Posts

What’s Changed in Cleantech Investing? Two things: Economics and Returns

I’ve been investing in cleantech since 2001, founded a bunch of startups, and have a good stack of exits to my name across every cleantech investing wave. In fact my last 4 investments have all exited. Not sure I’ll ever be able to say that again. And renewable power is cheaper than fossil. It’s fun to be able to say that now with a straight face.

Reflecting back, while a lot has changed, much has stayed the same. What has fundamentally changed are improved economics, and massively increased sizes of capital, exits, and returns, besides the obvious climate and policy pushes behind the energy transition. What hasn’t, is mispricing of risk. But hey, that’s what being a venture investor is all about, right?

Economics

Unlike a dozen years ago, when investing in cleantech was all about policy and we called it alternative energy because renewables were fundamentally more expensive than fossil: today it’s cheaper to build a renewable power plant than it is to even run a fossil fuel power plant. Policy frameworks are less the driver than energy economics. A decade ago policy frameworks were still a crucial minimum condition. Lazard research has been reporting for a while that in the US the average cost of solar and wind was cheaper than just the marginal cost of coal and gas generation. And shows energy storage within striking distance of peaking power plants at scale. If you haven’t read the Lazard report, it’s a must read. And in a great article on emerging markets, long a hard place for renewables to outcompete cheap coal, Bloomberg just noted solar is cheaper than coal in India.  Collapsing costs primarily in batteries and solar, have fundamentally and likely permanently altered the underlying economics of the key technologies in favor of cleantech and energy transition companies. This isn’t going away even if you think the policy frameworks are. And yes, on an unsubsidized basis.

Venture Returns – Is anyone making money?

The other change is increased raw size of markets, exits and returns.  A decade ago, returns in cleantech for venture funds still looked dicey, and while money was being made, the exist smaller, successes were much narrower, especially for mainstream venture funds who struggled to port their investment models from IT to cleantech. And I actually know a few funds from the early days that literally returned zero. Not just zero profits like 1x capital. Like awfully close to absolute 0x capital.  And for much of the last decade the private company unicorn phenomenon that drove a huge chunk of venture returns largely skipped cleantech deals, with only a handful of unicorns (C3 Energy as a rare example one of the few on the unicorn list for quite a while). In fact most of the key IPO and M&A exits were well in the <$1 Bil level – and the valley investor’s funds largely struggled with the sector. And aftermarket performance of cleantech IPOs in the pre 2010 timeframe was also choppy, even a rockstar company like First Solar is still 75% off its 2008 high (even though it’s at $92/sh vs the 2006 IPO of $20).

The returns improved in the succeeding 5 years. I was asked by one of my colleagues at Shell in 2015 what the best cleantech venture backed exits were. At the time, it was the Tesla IPO ($226 mm raised /$1.6 Bil IPO 2010), 60% Acq of Sunpower/Total ($1.4 Bil 2011), and Nest/Google ($3.2 Bil 2014), with a couple of dozen solid return venture backed exits mainly in the $50mm to $500 mm range.  Including a few nice IPOs like Sunrun ($251 mm raised/$1.36 Bil IPO 2015), OPower ($116 mm raised/$1 Bil IPO 2014), Silver Spring ($81 mm raised/$750 mm IPO 2013) and a few others. There were good exits, and plenty of money getting made for disciplined investors, but soon crowded out by other venture markets. However capital returns in cleantech in the last decade have not looked back, with a fatter tail post exit for long term holders than often in the early exit, and recent dramatically rising exit values.

Turns out that was just the beginning.  My favorite example now when asked did VCs make money in cleantech in the first wave? That single 2004 vintage venture backed deal and 2010 IPO, Tesla Motors, currently at $675 Bil in Market Cap, has alone carried insane venture like returns even if calculated on all the capital invested by the entire cleantech venture capital sector over its entire history, ignoring every other exit. 

Risk

The latest exit trend du jour is of course SPAC heaven, and while we all know this is likely to end rather badly, they have driven significant venture exits and returns, perhaps at the risk of poor aftermarket performance. But all is not forlorn, many of even the early IPO wins like Tesla, Sunrun and Enphase have literally seen venture like multi X growth and returns post listing – were investors to hold on.  And that’s likely to happen again – for the good companies. I had a great chat with an old friend Ira Ehrenpreis, an early Tesla investor, the other day on this very topic of when to hold and when to sell. Ira put his money where his mouth was and held Tesla. In that case it was definitely the right call – and not one I would have made as I’d likely have taken those awesome profits at or around the IPO in his shoes. Holding would also have been the right call with Sunrun and Enphase, which didn’t hit their stride until well post IPO, but not Opower, which peaked near its IPO at just under a billion, and was acquired by Oracle for about half of that a bit later. Will it be for the army of cleantech SPAC deals that don’t yet have product or revenue?

But what about non tech assets? When we turn to the global asset scale the numbers get just even more mind numbingly large. Just consider the global wind and solar asset investments which have been averaging just under a $1 Trillion every 36 months, at a relentlessly increasing MW/$. The industry is now up to the entire annual GDP of Germany spent on renewables generation globally in aggregate, and adding at the rate of one Philippines or Pakistan GDP every year, or one Italy every 3 years. Put in energy $ terms, annual renewables investment is already at about 2/3rds of the world’s annual E&P investment in oil & gas, and total renewables assets are now equal to total assets in BP, Chevron, ExxonMobil, Shell, Total, plus the top 10 national oil companies combined, and adding at the rate of a new major oil company by assets about every 365 days. And see paragraph above, power from those renewables is cheaper per kwh than the power from those fossil assets. Put in Silicon Valley terms, global renewables power generation alone, not technology, or anything else in cleantech, is adding just in assets the equivalent to the aggregate market cap of 100 average new tech unicorns each year.

These investments and exits and returns are not just PPP (“Paris, Policy, and Prayer”). And they have driven new corporate and financial investors into the sector.  Amazon for $2 Bil here, Bill Gates for a Billion there, Chevron, Shell, Aramco, etc for a few hundred million each in venture, and finally you’re looking at real money. Check out the fun WSJ article SPAC Demand to Draw VCs to Cleantech, for another take.  While writing this, two more, Quanergy and Embark, just announced in the last week. The returns aren’t just SPAC fodder of course. Solar products and services company Shoals Technologies, a 2021 IPO, and the most recent clean energy unicorn Aurora Solar, providing software to the industry, highlight the growing strength outside of SPACs.

However, like in the 2005-2010 time frame, risk is again getting mispriced by investors on a grand scale. That time it was thin film solar and cellulosic biofuels, and this time again SPACs are our perfect whipping post. Cases in point include Lordstown Motors, following on the Nikola debacle. Here are my favorite Lordstown articles:

Lordstown Motors warns investors it may go out of business – CNN.

Lordstown president dumped his stock to reportedly expand his turkey hunting farm – Yahoo! Finance

Watch the CEO on Jim Cramer discussing all his “orders”, and then Squawkbox discussing the meltdown, Jim Cramer discussing “where’d the orders go and I can’t help you anymore“.

Does anyone really want to bet against a sea change in mobility? Probably not. But did anyone not see the Nikola and Lordstown implosion coming? Anyone? And yet they are still at $7 Bil and $2 Bil market caps. Which would rank somewhere pretty high on the list of the top cleantech exits of all time up until like 24 months ago. A quote from an investor friend, “I know we should short it, but who really wants to take that risk?” I’ll let you decide whether the risk in those two are still mispriced…

This also highlights that no one in cleantech talks about the valley of death in cleantech financing anymore. A huge topic at every conference a dozen years ago. Good, and even no so great companies have access to later stage, corporate, and public capital that wasn’t visible a decade ago. Opening of course, the need for someone to fund some early stage companies to grow up and sell to the rest of the SPACs, right?

But bottom line, this is not 2008. It’s 2021, and the hype may be back, but the things that really matter in cleantech investing are very, very different.

Book Review: Private Empire

After having extensively tackled the topic of al-Qaida with The Bin Ladens and Ghost Wars, Steve Coll has turned his attention to ExxonMobil (NYSE: XOM)

At first blush, this might seem like a dramatic thematic departure for Coll as a journalist and author.  However, Coll’s newest work, Private Empire:  ExxonMobil and American Power, makes clear that the world’s largest corporation is roughly as powerful a force on the global geopolitical stage as the world’s most dangerous terrorist network.  And, not only powerful, but also sometimes working against the interests of the United States and its citizens. 

Private Empire begins with a recap of the 1989 Exxon Valdez accident and ends with the 2010 BP Deepwater Horizon accident, these two spills reflecting the hubris that widely prevails within Big Oil and the gap between the perceived and actual ability to prevent or at minimum contain such disasters. 

In between, Private Empire explores the cultural norms of ExxonMobil, its activities in U.S. policy circles (especially in sowing climate change denial), and its various dealings with bad actors around the world (e.g., Indonesia, Chad, Equatorial Guinea, Russia, Venezuela, Iraq) to obtain access to petroleum reserves.

Although definitive as a recent history of ExxonMobil, the book is far more than just a corporate biography.  It reveals the internal machinations of Big Oil and illustrates over and over how Big Oil needs to often stoop lowly into moral and ethical morasses in the relentless pursuit – a never-ending treadmill – of somehow replacing the oil and gas produced last year or else face inevitable decline.

One thing is abundantly clear:  as the largest remaining component of the former Standard Oil, ExxonMobil is most definitely the son of the father. 

Before being broken up into smaller pieces by anti-trust action in 1911, Standard Oil was ruthless in its rigor, professionalism and anti-sentimentality.  Everything and everyone not Standard Oil was an enemy to be conquered.  Strongly imprinted by the values of founder John D. Rockefeller, Standard Oil pursued one purpose – to maximize the wealth of its shareholders – fully cloaked in the belief that the company was doing God’s work in allowing Mankind to achieve higher standards of living.

ExxonMobil seems to operate in the same vein, and their leaders seem to follow closely in the footsteps of Rockefeller:  pious but cold, principled in their principles and no-one else’s. 

This was especially true of Lee Raymond, ExxonMobil’s CEO during most of the 1990s into the mid-2000s.  Raymond makes for an interesting villain:  someone with a few notable positive attributes (e.g., loyalty) that partially counterbalance his overt meanness. 

Notably, Raymond was convinced that everyone hated ExxonMobil and would always hate ExxonMobil no matter what.  As a result, Raymond didn’t have ExxonMobil undertake any proactive media or public relations strategies to soften the company’s image, as were more vigorously pursued by its fellow Big Oil brethren BP (NYSE: BP), Shell (LSE:  RDSA) and (to a lesser extent) Chevron (NYSE: CVX).  If the ExxonMobil empire was virtually-universally perceived as nasty, as long as it was respected and produced excellent financial results, that was fine with Raymond.

In the wake of Raymond, current CEO Rex Tillerson comes off much more favorably, with his Boy Scout earnestness and at least some willingness to engage productively with outside stakeholders.

Even with Tillerson’s less heavy-handed touch, the ExxonMobil playbook reveals itself again and again as domineering:  outlast and outspend the opposition, bend the truth and rules as much as possible, delay and litigate as needed.   It’s not a pretty picture.  Other oil companies no doubt act this way to some extent, but Coll makes the case compellingly that ExxonMobil is far and away the most extreme of the Big Oil club members.  Fully 100 years after the anti-trust dismemberment, resentment towards the government seems to still ooze from every pore and fiber of the ExxonMobil corporate body.

As you’d expect from the winner of a Pulitzer Prize, Coll is thorough in his reporting, and the writing is clear and energetic, effortlessly pulling the reader through the narrative.

One minor stylistic complaint:  the last seven pages of the book merit its own chapter, rather than being tacked onto the discussion of the Deepwater Horizon debacle.  Using Coll’s practice for naming chapters based on a juicy snippet of the text contained within, I would suggest that this denouement should be called “I Had To Do What Was Best For My Shareholders”.

This was a quote from Tillerson in 2011, when he revealed telephonically to U.S. State Department officials that ExxonMobil signed an agreement directly with the Kurds (not with the Iraqi government in Baghdad) to develop oil resources, against the explicit wishes of the Obama Administration.  With this anecdote and several others in the final pages, Coll ties up many of the loose threads he exposes in the prior 600 pages, and the cumulative effect makes for a sobering conclusion. 

Basically, Coll totals up all the ways in which ExxonMobil has won, at the expense of others who have lost.  In many cases, the loser was the United States itself. 

The subtitle of the book – ExxonMobil and American Power – is somewhat misleading, as it implies that the two subjects are on a similar footing.  Indeed, one can make the case that “American Power” (whatever that is, or whatever remains of it) is revealed by Coll to be in fact subservient to ExxonMobil.  When convenient, ExxonMobil benefited from the government’s service and support, and pressed upon both legislators and the executive branch for certain actions.  Otherwise, ExxonMobil went its own way, sometimes hostile to government (and often hostile to public) interests.

Perhaps in service of his role as President of the policy think-tank New America Foundation, Coll hints pretty clearly his sense that the “era of corporate ascendancy” — with ExxonMobil being a poster-child — is a significant negative force at work in the United States.  Mentioning the Citizens United decision as an example of the mechanics by which that force works, Coll asserts that ExxonMobil’s success “reflected in part the growing relative power of corporations in the American political and economic system.” 

The question that Private Empire ultimately poses the reader is whether ExxonMobil’s gargantuan success is a good thing overall – especially when considering who is losing, and why they might be losing.  This may be no more vividly illustrated than in the final paragraph of the book: 

“In 1999, the year that Exxon’s acquisition of Mobil closed, the federal government and the corporation each took in more money annually than was required to meet expenses.  Their paths then divided.  In an era of terrorism, expeditionary wars, and upheaval abroad, coupled with tax cutting and reckless financial speculation at home, one navigated confidently, while the other foundered.  From the day of the Mobil merger closing until the day of the S&P downgrade [of U.S. debt ratings in 2011], the net cash flow of the United States – receipts minus expenditures – was approximately negative $5.7 trillion.  ExxonMobil’s net cash flow from operations and asset sales during the same period was a positive $493 billion.”

It could be argued more broadly that the last decade has seen a massive wealth transfer from the U.S. taxpayer to its largest corporations (and its shareholders).  As Coll’s exhaustive and authoritative reporting suggests, nobody does it better than ExxonMobil.