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Returns In Cleantech Investing Run Hot And Cold

Investing in clean technologies is hot, but investors can quickly find themselves left out in the cold.

Just ask Kevin Costner, who recently informed a British magazine he lost roughly $40 million on two cleantech ventures. One that was developing a non-chemical battery promising enough to win a NASA contract.

Even professional venture capital funds do not count on more than one in ten of their investments really panning out, but those are the game-changing companies that more than make up for the other fizzlers.

Many players in the clean-tech sector fully expect some price bubbling – if only as validation of an attractive investment area. But they also insist it is inherently less susceptible to the outlandishly inflated valuations witnessed during the dot.com boom-bust cycle.

“There is real science [here] going after real solutions,” argues Joseph Muscat, Americas director of Ernst & Young’s clean advisory service. This is reflected in the provenance of many new technologies.

A cluster of windmills of the north side of Mars Hill Mountain is seen Sunday,  Jan. 21, 2007, in Mars Hill, Maine. Maine land use regulators took a big step Wednesday, Jan. 24, 2007,  toward denial of proposed wind project in Reddington Township, citing concerns about its visual impact. (AP Photo/ Robert F. Bukaty)
Robert F. Bukaty
A cluster of windmills of the north side of Mars Hill Mountain is seen Sunday, Jan. 21, 2007, in Mars Hill, Maine. Maine land use regulators took a big step Wednesday, Jan. 24, 2007, toward denial of proposed wind project in Reddington Township, citing concerns about its visual impact. (AP Photo/ Robert F. Bukaty)

The Chase Is On

Roughly half of global patents related to water technologies are coming from Asian countries, where water constraints are more pressing present-day concerns, according to Nicholas Parker, co-founder of Cleantech Group, which claims it established clean technology as a viable investment category in 2002.

Similarly, most of Canada’s current crop of clean technologies is coming from the energy-rich Western provinces where familiarity with the demands of oil/gas industries gives inventors an inside track on the most pressing worries. In other VC-supported sectors, 80% of start-ups originate on the east coast, explains John Ruffolo, Canadian director of Deloitte & Touche’s technology, media and telecommunications group.

In the last 18 months there has been “nothing less than a stampede” of more mainstream VC firms coming into the cleantech sector, says Ethan Zindler of New Energy Finance, often partnering with the pioneer firms of the sector – such as Rockport Capital Partners, Technology Partners, Nth Power - to take advantage of specialized knowledge accumulated over the past decade.

The new attention is mostly welcome, says Rob Day of @Ventures because many of the deals demand knowledge of a number of disciplines and industries and bring the bigger bucks needed to move start-ups closer to exit payback through acquisition or an IPO.

Nth Power’s Rodrigo Prudencio says that his firm partners with others to address any “blind spots” his small outfit may have, helping maintain its “excellent hit rate” which have included some of the better known star performers in this space.

“The scale of the challenge and opportunity keeps getting bigger and therefore there are more and more venture capitalists diving in, which is good in one sense, there are many more collaborators, but frankly there is more competition for deals,” says Prudencio. The Silicon Valley firm got started in 1997 and currently is in its fifth fund, with a total of $400 million under management.

Valuations And Volatility

Pricey And Dicey?

There is also some grumbling about how new money has pushed up valuations, sometimes significantly. That’s great for the inventors and entrepreneurs but ultimately can sour these kinds of plays.

“There is a lot of money chasing too few deals now,” says Zindler of New Energy, whose research shows that cleantech funds have invested “only 73% of the money available to them – a symptom of a competitive market where demand for deals is outweighing supply.”

“There are a lot of companies out there that are overvalued and as investors we have to be very careful…but there are also a lot of companies that are still at very attractive valuations, with really great value propositions that really make sense to do,” says Whitney Rockley of Nomura’s new cleantech venture group, based in London. “The hard part is trying to weed through the deal flow to determine which ones are based on really good, sound fundamentals and make sense for the industry.”

It doesn’t help that hedge funds have become increasingly active in this space, putting a lot of money to work very quickly, but often without the same level of due diligence, she adds.

Fields of corn surround the Golden Grain Energy ethanol plant, Thursday, June 30, 2005, in Mason City, Iowa. The environmental and agricultural communities, at odds over issues such as factory farming and pesticide use, have become allies to push for more widespread use of renewable fuels. Much of the new collaboration came as a result of efforts to pass a federal energy bill, now headed to a conference committee.  Sens. Tom Harkin, D-Iowa, and Richard Luger, R-Ind., brought the groups together
Charlie Neibergall
Fields of corn surround the Golden Grain Energy ethanol plant, Thursday, June 30, 2005, in Mason City, Iowa. The environmental and agricultural communities, at odds over issues such as factory farming and pesticide use, have become allies to push for more widespread use of renewable fuels. Much of the new collaboration came as a result of efforts to pass a federal energy bill, now headed to a conference committee. Sens. Tom Harkin, D-Iowa, and Richard Luger, R-Ind., brought the groups together

In general, the cleantech sector is maturing, with more rigor and focus on grounded business plans, carried out by more seasoned executives, who have gradually replaced the original innovators, says Jeff Lipton, managing director of CleanTech Investment Banking at Jefferies Group.That could have helped hydrogen and fuel cells companies with their beguiling potential of virtually limitless power. Fascination with the science was not always matched by a sober acknowledgement of the remaining technological challenges – not to mention the complete absence of industry infrastructure. Ballard Power Systems, Plug Power and Fuel Cell Energy are the poster children of that heedlessness. Honda continues to test its fuel cell ... but on cars that cost up to $1 million each.

The same euphoria got some biofuel companies in trouble. The share prices of handful of these companies are now below their debut price and numerous construction projects have been put on hold.

On October 1, VeraSun Energy, one of the nation’s largest ethanol producers, announced it was suspending construction of its 110 million-gallon-per-year ethanol biorefinery in Reynolds, Indiana, because of a fall in ethanol prices of nearly 50 cents a per gallon in the previous two months. The delay came less than six months after the firm first announced plans to build. “You’re going to see a wave of consolidation in the next 12 months or so,” says Jeffries’ Lipton.

Besides dependence on significant subsidies there are worries about long-term overcapacity, as well as the feedstock problem of corn prices pushed skyward, which sabotage project economic viability, and entangle firms in a politicized ‘food versus food’ debate.

“Could you have irrational exuberance in a subsector of these sectors, sure, no doubt, it could happen,” says Ron Pernick, co-author of The Clean Tech Revolution, which came out June. “Could you have irrational exuberance in all sectors, I don’t think so.”

Retail Investors Take Note

Retail investors are partially shielded by the discipline imposed by the capital markets. “The public capital markets appropriately are only funding those deals where a lot of the technology risk has come out of the process,” explains Joseph Muscat, Americas director of Ernst & Young’s cleantech advisory services.

Even after they are listed these stocks can still experience considerable volatility, because of fluctuating oil prices and fickle government support policies, which have periodically whiplashed early U.S. green energy investors for years.

Retail investors interested in this sector have at least half a dozen exchange-traded funds. (Learn more about green ETFs.)

“This is a reasonably young market sector - some of technology is going to succeed and others will not reach the projected level of adoption to make it commercial scalable – that’s why it’s a venture play,”