Cleantech Investment Revs Up, But Where Are the Exits?

Fisker Automotive, developer of this electric sports car, called Karma, was one of the largest cleantech fundraisers in the first quarter of 2009. In spite of the recession, venture capitalists keep raising their bets on cleantech, according to the latest quarterly tallies the Cleantech Group consultancy released Wednesday. Investors in the first quarter of 2010 plunked down a total of $1.9 billion on a record 180 cleantech companies in North America, Europe, China and India, according to the group.

That's up 29% from the fourth quarter and 83% from the first quarter of last year. But investments are still down nearly 27% from the third quarter of 2008, the last quarter before the recession, when they reached a record $2.6 billion. Meanwhile, the number of deals in the latest quarter reached the highest ever, topping the 165 deals in the fourth quarter.

"The first three months of 2010 representing the strongest start to a year we have ever recorded," says Sheeraz Haji, Cleantech Group president, in a statement.

Overall, the announcement Wednesday spells good news for the cleantech industry. Not only have venture-capital investments grown, but big corporations also showed a strong appetite for greentech deals and investments in startups. Royal Dutch Shell, General Motors and Valero Energy (VLO) invested in biomass and wind projects. All together, direct corporate investments announced in the first quarter reached $2.7 billion, a 140% increase from the fourth quarter.

Cleantech venture capital grew in the first quarter of 2009, compared to the previous quarter, but falls short of the investment peak in the third quarter of 2008.

Transportation Accelerates

In venture capital, transportation technologies led the cleantech recovery, overtaking solar investments. The biggest drivers included a whopping $350 million fundraising by Better Place, which is creating a network of electric-vehicle battery charging and changing stations, and a $140 million round for electric sports-car startup Fisker Automotive. Those deals helped the transportation sector gather a total of $704 million in venture investment, by far the largest for any individual cleantech sector.

Energy-storage investments, which aren't included in the transportation totals, also grew in the first quarter, more than doubling to $110 million from $42 million in the fourth quarter. Aside from getting a boost from the transportation sector, investments in energy-storage technologies, such as batteries, are being driven by a belief that storage is a critical component to bringing more renewables online, Haji tells DailyFinance.

Solar investments, the second-largest cleantech investment category, remained fairly flat. Solar companies brought in $322 million in the first quarter, which represents growth from about $200 million in the fourth quarter, but a drop from $451 million in the third quarter. The large amounts of capital some of the technologies require kept solar investment near its recent lows, Haji says.

Solar Stays Low, Smart Grid Plunges

"There's a lot of disappointment in how much capital it's taken to get some of these technologies to scale," he says. "For some of these big bets, like BrightSource and a lot of other leaders [working to develop large solar projects], it's taken a whole lot of time to get to market because of land use – there's a big fight over the Mojave desert – and other issues." Investor enthusiasm for solar has also been dampened by the regulatory environment in Europe, Haji adds. Germany, the largest solar market, is getting ready to reduce its solar incentives and other markets are not expected to be able to pick up the slack.

If high capital requirements are a problem for solar, why are investors jumping on transportation? After all, many transportation technologies also require large amounts of capital. But transportation has a stronger pull with consumers and corporations, Haji says.

"People are watching exactly where Nissan's lease price is at," he says, referring to the company's pricing of its Leaf electric car this week. "There's anticipation that there's a market there, whereas in solar there are very different market dynamics." In other words, transportation is just cooler. Of course, that doesn't mean it might not eventually see overinvestment, and then a pullback, just like the solar sector did.

Meanwhile, energy-efficiency and smart-grid investments, which grew in the fourth quarter, saw declines in the first quarter. Energy-efficiency companies, which enable consumers to use less energy, raised $217, down 38% from more than $350 million in the fourth quarter, and smart-grid fundings plunged even more dramatically -- nearly 80% -- to just above $50 million in the first quarter from more than $250 million in the fourth.

Haji says he expects those sectors to pick up again. "Energy efficiency investments are proving to be faster to bring to market, are usually based on proven technologies, are less capital intensive, are net negative in carbon emissions and have virtually no land or water impact," he says. "Smart-grid investment, while down in a significant way [in the first quarter], is being driven by increased awareness of the fragility of today's power-distribution infrastructure," as well as interest from IT industry to expand into the power market.

Finding the Exits

One of the biggest questions in the recovery has been about IPOs: When are the exits coming? Because venture capitalists need public offerings and acquisitions in order to make money on their investments, the slow IPO market has had a big impact. Venture capitalists have had to reserve more money than they expected while waiting for their portfolio companies to exit.

It looked like IPOs were on the rebound last quarter, particularly in China, but that seems to have stopped short. IPOs fell to $1.5 billion in 13 offerings, down from $2.9 billion in 18 offerings in the fourth quarter. China accounted for most of those, with eight offerings, But three Chinese companies -- Jinko Solar, Trony Solar and Daqo New Energy Corp. -- recently backed out of their planned IPOs, citing weak market conditions.

Even though cleantech IPOs fell, they've actually made up a slightly larger portion of the overall IPO market so far this year, accounting for about 5% of the dollars raised and 7% of the number of deals, compared to just under 5% and over 2% last year, according to the Cleantech Group.

And in North America, exits are finally looking up. IPOs on the continent grew to $589 million from $280.8 million, while acquisitions grew to $8.7 billion from $2.6 billion. Still, those numbers are lower than some had predicted after the successful public offering of battery company A123Systems (AONE) in September, which sparked a flurry of companies registering to go public at the end of last year and the beginning of this year. So far, the increased filings haven't translated into the increased IPOs many had expected, according to the Cleantech Group.

Mark Jensen, a managing partner for Deloitte's U.S. venture-capital services group, says he expects to see IPOs come back this year. "It used to be awful. It's not awful any more," he says. "Companies are maturing nicely and getting ready to go public, and I think we're going to see an active IPO market throughout this year. Is it going to be like 2001? Absolutely not, but we will have a nice steady flow of IPOs this year." Once the first successful IPOs happen, others will follow, he adds.

Industry Still Holding Its Breath

But if that's the case, what's the holdup? After all, A123Systems already opened the door last year. Well, the overall market's still bouncing around, although it's smoothed out from the 200 and 300 point fluctuations of a couple of months ago, and companies want to be sure their shares perform well after their first day of trading, Jensen says. "The market's better, but like everyone else, we're holding our collective breath that we're going to get back on the road to solid recovery."

It's hard to predict how a new stock will do if the market's unstable, Jensen says, and cleantech companies have more to prove than other industries. "If you're going to live up to performance expectations as an industry, you're going to have to outperform," Jensen says. "If I come out with a cleantech stock with some added risk and it's really just performing as well as other stocks, it's not going to be a good harbinger of the industry -- it's going to have to outperform the market."

Raising the stakes even higher is the fact that cleantech stocks underperformed, compared to the Standard & Poor's 500, in the first quarter. The Cleantech Index (CTIUS) fell 2%, while the S&P 500 grew 4%, Haji says. That's a change from the fourth quarter, when cleantech stocks significantly outperformed the S&P 500.

And stock performance is going to be a strong factor in determining whether companies decide to go public, although individual companies' earnings will also play a big role, he says. "If more of these companies get profitable and have good quarters, their board of directors and executive teams will push them out," he says. "If they have soft [results], they will wait another quarter."

DailyFinance writer Alex Salkever contributed to this report.

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