Continuing a tradition since 2007, once again we bring you some end-of-year thoughts about where we think the cleantech investment theme is going.
Our cleantech-specific analysis and advisory firm Kachan & Co. focuses on this space. We publish research reports. We get briefings from companies introducing new technology. We publish a cleantech analysis service. We’re quoted in the press. We pore over what’s going on in the world in clean/green tech markets and have made some informed calls over the years, like China’s cleantech dominance, the rise of efficiency technologies and the downturn in cleantech venture capital funding.
This year, we’re of the opinion that industry-watchers should take heart. Especially if you’ve been on the page that cleantech is past its prime or otherwise unworthy of your attention of late. Why? Because we’re more optimistic about the year ahead in cleantech than in our last two years of predictions (read 2012 and 2013), which were uncharacteristically negative for a firm that’s often been something of a cheerleader for the cleantech space.
What’s different this year? As you’ll read below, we believe the world turned an important corner in cleantech in 2013.
Gradual recovery in 2014
If you’ve not been looking carefully into the tea leaves this past year, you may have missed the quiet recovery already underway in cleantech, a process we expect will gain even more momentum through 2014.
We had the chance to take a close look at the fundamentals of cleantech this fall in co-authoring a new (and free!) 38-page research report. Titled Cleantech Redefined: Why the next wave of cleantech infrastructure, technology and services will thrive in the twenty first century, the paper analyzes the most recent investment research available across a number of industries and major impact areas.
One section of the report compares the cleantech wave to other technology booms of the last 50 years, like the dot com boom, the networking craze, biotech, the PC and the microprocessor. We found a number of parallels and a number of reasons for optimism comparing the cycles. After 20 years in technology, personally, the more I looked at the data, the more it felt I'd seen this movie before. After an initial frothiness and correction, there’s always a resetting of expectations and execution and a gradual “climb out” of the trough. Gartner calls it a hype cycle. And climbing out of the trough is where we are today in cleantech.
The recent downturn in venture capital investing in cleantech doesn’t mean the sky is falling. The dip becomes less threatening when viewed in the historical context of how venture capital always spikes early in emerging categories, later to be augmented with other sources of capital, such as often-unreported corporate and family office investment, as industries develop. It happened in the dot com, networking, biotech and PC eras, and this transition is now well underway in cleantech, as shown below. We offer a lot more detail, with additional figures and graphs, in our report.
While venture capital was the dominant source of clean technology financing in California in 2008, it played a lesser role in 2012. Source: CB Insights, Collaborative Economics. Excludes project finance and unattributed investments.
Another takeaway from the above: Pay less attention these days to venture capital investment as an indicator of the health of the cleantech space. You risk not seeing the real picture.
In addition to an analysis of patterns in venture funding in previous bubbles vs. what’s occurring today in cleantech, our 38-page analysis on the state of cleantech today also looks at overall investment levels into clean and green innovation and projects. It contemplates what’s to be learned from models like the technology adoption life cycle (of “chasm” fame.) It factors in the recent recovery in publicly traded cleantech funds and other metrics.
In all, based on what we learned writing this report, we forecast a continued recovery in cleantech. Not an exuberant one—we’re betting those days are over—but look for a clear upward trend in many things cleantech in 2014, i.e. corporate, private equity and family office investment, venture debt, project finance, M&A, interesting new innovation, new product announcements, etc. But don’t hold your breath for classic venture investment to increase appreciably.
Term cleantech to stay alive and well
There’s been speculation about whether the term ‘cleantech’ that my previous firm is credited with coining will, or should, persist. My colleagues sometimes suggested the phrase should quietly go away—that our job was to ensure that clean and green propositions are eventually added to all products, that all forms of energy become clean, that all synthetic chemistry and toxins be replaced with natural, biological solutions because these are ultimately the less expensive and potentially only real ways to accommodate more people on the planet.
My current cleantech research & consulting firm Kachan & Co. worried further about the future of the term cleantech this summer. I, myself, had something of a crisis of confidence after a set of cleantech power players I interviewed in Silicon Valley shared the extent to which they’ve been distancing themselves from the phrase. It seemed this summer that many of the investors, lawyers and global multinationals I’d worked shoulder-to-shoulder with for years had started considering cleantech a dirty word.
But today, at the end of 2013, we now predict the term cleantech to persist through 2014 and beyond. We have come to appreciate how our datapoints from the summer were very regional, and how the rest of the world is still enthusiastically embracing the term as shorthand for environmental and efficiency-related technology innovation.
We also now suspect that investors and service providers who recently distanced themselves from the phrase may have been too quick to do so, and anticipate a restoration of the cleantech-related teams at many of these firms. Why? Call it what we will in the future, the fundamental drivers of resource scarcity, energy independence and climate change aren’t going away. The largest companies in the world are demanding more and better clean and green products and services than ever before. And that’s driving a recovery.
The peak in global search traffic for the term cleantech and its subsequent decrease and stabilization mirrors the Gartner hype cycle. Is a gradual climb up again in the cards, as the hype cycle suggests? We predict yes. Source: Google Trends.
Realistically, cleantech teams at private equity investors, law and consulting firms may rebuild in 2014 under the auspices of “energy,” “advanced materials,” or other related monikers drawn from the taxonomy of cleantech. But massive funds earmarked for this space are being raised again (e.g. just this week: Tata/IFC: $400 million, Industry Ventures: $625 million, the UN’s Green Climate Fund: $TBD, expected to be massive) and these sort of numbers are representative of opportunity. And we think it’ll still mostly be called cleantech.
Crowdfunding emerges as viable in unexpected ways
Forget what you know about Kickstarter and Indiegogo. Donation-based crowdfunding only has limited usefulness for companies seeking seed or other early stage funding in cleantech.
In 2014, look for equity and debt-based crowdfunding platforms to catch their stride and serve as legitimate ways for cleantech vendors and project developers seeking to raise relatively modest amounts of capital. (Which isn’t to say we expect the U.S. SEC to sort out all regulations in 2014 around Title III raises under the country's Jobs Act. We expect that equity and debt-based crowdfunding plays in cleantech will leverage Reg D in the U.S. and other similar regional constructs worldwide in the short term to help companies raise money.)
In 2014, expect selected efficiency, “cleanweb”-style big data, collaborative consumption and other capital efficient plays to be able to raise hundreds of thousands of dollars for themselves in equity or debt via horizontal crowdfunding platforms like AngelList or FundersClub, or industry-specific debt and equity portals like Mosaic, SunFunder or a host of other emerging platforms. Under current regulations, such crowdfunded raises may ultimately be feasible up to $1 million per company per year in the U.S.
Which will likely make crowdfunding less attractive in 2014 for big, capital-intensive cleantech plays.
Underperformance in EV sales, and risks to growth rates
Betting that the future of transportation will be all-electric, and that 2014 will be THE year of the electric car, finally? Think again.
Enthusiastic bloggers breathlessly paint the picture that electric vehicles (EVs) are flying out of the showrooms (as in here and here), but they’re selling slower than expected by analysts, with only 150,000 expected sold worldwide in 2013.
Most industry watchers believe EV adoption will be spurred by governmental support in the form of subsidies, infrastructure funding and concessions such as free parking, access to high-occupancy vehicle (HOV) lanes and congestion-zone toll exemptions, along with broader adoption of wireless charging and smart-grid innovations. But, in our analysis, there are other forces causing risk to the growth rates of electric vehicles.
As we forecast last year (read “The internal combustion engine strikes back”), there have been innovations taking place in internal combustion engines (ICE) that could forestall the timing of an all-electric vehicle future. Even more surprising to us have been the substance and volume of fuel cell vehicle announcements this year from the world’s leading automakers—which are likely at least partially responsible for the quiet doubling of certain fuel cell companies’ share prices in 2013. Yes, you read that right: Automotive fuel cell companies’ shares are UP!
In 2010, my line to journalists that “the jury was in, and the future of transportation was to be all-electric.” In 2012, my talking point was that the near-term future of transportation was to be all-electric. In 2013, I started talking about fuel cells possibly succeeding all-electric in the far future of transportation, once costs come down. In 2014, fuel cell approaches may get even more ink and undermine the aggressive uptake expected for electric vehicles.
And that’s not necessarily a bad thing, for if their fuel (hydrogen, methanol, or in some cases formic acid or others) can be created in low-cost, sustainable ways, fuel cell vehicles could ultimately have less of an impact on the planet, given that the power required to drive EVs often comes from dirty sources.
Rare earth profits to be made in unexpected places
Fortunes will not be made in 2014 in rare earth element mining companies. Reconsider buying into rare earth element mining companies or associated funds. If holding rare earth mining investments hoping they'll return to stratospheric levels of yore, consider getting out of them.
Why? In the short term, we think recycling will be one of the few rare earth plays with upward motion. Much of the industry has been focused on new mines to meet growing demand for rare earths. But recycling of rare earths is gaining momentum quietly, and stands to accelerate in 2014 given the increasing costs of mining and cost and schedule overruns at high profile sites like Molycorp’s Mountain Pass California mine.
- Brussels-based company Umicore is at the forefront of recycling technologies for critical metals. At its site in Hoboken, Belgium, the company recycles about 350,000 tons of e-waste every year, including photovoltaic cells and computer circuit boards, to recover metals like tellurium. In 2011, it started a venture to recycle rare earths from rechargeable metal hydride batteries (there’s about a gram of rare earths in a AAA battery) at its Antwerp site, in partnership with the French company Solvay.
- Japanese car company Honda announced this March that it has developed its own in-house recycling program for metal hydride batteries, which the company plans to test using cars damaged by Japan’s 2011 quake and tsunami.
- The Critical Materials Institute of the U.S. Department of Energy is developing a method that involves melting old magnets in liquid magnesium to tease rare earths out.
Watch for more and more companies to be introducing rare earth recycling plays. And watch for a near future trend encouraging electronics manufacturers to design their products to be easier to break apart for rare earth element recovery in the first place.
Getting rare earth metals out of modern technology is hard, since they’re incorporated in tiny amounts into increasingly complex devices. A circa-2000 cell phone used about two dozen elements; a modern smart phone uses more than 60. Despite the relatively high concentrations of rare earths in technology, it’s traditionally been easier to chemically separate them from the surrounding material in simple rocks than in complicated phones.
Recycling is perhaps the best route forward for elements where demand is expected to level off in the long run. Expect demand for terbium and europium, for example, to fade as fluorescent bulbs are eventually replaced with much smaller LEDs. But for other elements, like neodymium, new supply is needed. Currently only tiny amounts of neodymium are required for ear-buds of smartphones—but high-performance wind turbines need about two tons each. But it's only these sort of large quantity applications that are expected to drive the need for new mines.
Other potentially appealing rare earth plays in 2014 include new processes at existing mines to improve processing yields, and the development of alternative materials to obviate the need for rare earth elements.
More on the subject in a brief on rare earths to our analysis service subscribers.
And so concludes our predictions for cleantech in 2014. What do you agree with? What do you disagree with? Leave a comment below.
A former managing director of the Cleantech Group, Dallas Kachan is now managing partner of Kachan & Co., a cleantech research and advisory firm that does business worldwide from San Francisco, Toronto and Vancouver. The company publishes research on clean technology companies and future trends, offers cleantech data and analysis via its Cleantech Watch™ service and offers consulting services to large corporations, governments, service providers and cleantech vendors. Kachan staff have been covering, publishing about and helping propel clean technology since 2006. Details at www.kachan.com.