As we approach the end of 2012, all the market dynamics influencing the progress of private clean technology companies that I highlighted in this piece 12 months ago are still with us – the slowing down of both equity investment into, and the acquiring of, private cleantech companies, the closed IPO market, the weak fund fundraising market, and the continued diversification of sources of capital and partnerships for the companies, most notably from the multi-national corporates and from China-based investors.
“The short-term is fraught with uncertainty and challenges, but the longer-term general direction and momentum, though, seem clearer”, I wrote 12 months ago. That still seems to stand.
With the exception of the broader market crash of 2008/9, venture investment into upcoming private clean technology companies has increased year on year since we began tracking the theme in 2002. Until this year.
2012 will be the first year to break this trend with global venture investment into cleantech companies set to fall below $7bn for the first time since 2007.
For some, this downturn in investment is a signal of fundamental problems with the underlying investment thesis behind such companies. However, when I look at the companies highlighted in 2012 Cleantech Connect and indeed the companies in our own 2012 Global Cleantech 100, and put them in the wider context of what we are seeing and hearing, I come to a very different conclusion.
I believe we are in a transition period, a very painful one to be sure. This is the handover from a second ‘wave’ of cleantech (that was, for all intents and purposes, a wave of clean energy generation companies) that has its roots in the heady days of 2005-06 when funds were being raised off the back of a couple of notable ‘gorilla exits’ (e.g. Q-Cells and REC) and a lot of blind optimism that the undeniable mega-trends would allow anyone riding the wave to make money.
Clearly that hasn’t worked out – just ask the public market investors in Q-Cells or A-123 Systems, or the VC’s behind Miasolé, the most recent example of the ‘clean-out’ and the selective feeding going on around some of clean technology’s distressed assets. Ally that to the many examples of investor-driven CEO changes, Better Place being the most high profile and recent case, it is clear that all is not well with much of the portfolio of cleantech’s second wave.
But this wave and the clean-out will eventually be done; I believe by the end of 2013 it will largely have played through. For sure, we should expect 2013 to be a year of more distressed M&A, and more bankruptcies, and some fund managers will be unable to raise a next fund. All of which will mean capital will be very tight for companies.
However, I think 2013 will also have good news on the ledger – some companies will IPO, funds will get to first, in some cases, final closes, in other cases, and there will be more non-distressed M&A, as there are some quality targets out there. More western companies took funding from China in 2012 than they had in 2011. Russian investors became much more visible and influential on the world cleantech stage in 2012. I expect 2013 to continue to show this geographical diversification in where western clean technology companies are sourcing their capital, their customers and their partners.
I feel optimistic about the future – not to ignore or underestimate the pain many are feeling right now, as the market shakes out the companies and investors who won’t be around to play in the second part of this decade. Consolidation is a benign word to describe what is happening, in the solar world particularly, but I believe this to be consistent with the necessary growing pains all mega-trends have gone through.
The underlying macro-drivers that create the market need for the rise of cleantech innovation companies have only strengthened. Beyond the current clean-out, I believe there to be a brighter period where cleantech in its broadest resource-efficiency sense, distinct from clean energy in its narrowest, will predominate; where fewer overall players will add up to a more rational market; where some new businesses will succeed, by leveraging the technological progress that has been made on the billions invested in the last decade, leveraging the many lessons that have been learned along the way, and operating in spaces where resource efficiency and ‘doing more with less’ economically is what counts, over environmental purity, evangelism, and hope.
Testament to this more practical and balanced market has been the greater influence and presence of the major traditional corporations in cleantech generally, and this continues. Their influence in terms of capital deployed continues to increase - albeit mostly they remain active at the later stages.
Mind the early-stage gap. Whilst I would expect this to be one of the tough aspects of 2013, I do hope in 12 months in this end of year piece to also be able to see more clearly the transition to brighter times for cleantech companies for the rest of the 2010’s.