'Tis the season for nor'easters, new year's resolutions, and venture capital prognostications. All three, basically snow jobs.
2010 wasn't a good year for many cleantech venture capitalists. I think 2011 will be better… for some. Here's what I wrote about my 2010 predictions in retrospect. And here are some of my predictions for 2011:
1. The cleantech venture capital shakeout will become more obvious
I haven't seen too much written about this by those outside the industry, mostly because it's been pretty quietly done. But as we've talked about here before, there's been an exodus of investors out of the sector lately. To date, it's been mostly individuals — either individual VCs leaving their firms, or the "cleantech guy" at diversified firms now being redirected back out of cleantech investing into other sectors. But wearing my limited partner hat, I'm seeing a whole lot of cleantech-specific firms out there or getting ready to go out there and raise new funds. And I just don't think the LP community will be able to support all of them. The big institutional LPs have been shifting away from venture capital as an asset class, and they've become more tepid about cleantech. 2010 saw a stop of any new cleantech venture firms; 2011 will see the shakeout of existing cleantech venture firms. Certainly there are a good number of cleantech-specific funds that previously had been able to raise funds simply on the basis of being cleantech specialists, but who now will be competing against each other for increasingly scarce LP dollars. And (often because of the overall VC category performance, and the lack of VC exits overall over the past decade) many won't have an advantaged track record, and won't have a really differentiated pitch versus their peers. I think it'll be lean times for many of those funds. The firms won't go away, but there may be more obvious slimming of staff as operating budgets go down and the lack of dry powder makes it less necessary to keep staff on. The good news is, given the continued need for experienced senior management at cleantech venture-backed firms, I think a lot of this will be VCs leaving to take operating roles. The other good news is that I think things will continue to get gradually better for cleantech venture fundraising…
2. 2011 will be the "Year of Energy Storage"
I predicted 2010 would be the Year of Energy Efficiency, and I think I was pretty much right (for once). This year, based upon the conversations I've been having with fellow cleantech VCs, I think it'll be the year for energy storage. By which I mean battery and ultracap technology, and large-format energy storage for grid-scale purposes. I continue to see lots of very interesting basic innovation going on, and some interestingly pragmatic attempts to productize some previously "exotic" approaches. I hear VCs harping on the problems the grid faces from intermittent renewables; the need for energy storage inside the meter for grid-tied and backup power purposes; and the continued VC love affair with electric vehicles and electronic devices. All of which need innovations in energy storage. This doesn't mean I'm predicting a lot of very capital-intensive bets on brand new chemistries and entirely new battery formats. Certainly, there will be a fair bit of that, but I'm also seeing a lot of interesting "chemistry-agnostic" approaches to building the systems implementing these applications, and even some attempts at "fabless" (in this case, relying upon contract manufacturing) business models, both of which are less capital intensive than an A123 manufacturing plant (for example).
Runner up is LEDs. LEDs are going to be ready for prime time in 2011. And as that inflection point hits and LEDs start to penetrate mainstream lighting, VCs are going to want to get on board — even more so than they already have. However, I have spoken with a number of investors who see the market opportunity and trend, but don't see a good way to play it. They don't want to back an LED chip manufacturer; LED "light engines" (ie: the lighting component that would go into a traditional lighting OEM's fixture) are already pretty heavily invested and seeing slow market traction; and they don't want to invest in just an undifferentiated fixture OEM startup, going against the deeply entrenched incumbents. I think controls will be an area that gets a lot of attention, and I think VCs will find plenty of excuses to put dollars at work in the LED space regardless, but those are the reasons why I expect LEDs to be a runner-up to energy storage in the "Year Of" competition.
3. 2011 will be a moderately up year for cleantech venture dollars and valuations
Despite the cleantech venture capital shakeout described above, there are still lots of investors interested in the category. And we're all still climbing out of the 2008-2009 trough. 2011 will probably be as up and down as 2010 was, but with a generally upward trend.
4. A major geopolitical event will spike oil prices above $120/barrel
US crude oil futures for the next few years are already hovering over $90/barrel, and it's a highly volatile commodity market. And, there are enough flashpoints around the world where something will create a supply-side panic during the year, even if any feared interruption of supply doesn't actually happen. Meanwhile, the continued slow economic recovery will decrease the market's capacity to absorb such supply-side shocks without corresponding price spikes. So I think a pretty moderate spike at some point seems likely. The interesting thing, however, will be to see how that impacts both U.S. politics, and LP interest in the cleantech venture category… "Been there, done that" or another "OMG" moment?
5. There will be an energy law passed in the U.S., but it will be very patchy and incomplete
The Obama Administration seems bound and determined to reach across the aisle and try to find non-partisan issues to work on over the next couple of years. The three major ones I've heard being talked about are tax reform, education and energy. Tax reform is too hard to be first in line. Education will probably be first, but energy will be considered as well. I've seen evidence that some of the key players in the White House are now being tasked to think about energy policy, which really hadn't happened before, and what I'd been told by insiders is that "when you see the White House's 'A-Team' focused on this, that's when you'll know they're finally serious.'" However, I also expect a lot of partisan bickering and stalemate over the next 12 months and more. Certainly, "climate" isn't going to be the centerpiece of any new energy bill. And I don't see a lot of encouragement that there will be any serious new commitment of resources put toward development and implementation of new energy technologies. But it wouldn't surprise me to see an energy bill get passed that extends a few expiring subsidies for renewable energy technologies, does some token reform of subsidies for traditional energy production, and that puts some kind of restriction on the EPA's ability to regulate carbon. Those subsectors with the loudest constituencies would win out in the big horsetrading that would happen on Capitol Hill, others that are less-organized would get shafted. All in the name of Energy Independence and Energy Security, of course. There's an outside chance that a national RPS (or equivalent) gets passed, but I expect it would be pretty toothless by the time the political process did its work… This is a prediction I feel very iffy about, by the way. There's a very good chance nothing gets passed at all.
6. A couple of big venture-backed cleantech IPOs (valued over $1.5B) will happen, but still no blockbusters
There are a number of compelling IPO stories starting to line up. Will they go out in 2011? Completely up to how the stock market behaves, and what's actually going on behind the scenes at these companies. It will come as no surprise to many readers that many of the most lauded cleantech companies have questionable balance sheets, cashflow, and growth prospects; whereas some of the ones most beaten down by the press are now starting to come around and show signs of legitimate performance. I just looked at some journalist's list of the "Ten Most Likely Cleantech IPOs in 2010" from a year ago and I think only two of them actually happened. So I'm not going to try to pick which ones will be the IPOs in 2011, or even pick the sectors they'll be in. But I do think, if there's an IPO window on Wall Street at all, there's a good chance a couple of decent ones go out. Nevertheless, I also don't see the potential for the kind of hype that would allow for a really blockbuster cleantech IPO, either. I don't see any cleantech startup turning down Groupon-type acquisition offers anytime soon, in other words…
7. Family offices and other non-traditional investors will become a critical source of funding for cleantech private equity
For the most part, this is already happening, you just haven't seen it written up much in the press because these types of investors typically don't put out press releases. But I think in 2011 we'll see even more obvious leadership played by the family office and other non-LP-backed private equity community, in the cleantech sector. Partly by default, as the fundraising challenges for cleantech VCs continue. But also I speak with a number of such investors who want to start doing more direct investments into the sector. And also, these investors can typically invest with much more flexibility, which is key for a sector in need of some reinvention of business models. Speaking of which…
8. New hybrid investment models will emerge
I predicted this for 2010. It didn't really happen. But I continue to speak with both LP-backed and non-traditional VCs and PE players who see the need. So I'll double down for the prediction for 2011. And what I'm talking about is the emergence of new models that combine project finance and venture capital; that take innovative approaches to the use of debt and equity combined; and/or investment into the kinds of business models (like services, etc.) that VCs have typically had a hard time backing.
9. "Tech-enabled services" will be the new hot buzzword among cleantech VCs
Well, I shouldn't actually predict buzzwords. I mean, who'd have thought something like "black swans" would have caught such momentum in VC jargon. I'm not the guy to successfully predict fashions of any sort, rhetorical or otherwise. But I do think that VCs and other cleantech investors are going to be increasingly interested in making bets based upon interesting business models, not based upon some whiz-bang proprietary technology. There's increasing awareness of the relative fungibility of various clean technology innovations, since at the end of the day all are just different ways to source basic energy commodities (kwh, or joules). Fewer VCs are willing to make bets based upon an expectation that a purely technological innovation will be able to take the world by storm, at least within their investment holding period. And there's increasing respect for how hard it is to bring truly revolutionary technologies to market in these sectors, given the unique challenges along the way in productization and commercialization. But I see increased interest among such investors in finding better ways of delivering compelling solutions, in relatively capital-efficient ways. To me, this says they'll want to find service-type business models, but where there's enough of a proprietary technology angle that they can still look at themselves in the mirror and claim to be technology investors. Or to put it less cynically, they'll want to see enough differentiation and defensibility that they can believe a venture-type growth and exit story, even if it's a service business. And at the end of the day, service businesses will be who really deploy all these clean technologies we spend so much time talking about. There's a definite market need for it, but to date it's been undercapitalized as an overall business model category.
10. Among U.S.-based cleantech venture investors, they will devote relatively more dollars to international investments
I see a trend among US cleantech VCs toward investing overseas. They want to tap into more attractive markets, especially as the US federal government continues to show such a lack of leadership on climate and energy issues. They want to tap into the overall demographic and economic momentum of the BRICs and other emerging markets. And they want to not be too heavily tied to the fate of the US dollar, which many expect to fall eventually. So I expect that in 2011 we'll see even more emphasis put on finding cleantech investments in places like India, Brazil, China, and even Europe. Which will put a lot more US cleantech VCs on airplanes — and possibly prompt some opening of overseas satellite offices, and/or partnerships with firms located closer to the investments.
11. The Washington Redskins will have a winning record
Those of you who follow me on my twitter feed (@cleantechvc) will know that I have an unhealthy affection for a certain woebegotten professional football team based in the suburbs of Washington, D.C. This year, they will yet again have a losing record. But for 2011, I see them getting better. Not getting great, but hopefully a bit better. I mean, they almost have to, right? Well, no they don't. And recent history suggests they won't. But even still, I feel a bit optimistic. Playoff-bound? Let's not go nuts here, I want these predictions to be at least plausible…
Thanks everyone for continuing to read these thoughts and for sharing your own in return, in comments, email and on twitter. I continue to get pinged by great entrepreneurs and investors out there based upon something or other I've written, and I always appreciate it and hope these posts have been helpful in some way… Here's to surviving 2010, and to good returns in 2011!