Green Startups: Trapped In the 'Valley of Death'

Young cleantech companies are running out of gas on the road to going public

(Corrects period of investment decline in last paragraph.)

Startup companies call it the Valley of Death—the arduous terrain between proof of concept and the beginning of mass production and significant sales. In good times, just 40 percent of companies go public or get acquired, according to John Taylor, head of research at the National Venture Capital Assn. in Arlington, Va.

Now the Valley is even deadlier. Hundreds of U.S. cleantech startups find themselves stuck on the road to serious revenues because of the toxic combination of a stalled economy, scarce funding, and Washington's failure to enact comprehensive climate and energy legislation. The market for initial public offerings is frozen and venture capital is drying up because of uncertainty. Faysal Sohail, a managing director at CMEA Capital, a San Francisco fund that helps oversee $1.2 billion in venture capital investments, says that at the start of the year he had six profitable companies that were ready to go public but couldn't. "It's a sour mood," he adds.

Venture capital and private equity firms have poured some $49.3 billion into solar, wind, and other alternative energy companies since early 2000, according to data compiled by Bloomberg New Energy Finance (BNEF), a research unit. Most placed their bets with the expectation that they would cash out in five to seven years. In the new normal, that horizon is getting pushed out. "We're about 12 to 18 months behind where we expected to be," says Alan Salzman, founder and chief executive officer of VantagePoint Venture Partners, which has channeled more than $5 billion into startups, including BrightSource Energy and MiaSol, two solar ventures.

The same complaint is being heard across the VC community. "We're in a difficult market for initial public offerings, cleantech or otherwise," says Brian Bolster, head of alternative energy investment banking at Goldman Sachs (GS) in New York. "There are 108 IPOs that are stale—or at least 100 days old," he says, referring to the number of days since companies filed paperwork to go public. "We're seeing companies come out, but it's about a tenth of those that want to come out."

While Tesla Motors (TSLA) made a splash with its June IPO, raising $226 million, only two other U.S. cleantech startups have staged offerings this year: biofuel companies Codexis and Amyris. Tesla now trades 23 percent above the IPO price of $17. Codexis is down 15 percent since trading started on Apr. 21, and in September, Amyris managed to raise just $84.4 million at below its intended price range, according to BNEF.

Wall Street's interest in these companies has been fueled in part by the Obama Administration's $787 billion stimulus package, which makes new transportation technologies a priority. Solar panel makers haven't received a similar boost because of the Administration's failure to win support for a federal renewable energy mandate and a cap on carbon dioxide emissions, both of which would boost demand for clean power.

For startups that cannot go public, the next best option is finding deep-pocketed partners willing to pony up millions for new factories and equipment. Such partners are hard to find. And when marriages can be arranged, they take place at an earlier stage, notes Sohail. "It used to be we'd wait for round D to find a partner. Now it's right away."

France's Areva in February bought Ausra, a California company developing solar thermal power plants, for an undisclosed sum. Last month, Japan's Sharp paid $305 million for Recurrent Energy, a U.S. developer of rooftop solar arrays, in a bid to win back market share being taken by Chinese panel makers. "It's a capital-intensive business and we reached the limits of private equity," says Arno Harris, Recurrent's CEO. "With Sharp's balance sheet, we'll have no problem."

Many an entrepreneur right now wishes he were in Harris' shoes. An Oct. 1 report from Cleantech Group, a San Francisco research outfit, noted that VC investments in clean technology fell 30 percent in the third quarter, to $1.53 billion, compared with the previous quarter, with solar taking the biggest hit. "Venture capital has been very good at driving technology," says Goldman's Bolster. But even VCs don't have pockets deep enough to pay for scaling up these capital-intensive businesses. "When it comes time to write that $500 million to $1 billion check," Bolster says, "nobody's home."

The bottom line: In a market that is less receptive to initial public offerings, more cleantech startups are willing to be acquired in order to survive.

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