Clean Technology: More good news for the socially and environmentally responsible
investor
By Diana Propper de Callejon, Mark Donohue, and Rob Day
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 percent 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.
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 large utilities deploy wind energy in the US 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 percent 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 percent returns from that portfolio
of companies, a return that many venture capital investors would find attractive.
Summary
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 percent - 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.
Forecasted Growth for Selected Clean Technology Markets
Market 2000 est. 2012 est.
Wind power $5B $49B
Solar power $3.5B $27.5B
Power quality $5B $15B
Industrial water purification $5-6B $20B
Desalination $45B $75B
Source: Frost & Sullivan,
Clean Edge, Water Technology, Charles Schwab
Article by Diana Propper de Callejon, Mark Donohue and Rob Day of Expansion
Capital Partners, a leading venture capital firm that provides growth capital
to expansion stage, Clean Technology enterprises. For more information visit
their web site at - http://www.expansioncapital.com
Article from the LOHAS Journal (Spring 2005). Reprinted with permission.
