This year, venture capital firm, Lightspeed, has invested across several cleantech areas like solar (Stion), biofuels (LS9, Solazyme), clean coal (Coaltek), LED lighting (Exclara) and energy storage (Mobius Power).
1. Cleantech funding will slow significantly, forcing startups to seek alternative growth strategies
The level of cleantech VC investment reached its highest levels ever in recent years. With the market downturn, however, many of the key players in the recent wave — private equity funds, hedge funds, project financiers and debt providers — have slowed or halted their funding pace, and the IPO window is effectively closed. VC firms will continue to invest, but at a more modest pace.
As a result, we expect many startups to delay their timing for achieving commercial production. Startups will need to rethink their scale-up strategies and sacrifice growth in favor of reaching breakeven earlier. Hardest hit will be the companies that need to make significant capital expenditures to prepare for commercialization, but still have substantial technology and scale-up risk.
As companies find it more difficult to attract funding and drive down costs, expect some to seek more creative solutions. For example, biofuel startups will increasingly leverage underutilized production assets owned by distressed corn ethanol companies for commercial production capability. Meanwhile, expect large, established energy enterprises to play an increasingly vital role in helping to support startups as a development partner, funding source, customer, distribution partner or acquirer.
2. Companies will come under increased pressure to achieve competitive cost economics
With oil and energy prices falling significantly from last summer’s historical peaks, cleantech startups have stiffer requirements for the cost economics needed to compete with traditional energy sources. Companies with technologies that enable disruptive cost economics and can target higher-value market segments will be best positioned to stay competitive. For example, biofuel companies that can produce higher-value specialty chemicals can thrive even with oil at US $40 per barrel. In solar, even with polysilicon prices falling due to the impending supply glut, high-efficiency thin-film solar panel providers will have the potential to exploit an intrinsic cost advantage. Conversely, companies that do not provide compelling cost economics will find it tough to contend.
The downturn has also made consumers and enterprises increasingly price sensitive and less willing to choose products at a price premium for the sake of “going green.” As such, sustainability-oriented green building products without an inherent cost advantage will be a tougher sell with more cost-conscious building owners.
3. Investor interest in energy storage, especially for automotive and grid-scale applications, to grow strongly
VCs will continue to invest in areas with large market opportunities, significant headroom for innovation, and more capital-efficient expansion models. We expect energy storage to be one of these areas. In the automotive sector, batteries with improved safety, performance, and cost parameters will be crucial to the broader adoption of electric vehicles (EV’s) and plug-in hybrid electric vehicles (PHEV’s). In the utility sector, the dramatic increase in distributed generation expected in the next decade from wind, solar, geothermal, and other sources will continue to adversely impact grid stability. We believe that economical grid-scale storage will be a critical part of the solution.
4. Government will play larger role in cleantech, as policymakers around the country increase their support
With passage of the solar investment tax credit and the Obama Administration’s stated support for a US $100B+ energy plan, we expect the seeds of key U.S. energy policies for the next decade being planted in 2009. Although policy enactment may not happen in the coming year, expect topics like carbon cap-and-trade/taxation, national Renewable Portfolio Standards (RPS) and Renewable Fuel Standards (RFS), biofuel incentives, EV infrastructure, and grid-scale storage to be hotly debated.
We expect that the federal government will move to formalize a venture capital-like arm to invest in promising cleantech startups, with particular emphasis on commercialization as opposed to research & development. State governments will continue to drive cleantech policy, with more states establishing or tightening RPS and RFS, reducing permitting requirements involved in consumer renewables adoption, and offering tax breaks for startups.
Importantly, policymakers at all levels will continue to consult the private sector to understand benefits and risks of emerging technologies that could benefit from regulatory support to avoid legislation that could potentially be detrimental to the cause (see Lightspeed’s presentation to California’s Lt. Governor and the Commission for Economic Development).
5. Cleantech comes of age in China
During the middle of last year, China passed the U.S. as the world’s largest producer of greenhouse gas emissions (GHG). 300 million people in the country have no access to potable drinking water; over a million people each year die from air pollution-related disorders, with new coal-fired plants going into operation on a weekly basis.
The Chinese government has put its might behind increased support for cleantech, enabling viable technologies to achieve distribution more rapidly. After the Olympics ended, the national leadership passed the Circular Economy Law to stimulate cleantech spending through energy efficiency, water conservation, and tighter regulation of GHG emissions. Further, the government has committed to a renewable energy budget of ~US $300 billion over the next 12 years, a ~15% renewables target by 2020, and a ~US $200 billion environmental protection budget through 2010.
VCs have already responded to this building momentum, as local investment in cleantech rose from US $550 million last year to an expected US $720 million this year, according to Cleantech China Research. Sectors that look poised to attract VC investor attention in 2009 include wind, clean coal, waste-to-fuel technologies, and energy-efficient building materials.
Peter Nieh is Managing Director and a founder of Lightspeed, covering the areas of cleantech, software and the Internet. He has twelve years of venture capital experience and seven years of operating experience. Prior to Lightspeed, Peter worked in business development and product marketing at General Magic, a startup that before the emergence of the Web pioneered the development of e-commerce and electronic media services by partnering with the world’s largest telecommunications service providers and consumer electronics companies. He also managed Acer’s portable PC business in North America, where he launched the company’s first laptop and notebook PCs. Before Acer, Peter was a strategy consultant at Bain & Company where he worked predominately with high-technology clients on product, sales and distribution strategies. While an undergraduate at Stanford, he worked at Apple Computer, where he helped to develop the power management system for Apple’s first portable computer.