All eyes are on the energy world with the recent catastrophe in the Gulf, a possible Energy bill in waiting and the increasingly global nature of clean technology. In addition to these market dynamics, there are significant movements in wind, solar, and the development of innovative business models.
As we enter the second half of 2010, it’s becoming clear that clean energy is shaping up to be the significant story of the year. We’ve already seen strong activity in this area on the M&A front. In fact, clean energy M&A volume in Q1 2010 reached $17.6 billion, the highest quarterly total ever. Driving this trend is United Technology’s 49.5% acquisition of Clipper Windpower, and Siemens’ purchase of Solel Solar Systems late last year.
As we look forward, we believe the following trends will shape the future of the clean energy landscape:
1. Continued acceleration of cross-border M&A (international companies buying U.S. companies)
An example of cross border activity is the acquisition of Atlanta-based Ventyx by ABB, a Swiss engineering firm. Ventyx specializes in the development of software for managing energy use across emerging smart grids, while also providing a range of analytical software for energy trading, risk management and mobile workforce management. Additionally, it has developed a number of software systems for the renewable energy industry designed to help developers forecast and manage power outputs.
This is one of many deals that marries the market knowledge, global reach and distribution of European companies with North American businesses that possess superior technology and products.
2. Continued emphasis on capital efficient business models
One thing we’ve learned from the past is that capital efficient business models win nearly every time. Take the solar industry. In the copper-indium-gallium-selenide (CIGS) market, the first wave of companies had difficulty scaling up at a profitable price in commoditized markets like solar. As a result, these first generation business models simply didn’t work where the key to winning was determined by the company who could deliver energy at the lowest dollar per watt.
Now we are seeing the next wave of CIGS players entering the market. These companies are taking a refreshing new tact and developing capital efficient business models that don’t rely on huge capital outlays. The goal with this wave of companies is to achieve manufacturing scale at the lowest product cost possible using capital-efficient models that don’t involve billion dollar factories.
For example, Applied Quantum Technologies (AQT) has managed to get pretty far on a relatively modest sum, raising just under $15 million. In a short period of time, it has successfully produced CIGS materials at an NREL-validated efficiency of greater than 10 percent. It has taken other CIGS players several years to reach that milestone. AQT also recently announced a partnership with Intevac to provide manufacturing capacity for the production of their CIGS cells. Through the partnership, AQT is deploying a proprietary streamlined manufacturing process on Intevac’s manufacturing platforms with the goal of producing high-performance, low-cost CIGS thin-film PV cells.
Another notable deal was the $23.5 million investment by Khosla Ventures in EcoMotors. Unlike Tesla, which will need to raise hundreds of millions of dollars (if not billions) to support its business model of manufacturing the cars it designs, EcoMotors will license its technology to existing car companies. This is a much more capital efficient business model.
3. Vertical integration of the wind and solar supply chain
Closing out 2009 was the Siemens AG acquisition of Israel-based receiver manufacturer, Solel Solar Systems. This demonstrated a trend we expect to see more of in 2010. The significant aspect of this partnership is that Siemens is integrating Solel’s technology into its solar projects. Vertical integration mitigates risk and can also reduce cost, which in turn makes it easier to finance projects. The commitment by Siemens to the concentrated solar power industry is helping drive the market forward. When global giants enter an emerging market like renewable energy, it’s great validation and credibility for the industry as a whole.
4. Continued movement away from early stage opportunities
Late stage companies with innovative approaches in traditional, established clean energy markets will continue to succeed. We see great opportunity for compelling late-stage clean energy companies with proven technology, strong customer acceptance, resourceful management teams, and capital-efficient business models. Clean tech venture capital investments in Q2 2010 totaled $1.5 billion, which was the highest number since Q3 2008. The amount of venture capital dollars invested in 2010 was up 64% in dollar terms compared to Q2 2009 but the number of deals was only up 4%. This highlights the trend of investors looking to put larger amounts of capital into later-stage companies.
In closing, the second half of 2010 appears to be as promising, if not more, than previous months. The clean tech market is clearly readjusting to the new realities of limited capital and a reduced risk appetite among investors. The companies that we see being financed are more capital efficient, have a lower risk and likely a better chance to succeed than many of the companies financed in the 2007-2009 timeframe.
Michael Butler is Chairman and CEO of Cascadia Capital, a Seattle-based boutique investment bank that serves domestic and global clients. Cascadia focuses on growth companies in the areas of Sustainable Industries, Information Technology, and Middle Market.