John Metzger, Metzger Associates
This article can be found in the 2013-2014 Innovative Energy Review
Cleantech investors have had their ups and downs along the notorious Gartner Hype Cycle of technology adoption. The Hype began in 2007 when climate change policies and spiking oil prices convinced institutional venture capital firms to pull the Technology Trigger on clean technologies to the tune of $150 billion that year alone. Venture capitalists recognized the vast potential and collectively chose to challenge the dominant paradigm – in this case, the century-old power grid. One seven-year cycle later, you could say they did it, causing enough disruptive chaos in a moribund, flat-lining industry to establish wind and solar as the fastest-growing power sources in the world today.
Despite low market penetration and still distant venture-class returns, alternative power sources are now being adopted, accepted and integrating nicely onto the existing grid. Regulated utilities and independent power producers are viewing renewables as a viable industry, and are actively balancing their portfolios by producing and purchasing clean power.
Solar, battery and transportation fuels and technologies achieved the Hype Cycle’s Peak of Inflated Expectations in record time, but fell quickly into the Trough of Disillusionment as inexpensive Chinese solar panels, inflated federal financing adventures, ambiguous tax incentives, subsidies and recession drove risk capital investors back to the sidelines. Just as the cleantech industry began crawling out of the Trough and up the Hype Cycle’s Slope of Enlightenment, the discovery of domestic natural gas in mass quantities, entered the market. The resulting crush in oil prices had a dramatic impact on the availability of cleantech capital.
Utilities Adopt, VCs Look Elsewhere
Natural gas has already tested the market’s original cleantech loyalty, but not before wind and solar had the chance to mature to the Hype Cycle’s Plateau of Productivity, assuming the throne as the first competition to coal-fired electricity since the nuclear era. While there are still plenty of incremental productivity gains to be had, VCs are not seeing enough disruptive technologies on the near-term horizon to continue their aggressiveness in the cleantech market. Fortunately, global market adoption, industry consolidation and consumer demand continue to swing the pendulum toward more clean technologies, and it’s now the incumbent industries investment to lose.
Where’s the Money?
The majority of clean technology companies are still early stage with few customers or revenues, yet requiring mega-capitalization for scale up. The big money is making its way back to the table, but now VCs are challenged by a new generation of strategic, socially conscious investors. Private equity, angel and family groups are stepping up to fund companies without the 10x returns that form the venture model. Cleantech companies that use big data, sensing, software and other IT solutions in power gen, efficiency and transportation are finding many of these newer investors happy to put in equity capital. These investments help move companies toward funding by investment giants such as Goldman Sachs who is devoting $40 billion to cleantech over the next decade. Driven by policy and technology, investment banks, automakers and industrials like GE and Siemens have increased focus on infrastructure, manufacturing, vehicles, battery technologies and other long-horizon, large-scale, massively capitalized corporate ventures.
Back to the Gold Rush?
Despite the last few lean capital years, the venture investors are back on the hunt for early-stage technologies and are targeting higher-risk/return ratios, higher profit margins and faster ROI timing than what they encountered the last time around.
Air and water analytical and monitoring software, operations and control systems, LED lighting, emissions control technologies, smart buildings, recycling and energy efficiency technologies, waste reduction and water management solutions, and other technical, money-saving, productivity-gaining tools are getting more nods from VCs. In their search for the next prize-winning widget, they are understandably demanding strong management teams run by experienced entrepreneurs who won’t repeat the mistakes of the past. With an eye on future funding, IPOs and M&A, VCs are avoiding companies with complicated investor pools and tax situations, and low-margin, long-return horizons.
Some of the most fundable ideas are coming out of Colorado’s unique entrepreneurial ecosystem of research and incubation. The National Renewable Energy Laboratory is working directly with businesses to demonstrate and validate commercially viable technologies. The State university system’s tech transfer network, entrepreneurial support organizations like the Rocky Mountain Innosphere the Center for Renewable Energy Economic Development (CREED), and the Rocky Mountain Cleantech Open are accelerating cleantech companies’ path to commercialization and creating merger and financing opportunities sooner than traditional expectations.
Cross Industry Collaboration
The state’s established aerospace and geospatial businesses have become global problem solvers in areas ranging from natural resource mapping and conservation to erosion control and environmental monitoring. Advanced water recycling technologies from the state’s brewing industry, remediation systems out of mining and agriculture, energy storage and distribution innovations from the military, and a myriad of green technologies coming out of the tourism and ski industries are all part of the mix that makes Colorado one of the world’s leading cleantech clusters attracting talent, capital and companies.
The challenging funding market of the last few years has given the cleantech industry the jolt it needed to get back on a realistic track in terms of operations, implementation, financing and growth strategies. And though abundant natural gas has kept petroleum prices down, the price of a barrel of oil is back on the rise and on a more rational trajectory, which is good for cleantech capitalization and advanced energy implementation.
Just like the auto industry that saw explosive growth followed by a market crash, cleantech is dusting itself off and heading up the Slopes of Enlightenment to the Plateaus of Productivity. And, hopefully like the auto industry and now the Internet, we can look forward to years of rational, sustainable growth, producing and using efficient, clean energy to the immeasurable benefit of society, businesses and investors.
John Metzger has been working with venture-backed businesses for nearly 30 years, with his marketing firm, Metzger Associates, and seed-fund TeQuity Capital in Boulder. He is the former president of the Rockies Venture Club, and has supported Colorado technology economic development in partnership with the CCIA, State Governor’s Office, University Tech Transfer System, TechStars, National Association of Corporate Directors, the Innovation Center of the Rockies and a variety of other venture capital and economic development groups.