Clean Technology: A Compelling Investment Opportunity
By Diana Propper de Callejon, Mark Donohue and Rob Day, Expansion Capital Partners
Clean Technology is a rapidly emerging investment area that is drawing increased interest from the venture capital community. In the last three years, more than $3 billion in venture capital has been invested in Clean Technology (also referred to as “cleantech”) enterprises. Clean Technology represented about one percent of all North American venture investments five years ago; but it has grown quickly, and has ranged between 5-7% of such investments over the last eight reported quarters.
What is Clean Technology?
Clean Technologies are technologies that:
- Use energy, water and raw materials and other inputs more efficiently and productively,
- Create less waste or toxicity
- Deliver equal or superior performance, and
- Improve customer profitability, through cost reduction and/or increased revenues,
Such technologies are found in a broad range of industries, including energy, water, manufacturing, advanced materials, and transportation. Examples of Clean Technologies are wind and solar energy, water filtration, industrial process controls and hybrid electric vehicles.
Given the environmental benefits these technologies confer, Clean Technology is an intrinsic part of a Sustainable Economy.
What is making Clean Technology a compelling space for venture investors?
A convergence of factors is behind the emergence of Clean Technology as an investment category that has attracted both dedicated Clean Technology funds, as well as mainstream venture capital firms. The principal factors include:
1. Many clean technologies serve large, fast-growing markets.
Over the last ten years, demand for Clean Technologies has grown significantly and has driven the growth of what are now multi-billion dollar markets. These markets continue to expand rapidly, in many cases at double digit annual growth rates. For example:
- The market for automation technologies that increase the efficiency of energy management is currently valued at $2-$5 billion.
- Global wind energy markets, valued at $5 billion in the year 2000 are expected to grow to $50 billion by 2012, while solar energy is expected to move from $3.5 billion to $28 billion in the same time period.
- The US EPA estimates that $3 billion is spent each year in the US on repairing and upgrading the drinking water infrastructure alone, and is expected to increase significantly.
- The industrial demand for clean water is driving the growth of water technologies, currently a $6 billion market, and expected to grow into a $20 billion market by 2012.
Forecasted growth for selected Clean Technology markets
Industrial water purification
Source: Frost & Sullivan, Clean Edge, Water Technology, Charles Schwab
2. Market trends and economic forces are driving the adoption of Clean Technologies.
The emergence of markets for Clean Technology over the past ten years has been driven by a confluence of economic trends, technological advancements and resource constraints that position clean technologies for sustained growth.
For example, the energy infrastructure in the US has suffered from many years of underinvestment, costing US businesses billions of dollars from power fluctuations and outages. Utilities are now looking for technology solutions to upgrade the power grid. Also, in the water sector, more than one-third of the States expect water shortages in the next ten years, spurring investment in water treatment and recycling technologies.
Key commodity prices have been rising around the world. In several cases – most notably oil and gas – there has also been an increase in price volatility. As a result, producers and users of these commodities are searching for new technologies that can help reduce waste, improve resource efficiency, and better manage risk. One reason wind energy is being deployed in the US by large utilities is as a hedge to the volatility in oil and gas.
At the same time, technology innovation in recent years has driven down the cost of cleaner, resource efficient technologies, making them competitive on price and performance. The National Renewable Energy Lab estimates that, in the 1990s, the US Government alone spent an estimated $5-$10 billion a year to develop renewable energy and energy efficiency technologies. This has helped to drive down wind energy production costs 80% over the last twenty years, while solar power has dropped to one-tenth the cost it was during the 1970s.
Equally of interest, technology innovations from other industries, such as telecommunications and IT, are finding Clean Technology applications including advanced sensors for testing water quality and other environmental monitoring, and the remote monitoring and control of distributed energy assets.
3. Clean Technology companies today are often today run by experienced, proven, and effective management teams.
As Clean Technology markets have grown, and as companies such as GE, Honeywell, DuPont, and others increasingly turn to clean technologies to address the needs of their businesses, it is now more common to see Clean Technology enterprises run by management teams with experience within such large corporations, or experience in selling to them. Recent years have seen an influx of successful entrepreneurs from other industries who have been attracted to the fast growth rates in Clean Technology. Finally, Clean Technology is now seeing the emergence of serial entrepreneurs – executives who successfully sold or took their prior Clean Technology company public and are now running a new Clean Technology company in the hopes of repeating their experience. The presence of tested and proven management teams is a key success factor for investors.
4. There is a strong and growing flow of attractive deals in Clean Technology
Concurrent with the developments detailed above, the quantity and quality of deals in Clean Technology has increased significantly in recent years. In the last three years alone, there have been more than 500 Clean Technology venture capital investment transactions. At Expansion Capital Partners, a dedicated Clean Technology venture capital firm, the fund management team has reviewed more than one thousand deals across the diverse Clean Technology industries, and the fund managers expect the annual number of deals reviewed to increase as these markets continue to grow.
5. The potential for strong venture returns in clean technology investing has been demonstrated in venture investment activity of past years.
A recent analysis has confirmed that venture capital investors can find attractive returns in Clean Technology. The newly released report by the Cleantech Venture Network and Vortex Energy, “Cleantech Venture Investing: Patterns and Performance,” analyzed historical investments in Clean Technology and estimated returns to private investors in numerous transactions. (Diana Propper de Callejon, one of this article’s authors, is a co-editor of the report.) The study, the most extensive analysis of its kind in the Clean Technology space, determined that exits have been readily available to private investors in Clean Technology companies. The report identified more than sixty initial public offerings and over 700 M&A transactions, covering the period of 1987-2004. Exits were achieved across a broad spectrum of Clean Technologies, from water purification and industrial controls, to power storage and energy management. A smaller number of liquidity transactions for which there was sufficient data were aggregated into a “hypothetical portfolio” and analyzed to determine returns to investors. The analysis suggested that private investors could have made between 20% to 30% returns from that portfolio of companies, a return that many venture capital investors would find attractive.
Thanks to the market developments described above, venture investors are now paying close and growing attention to Clean Technology. However, the sector as yet remains relatively underinvested, compared to the majority of venture capital dollars – over 80% -- still targeting investments in IT, biotech and telecommunications. That’s good news for Clean Technology focused investors as the sector remains sheltered from inflated deal valuation. The maturation of the Clean Technology space is also good news for the Socially Responsible Investor (SRI) given Clean Technology’s potential to deliver attractive financial returns as well as significant environmental upside. In fact, some would suggest that Clean Technology is one of the biggest stories in the SRI world today.
About the Authors
Diana Propper de Callejon and Mark Donohue are General Partners of Expansion Capital Partners, and Rob Day is a Principal at the firm. Expansion Capital Partners is a leading venture capital firm that provides growth capital to expansion stage, Clean Technology enterprises. To contact the authors, please visit www.expansioncapital.com