Each year, Dallas Kachan of research and consulting firm Kachan & Co. sets out predictions for the coming year, many of which have materialized, he says. He predicted the growth of cleantech venture capital in 2011 and its decline in 2012, the emergence of energy efficiency as a leading technology theme, etc.
Venture capital for cleantech drops further
Venture capital investments in cleantech have been dropping and Kachan expects to that to continue next year even with a potential pickup in the global economy.
We will go so far as to predict that the salad days of cleantech VC are behind us, never to return to previous levels, and that the bloom is off the cleantech rose for the mainstream venture investor.
What it really means is that venture capital, as we know it today, is not proving itself suited to the unique characteristics of cleantech investments. Therefore, the amount of venture investment in clean products and services no longer functions effectively as a leading indicator of the health of the cleantech space. It will remain useful for spotting technology and geographical trends – such as the recent decline of solar and rise of transportation and biofuels as current investor focuses.
Why are we pessimistic about the levels of conventional cleantech venture capital we’ll see in 2013?
- Lack of rock star IRRs. IPO poster kids of cleantech declaring backruptcy, and relatively modest returns to date on cleantech mergers and acquisitions (M&A), large exit multiples bolstering VC’s internal rates of return (IRRs) continue to elude the space. That’s weeded out many conventional venture capitalists who want shorter term returns.
- Lag time of negative sentiment. it takes a few quarters for pullback to show in venture or project investment numbers because deals can take quarters to consummate. The disillusionment we’ve been hearing from investors through 2012 will still take several more quarters to manifest in deal numbers yet to post. It takes awhile for a ship to slow down.
- Poor policy support. It’s a tough time for cleantech subsidies worldwide, with the exception of Japan. Lack of policy support makes it hard for the private sector to feel enthusiastic about investing in cleantech. Especially when, rhetoric to the contrary, the reversal of perverse subsidies to the oil and gas “dark side” is unlikely to ever happen.
Investments in Cleantech Will Continue
Just because VCs are less interested, doesn’t mean investments won’t continue in cleantech.
Family offices, sovereign wealth and corporate capital are now having more significant roles in cleantech, filling gaps where traditional VC has played in recent years. It’s a sign the sector has matured.
Fewer VC cooks in the kitchen may impede innovation, but deep pocketed corporate capital should help clean technologies that are already de-risked reach meaningful levels of scale.
Building factories isn’t what VC is about, anyway. Less venture capital available will hurt early stage innovation, yes. It’s a gap that angel and government funding shouldn’t, alone, be expected to fill. Yet on the other hand, to have meaningful impact, many clean technologies, including renewable energy, now need massive amounts of later stage and project funding. Some sectors like wind and certain biofuel innovations have been largely de-risked and now just need scale. And that takes lots of money. More than most ever thought it would. And that level of capital is never what VC was supposed to be for, anyway.
Fewer cooks in the kitchen in deals. With many investors opportunistically chasing cleantech in its heyday now having departed, in theory only the strong and committed have remained. That should translate to fewer and more knowledgeable parties at the table.
The skids have been greased for corporations. Fewer parties at the table should make corporate venturing and strategic investment more appealing to the world’s biggest companies, which are buying their way into cleantech.
Significant players include Dow, Johnson Controls, Schneider Electric, Eaton, Honeywell, Hitachi, GE Energy, and many more.
Read his full analysis:
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