It struck me the other day that I may have been looking at the recent spate of cleantech IPOs backwards. Perhaps instead of lamenting the dearth of profitable healthy companies going public on major exchanges in our sector, what we should be considering is whether early and still risky IPOs mean cleantech venture capitalists are finally finding a capital path and exit model that works, akin to the IT and biotech venture models that delivered such terrific returns up until the internet crash. And the question then is, can these IPOs continue, and perform and validate the broad strategy that our tech venture capital sector has been following in cleantech?
Our American institutional venture capital sector largely missed the cleantech AIM boom in Europe. Missed the Carbon trading boom in Europe and Asia. Missed the Chinese solar manufacturing boom. And missed the corn ethanol boom in the US, the wind project developer boom in the US and Europe, and the sugar cane ethanol boom in Brazil. Oh, and missed the shale gas boom in the US. Each of which were tens to hundred billion + dollar booms. All the money in those sectors was made largely by investors and players outside the traditional venture arena – though some exceptions in each prove the rule.
Instead the American venture capital and tech sector eschewed what proved to be a huge number of highly profitable investment areas in cleantech as “not venturable bets”, and has poured c. $15 -$20 billion + into thin film /advanced solar, cellulosic biofuels, solar finance, smart grid, automotive/energy storage technology. One cynical argument is that in a hubristic attempt to avoid the “low tech”, policy driven and capital intensive sectors in cleantech, our venture sector overreached into technology risk, and then once they found the policy risk and capital intensity waiting for them on the other side busily moving the bar, they started clamoring for M&A, IPOs, and government funding and policies to bail them out. In any case, the cleantech deals are hurting for a lot more cash and likely need early IPOs to make the sector viable long term, but the first generation of cleantech VCs have learned lots of lessons.
BUT, are we now on the cusp of a model capable of anchoring returns for these last few years of the 2nd and 3rd waves of cleantech venture capital investment anyway – a model perhaps described as 1) raise larger funds, 2) take more concentration early in technology risk curves, 3) stack on capital fast 4) take heavy leverage with government dollars, 5) IPO early leaving money on the table in terms of tech boom style multiples, but leaving a lot of technology and scale up risk for the public markets. Time will tell.
Critical to this model would be 1) the aftermarket performance of the the first wave of these IPOs, and 2) willingness of policy makers to continue to fund. So a quick look at the Big 4 of US venture backed cleantech IPOs to date hopefully tells us something. Excluding for this analysis earlier US cleantech powerhouse deals SunPower and First Solar, which came up a different financing paths and well before the policy and FIT booms that drove most of the first generation of solar profits.
A123 – Went IPO on the back of having neat batteries for EVs. Still losing money.
Amyris – Not sure what it went IPO on. Still losing money.
Codexis – Went IPO on the back of a strong R&D partnership and contract with Shell. Still losing money.
Tesla – Went IPO without the product it needs to breakeven built on the back of DOE money and car sex appeal. Still losing money.
Aftermarket performance, key to the actual returns of the LPs who usually aren’t out at the IPO and even more critical to willingness of the public markets to underwrite more deals, hasn’t been awful. Three of the four doubled from the IPO price before peaking and giving back one to three quarters of value from their peak. Two of them are still above listing, mean 90 day post IPO performance is a positive 27%, only one struggled to see a strong pop, and the mean performance to date since IPO price is+9%.
Of course, the largest, most mature, and earliest bellwhether, A123, has been on a long slow slide. Meaning overall dollar weighted average performance would be a -6%. And 90 day performance is only 3% with performance to date a -8% if calculated on the 1st day close not the IPO price, meaning it may be more underwriters managing issuance price than true aftermarket performance. If benchmarked against the S&P 500, foreign cleantech IPOs and other non cleantech US IPOs it might not look so good. But time will tell.
Will these first Big 4 hold out for solid returns, or slide like A123? What portion of their businesses will get built and eventually become profitable? Will they be able to raise more capital? Will the next crop of rumored and planned cleantech venture backed IPO candidates from BrightSource to KiOR to Silver Spring to Opower to Bloom Energy make it through? How much cash will they need before they do/what kinds of aggregate cash on cash returns multiples will we see, and will they too hold up when the public markets are asked to support billions of capital into dozens of these deals needed to anchor the cleantech venture sector?