Talk of a cleantech bubble is nothing new, but two recent industry reports fueled the fire with their analysis of runaway increases in investment in the sector.
In March of 2007 the annual report from Clean Edge and Nth Power, Clean-Energy Trends 2007, detailed that VC investments in energy-tech start-ups rose 262% in 2006. In May of 2007 analyst firm Lux Research issued the Cleantech Report reporting that IPO value for cleantech was up 156% in 2006 accompanied by a warning that “a boom-and-bust scenario looms in energy technology”.
In late June of 2007 the hypothetical bubble was a hot topic at the Greenvest 2007 Conference. Nth power founder and managing director Nancy Floyd acknowledged the incredible growth since she started investing in cleantech back in 1993. “Ten years ago there was less than 50 million dollars invested in this sector. Last year [there] was 2.4 billion. And if you look at the first quarter of this year it was 900 million which means we’re on a runway to have 2.6 billion of venture capital invested in this sector.”
Despite soaring numbers, there is still plenty of optimism. According to Clean Edge co-founder Ron Pernick, “At $55 billion, the global market for biofuels, solar, wind, and fuel cells are now considerably larger than the global recorded music industry. Within a decade we predict these clean-energy markets will exceed $220 billion.”
As part of the Greenvest 2007 panel “Helping investors make more green through green investing”, Floyd addressed the issue of hype head-on, “A lot of people have talked about: Is there a bubble? Is there too much money going into this sector? You know, (gestures to panel) we’ve all co-invested together, but if you looked at our individual portfolios I think you would find that they are not so overlapping.”
Bubble or not, even those who agree with their predictions worry that there will be some hiccups in that growth and some areas are definitely too hot. When Publisher/Acting Editor of “Inside Greentech” Dallas Kachan addressed the panel “Harnessing the clean tech future” if solar company valuations are too high, all six participants said yes (including Raj Atluru of Draper Fisher Jurvetson, Philip Deutch of NGP Energy Technology Partners; Scott MacDonald of Emerald Technology Ventures, Chris Erickson of Pangaea Ventures, Group Lee Bailey of US Renewables, Marko Maschek of 3i).
Raj Atluru of Draper Fisher Jurvetson pointed out that overvalued doesn’t mean they’re not valuable companies. “Just because they’re overvalued doesn’t mean they’re not great companies. So I think the markets just overvaluing them right now because of the tremendous growth in solar… you wouldn’t have said in 2000 that ebay wasn’t a great company or Yahoo wasn’t a great company or Google wasn’t a great company. They’re fabulous companies, they were just massively overvalued back at that period of time”.
Despite their forecasted boom-and-bust scenario, those at Lux Research claim that “untapped opportunities persist in air, water, and waste technologies, which have been comparatively starved for capital.”
Given that not every sector, nor technology, within the clean category is equal, we talked to three venture capitalists from three very different sized and types of firms to get their views on what is hype and where they’re putting their, or their companies’, money.
In part one, we talk to Keith Gillard who’s in charge of North American investment for BASF Venture Capital which, as a subsidiary of the world’s largest chemical company, focuses on chemistry-related investments. Their recent investments include:
- Colorado-based LUCA Technologies which is using biotechnology to try to develop mass production methane farms as a source of energy.
- Livermore, California-based UltraCell Corporation that has developed a fuel cell system using a micro reformer which generates hydrogen from methanol.
Gillard sat on the Greenvest panel with Nancy Floyd and others like CMEA Ventures Founder and Managing Director Tom Baruch and Chrysalix Energy Venture Capital President and CEO Wal van Lierop where he explained his company’s investments. “Industrial biotech is a key area for us… Either we’re going to be evolving or we’re going to be making lifeforms, little animals that do the work for us. And we’re already in a company, we’re looking at a few others, that are in this area, but the applications are enormously broad.”
We talked to him a bit more about his company’s investments, where the deals are and all that hype.
Keith Gillard, principal, BASF Venture Capital America: “There is a lot of hype right now around clean tech. Around energy in particular. And I think that enthusiasm is also spilling over into other areas around there like water. Even going into environmental areas, cleanup, soil, air and things like this, but energy is really at the heart of where the hype is. And it’s really easy to get excited about that because we all use energy. We all see it, it impacts our lives and we’re all feeling the crunch of increased energy prices, especially in transportation.”
“But enthusiasm does not make for scientific advancement. Just because you’re excited about something doesn’t mean it’s possible. I mean, I’m a science fiction fan and I probably wouldn’t be in this industry if I wasn’t, but at the same time there’s a difference between what is possible and in the next 5 years, 10 years and what will be possible in 100 years. One thing we talked about in the last panel there is they asked how long is it going to take before 50% energy production from renewables and I think the consensus in the room was somewhere between 50 and 100 years.”
“But some of those people there are betting that it will happen sooner. I don’t think it has to happen sooner. If you can make for economic advantages for using renewable energy and you can create better efficiencies than you can make money with renewables without having to wait for them to have that 50-60% penetration.”
“The big hype, the big problem, is around the transportation area. I think people are very emotional about this because they feel the pinch in their pocketbook everytime they fill up their car, and so they’re reaching for something that isn’t necessarily ready yet. And you do have the president going in his speech and talking about the addiction to foreign oil and talking about ethanol programs. But ethanol isn’t there yet.”
“Ethanol is great in a local environment where you can generate it and use it right there, but storing ethanol, transporting ethanol is difficult. The moment you bring the storage and transportation of ethanol into the equation, the economics shift dramatically. The other problem here is the cost of the feedstocks. And what I think people have ignored is ethanol for transportation does not exist in a vacuum. The price of corn effects the price of food, all food. Corn is used for everything, not just to feed humans, but to feed all the animals that also feed the humans.”
“I think that the push to use ethanol in gasoline is going to drive up inflation across the board and I think that as we see all of these plants that have been financed come online you’re going to see demand for corn-based ethanol exceed supply. And then people are going to start to bid it up. Because you have to have feedstock to keep things running. These plants need to be running at near 100% capacity in order to be economically viable. If you can’t get the feedstock it’s cheaper to keep the plant turned off than to turn it on. What happens in that case, there’s only so much to buy.”
“People are going to start to bid each other out of it. Some of these places are going to run out of money, no longer able to bid. They have to shut off. What happens to those investors? So I think we really have to be careful about hype around this area in particular, the fuels. There are other areas where biofuels will be very interesting and when you get into cellulosic ethanol fantastic. There’s a great future there because there are so many places where you can generate it locally. Biobutanol is also a very interesting area. But as my company doesn’t invest in fuels we won’t be speculating there either.”
faircompanies: You’ve mentioned ethanol as perhaps being a bit overvalued. Where is the value in cleantech?
I think if you want to get into the specifics of what is going to drive the renewable energy you have to get into a dozen or maybe a hundred different specifics because it’s not just going to come from one place. Sure, areas like wind and areas like solar and I would even put the hydro in a general category in there as well. These are all parts of the puzzle and within those, of course, there are also specific technologies that are appropriate for specific applications or maybe for particular sights. Solar works really well out in Arizona. Solar doesn’t work so well up in Greenland. Nevertheless Germany is one of the big markets for it even though efficiencies are not so high there, but that is a subsidy play there so we remove the subsidies and does it make economic sense? I don’t know, but it makes emotional sense to people and that helps.
So are people investing with knowing there’s a longer return on investment in this sector? Or are they just hoping things might happen fast?
I think people are investing not just because they hope things are going to happen fast. Things are happening fast enough right now to get a really good return and look at the solar plays. Look at those IPOs. Some fantastic exits are happening in clean technology; that’s not a problem for VCs at all. You can really see a good exit and a good multiple. I think what continues to drive early stage investment, in particular, is the promise of good return, the promise of markets that are coming. WE are seeing right now — we’re at the crook in the curve and we’re starting to see that exponential factor move in so we’re starting to get some confidence in the slope increasing over time. We’re going to see more money coming. Makes sense right now –makes even more sense in 5 to 10 years and so on.
Are there specific areas that you’re focused on for your investing?
We’re BASF. We’re a large chemical company so we focus on places where chemistry is at the heart of what they do. And even to be more specific traditionally we have not done a lot in silicon chemistry. So if you want to talk about solar, silicon solar is not a place that we’re very likely to play. Also, we think that most of the good bets on silicon are already on the table. Some of these are early stage companies, but the VC bets are already there.
“We don’t know which ones will win, but the winners probably exist. What we’re looking at is what comes next; going into organics; things which are polymers or plastics, things that can be manufactured cheaply from feed stocks that we understand and we have a lot of experience in manipulating so we’re looking at companies in this phase. There are also some interesting new materials that people are working with in this whole other area; which may or may not be organic in nature. This is very exciting for us. Mechanical areas, of course, like wind, hydro, etcetera, no.”
Things like CIGS (copper indium gallium selenide- a cheaper, sprayable alternative to silicon for solar panels)?
CIGS, yeah, CIGS is very interesting gallium arsenide [a semiconductor with some some electronic properties superior to silicon’s], indium phosphate, whatever, these more esoteric things that may be a lot of people don’t know– certainly we’re very interested in that.
I’ve heard from some investors, even one ex-Silicon Valley VC, that cleantech is all a fad. Do you think there are just some conservative people out there or is there some truth to what they’re saying?
I think for those people who are naysayers and are going counter to the cleantech movement there’s a lot of validity in what they are saying. I mean there’s a lot of money that has moved into cleantech, not just in investments. If you look at capital that is earmarked for investment into cleantech, but not yet invested; it’s a lot of money. I don’t want to quote a number here. I’m sure you can find a more accurate number than what I would quote you.
“There are a lot of good deals out there, but there’s more money than there are good deals. So what will happen? I don’t know. So some of the naysayers saying why should we put money into clean tech? They’re right. They don’t need to. There’s a lot of money here for the good deals to get funded and we are funding them. Actually, I would say that the upward pressure on valuations is an indication that actually there is more money chasing the deals than there are good deals chasing the money.”
“So I think it’s fine. Not everyone has to be putting money into this. There’s a lot of us who are. I’d rather see money coming from people who understand this phase and understand the technology and markets rather than from people who are just looking to make a return. Lots of web 2.0 companies out there for them.”
- The second part of this cleantech series: A cleantech bubble (II)?
- The third part of this cleantech series: A cleantech bubble (III)?