Given the recent bankruptcies of U.S. solar manufacturers Solyndra, Spectrawatt and Evergreen Solar, some are asking if cleantech investing is viable. At SJF, our cleantech portfolio companies are achieving good results, particularly utilizing capital efficient, innovative business models that can thrive in the U.S. market. These firms are applying new business models to a variety of well established sectors that have been slower to apply new ways of conducting business. These business model innovations drive efficiency gains and create economics that work today particularly in recycling, asset recovery, infrastructure, and agriculture.
Likely we will see more failures in upstream U.S. solar technology companies in the coming year, given the relentless price declines being driven by the scale up of Chinese PV module manufacturers, fueled by national and regional government subsidies. In 2006, SJF conducted a webinar on the merits of investing in downstream solar in the U.S. (installation, development, finance) in comparison to upstream manufacturing which must compete globally. We reprised this analysis in March 2010 with a discussion of the two models of cleantech VC investing, the ‘today markets’ approach of SJF Ventures as compared to the ‘tomorrow markets’ approach of much larger cleantech funds working on breakthrough technologies. Later in 2010, SJF Ventures led a Series A financing in Community Energy to carry forward that theme in the solar markets with a company that innovatively combined a downstream utility scale solar project developer with a proven wind developer and REC marketing firm scaling up its solar development business.
The global trends for companies with cleantech innovations are very strong – resource scarcity; climate change; energy volatility; population growth; aging infrastructure; and popular, corporate and governmental support. There will certainly be cleantech technology winners for US investors. Witness, for example, the recent spate of IPOs in early 2011 of U.S. biofuel technology companies: KiOR, Codexis, Solazyme, and Gevo. Just as in the early days of internet investing there were some spectacular failures, so too will we see such failures in cleantech investing, particularly in segments which are competing against Asian industrial policy mandates like solar panel manufacturing. That said, the opportunities to apply U.S. wireless, internet, biotech, and other innovations to the energy and materials intensive sectors is huge.
One segment where SJF is finding multiple cleantech innovation opportunities is in recycling, asset recovery and reuse. SJF has several successful companies in the segment, including Salvage Direct (auto recovery), eRecyclingCorps (cell phone recovery and reuse), CleanScapes (municipal recycling, organics and waste collections), Optoro (returned retail goods recovery), and Living Earth (organics composting). These firms and many others like them are using business model innovations to capture significant value from used goods that previous were wasted in landfills, generating incremental additional jobs, wealth, resource conservation and carbon reduction for the U.S. economy.
These companies are good examples of SJF’s ‘capital efficient expansion’ strategy of cleantech investing, characterized by:
- Significant commercial revenues
- Business model innovation that are execution plays
- Selling to existing markets
- Incremental change
- Capital efficient with raises <$15MM
- Venture returns through strategic sales
- Includes broader definition of sustainability beyond energy generation
This capital efficient, business model innovation approach to building high quality companies across the U.S. is sometimes lost in the media focus on the big technology bets by large cleantech funds typical in Silicon Valley, including:
- Frequently pre-revenue
- Big technology AND execution plays
- Assume new or emerging markets
- Transformative change
- Capital intensive with raises >$50MM
- Require exits via IPOs
- Energy focused
We will need both approaches for the cleantech transformation needed in large segments of our economy – energy, infrastructure, food, transportation, buildings, and materials. However, the latter investing approach will sometimes result in spectacular failures such as Solyndra as well as some spectacular successes, such as First Solar. It is important that the success of capital efficient cleantech investing across a broad array of industry verticals is not lost in the conversation. – David Kirkpatrick