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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.

A Holy Moly Gutsy Week in Cleantech

Reading cleantech news and SEC filings this last couple of weeks makes for a holy moly OMG damn that takes guts set of moments. Well, the cleantech sector is nothing if not entertaining.  I’m obviously going to have to up my game and find more entertaining deals.

 

Total buys controlling stake in Sunpower. Sunpower was certainly a pioneer, and really kicked off vertical integration in photovoltaics with its acquisition of Powerlight in 2006. $2.3 Billion equity valuation? 46% share price acquisition premium? Wow. No guts, no glory. But at something like a little south of a PE of 30 on the 2011 earnings guidance as well as 2011 year over year revenue growth forecast of close to 30%, probably not too far out of line. And they didn’t even have to buy the whole thing!

Sunpower has had a hell of a run, but basically every solar analyst on the planet has been crowing that its core strategic advantages have seriously eroded. And maybe they have. We shall see. But growth is growth, and high performance panels are high performance panels. With another $1 billion in letter of credit from Total to backstop it, I think this is a gutsy, but strong move. If I’m Sunpower, I needed to do something. And with my stock price at not much over 10% of my high? This is a deal I’ll take. And if I’m Total, buy control of Sunpower for a 7th of it’s price peak and a PEG of around 1 to get a Tier 1 position in solar and stacks of growth potential I can pour cash into? Or build another offshore platform? Hmmmmmmh. I think I’d actually like the solar play this time. And take the margin risk.

 

KiOR files for IPO. Um, wow. Fascinating technology, though still a lot of scale-up to be done. We know for sure that Vinod Khosla has a cast iron stomach and more guts than me. I read the S-1 cover to cover last night. S-1s are notoriously messy reading and tricky to decipher how the venture rounds were done, but here’s what it looks like at first read:

July 07 Khosla invests $2.5 mm in a milestone deal of $1.4 and $1.1 for c. 50% of the stock excl option plan, a c. $2.5-3 mm pre money/ $5-6 mm post.  Great, nice cheap deal.
Mid 08 Artis (who was also heavy into Solyndra) and Alberta Investment pump in another c. $12 mm for c. 55% excl option plan, about a 1x uptick c. $10-12 mm pre-money.  CEO comes in here.  Price and capital in still within normalcy, but rolling almost as fast as we did our Zenergy deal in superconductors a few years back. But then it gets really gutsy.
Aug 09 Khosla $15 mm bridges a conv note, and gets paid handsomely when in
mid 2010 Khosla puts in another $80-90 mm in addition to the prior Convertible note for 35% of the Company, but all of the voting control.

Somewhere in there the state of Mississippi gives them $75 mm in no interest loans kicking in this last quarter (which sounds like it goes into default if KiOR doesn’t invest $500 mm into the state of Mississppi by 2015).

They then file for an IPO with Credit Suisse, UBS, and Goldman. All with like just a 15 barrel of oil equivalent per day pilot plant, planning to scale to a still miniscule 800 BOEPD with the couple of hundred million dollar investment from Mississippi and Khosla.

This isn’t just Khosla priming the pump and dumping on the rest of the venture world.  This is money where your mouth is.  This is make ’em pay to play style Texas Hold’em.  Pushing all in on a pair of queens with a straight flush showing on the flop.  Figuring pot odds be damned, the pair of queens is worth a shot if we can push half the table in with us, and we’ll just buy back in and do it again  if it doesn’t work out.  Damn. No guts no glory.

 

And of course, for BrightSource, one IPO filing and more “tortoise troubles”. Basically the regulators now think there are more endangered desert tortoises getting moved or killed than they had permitted Brightsource at Ivanpah.   The week after you file for an IPO and Google gives you money? 😉

And phase II and III are on ice or partial ice. I asked my wife how exactly it happens that they miss this badly on the number of tortoises (she’s been doing environmental risk assessments in the SoCal desert her whole career).  Her answer, usually means somebody on one side or the other doesn’t understand statistics.

This is already a very tight deal. And I was never sure exactly what a measely $250 mm in IPO money was going to do to help, when each project costs $2 billion, and takes fifty to a hundred million and years to develop. I’m thinking they need some real Total style money in this one to win.  But at this time in my reading, I’m beginning to think I have no guts.

Time to think about upping my game again.  My partners will be glad to hear that.  They think I’ve gotten a little risk averse.