Rob Day
Apologies to everyone for the lack of posts for the past couple of weeks. At least I have a good excuse (see pic)…
So what did we miss over the past week-plus? Not much. A few deals (and we’ll do a bit of an update on those next week), Google putting money into geothermal, and a coming free-fall in silicon prices. Frankly, my news alerts have been filled with much more generic fluff/ hagiography about “big name VCs are jumping into cleantech, and say it’s the next big thing!” than any real news items on the subject.
There was also a brief two-part discussion from Dan Primack of PE Week Wire on the cleantech wave. Dan always takes a good critical eye to any emerging trends, pushing past the fluff to get to real issues, so it’s worth checking out his thoughts (here and then here). I find myself largely in agreement regarding Dan’s “on the one hand, but on the other hand” take on the sector right now, for reasons regular readers of this column will already find familiar…
One question for Dan, however — what’s the justification for saying that there is “a relative lack of potential acquirers?” Energy, water, and materials significantly touch so many major markets, and so much of the Fortune 500, that it’s a very surprising comment. If anything, one thing that has excited long-time investors in the sector is the deep pool of potential acquirers. Heck, if even Google and Bank of America — which don’t make any physical products — think energy tech is a strategic priority, I’m challenged to think of any industries for which looming natural resource constraints WON’T lead to opportunistic acquisition thoughts.
Don’t believe me? See the track record even before the latest hype cycle, in this somewhat-dated presentation from the Cleantech Group (note: link opens PPT file).
So, Dan, why are there relatively few acquirers for cleantech companies?
Rob Day
For those who can make it, the Marines’ Memorial Association (in association with the Renewable Energy Business Network) will be holding what should be a fascinating forum on Wed. evening.
As the campaigning season ramps up into full swing, try as you might to avoid it, you can’t help getting wrapped up in presidential politics if you care about clean technologies and energy policy. Energy policy is now front-and-center in the political debate at the national and at most state levels. Many people are expecting pretty big shifts come 1/20/09, but there are a lot of unanswered questions about what these shifts might look like.
On Wednesday evening, the Marines’ Memorial Association will be hosting a debate between high-level advisors from each of the campaigns, moderated by Jim Sweeney of Stanford. You need to register to be able to get into the event, so do so immediately if you want to attend. And hurry, space is limited and it sounds like it will be pretty full. Click Here to register.
Rob Day
The big news over the last few days has been the IPO filing of lithium ion battery innovator A123, who’s looking to go public on NASDAQ sometime soon.
Much will be written elsewhere about the prospects for the company’s IPO, by those who follow the public markets more closely (and to reiterate the disclaimers, don’t get your investment advice from this column, it would be the blind following the blind and we take no responsibility for your investment decisions, good or bad). But there’s also a lot of information in the company’s S-1…
I thought it might be good to go through some of this info as a means of illustrating what a “successful” (still to be proven, but so far so good) cleantech venture investment of a certain type (energy storage, using a capital-intensive “build them ourselves” business model) might look like.
Funding history (note: all of the below are extrapolations and over-simplifications which are intended to be illustrative, but in fact may be quite wrong):
2001 - Founded out of MIT. Unclear what seed capital may have been provided.
2001-2004 Raised $12.7mm in Series A ($1/sh) and Series A-1 ($1.50/sh) funding.
June 2004 Raised $20mm in Series B ($2.08/sh) [note: this was widely erroneously reported as a "$30mm Series B" since the company reported their aggregate raises at about the same time], pre-money approx. $58mm.
Feb 2006 Raised $30mm in Series C ($3.37/sh), pre-money approx. $125mm.
Aug 2007 Raised $70mm in Series D ($6.56/sh), pre-money approx. $300mm.
Feb 2008 Raised $16.5mm in common ($7.22/sh), pre-money approx. $400mm.
Jun 2008 Raised $102.1mm in Series E (16.59/sh), pre-money approx. $1B.
The above valuations are really rough estimates, but still provide a bit of insight into the investment path on the way to an IPO for a company of this business model. The amount of Series A, especially given the dynamics of 2002-2003 energy tech VC, show that the early investors were pretty excited about this one right from the beginning, and probably paid a high single digit million pre-money valuation, likely higher in the teens or low twenties as a pre-money. That’s higher than many Series A stage valuations that we see even in today’s market.
The progression of valuations shows a steady march upward, practically doubling or tripling each year. That’s more of an exception than a rule in any VC category, naturally, since we’re looking retrospectively at a company that looks like they’ll be a success of some kind. However, given that the company mentioned earlier this year that they were planning to IPO, the valuations on the GE-bought common round in Feb and particularly on the Series E are indicative of a high confidence in that IPO taking place.
Notably, the Series E appears to have mostly been from new investors, since GE ($30mm of the $102mm round) was the only participant in that round who is now a 5% stockholder. So it’s a bit of an illustration that these “venture capital” late-stage, pre-IPO rounds are often mostly done out of the pockets of non-VCs, and thus it’s misleading to include these kinds of rounds in the quarterly venture capital surveys that are put out there. Nevertheless, most of the surveys continue to do so, and that’s one reason why we continue to see a few megadeals dominating the dollar totals each quarter.
Business model and capital needs
I described the company’s model above as “capital intensive, build-them-ourselves”. There are a lot of paths a company can take with the development of innovations that will eventually go into devices (be they batteries or turbines or solar panels, etc.). The spectrum of capital intensity roughly goes from simple licensing to someone else who is manufacturing product, to building subassemblies to be integrated into other OEM’s devices, up to developing/acquiring manufacturing capacity and building the entire device yourself. There are reasons to like and dislike all the choices. A123 has chosen mostly the latter route, having acquired significant China and Korea based manufacturing facilities and employing nearly 1,000 people now in manufacturing.
This choice means higher revenue but it’s also meant bigger capital needs along the way. They invested approximately $28mm in 2007, for example, in capex and acquisitions to build out manufacturing capacity. And in Q1 2008 they burned through $13.5mm in cash (not counting financing inflows) even while at a revenue run rate near $40mm/yr. They raised an aggregate $235mm [8/11 update: corrected previous bad math] in preferred equity along the way, not counting the common equity raised earlier this year or any other common shares sold along the way, nor the relatively smallish debt the company raised during the growth path. Not a game for those with thin wallets or for the faint of heart…
Fun with Fair Market Value
On pp 52-53 of the S-1, there’s an interesting progression of the FMV on common stock as decreed over time. What’s interesting is to see how the exit scenarios progressed over a short amount of time:
March 2007: 25% chance of IPO, 25% chance of sale at or below liquidation preferences, 50% chance of continuing as-is. At this point, importantly, the company already had significant revenue and was in the process of raising their Series D.
August 2007: 40% chance of IPO, 40% chance of sale at or below liquidation preferences, 20% chance of continuing as-is. Clearly, there were pretty high liquidation preferences at play…
July 2008: 75% chance of IPO, 25% chance of sale above the liquidation preference, chances of a sale below the preference or continuing as-is were zero. Reading between the lines, looks like the company had received a potentially attractive acquisition offer and that it was clear there was going to be an exit soon one way or another. But that’s purely speculation on my part…
The odyssey of an early investor
One name that comes up repeatedly in the document is North Bridge. It’s clear that they were fairly early investors in the company, purchasing something like 4.93mm pre-Series C shares, 1.6mm Series C, and 1.3mm Series D. Unclear whether they participated in the Series A/A-1 or not from the publicly-available info, but it’s probably a safe assumption.
Over the holding period, even while the company seems to have consistently progressed in product development and market development, from North Bridge’s perspective it must have felt like there were some significant shifts along the way. Looking at the Series B investors, we see names like Motorola, Qualcomm, and OnPoint. This indicates a market vision in devices. When they came out of stealth mode, the story was big on power tools. But with the recent upswing in hybrid vehicles and now the partnership with Chevy around the Volt, A123 is as much as anything else a “next generation transportation” play. The latest vision as articulated in the S-1 is grid-scale storage. Perhaps North Bridge’s investment team saw this from the beginning, and it’s all rolled out exactly according to plan. But my guess is that the original pitch was heavy on the device market and light on the vehicle and grid storage markets, and that the vision of the company has significantly shifted over time. It’s so tough to know so many years ahead of time what’s going to be the real success driver for a company, and investors have to make the decisions they can with the info available at the time, and encourage the management team to balance focus with opportunism along the way as markets shift and emerge.
It would be great to see A123 succeed in general, but for North Bridge in particular they have to be pretty happy with the results so far. Based on the most recent Series E price, their holdings are worth approx. $130mm on paper, and their investment was probably something near to $20mm. And, with any luck, the price per share after IPO and expiration of lockup could be significantly higher than the Series E price. Not too shabby.
Of course, weigh these happy results against the odds facing the company 5 or 6 years ago when North Bridge likely first got involved in the company. Not a slam dunk, that’s why they call it “venture capital”, but probably a smart bet in retrospect to get in that early…
In conclusion
A123 is a good illustration of one kind of cleantech venture capital investment, the kind that’s been talked about a lot recently thanks to various investors deciding to go later and bigger — the capital-intensive, go-for-broke model that we’ve seen in sectors like solar, biofuels and energy storage. It shouldn’t be taken as an illustration of MOST cleantech venture capital, since so much of cleantech VC is in more capital-efficient, M&A-the-likely-exit type plays. EnerNOC, for example, had raised only $27mm and had been in business only 6 years when they IPO’d.
But for all the naysayers out there who argue that there aren’t good exits to be made in cleantech, A123 will be a test case. The time since founding, at around 7 years, isn’t atypical for IPOs. The aggregate amount of venture financing, at $235mm [8/11 update: corrected previous bad math] (plus seed and common), is high but not shockingly high for a manufacturing-oriented business model like this. So A123 either represents a typical or slower/capital intensive example of a cleantech VC investment, all things considered.
And if North Bridge and their co-investors can see terrific returns even on this kind of play at the most challenging end of the cleantech spectrum, that should help settle exit concerns out there, among those who somehow think cleantech is not yet proven as an attractive investment area.
We’ll have to watch and see how this plays out over the next few months…
Rob Day
We talked about Q2 numbers a while back, but Ernst & Young’s Q2 release this past week is particularly useful to look through because of the depth of data they released — a great breakdown by stage, category, etc. with historical data. Inclusive not only of energy, but also other cleantech sectors often ignored. The E&Y data was worth the wait…
The headline which you’ve probably already seen is that it was a record quarter for U.S. cleantech venture capital, at $962mm, way up from Q1 and the biggest quarter since 2002 (barely beating out Q3 2007).
Of course, that’s on a dollar basis. The NUMBER of deals was big, yes, at 41, but that only puts the quarter at the 3rd most active quarter E&Y tracked since 2002. Not fewer deals, really, but certainly bigger deals.
What’s driving this? Two big trends are clear in looking through the data:
1. Solar continues to bring in the dollars. $487mm, or more than 50% of the quarterly total. But only 14 out of 41 deals. In terms of dollars, this was only the 4th biggest quarter since 2002 for non-solar cleantech deals. It’s all solar, all the time these days.
2. Overall deal size is up. Because E&Y very helpfully breaks out deals by stage in their analysis, we can see that “First Round” deals averaged $12mm in size, up from an average of $10mm last year… But “Second Round” deals averaged $37mm for the second quarter in a row, hugely up from 2007’s average size of $23mm. There’s evidence of deal size inflation at all stages, but it’s most strongly felt in second round deals.
It would be easy to look at the second point above and conclude that valuations are up. It’s only indicative, but generally speaking bigger round sizes will mean a bigger valuation.
But it’s unclear how much deal size inflation is being felt across the non-solar portions of the sector. Let’s compare to 2007 totals.
1. The average deal size for a solar deal (note: inclusive of all round stages, unfortunately even E&Y doesn’t break out the full crosstabs) was $35mm in Q2. That’s 45% higher than 2007’s average solar deal size of $24mm.
2. The average deal size for a non-solar deal was $17.6mm, 25% higher than 2007’s average non-solar deal size of $14mm.
3. In 1H08, 61% of cleantech deals were “Second Round” or “Later Stage”, up from an already high 46% for 2007.
So it’s hard to argue that deal sizes are up across the rest of the sector. While non-solar deal sizes are up, it’s unclear how much of that is driven by the general shift toward later-stage investing.
Solar and later-stage investing are driving the bus right now, and showing no signs of slowing down.
What does the data tell us in terms of “what’s next”? Notably, energy efficiency deals and deal sizes are up in a big way. Other than that, other sectors looked down or flat for the most part.
Rob Day
With a column title like that, I’m sure to under-deliver, but here goes…
A couple of recent trends I’ve noticed that are worth highlighting:
1. “Super angels” seem to be taking an increasingly important role in the world of cleantech venture capital these days. By using this term, I mean family offices, foundations, etc., so “angels” is kind of a wrong term, but the point is non-traditional institutional investors representing high net worth and/or mission-oriented investors who may or may not have the same IRR goals as traditional VCs. This is potentially a really healthy development in light of the capital gaps we’ve noted before, but it’s also simply noteworthy just how much more active these kinds of investors are becoming, particularly regarding direct investments (versus indirect placements in VC firms, etc.).
2. There seem to be an awful lot of stories in the various online rags these days about cleantech startups that are SEEKING big rounds of financing, versus the more typical silence about fundraising until the money is actually in the door. It’s interesting, because usually privately-held companies want to be much more quiet about their growth plans, for competitive reasons. Does this trend represent a PR strategy shift to raise the profile of companies ahead of big rounds of financing, ignoring competitive impacts? Does it show that companies have been struggling to raise these big rounds, and are forced to go advertising to harder-to-reach investors (like, perhaps, Super Angels)? And/or does it simply reflect a more competitive green business media space these days, where the reporters are digging more and more to get “scoops”? Perhaps some of these journalists could chime in with their perspective on why the shift is happening, but at least on this site we’ll continue to err on the side of discussing actual deals and not just passing along fundraising advertisements…
- Aptera raised a $24mm Series C round, with investors now including Idealab, Esenjay Investments, The Simons Family, The Beall Family Trust, and Google. This syndicate is a good example of the first trend noted above…
Speaking of this cleantech VC “thing” not being easy, in today’s PE Week Wire, Dan Primack asks a provocative question: “What I’ve been pondering… is about the new class of cleantech investor, and if there are enough experienced bodies to satisfy the VC market’s appetite.” In other words, does sector-specific deals experience matter in cleantech venture capital, and if so, is it a limiting factor.
As we’ve discussed here before, generalists coming into cleantech aren’t dummies, when they jump into the sector and begin engaging with cleantech investors and startups they can bring a lot of quite valuable and often complimentary skill sets and networks, etc. So while sector-specific deals experience probably does matter, generalists can quickly get up to speed in a couple of targeted markets, especially when they look to co-invest. We’ve co-invested with smart generalists and look to continue to do so when appropriate, because so many cleantech opportunities overlap into other more traditional investment sectors (think batteries and consumer devices for one illustrative example of such overlap) that the teamwork can be quite powerful.
The real challenge comes from the fact that cleantech markets are so broad and diverse, that even after spending most of my career in these markets, and several years now as a cleantech specialist investor, I’m still learning all the time about new technologies and applications I hadn’t previously had exposure to. There’s a multi-year learning curve even for the smartest investors, and so naturally new entrants to the market will have to either pick one or two sub-sectors to focus in on for their first few deals (and for the most part they’ve tended to go where the action already is — solar, et al), and/or go later-stage as follow-on investors backing already well-established companies even if still pre-revenue. IMHO, this dynamic is a major reason why we’ve seen these waves of over-heated activity in late-stage and in certain narrow subsectors within cleantech, even while the overall cleantech investment sector remains underinvested relative to the amounts going into other tech sectors (the “health care venture bubble”, as I jokingly refer to it). The new entrants are naturally driven in these directions.
Dan does posit a potential counter-argument, that the cleantech sector is so “easy” to find good investments in, that experience doesn’t matter — to paraphrase, that anyone can fall out of bed and find good cleantech venture investments. I’m not sure how well that hypothesis will survive the next 12 months, but it’ll be fun to track…
Readers are encouraged to get back to Dan with their own comments, and/or to leave comments here.
Other provocative questions: Is nanotech finally ready to get real?… Are all the low-hanging carbon offset fruit plucked already?… And finally, are VCs really this dumb? (ouch)
