It struck me the other day that I may have been looking at the recent spate of clean-tech IPOs backwards. Perhaps instead of lamenting the dearth of profitable, healthy companies going public on major exchanges in our sector, what we should be considering is whether early and still-risky IPOs mean clean-tech venture capitalists are finally finding a capital path and exit model that works, akin to the IT and biotech venture models that delivered such terrific returns up until the Internet crash.
The question then is: Can these IPOs continue, perform and validate the broad strategy that our tech venture capital sector has been following in clean-tech?
Our American institutional venture capital sector largely missed the clean-tech AIM boom in Europe; the carbon trading boom in Europe and Asia; the Chinese solar manufacturing boom; the corn ethanol boom in the US; the wind project developer boom in the US and Europe; the sugar cane/ethanol boom in Brazil; and the shale gas boom in the US -- each of which were tens to hundred billion-plus dollar booms. All the money in those sectors was made largely by investors and players outside the traditional venture arena – though some exceptions in each prove the rule.
Instead, the American venture capital and tech sector eschewed what proved to be a huge number of highly profitable investment areas in clean-tech as “not venturable bets” and has poured about $15-20 billion-plus into thin film/advanced solar, cellulosic biofuels, solar finance, smart grid, automotive/energy storage technology.
One cynical argument is that in a hubristic attempt to avoid the “low tech,” policy driven and capital intensive sectors in clean-tech, our venture sector overreached into technology risk; once they found the policy risk and capital intensity waiting for them on the other side busily moving the bar, they started clamoring for M&A, IPOs, and government funding and policies to bail them out.
In any case, the clean-tech deals are hurting for a lot more cash and likely need early IPOs to make the sector viable long term, but the first generation of clean-tech VCs have learned lots of lessons.
But are we now on the cusp of a model capable of anchoring returns for these last few years of the second and third waves of clean-tech venture capital investment anyway? This would be a model perhaps described as:
- Raise larger funds.
- Take more concentration early in technology risk curves.
- Stack on capital fast.
- Take heavy leverage with government dollars.
- IPO early, leaving money on the table in terms of tech boom style multiples, but leaving a lot of technology and scale up risk for the public markets. Time will tell.
Critical to this model would be the aftermarket performance of the the first wave of these IPOs, and willingness of policy makers to continue to fund. So a quick look at the Big Four of US venture-backed clean-tech IPOs to date hopefully tells us something. We're excluding for this analysis earlier US clean-tech powerhouse deals SunPower (SPWRA) and First Solar (FSLR), which came up different financing paths well before the policy and FIT booms that drove most of the first generation of solar profits.
- A123 (AONE): Went IPO on the back of having neat batteries for EVs. Still losing money.
- Amyris (AMRS): Not sure what it went IPO on. Still losing money.
- Codexis (CDXS): Went IPO on the back of a strong R&D partnership and contract with Shell (RDS.A). Still losing money.
- Tesla (TSLA): Went IPO without the product it needs to break even built on the back of DOE money and car sex appeal. Still losing money.
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Aftermarket performance, key to the actual returns of the LPs who usually aren’t out at the IPO and even more critical to willingness of the public markets to underwrite more deals, hasn’t been awful. Three of the four doubled from the IPO price before peaking and giving back one to three quarters of value from their peak. Two of them are still above listing, mean 90-day post-IPO performance is a positive 27%; only one struggled to see a strong pop, and the mean performance to date since IPO price is +9%.
Of course, the largest, most mature, and earliest bellwhether, A123, has been on a long slow slide -- meaning overall dollar weighted average performance would be a -6%. And 90-day performance is only 3%, with performance to date a -8% if calculated on the first day close, not the IPO price, meaning it may be more underwriters managing issuance price than true aftermarket performance. If benchmarked against the S&P 500, foreign clean-tech IPOs and other non-clean-tech US IPOs, it might not look so good. But again, time will tell.
Will these first Big Four hold out for solid returns, or slide like A123? What portion of their businesses will get built and eventually become profitable? Will they be able to raise more capital? Will the next crop of rumored and planned clean-tech venture-backed IPO candidates make it through? How much cash will they need before they do/what kinds of aggregate cash on cash returns multiples will we see, and will they too hold up when the public markets are asked to support billions of capital into dozens of these deals needed to anchor the clean-tech venture sector?