs that it's okay to make smart bets in the sector -- as long as you don't describe or rationalize them as "cleantech". And with some new success stories to point to out of the sector, that tends to bring back the interested investors. Anecdotally, I'm seeing more growth stage investors interested in the growing number of revenue-stage startups out there (so that'll drive the dollars), and more early stage investors with strategies that overlap with the natural resource scarcity investment thesis.
That said, LPs still aren't streaming back into the sector, so the rebound can't be too strong. If LPs don't give VCs dollars to invest, the VCs can't invest. So that's why it probably won't be any better than a slight "up year".
Once again, I'm only referring to US tracked deals. I still find the deal tallies outside of the U.S. to be particularly squirrelly, and there are always other factors at work that make it impossible for me to guess what's going to happen in various other regions.
2. 2014 will show signs of a rebound in cleantech private equity LP activities.
This is a tough stat to track. VC fundraisings aren't well-reported, and it's tough to categorize who's a "cleantech" VC these days anyway.
That said, there are some resources out there, such as this special report by Prequin from a year ago (note: link opens pdf). And it wasn't a pretty picture at that point in time, with both fund closings and dollar amounts way down in 2012. I expect when and if we see similar figures for 2013, it'll be much of the same.
But I think there are too many reasons for certain types of LPs to want to tap into the macro thesis here, and too many emerging signs of successful GP strategies, for the LPs to remain so sidelined for a third year in a row. The $5 Trillion sitting in sovereign wealth funds will want some exposure to resource innovations. Family offices and high net worths and corporates continue to be very interested in the long term cleantech opportunity. And while the word has been out until now about a "cleantech crash", I fundamentally believe that such thinking is increasingly stale. It won't be an opening of the floodgates, no. But I'm expecting a slightly better fundraising environment for cleantech VCs in 2014 -- although they may not label themselves as such.
3. We will start seeing even the most stalwart defenders of "cleantech" migrating away from the phrase.
I've alluded to it a couple of times above, and it's already obvious -- "cleantech" as a label is increasingly out of favor. The shame of it is that there's no readily-apparent replacement. But to too many people (see: 60 Minutes) the "cleantech" label basically just means solar panels and biofuels and electric vehicles.
Always remember: "Cleantech" has best described not one sector, but an overall investment thesis based upon more efficient use of a wide variety of natural resources. What's going on right now is a clear broadening of the sector (see below) to the point where trying to apply just one label can feel overly constraining. It's why some proponents of "cleantech" can with a straight face claim it includes a multitude of LOHAS (lifestyles of health and sustainability) and cleanweb (ie: sharing-economy apps) deals, even while many entrepreneurs in those sectors would be shocked to hear themselves described as "cleantech". I've seen Waze claimed as a "cleantech success story", for example, but I would be very surprised if the founders, investors and acquirers of the company ever publicly described it as such.
At my firm, we increasingly describe ourselves as being in the business of "resource innovation". I've seen dozens of different such phrases out there being used by my peers in the investment community. In fact, as "cleantech" remains a bit of a toxic phrase in some circles, there's an imperative for investors to want to clearly differentiate themselves from some of the visible failures of the past by coming up with some other way of describing their focus areas.
I don't expect we'll see this coalesce into one single favored phrase. In fact, this branding confusion is in one way a very healthy indicator of both a) a necessary broadening of the areas where we all invest; and therefore b) an even stronger blurring of the lines between this sector and other tech investment sectors.
A couple of years ago it was popular to predict that "cleantech" was going to make itself irrelevant as a phrase because of successes, where these approaches would just become integral to other sectors. After all, it's just an investment thesis that intersects with all these other sectors. Well, whether because of success or simply to get that bad Solyndra taste out of the mouths of the uninformed, it's probably time...
4. 2014 will be "the year of large format electricity storage"... but...
I was way off with my prediction last year that we would start to see some visible flame-outs in the "big batteries" sector.
Basically, I was seeing solar panel manufacturing redux in the wave of credible -- but ultimately substitutable -- high-cash-burn storage startups that were getting ready to come to the market. I still see that. "Big batteries" now are being commercialized across a wide range of approaches, from chemistry-based to gravity-based to kinetic-based to... well, you name it. And they're all still ultimately competing with natural gas based peaker plants, and demand response and ancillary services (after all, the cheapest way to meet peak power demand is simply to reduce it, instead of expensively making and then storing the power). That is just an awful lot of substitutionality which speaks to some strong commoditization looming.
That said, the wind is definitely at the back of this sector right now. I continue to speak with many investors who see the potential for valuable tech breakthroughs, Bill Gates can't stop writing checks into the sector, and the California regulatory support for initial roll-outs is justifiably boosting the spirits (and in some cases, early revenues) of many entrepreneurs. I have a hard time believing this momentum will wane in 2014. In fact, as some of these very credible efforts start bragging about their initial sales and installations, and if Bloom can ever IPO, it'll seem like the hottest subsector around.
But... I still believe in that looming wave of commoditization, which doesn't tend to treat capital-intensive startups well. So I'm expecting a great year for the subsector in 2014. Beyond that... holding my breath.
5. This will be a significant up year for exits, both IPOs and M&A.
A lot of startups in the sector have quietly grown to revenue levels that make them credible acquisition and even IPO candidates. The IPO window is open (a crack, for now) at the moment, and stock prices are on the rise. Large corporates have never been more serious about these innovations, and the range of such corporates has broadened a lot as well. This should be a year for putting some runs up on the board.
But how to define it? After all, 2011 and 2012 weren't bad years for M&A, at least as tracked by the Cleantech Group, with "total deal count" and "total value" both much higher than in, say, 2007 before the Great Recession hit. But would any of us really point to the past few years as being great for exits? I for one wouldn't. So I think there are some methodological challenges in defining "a great year for exits".
So I'll go out on a limb and get overly-specific (which never seems to serve me well in these annual predictions, but oh well), and predict a) disclosed (not "total") VC-backed cleantech M&A will go up more than a third, to go above 40; b) disclosed value of those deals will grow above $8B; and c) IPOs of VC/PE backed companies in cleantech sectors will go back above 20, and total raised proceeds will go above $3B. That's strong enough growth in all three areas that, if met, it should overwhelm any methodological challenges and show strong exit trends for the year.
6. Some Democrats in the US Senate will get vocal about climate policy, but nothing significant will result in 2014.
Forecasting little forward progress in federal climate policy in 2013 was a really easy prediction. This one probably is as well.
Some Senate Dems have apparently gotten buy-in from Reid to get more vocal about climate policy again, and perhaps to push forward some legislative proposals. We all know they won't go anywhere.
Speaking only for myself, I'm glad for any federal lawmaker who talks loudly about the need for progress here. It's too important to let another year just go by with radio silence from Capitol Hill, with the implied lack of any momentum at all. That said, having Senate Dems flap their gums about this issue without seriously engaging any emerging conservative-born policy solutions seems like a recipe for more partisanship on climate policy, rather than really moving the ball forward. Even if it's to ultimately not propose any legislation in the "silly season" that is an even-numbered year in American politics, it would be much more promising to see these Senate Dems proactively engage with proposals from the likes of E&EI for carbon tax shifts. Note: I'm not arguing for Dems to just buy into someone else's policy agenda, or vice versa. Just suggesting that vocally highlighting the issue while also visibly engaging with the (admittedly still very few) voices on the other side of the aisle also calling for policy solutions would set up a serious policy development effort a lot sooner than just talking about it as a partisan issue would. Let's regain that sense of inevitability, rather than build more entrenched, polarized positions.
Many will disagree with me. Whatever. My prediction stands, that there will be increased talk but still no real progress, at least legislatively. And I remain unconvinced this is really a priority issue for the White House, too. So another nothingburger of a year in terms of federal climate policy. State-level policies, however, might be a different story once again...
7. Meanwhile, the decentralized solar boom will continue...
Installed system costs keep falling (even as panel prices rebound a bit), the policy environment doesn't look to shift significantly in 2014, and third party capital has figured out how to scale up financing for these distributed assets. The market looks great for another year. New models like community solar will provide more impetus for continuing to expand the market as well.
8. ...And the lessons learned in financing distributed solar will be applied to energy efficiency project finance, which will see a breakthrough year.
There are just a ton of efforts out there right now, trying to figure out how to scale up energy efficiency project finance. Third party capital is still on the sidelines, for the most part, waiting to see what those scalable models look like as specifically applied to building energy efficiency projects instead of rooftop solar.
I think a couple of these efforts will break through in 2014. I see emerging M&V and origination platforms coming together. Early sources of capital (similar to the role US Bank played in 3rd party solar) engaging with such platforms. Consultants, contractors and equipment vendors increasingly interested in utilizing such platforms. The necessary pieces of the puzzle are engaged and actively getting early efforts underway. It should be a great year to be in EE projfin.
There's an overall macrotrend around project financing for distributed assets that's part of the ongoing "next wave" in our sector. I expect energy efficiency to be the next such story, based around the level of activity I see there in particular.
9. The "Big Four" sectors in cleantech venture capital will total less than 50% of tracked venture dollars.
Historically, solar, energy efficiency, transportation and biofuels/biochem have dominated the "cleantech" sector's investment activity, at least in aggregate. It's been a decidedly energy-focused bunch of investors up until now. I think this will be the first year when those four categories add up to less than 50% of tracked venture dollars.
As mentioned above, sectoral definitions have broadened and become more vague/ overlapping. And I see a lot of my investor peers in the sector spending a lot of time looking at areas like food, water, recycling and waste, etc. Already, in 2013 we saw the "Big Four" pushed down to around 57% of the dollars tracked by the Cleantech Group, and that's including some big shifts within subsectors, such as the shift within solar to business model innovations downstream instead of hardware manufacturing, and the shift toward cleanweb plays within the "transportation" category. These shifts will continue.
10. I'm soon going to owe some joke bet to my Seattle-based friends at Powerit Solutions.
Yep, staying far away from making any predictions about DC sports teams this year. But here's a sports prediction anyway: Seattle over New England in the Superbowl, in an easy win. Charles Barkley is right, New England friends, "Y'all take the winning for granted." Well, enjoy one last Peyton Manning choke-fest while you can. Seattle looks unbeatable. But I'm sure I'll get sucked into a Boston vs. Seattle bet anyway, if it comes to that...
Have a great 2014, everyone!
Photo Credit: Cleantech Predictions for 2014/shutterstock
Rob Day is a Partner with Black Coral Capital, based in Boston. He has been a cleantech private equity investor since 2004, and acts or has served as a Director, Observer and advisory board member to multiple companies in the energy tech and related sectors. Rob was a co-founder of the Renewable Energy Business Network (www.rebn.org), a non-profit organization which was acquired in 2009 by ...
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