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Investment The Evolution of 'Tech' in Cleantech

Dharmesh Thakker
Monday, August 2, 2010
Dharmesh Thakker
Cleantech 1.0 from 2004-08 was dominated by solar and bio-fuel startups, founded by semiconductor and biotech execs in many cases. Massive global energy markets ($6 trillion worldwide energy spend, $300 billion U.S. electricity markets, $20 billion India solar mission), rising energy costs, favorable regulatory landscape, and technology maturity were driving the first generation of startups. By contrast, there seem to be a growing number of software and networking gurus frequenting cleantech entrepreneur circles and energy efficiency startups these days. At Advanced Technology Ventures, where I focus on cleantech and software startups, we have had the benefit of witnessing this trend firsthand, given our involvement in cleantech since 2004, and believe this mix is healthy for the overall cleantech sector.

In 2008, at the peak of the cleantech investment cycle, about $2.5 billion in equity was invested in solar energy alone with over 10 venture backed companies raising over $100 million each. Bio-fuel figures were not far behind at over $900 million in investments. Part of the reason behind these staggering figures is the use of expensive equity dollars to fill-in for virtually nonexistent project finance and debt. Using simple math, we’d need to see 15-20 multi-billion dollar IPOs in the next few years to produce venture-like returns. Moreover, startups need not only a technology based advantage but also significant economies of scale (and a few more billion dollars) to be cost competitive with First Solar and Chinese PV players in the solar area for example, or else they risk going down the path of ‘profitless prosperity’. In short, a few winners will emerge, but until robust project finance and debt markets emerge, it will be largely a tough space except for those that invested very early in these areas.

Investment Areas

Learning from our portfolio of 11 cleantech companies, we have refined our thesis to focus on two key areas: downstream technologies for accelerated renewables deployment, and demand side management.

The billions that have been invested in core research have prepared several renewables for prime time commercialization. At the same time, the need for renewables is rising by the day, driven by rising costs and carbon footprint of fossil fuel sources, and state and potential federal Renewable Portfolio Standards. Recent events like the Gulf oil spill only exacerbate the problem. However, widespread commercialization has been inhibited largely by the lack of grid parity (price competitive with coal) without subsidies, and intermittency of most renewables that requires grid upgrades. Solar panels, for instance, have seen prices decline from $5/W a couple of years ago to less than $2 now, yet the balance of system (BOS) costs including labor, racking, inverters are still hovering around $4-5/W and continue to affect the adoption rate. We find innovations such as micro-inverters, DC-DC optimizers, innovative racking systems that can lower the BOS costs for solar energy, as the critical missing link to help solar energy achieve grid-parity. Similarly, wind has the potential to be 20 percent of our energy supply by 2030 and a $100+ billion opportunity annually. Components, control systems, and predictive analytics that reduce downtime and can enhance project returns, help multiply wind energy’s footprint. More broadly speaking, grid storage technologies that smooth out the effect of intermittent renewables on the grid are another area of strong interest. As initial deployment of many of these technologies in the U.S. and Europe mitigates commercialization risk, they can be applied to address the massive market opportunity in India and China as well.

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