For the first time in 30 years an entire quarter went by without a venture-backed company going public, according to numbers released by the National Venture Capital Association this week. The industry group plans to analyze its findings and share its thoughts with the press next week, but in the meantime, analysts and pundits are speculating that everything from the recession to Sarbanes-Oxley rules to the mortgage crisis are to blame.
While economic downturns and expensive, complicated regulations may well be part of the equation, it’s also likely that investor interest in cleantech is playing a role. Nearly every name-brand venture capital firm now has its own cleantech fund worth hundreds of millions of dollars, and after a few years getting to know the space, venture capitalists have come to realize that investing in a cleantech company is nothing like investing in a dotcom, particularly when it comes to a quick and lucrative IPO.
It’s not that investing in cleantech isn’t financially viable, or even that cleantech startups don’t make good public companies–although that is probably the case with some. It’s more that the growth arc of a cleantech company–run experiments in a lab, prove that your technology works, then prove that your technology can be produced at scale at a reasonable price point, all while dancing around continuously changing federal, state and local regulations-runs counter to the high-margin, quick-return deals that have characterized venture capital investing for the last few decades.
To get the 20 percent return sought after by most VCs, investors are looking more at later-stage deals, according to a recent report by Ernst and Young, and some view a merger or acquisition, rather than an IPO, as the ultimate exit for a cleantech company. Large corporations are increasingly handing over massive investments to cleantech start-ups to conduct research relevant to their core business. General Motors, for example, has invested heavily in everything from A123 Systems’ nano-battery technology to cellulosic ethanol technologies currently being developed by Mascoma and Coskata.
Other options increasingly luring venture-backed cleantech companies away from traditional IPOs include reverse mergers and listing on the AIM exchange in London rather than on a U.S. exchange. Reverse mergers, which entail finding a publicly traded “shell” company willing to purchase your private company and then hand over controlling stock of the now-public merged company, essentially allow private companies to go public without dealing with an IPO.
Also called a “reverse IPO,” the practice has gained popularity as a less expensive way for companies to go public and immediately begin trading stock. Akeena Solar (Nasdaq: AKNS) and Carmanah Technologies (CMH on the Toronto Stock Exchange) are two cleantech companies that have made reverse mergers work well in the last two years. London’s AIM market also provides quicker access to public markets (and thus cash flow), but navigating the foreign exchange can be tricky for U.S. companies, despite its near-total lack of regulation.
VCs are also learning to simply adjust their expectations and play the waiting game when it comes to cleantech investments. Nancy Pfund, a venture capitalist with DBL Investors in San Francisco, recently told The New York Times that one of her portfolio companies, Solar City, was set to more than double last year’s revenue of $26 million, but that it, like a lot of energy startups, was simply too early in its development to go public.
While a slowdown in IPOs may be worrisome for the venture capital community, investors capable of shifting their paradigm a bit to better fit the needs of the emerging cleantech market could wind up with success stories even greater than the legends of the dotcom days if they’re willing to wait awhile.
Amy Westervelt is a Senior Correspondent for Sustainable Industries magazine, covering technology, food and agriculture, and other sustainable business topics. Her recent feature “Let’s Make A Deal,” looks at the ins and outs of financing a cleantech company – without venture capital.