Annual Report - 2017
Annual Report - 2017
Sustainable Technology Growth Equity Investing — Why It is Different Today
The sustainable technology growth equity market in the U.S. has benefited from the broad spectrum and traditional landscape of U.S. growth venture investors. However, the initial investments in the 2006-2012 timeframe severely underperformed, in terms of returns and commercial success, relative to other industries.
It is worth observing that what was defined as the cleantech sector’s 2006-2012 investment boom was a loose collection of different markets and technologies. Those technologies and markets comprised just one subset of the full breadth of the sustainable technology universe, much of which is now attracting substantial investment.
Starting in 2006, growth equity investor interest in the sustainability sector significantly increased after a spike in oil and gas prices, new supportive legislation and growing public awareness of climate change. Many established Silicon Valley investors launched green only funds in an effort to capitalize on an exciting new industry. Very few of these investors had any expertise in energy, resource efficiency or sustainable technology.
Five years later, the industry was in shambles with nearly 90% of the companies funded failing to return the initial capital investment. Traditional investors with short-term horizons, no prior experience in investing in the space and no detailed knowledge of the existing infrastructure systems and regulatory constraints, were ill-suited to invest in capital intensive and hardware-centric companies, such as PV solar manufacturing, biofuels and waste gasification.
Market factors had a negative impact on these investments. However, the underlying causes of the poor returns were structural in nature.
- The industry was nascent with most technologies still in the development phase, and the majority of start-ups needed more time to field test and prove their commercial viability. The adoption rate of existing incumbents was slower than expected.
- Many of the technologies lacked a supportive value chain and were very expensive to scale. Without certainty around end-market demand, equipment manufacturers were unwilling to scale up capacity, enabling lower costs.
- Low energy prices significantly reduced the demand for potential disruptive technologies.
- Starting in 2010, many sustainable infrastructure initiatives were repealed. As a result, many incumbent companies did not feel the need to invest in or acquire riskier growth companies – leading to a limited number of exits.
By the end of this period, renowned Silicon Valley investors, such as Kleiner Perkins, New Enterprise Associates, Kholsa Ventures, DFJ and Sequoia, had largely left the field and were no longer willing to invest in sustainable technology companies.
WHY IT IS DIFFERENT TODAY
The 2006-2012 boom wasn’t the first attempt to disrupt traditional energy markets and incumbents. From 1999-2001, the energy technology investment cycle played out presaging the more recent cycle and bringing sustainability as a theme to the public’s attention.
What has changed are the lessons learned and refined through two funding cycles.
Today, sustainable technology growth investors are focused on capital-light business models including advanced transportation, energy storage, energy efficiency, logistics, analytics software, the industrial internet and the development of IoT smart cities. These companies have a shorter time horizons to scale deployment, are less capital intensive and have the potential to disrupt large global markets.
Although growth capital providers don’t always use the term “sustainable technology” for these sectors, they represent the return opportunities that the growth capital model was designed to fund and both investor interest and opportunities are significant.
Investors today recognize the need to scale within existing infrastructure. They have realistic paths to market, understand the often lengthy timelines to adoption, find low cost ways to scale their suppliers and are open to strategic collaboration. They seek to avoid businesses that are dependent on manufacturing scale up in advance of proof of cost competitiveness or customer demand.
Global multinationals have committed to sustainability and in addition have begun making growth equity investments alongside financial investors. They are able to bring their knowledge, commercial relationships, lower cost access to customers and an ability to test technologies at large scale to help sustainable technology companies succeed and to create confidence in the growth equity investment environment.
Attractive exits are now available as a different attitude prevails today among large energy and industrial incumbent companies. There is no question on the inevitability of the sustainable transition and the overall benefit to companies and the world. Big companies are leading the way and making acquisitions.
Consumers are driving corporate sustainability. 48% of Fortune 500 companies have renewable energy or carbon reduction targets. In the U.S., states and major cities (including Los Angeles, Atlanta and Salt Lake City) have also individually committed to fight climate change and continue to work towards the 2025 emission reduction targets and the Paris Accord. This reinforces the view that growth equity funded sustainable technologies will find robust end-markets.
What is evident today is that there will be compelling returns for growth equity investors who participate in the broad secular trend of sustainable technology.
About Greentech Capital Advisors
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