From our standpoint at Kachan & Co., 2011 could be a strong
year for the global clean technology sector. Seemingly, the markets
have been correcting themselves in 2010; valuations are returning
to rational P/E multiples, price signals are emerging again after
massive government investment in cleantech, early stage deals seem
to be returning, corporate investment is flowing, new funds are
being announced everywhere.
Outside the U.S., which is having an increasingly hard time
supporting the sector, cleantech is alive and well, even in exits…
albeit mostly in China.
While we’re calling a positive 2011 for the industry, the
largest risk, to cleantech and every sector in 2011, will continue
to be the spectre of another global economic slide: another massive
economic “stair-step” downwards prompted by the continued and
growing mismatch between global energy supply and demand, food
supply and demand, ever-increasing debt and trade deficits,
currency revaluation or political/military developments. Any one,
or combination of these, could result in another 2008-scale
financial crisis, or worse.
Yet, if none of the above make themselves felt, 2011 could be a
solid year for worldwide cleantech. Here’s why, in our
analysis.
1. Sustained worldwide VC
investment in cleantech in 2011
Predictions of cleantech’s death, or bubble, are
exaggerated, we believe. Kleiner Perkins may be
target=”_blank”>looking to scale back its cleantech
investing. But that doesn’t mean cleantech companies
won’t be getting funded, or that the sector is on the
target=”_blank”>downside of a bubble, as some have
called it. The big drivers of cleantech remain: resource scarcity
and the drive for greater efficiencies, the desire for energy
independence, and (dare we say it?) climate change-the latter
of which has taken a back seat of late. We predict these
drivers-particularly the real or perceived scarcity around oil,
rare earth elements and other commodities-will be felt even more
acutely in 2011, especially as the Chinese middle class expands,
further cementing the demand for and the market validity of clean
technologies.
Much media attention was given to a downturn in cleantech
investing in the third quarter of this year, in particular
target=”_blank”>North America’s share of it. But
doomsayers missed that there was still a fourth quarter in 2010 to
report. And that worldwide, cleantech investment hasn’t fared that
poorly in 2010. Indeed, as tracked below, 2010 venture investment
in cleantech, even simply up to and including 3Q10, has already
exceeded that of all of 2009.
Venture investment in cleantech in 2010, up to and including
3Q10, already exceeded that of all of 2009. The full 2010 total
will be at least $1B higher when fully tallied and reported in
2011. That’ll make it the second best year on record-hardly a
bubble that’s burst. Source: Cleantech Group
We believe venture investors will continue to chase
opportunities in cleantech in 2011, investing robust amounts from
record-level funds raised recently around the planet. Make no
mistake: there’s plenty of capital being allocated for cleantech in
2011. Another $500 million has
target=”_blank”>just been announced from the
California Public Employees Retirement System (CalPERS). Hony
Capital in China is closing in on
target=”_blank”>a new 10 billion RMB ($1.5 billion)
fund, and there’s a new €9b ($12.4b)
fund for cleantech in the EU. And that’s just three of
dozens announced in the last month.
Yes, there are concerns about exits and long time horizons in
cleantech, but the sheer sizes of the addressable markets many
cleantech companies target, and the possibilities for massive
associated returns, will continue to draw investors to the
sector.
2. Venture capital will
continue to cede importance to corporate and non-institutional
capital
As important as venture numbers are, they are no longer
the single barometer of the state of worldwide cleantech
investment. They don’t factor in most angel, project finance,
private equity, sovereign and other sources of capital that are now
making an impact in cleantech worldwide.
One of the most important sources to watch is corporate venture
funding. Look for large companies to invest billions in cleantech
in 2011. In recent weeks, Suez Environnement, affiliated with
GDF Suez, created a venture capital fund called Blue Orange to
invest primarily in waste management. GE invested
$200 million+ in a handful of cleantech companies under the
auspices of a competition. Corporations continue to form corporate
venturing arms, driven not just by returns, but by associated
corporate social responsibility (CSR) benefits.
Also anticipate an increase in corporate-led cleantech M&A
activity in 2011, which reached record levels in 2010. Expect
cash-laden firms to pick off even more leading technologies and
concepts, as in recent transactions like
target=”_blank”>Constellation buying CPower,
and
target=”_blank”>Sharp’s purchase of Recurrent
Energy.
3. A return to early stage
venture investments
We predict a return to early stage venture capital investing in
cleantech in 2011. Already, in the last few months of 2010, data
shows the pendulum has begun to swing back to early stage deals. In
the third quarter of 2010, 46 percent of all cleantech deals
worldwide were early stage deals, according to
target=”_blank”>latest data.
Why? Investors are no longer piggybacking on U.S. government
grants and loan guarantees, which had skewed investment into more
mature cleantech companies. Government stimulus funds earmarked for
cleantech by the U.S. and other countries globally are now largely
allocated. In 2011, venture investment in cleantech will
return to what it does best: seeking out emerging early stage
technologies and teams that promise good multiples, and will be
less influenced by governments putting large amounts of capital to
work themselves. Funds are still being raised. And those funds
will need to be invested.
4. Energy efficiency
emerges as the clear rock star of cleantech
Yes, we have a broader definition of energy efficiency than others
(see our cleantech taxonomy
target=”_self”>here). But efficiency-including
smart grid, where we expect continued massive investment and
corporate activity-really just got underway in 2010, so expect big
things in 2011. To wit: GE’s huge announcements, investments and
acquisitions in the third quarter of 2010. And just over a month
ago, Russia unveiled a
target=”_blank”>massive energy efficiency plan,
given that the country apparently wastes as much energy in a
year as the French economy consumes.
There were some calendar quarters in 2010 where more venture
investment went into solar than efficiency, but in 2011, look for
efficiency to become the clear dominant investment theme as
investors continue to seek less capital intensive efficiency plays
and eschew solar, where company valuations have been swinging
wildly in 2010 from continued supply/demand and international
subsidy havoc.
Anticipate a Darwinian winnowing of efficiency companies in
2011-partially because of concerns about differentiation, and
partly because of the long sales cycles of utilities that are only
starting to become appreciated to some startups. There will be
failures in 2011 in certain advanced metering companies and other
firms engaged in death-by-trials with utilities, and some
winners among favorite brands like OPower, EnergyHub, Tendril,
Silver Spring, eMeter, AlertMe, Energate. The deep-pocketed stand
the best chance of surviving.
5. Biofuel investment could
reach former highs
If economic growth continues in 2011, oil prices will rise, making
renewables more cost competitive. And after several years of
relatively inexpensive oil, we predict an upswing in biofuels
investment in 2011, specifically, that will catch some unaware;
investors still smarting from crop-based ethanol and biodiesel,
cellulosic ethanol and algal oil disappointments may not see a
target=”_blank”>drop-in biofuels revolution at
hand.
The excitement will not be over cellulosic ethanol, which we saw
disappear from headlines in 2010. Cellulosic ethanol may even
disappear from investors’ portfolios altogether in 2011, if the
U.S. EPA
target=”_blank”>lowers its cellulosic ethanol
mandates yet again. We believe the recent jump in
the share price of Amyris (NASDAQ:
target=”_blank”>AMRS) is representative of a
larger awakening to the transportation, storage, energy balance and
fungibility benefits of drop-in biofuels, i.e. chemically similar
diesel, jet fuel, butanol, bio natural gas and others.
In biofuels in 2011, as elsewhere in cleantech, look for biology
to trump chemistry. And for the likes of Amyris, Codexis (NADAQ:
target=”_blank”>CDXS) and Gevo to make more
commercial progress than cellulosic companies Range Fuels, Coskata
and Mascoma.
6. Nuclear surprises, but
not in U.S.
Expect to hear about more and more nuclear innovation in 2011, as
the industry begins cautiously testing new science after decades of
relative inactivity. However, don’t expect the U.S. to lead in
either the science, the trials or the adoption: watch Asia, Europe
and Canada as centers of innovation and where trials of new nuclear
tech will be performed in 2011. Companies to watch include Thorenco
(new reactor designs based on thorium fuel), Thorium One (thorium
fuel for existing reactors, trials scheduled to start in existing
reactors in 2011), Kurion (glass encasing of nuclear waste),
General Fusion and others. Nuclear development will remain stalled
in the U.S. in 2011 in regulatory and public opinion purgatory
while the rest of the world passes it by.
7. Recycling and mining
will attract more investment
Rising commodity prices have been quietly making the economics of
recycling and recovery of trace materials more commercially viable.
Silver almost tripled in price in 2010. Gold doubled. Companies
that recover and reprocess materials, such as scrap metal, used
lithium batteries or mining tailings, will be companies to watch in
2011. BacTech Mining (CVE:
target=”_blank”>BM), Simbol Materials, Buss &
Buss Spezialmetalle, DeMetai Technologies, MBA Polymers
and GFL Waste & Recycling (which just got a
target=”_blank”>$100m private equity
infusion) are examples of companies that could
benefit from commodity prices that will continue to rise in 2011.
That’s barring a macro-economic downturn that, like everything
else, whacks the price of commodities (gold bugs note: metals are
not immune to market gyrations! Gold fell substantially in the 2008
global downturn).
8. Natural gas emerges to
threaten solar and wind for utility renewable power
generation
Renewable natural gas? Today it’s fossil-based. But what if
chemically identical natural gas (not just messy syngas) could be
made inexpensively from practically free feedstock? Such gas, if
indistinguishable from petro-based natural gas, could be
transported in existing pipelines and sold at a premium to
industrial customers like power utilities anxious for a cheaper
renewable source than solar and wind. And, if burned in existing
IGCC / NGCC plants, such power could be baseload 24/7 renewable
energy. Look for scientific innovation in natural gas in 2011,
increased political support for it as a transitional “cleaner”
fuel, a folding in of it into renewable energy standards and
general cleantech industry buzz over it being an important new
wagon to hitch to.
9. China becomes the most
important market for cleantech: if you’re not selling in China, you
won’t matter
Expect the leading cleantech IPOs of 2011 to continue to
be on the Shenzhen and Hong Kong exchanges, as they were in 2010.
Central government support of Chinese clean technology companies on
Chinese exchanges will continue to give the country’s solar, wind
and other vendors advantage in access to capital, growth and,
therefore, ability to scale and conquer worldwide.
Kachan & Co. made a case
target=”_self”>this past August that China had
assumed the worldwide leadership position as a cleantech market and
supplier. This week,
target=”_blank”>Ernst and Young asserted the same
thing. So it’s time to underscore it again: if you’re not
selling into China in 2011, you’re missing the biggest market for
your clean technology product or service.
in 2011, the leadership of cleantech vendors and service
providers will be determined by the extent of their traction in
China. It’s the largest and the fastest growing
market for clean technologies, and to ignore it out of concern for
intellectual property or other costs of doing business will be to
watch most of one’s addressable worldwide market disappear to
competitors that willshoulder the costs of business
in China.
We’d welcome rhetoric in 2011 being less about how countries
could or should compete with China’s cleantech leadership, and more
focus on how to simply get on with capitalizing on the commercial
opportunity that Chinese growth represents. While there’s still a
worldwide financial system to profit from.
[
target=”_blank”>Reposted with permission by the author.] A
former managing director of the Cleantech Group, Dallas Kachan is
now managing partner of target=”_blank” title=”kachan cleantech”>Kachan &
Co., a cleantech research and advisory firm that does
business worldwide from San Francisco, Toronto and Vancouver. Its
staff have been covering, publishing about and helping propel clean
technology since 2006. Kachan & Co. offers
title=”cleantech research”>cleantech research reports,
consulting and other services that help accelerate its
clients’ success in clean technology. Details at
title=”Kachan cleantech”>www.kachan.com.
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