Cleantech Evolves, But Will Investors Follow?
Cleantech might be turning a corner. But one important question is whether the evolving sector, showing signs of resurgence, can recapture the attention of disillusioned investors.
After vast sums of venture capital were poured into cleantech in the latter half of the 2000s—peaking at $4.3 billion in 2011—the flow of money slowed over the past several years. A combination of factors contributed to the sector’s downturn, including much-maligned failures by VC and tax payer-funded companies like Solyndra; cheap natural gas prices that undercut momentum in alternative energy; and a brutal recession.
But there is renewed hope among some investors who stuck with cleantech through its ups and downs. Technologies that perhaps weren’t ready for prime time several years ago have started to translate their promise into big businesses—solar power (SolarCity (NASDAQ: SCTY), $4 billion market cap), electric vehicles (Tesla, (NASDAQ: TSLA), $26 billion market cap), and smart grids (Silver Spring Networks, (NYSE: SSNI), around $600 million market cap), to name a few examples.
Several years ago, investors in the Seattle-based cleantech angel group Element 8 mostly saw companies selling “a widget or a technology that improves efficiency or lowers cost,” says Element 8 co-chair Eric Berman. Such businesses are usually narrowly focused on being suppliers to other manufacturers or to niche markets.
But increasingly, the group—which invests across North America—is encountering sustainable technology companies selling a “more holistic, more integrated product with a clear value proposition,” Berman says.
And sometimes that message isn’t primarily about going green. Tesla and SolarCity “aren’t selling electric transport or solar electricity (as a ‘pure play’ cleantech company might),” Berman says. “They’re selling high-performance, elegant transportation and lower energy prices, respectively. The buyer doesn’t care what kind of batteries Tesla has in the car, doesn’t care what solar panels or what inverter or what the efficiency of those are in the case of SolarCity—(they’re) using the cleantech technology to meet a non-cleantech goal.”
Part of the progress being made in some segments of cleantech, like solar and wind power, mirrors what has played out in the development of other industries: researchers and companies gradually introduce technological advancements, manufacturing processes become more efficient, the cost of doing business shrinks, and prices come down, Berman says. “It’s exactly what’s happened in computers in the past 40 years,” he says.
And more and more, cleantech innovation isn’t around the technology itself—it’s the business models, says Rob Day, a partner with Boston-based cleantech investment firm Black Coral Capital. Residential solar panels didn’t take off in the U.S. until companies like SolarCity, Vivint Solar, and Sunrun introduced financing options, like leasing and power purchase agreements, that eliminated the high up-front costs for consumers to install the panels on their rooftops.
Thousands of jobs have followed to meet the demand. From 2010 through 2015, the U.S. solar industry more than doubled the size of its work force. As of November, nearly 209,000 people held solar jobs, a larger number than some fossil fuel generation sectors, according to data from The Solar Foundation.
Another example of progress in cleantech business models is Waltham, MA-based Harvest Power, which operates more than 40 facilities that recycle organic waste. The company uses anaerobic digestion technology that has been around for a while, but Harvest figured out how to turn it into a profitable business that generated about $150 million in revenue last year.
“We’re seeing the high growth potential from new business model innovation, and we can take advantage of some of the technological innovations from a decade ago” or more, Day says. “And that’s unlocking a lot of growth.”
Sustainable technology investors like Day are also experimenting with the ways they structure deals. Many cleantech companies’ products involve installing expensive equipment and other large capital costs, and the founders don’t want to give up a huge equity stake to investors in order to cover those initial costs. Instead, Black Coral has done deals that are essentially a mixture of equity and debt financing.
The debt funding—which Day calls “deployment” or “project” capital—covers the initial equipment expenses and future maintenance costs; the investors own the equipment and get paid back via service contracts with the end customer, Day says. The equity investment is separate and follows traditional venture capital terms.
Black Coral has structured investments in Clean Energy Collective and OneRoof Energy in this way, Day says. Other investment firms with similar funding models include Generate Capital and Ultra Capital, he says. Day thinks this approach will start to become more common, “but it remains a rare model so far.”
Lars Johansson, an Element 8 board member, thinks the broader investment community’s interest in cleantech is rebounding. It helps that the scope of the industry has expanded, and in some cases cuts across multiple areas that are hot right now, like financial technology, the Internet of Things, data analytics, and more.
“In the cleantech boom years in the late 2000s, interest was mostly driven by interest in solar and biofuels,” Johansson says. “These days we see much more diverse opportunities across many sectors.”
For example, smart thermostat maker Nest is a consumer tech and connected device play, but it also aims to help make homes more energy efficient—thus a cleantech angle. HoneyComb makes camera-equipped drones that survey farms and kick out data used by farmers to evaluate crop health, help increase crop yields, and lower costs—a sustainability/drone/data play that attracted funding from Element 8 members. And so on.
“Cleantech is no longer a category, it’s more a lens to view the world,” Day argues. “These are attractive as investments if you just stop viewing the world through a 2008 lens. People will recognize that cleantech is back, but cleantech is very different than it used to be.”