2012 Forecast: Clouds and Opportunities on the Horizon

In 2011, the conventional wisdom on cleantech investing went something like this:

'cleantech is too reliant on government subsidies and bound to fail once subsidies inevitably run out, a poor environment for initial public offerings is making investors cautious in all sectors, economic instability in Europe is advancing the cause of austerity over investment, lack of progress on U.S. federal energy policy gives American investors ample cause for continued caution, and, meanwhile, a glut of cheap natural gas is crowding cleantech offerings from the marketplace.'

And yet, globally nearly nine billion dollars in venture and corporate capital were invested in cleantech in 2011, up 13% over 2010.  Solar led the way with $1.8 billion in investments in 111 deals.  Mergers and acquisitions grew by 153% in 2011 to $41 billion, as many cleantech startups sought their exits with mature companies seeking new innovations.  

In the U.S., gloom and doom dominated conventional wisdom in the business environment in 2011 as well, and yet cleantech investments here grew 30% over 2010, with U.S. solar installations growing more than 65% year-over-year. 

As we look forward, 2012 looks like a challenging year for investors, as some markets will face increasing financial constraints, especially within the Eurozone.  In the U.S., a shortfall of tax equity and supply-demand mismatch may limit growth in solar and wind power development, as forecast by Ernst and Young's All Renewables Index.  The potential sunsetting of the production tax credit, or PTC, for wind power in December 2012 could also put a crimp in wind power investment if this is not extended.

Yet 2012 will present opportunities and could represent a pivotal year for cleantech.  Around the world, governments seeking answers to their fiscal challenges are engaged in a global dialog over how to best stimulate sustainable growth, and many continue to look for answers from cleantech innovation.  In his State of the Union address on 23 January 2012, President Obama confirmed his support for renewables, stating that he “will not walk away from the promise of clean energy.”
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Books to Inspire this Holiday Season

I've enjoyed launching this blog in 2011 and I want to thank every one of you who has stopped in.

When beginning our deal screenings at Keiretsu Forum Northwest, we often start with a round of friendly introductions.  A common topic we ask everyone to share is "what's on your reading list these days?"

So, in the spirit of the holiday gifting season I'd like to share three new books from 2011 that offer inspiration to entrepreneurs, investors, cleantech consumers, and all of us hoping for a cleaner and greener 2012.

Guy Kawasaki: Reality Check: The Irreverent Guide to Outsmarting, Outmanaging, and Outmarketing Your Competition

Early 2011 brought this collection of Guy's engaging blogs to a print volume.  Full of pragmatic advice to entrepreneurs, and delivered in Guy's patented no-nonsense style.

Amory Lovins: Reinventing Fire: Bold Business Solutions for the New Energy Era

"If you wanted to bring America happiness and prosperity, and address unemployment, government gridlock and climate change, and create meaning in a world rife with contradictory views and ideologies, you can do one thing: read Reinventing Fire...and then see to it that it is read by every decision maker in the land." - Paul Hawken, co-author, Natural Capitalism

Frances Moore Lappé: EcoMind: Changing the Way We Think, to Create the World We Want

"Frances Moore Lappé confronts accepted wisdom of environmentalism. Drawing on the latest research from anthropology to neuroscience and her own field experience, she argues that the biggest challenge to human survival isn’t our fossil fuel dependency, melting glaciers, or other calamities. Rather, it’s our faulty way of thinking about these environmental crises.  Lappé dismantles seven common “thought traps” and offers contrasting “thought leaps” that reveal our hidden power. Like her Diet for a Small Planet classic, EcoMind is challenging, controversial and empowering."  - Amazon.com

And to you all - a happy holiday season!
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China's Cleantech Success: Part III - Leveraging Collaboration

In his opening remarks at the Clean Energy Forum, Zheng Bijian, Chairman of the China Institute for Innovation & Development Strategy, reminded participants that Chinese investment in the United States surpassed United States investment in China last year. The countries’ economies are increasingly interdependent – as are the energy and environmental challenges they face.  “It is both necessary and possible to work together," said Zheng. 

Despite the difficult politics of U.S.-China relations, investors and entrepreneurs have begun to show the way toward building and expanding clean energy trade and investment that links the U.S. and China in a productive ways.

The U.S. and Chinese governments have been cooperating on clean energy technologies for decades, but when President Obama announced the creation of the U.S.-China Clean Energy Research Center (CERC) Program during his state visit to China in November 2009, he helped to launch a fundamentally new way of working together.   The commercial benefits – and intellectual property ownership – of the CERC collaborations are to be shared according to a negotiated protocol.

While the high-minded rhetoric found in that meeting between Chinese President Hu and Obama captured a political zeitgeist that now is shared by perhaps too few, the new collaborative investments in cleantech that have been spawned since indicate real coming opportunities.  

The CERC Program has thusfar flown under the radar of most in Congress, and proponents of the program say they would rather it stay that way given the heated anti-China rhetoric that is popular with some in Congress these days.  

The small and highly strategic CERC Program is a tiny piece of the U.S. budget: $150 million in total public and private funding split between the United States and China.  The program intends to leverage this public funding by encouraging collaboration and private investment.  At the strategic level, the hope is that U.S.-China partnerships spawned here will help bind entrepreneurs and investors from both nations into collaborative business relationships rather than zero-sum competition.

Another of the program's larger strategic goals is to cut carbon dioxide emissions from the three largest sources: coal-fired power plants, cars and trucks in the world's two largest markets, and the massive stock of buildings under construction in China's growing cities.  Obama's position has been that the United States and China are central to solving the climate change challenge.

Even while the broader bilateral relationship between the U.S. and China has cooled since 2009, three new U.S.-China CERCs for development and commercialization of clean technologies have been launched with a combination of public and private funding.  

The three U.S.-based CERCs (which have three counterpart "EIH" centers in China) are in Detroit for electric vehicles, in West Virginia for clean coal technology, and in Berkeley for building efficiency .  The CERCs are to implement a clear plan to use the complementary strengths of the U.S. Chinese markets, with innovation focused in the U.S. and rapid deployment and scaling up operations being the focus in China. 

While pubic funding to run these six centers is modest, returns could be considerable, making this, as Terry Cooke describes, "a thoughtful and highly promising avenue for marshaling innovation talent,  top-level technology and investment support."  

News from U.S. CERCs and China-based EIHs will be worth watching in coming years as they help advance new prospects for clean energy cooperation and investment.
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China's Cleantech Success: Part II - Opportunities for Collaboration

Watching the rise of cleantech IPOs over the past few years, one can track the continuing rise of the clean tech sector in China.  Since 2009, China's IPOs have accounted for the over 60% of money raised, and over 50% of cleantech IPOs by number.

And while this trend challenges U.S. investors, over 80% of cleantech Chinese joint ventures involve western partners.

A recent study from Pricewaterhouse Cooper,"The U.S.-China Cleantech Connection: Shaping a new Commercial Diplomacy" describes ambitious Chinese-U.S  collaborations coming together to leverage cleantech opportunities within and beyond the U.S. and China markets.  For example, U.S. and other foreign firms are poised to contribute needed technology and expertise if and when cleantech vehicles in China gain the level of traction automakers and legislators are hoping for.

 Tim Carey, U.S. cleantech leader at PwC adds, "With the sudden increase of U.S. and China cleantech investments, the opportunity exists for U.S. companies to begin nurturing partnerships with both large and small fast-growing companies within China. Partnerships built on mutual cooperation, trust and a clear understanding of each country's business conditions and needs will pave the way for long-term relationships and significant economic growth."

In his opening remarks at the Clean Energy Forum in January 2011, Zheng Bijian, Chairman of the China Institute for Innovation & Development Strategy, reminded participants that Chinese investment in the United States surpassed United States investment in China last year.  

"The countries’ economies are increasingly interdependent – as are the energy and environmental challenges they face," Zheng said, “It is both necessary and possible to work together,” 

What do you see as the most exciting U.S.-Chinese collaborations in cleantech?
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China's Cleantech Success: Threat or Opportunity? - Part I

Today, China is the world’s cleantech manufacturing leader, and its innovation capacity is rising.

This phenomenon is a cause of angst among many in the U.S. watching China's heavily subsidized research, development, and manufacturing ventures increase market share. That anger toward China grew this year as the global solar industry suffered a glut of goods that exceeded market demands, and U.S. solar tech firms saw profits plummet.  Resentment then morphed into action, as petitions were filed with the U.S. International Trade Commission and the Commerce Department to demand investigations of Chinese companies allegedly flooding the U.S. market with solar cells and panels at below market prices.

But is China more of a threat or opportunity for companies in the solar supply chain? That perspective depends on where you are in that chain.  If U.S. companies can learn how to piggyback on Chinese production, the perceived threat would become an opportunity.

Take, for example, Innovalight Chief Executive Officer Conrad Burke.  When the floor fell out from under solar panel prices Burke turned from producing panels using his firm's patented technology to licensing that technology directly to Chinese solar cell producers.  Innovalight leveraged expansion of solar manufacturing in China, and Burke thinks other large U.S. corporations should have the sense to follow suit.  

Seen in this light, China's production is a sourcing opportunity rather than a threat.  According to the Organization for Economic Co-operation and Development (OECD), 55% of China's exports are attributed to production and assembly, and 58% of those are driven by foreign enterprises, of which 38% are entirely foreign-owned.  This is a reason why there is not one Chinese company among the world's top-10  high-technology firms in terms of revenue.  China's export performance can often be attributed to efficient assembly operations, with value-added inputs imported from US and European producers who see those opportunities.

And while anger abounds at a Chinese government subsidizing both cleantech R&D and commercialization, the financial landscape for Chinese cleantech innovation goes far beyond state funding. There is a huge influx of new venture capital and private equity funds focused on Chinese cleantech.   According to analyst Shawn Lesser, limited partners around the globe are increasing their exposure to China.  38% of European LPs plan to have more than a tenth of their PE exposure in the Asia-Pacific region in the next two years; 41% of North American LPs and 87% of Asia-Pacific LPs aim to have a similarly high proportion.  And, Stephen Marcus of the Cleantech Group estimates that 86% of cleantech joint ventures with a Chinese company involve a foreign partner.

American-financed cleantech is penetrating Chinese markets in new ways, with opportunities created by superior US innovations matched to Chinese manufacturing prowess.  

China needs these collaborations with foreign companies and investors.  U.S. firms bring a wealth of innovation as well as experience adapting technologies to servicing the needs of myriad industries.  Chinese firms hungry for these partnerships are growing rapidly. 

Where do you see opportunities or threats in China's emerging cleantech sector?  I'll explore a few emerging opportunities in our next installment.
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Energy Storage Solutions Leading Cleantech Investment

 "The report of my death is an exaggeration."

- Mark Twain

After three quarters of investing in 2011, last year's rumors of the death of cleantech investing seem quite exaggerated.

Innovators in energy storage produced some stunning cleantech deals during the third quarter of 2011, raising a total of $514 million in capital across 34 deals.  This represented 23% of the 2.23 billion in capital investments across 189 cleantech deals worldwide (followed by 16% in solar, 10% in energy efficiency and 8% in transport).

"Advanced storage technologies have gone from nice pilots to actual deployments. And the other thing that has changed is the level of interest among big corporates – big players on the grid are making equity investments in these companies", said Sheeraz Haji, CEO at Cleantech Group.

The top 3 venture capital deals in energy storage were either fuel cell or lithium ion battery companies:

• Bloom Energy, a California-based developer of solid-oxide fuel cell technology, raised $150 million.
• Boston-Power, a Massachusetts-based producer of lithium-ion batteries, raised $125 million.
• ClearEdge Power, an Oregon-based manufacturer of silicon-based stationary fuel cells, raised $73.5 million.

$150 million was raised by Bloom Energy, maker of  solid oxide fuel cells.

Bloom also  assembles these fuel cells into an energy server it calls the Bloom Box, which converts natural gas or biogas into electricity. The Bloom boxes have attracted high-profile customers including Google, eBay, Adobe, and Walmart to successfully compete against a crowded field that includes FuelCell Energy, Ceres Power, ClearEdge Power, and others.

This $150 million round was funded by Kleiner Perkins Caufield & Byers, New Enterprise Associates and others in September.  The deal was marketed as a “pre-IPO” round at a $2.7 billion pre-money valuation.  This latest round would push Bloom’s private financing somewhere around $600 million.

New funds should help the company scale up manufacturing, lower costs, and potential expand its operations beyond the subsidized California market.


$125 million was raised by Boston-Power, is a startup producing lithium-ion batteries in  Westborough, Mass.

The largest and fastest growing market for these batteries is electric vehicles, thought the product is capable of many applications.  Saab has agreed to use Boston-Power's batteries in its electric car projects.  Good news for Boston, considering that competition, in the EV market is fierce, with competitors including LG Chem, A123, Panasonic, and Sony now getting into the game.

Dr. Christina Lampe-Önnerud, says their lithium-ion battery has the highest energy density, and fastest charge, and is safe and green."

The $125 million round was led by GSR Ventures, a VC firm with operations in China and offices in Beijing and Silicon Valley. Existing investors Oak Investment Partners and Foundation Asset Management also invested

Investment will enable Boston-Power to build a factory in China capable of producing 400 megawatt-hours of batteries or 18 million units of the "matchbox-sized" prismatic lithium-ion cells. The funding will be used to build the factory along with a technical development center helped out in no small part by generous subsidies from China's government.  In concert with this investment, Boston is moving a number of positions and responsibilities from its Massachusetts offices to China.


$73.5 million invested in ClearEdge Power

ClearEdge was already the global leader in stationary fuel cell production (uninterruptible power supplies (UPS), combined heat and power (CHP), and residential power). These funds will be targeted toward growing customer adoption in key markets, as well as developing and commercialize new products.

This news comes on the heels of 480 percent growth in year-over-year revenue for ClearEdge, which has created over 150 high tech jobs in the last three years.

The largest contribution came from investor Artis Capital Management, followed by Austrian Gussing Renewable Energy, Southern California Gas Company, and Kohlberg Ventures.

A recent Pike Research report estimated that the stationary fuel cell industry has seen a 27 percent compound annual growth rate in the past two years, as technology costs are continuing to fall, new companies are coming into the space and adoption is gathering steam.  The report estimates sales will exceed 1.2 million units per year by 2017.

Cleantech Investment Shifts in Q3 2011

Across the world, governments hit hard by recession are scaling back their subsidies for clean energy. This ephemeral funding and its influence over modern energy markets is causing concern among cleantech investors.

For casual observers, doubts about clean energy seemed to be confirmed this fall when solar panel maker Solyndra filed for bankruptcy after bringing in over $1 billion in venture capital and $528 million in government loans.  This was unwanted news for the sector in a year of low-confidence for investors and declining investments in cleantech start-ups.

Still, there were bright spots in the cleantech investment picture for the third quarter of 2011, even if the Solyndra bankruptcy added to the jitters of venture capitalists wary of returns from new technologies or basic research.

The result?  Investments in cleantech have been slowly picking up steam after a slow 2010, energy storage investments led the sector in Q3, and investments in technologies that conserve energy or manage its use are coming on strong.

Q3 Results

According to a new report by the Cleantech Group, cleantech venture investments rose in the last quarter despite market volatility and the collapse of Solyndra.

"While financing remains constrained, it's still growing," says Sheeraz Haji, CEO of Cleantech Group. "Energy Storage emerged as our top sector, indicating continued strong interest in advanced technologies for grid-storage as well as for electric vehicles."

$2.23 billion in capital investments across 189 clean tech deals were made across the globe in Q3, a 12% increase from the last quarter, and a 23% in the same quarter last year.

North America was still the leader in terms of capital investments with $1.69 billion raised across 128 deals, followed a distant second, surprisingly, by the UK with $184 million raised in 23 deals. India's clean tech companies raised $165 million in 16 deals and China came in fourth with $138 million invested in 15 deals.

Distribution of Investments in Q3

Energy storage investments topped other cleantech sectors in amount invested ($514 million), followed by solar ($350 million) and energy efficiency ($223 million).  Energy efficiency saw more deals than other sectors, with 34 funding rounds, ahead of solar (33 deals) and energy storage (19 deals).  As for regional distribution, Asia Pacific ($303 million across 21 deals) passed Europe & Israel ($230 million) for the number two spot behind North America ($1.69 billion across 128 deals).

Both the IPO and M&A market were a bit slower in 3Q 2011 compared to the first half of the year. China was home of the most cleantech IPOs, with 11 of the 14 IPOs in 3Q.

North America accounted for 76 percent of the total amount invested, Asia Pacific for 14 percent and Europe & Israel for 10 percent.

North American companies raised $1.69 billion, up 17 percent from 2Q11 and up 59 percent from the same period a year ago. The 128 deals disclosed marked a record high for cleantech VC rounds in North America.  California led the way with $654 million investment (39 percent share), followed by Massachusetts ($176 million, 10 percent) and New Mexico (175 million, 10 percent). Canada saw a drop in terms of VC funding with $33 million invested across 8 deals.


Trends Emerging

Despite concerns, investments rose in the last quarter in the cleantech sector despite market volatility and the collapse of Solyndra.  Meanwhile the software sector enjoyed its strongest quarter in almost 10 years.

What does this mean for entrepreneurs and investors?  Cleantech investment is not yet entering the decline that many have predicted.  Yet in this uncertain investment environment, money is moving to safer bets.

Big winners currently are software companies that are applying their technology to the energy industry.  According to the New York Times, this year venture capitalists are on track to invest more this year than in 2010 or 2009 in start-ups that make software and other technologies that conserve energy or manage its use.
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