The startup investment cycle takes time. The average time to IPO is 12 years which means that just as with scientific research, the investment lags the results by a long time.
Contrary to populist belief, this also shows that investors are able to think about the long term, not just thinking about short term returns. Indeed, long term value investing is where the most consistent returns are, and venture capital is where you can find the largest outcomes.
The startup advantage is agility and flexibility. Modern approaches to build and deploying software means that innovative ideas can rapidly reach customers.
The problem is that whilst “moving fast” might work for a consumer mobile app or a backoffice SaaS product, the cleantech sector tends to involve highly regulated, capital intensive, mission critical infrastructure.
Key features of energy systems, however, impede accelerated innovation. Energy is a highly capitalized commodity business, with complex supply chains and established customer bases, providing essential services at all levels of society. These features lead to systems with considerable inertia, focus on reliability and safety, aversion to risk, extensive regulation, and complex politics.Advancing the Landscape of Clean Energy Innovation, February 2019
This presents problems for startups trying to break into the industry as well as scale-ups looking to grow innovative technologies. A lot of effort has to be spent ensuring technologies work properly and can be maintained safely. The longer it takes to deploy and prove a technology, the more risk there is for the startup.
Unlike a software startup which can build and release their product with a single in-house team, cleantech often requires the commercialisation of academic and scientific innovation. Like biotech research, it can be a long road to productising an academic discovery and the initial phases tend not to attract private sector investment.
Startups can find a very important role in the cleantech sector, but they are not the only player, and typically participate at a later stage.
So what happens once a startup is ready to get going?
How much is being invested in cleantech?
Crunchbase lists 2,044 companies that categorise themselves either as CleanTech or Clean Energy, 95% of which are classified as “active”.
From that list, $49.9bn has been invested across 2,694 funding rounds. The average total funding is $53m although the median is $3m. However, that includes some large utilities such as Gas Natural – I would question whether they deserve the label “cleantech”.
Of the 288 companies that have exited, the valuation at IPO totals $10bn and M&A exits total $66.1bn. This means of $49.9bn invested into cleantech, investors have returned $76.1bn.
Compared to other sectors
Using the data from Crunchbase to compare companies by category, cleantech comes second from bottom in total amount of investment and bottom in terms of number of companies.
If you exclude the IPO and M&A exits from the Crunchbase data, the numbers reduce significantly to 478 companies and a total of $10.4bn invested across 1,160 funding rounds. The average total investment is $26m with a median of $1.7m. 92% of those are still “active”.
Does cleantech require larger investments?
Given the high barriers to entry, it would be reasonable to guess that cleantech would be similar to the biotech profile, particularly when it comes to the amounts invested.
This is proven by the numbers: $53m is the average total investment across cleantech companies, with only financial services averaging more at $56m. However, there are some large outliers which push that average up and the cleantech median is much lower at $3.2m compared to biotech at $6.5m.
The data shows that more money is needed to bring cleantech and biotech technologies to market when compared with the other categories. There are fewer cleantech companies but they raise more money than e-commerce, advertising and education, and about the same as health care. Financial services and biotech tend to raise more, with biotech raising significantly more.
Stats based on Crunchbase categories of all companies as of 2019–08–26. Companies can have multiple categories applied to their profiles.
What are the cleantech investment trends?
Peaking in the 2012–2015 period, the overall number of startups founded has been on a downward trend for the past few years.
On average, 52 cleantech companies are founded each year, but that is tiny compared to e-commerce which has seen an average of 988 companies founded per year since 2004.
The peak years for cleantech were 2009, 2010 and 2011 with 73, 70 and 71 companies being founded respectively. The category needs to be plotted by itself because it is so small relative to the others.
Despite this negative trend of companies being founded, the numbers closing investment is actually increasing. More companies have raised funding over the past few years.
This suggests that companies in cleantech might need more time to reach a point where they can raise funding, possibly due to the long product development times.
Stats based on Crunchbase categories grouped by date as of 2019–08–26. Companies can have multiple categories applied to their profiles. In the cleantech funding total graphs, Bloom Energy was removed from the 2004 stats because of its $825m outlier funding round.
Cleantech funding outliers
Every sector has its funding outliers — those that raise huge rounds. We’ve seen the recent IPOs of the likes of Uber (raised $24bn) and WeWork (raised $12bn), but what are the equivalents in cleantech?
Going back to 2004, there are a number of cleantech outliers who have raised large rounds.
- Bloom Energy (raised $825m) — founded in 2001, $1.6bn IPO 2018. Provides on-site power generation systems that can use a wide variety of inputs to generate electricity.
- Sonnen (raised $169m)— founded in 2010, acquired 2019. Intelligent lithium based energy storage
- Infinia (raised $147m) — founded in 1985, acquired 2013 through bankruptcy proceedings. A solar energy tech company.
- Ice Energy (raised $132m) — founded in 2003. Utility-scale distributed energy resources and storage technologies for clean energy.
- Motiv Power Systems (raised $77m) — founded in 2009. Electric powered intelligent chassis & software solutions for cost effective, reliable, class 4–7 commercial vehicles.
Where is the cleantech opportunity?
Energy has a huge focus because of the massive opportunity not just in emerging markets like China and India, but because of the expected growth in demand everywhere.
$1.8 trillion was invested into the energy sector in 2017 but the International Energy Agency estimates $2.8 trillion is needed each year to meet demand.
But energy is just one subsector.
Cleantech Group run an annual list of the top 100 cleantech companies across multiple categories. For 2019 (looking at companies that raised funding up to Dec 2018), their Cleantech 100 companies raised over $14bn with an average investment of $37m.
They include categories such as Agriculture & Food ($1.9bn), Energy & Power ($1.8bn), Industrial & Manufacturing ($951m), Materials & Chemicals ($247m), Resources & Environment ($767m) and Transportation & Logistics ($8.37bn). This is a much broader definition than used by Crunchbase above e.g. they include taxi-on-demand company, Lyft, which shows that there are many ways that startups can help tackle climate change.
Who is investing in cleantech?
There are investors on the lookout for these kinds of opportunities. Just look at the replies to Mike Maples’s tweet:
And there are funds specifically focused on the sector, some of which have only been announced recently:
- Breakthrough Energy Ventures — A $1bn fund backed by Jeff Bezos, Bill Gates, Richard Branson, Vinod Khosla, and many others.
- ETF Partners
- Lux Capital — A $2.4 billion firm investing at any stage from $50,000 to $50 million.
- Incite Ventures
- Future Shape
- Baruch Future Ventures founded by Tom Baruch.
- Social Impact Capital
- Power House
- Ramez Naam’s AngelList syndicate (which I am part of).
What is the cleantech investing outlook?
Climate change and making a positive contribution to improving the environment is clearly on the political agenda. There are fewer companies being founded but there are more funding rounds. Of those cleantechs that have been funded, there have been some very large investments, mostly focused around energy, but the absolute numbers are still small.
The consensus in 2019 is that the startup ecosystem is efficient and there is a lot of capital waiting to be deployed. According to Tom Tunguz:
For founders who have established product market fit, a panoply of capital choices exist. In my view, the fundraising market in 2019 is the strongest it’s ever been. Founders have more options than ever.
The data shows that there is less competition for funding and that when funding is closed, large amounts can be secured from a range of investors. When evaluating ideas as a founder, less competition is good, but no competition is a red flag.
Cleantech is not a crowded market and has seen significant exits, but the small number of companies suggest it is not particularly “easy”. Are founders put off and focused on other areas with lower risk? With the buzzwords focused elsewhere and new capital available for investment, now seems like a good time to get involved.