Alternative energy market lures controversy and venture capitalists
Monday May 14, 2007
A soya bean field in Springfield, Illinois.
The jolt comes at a time when venture capitalists are practically falling over themselves to invest in cleantech startups, no doubt reminiscing for the days when companies like Yahoo!, eBay and Amazon first floated their shares and gave them exit strategies they have been only able to dream about since the bubble burst.
In the first quarter of this year US venture capitalists invested $264m (£133m) into 23 cleantech deals, a 41% increase in dollar value over the fourth quarter of 2006, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association (NVCA).
The report, based on data by Thomson Financial, shows that while the 2006 US investment in cleantech of $1.5bn in was only slightly bigger than a blip in the overall total of $26bn, it is growing "exponentially" said Emily Mendell, the vice president of strategic affairs at the NVCA.
According to Lux Research, which has just completed a comprehensive report on the sector, "the warning signs of a bubble are flashing in the energy technology segment, where initial public offering values and venture capital deployments more than doubled last year – setting the stage for a boom and bust".
Lux reported around 930 startups in global solar energy and biofuels arena and that some 200 of them have received some venture capital money.
The $1.5bn figure MoneyTree reported was only $623m in 2005.
Says Michael Holman, a senior analyst at Lux: "I think from looking at the sheer amount of money that is being invested right now we have to think that a lot of that money is now chasing after some opportunities it wouldn't be in a more sober climate."
Later stage institutional investors have also been caught up in the hype. Lux reported that in the energy segment where IPO value rose from $1.6bn in 2005 to $4.1bn in 2006. Most of those companies came public either on London's Aim market or in Frankfurt, because there are less stringent revenue milestones that the US Nasdaq exchange.
However, one ethanol company that chose the Nasdaq disappointed investors this month by reporting a loss when Wall Street analysts were confidently predicting another profitable quarter.
That company is VeraSun Energy, which is the number two producer of ethanol in the US after giant Archer Daniels. It reported a loss of $312,000 on revenues of $144.5m when analysts thought it would better last year's corresponding quarterly profit of $2.7m. Those results sent its share price plummeting 15% to $16.72 , well below its IPO figure of $20. It also dragged down the share prices of Archer Daniels and others in the sector.
Mr Holman is quick to point out that the public has not bought in on the hype as have venture capitalists and consequently many alternative fuels stock prices are not outperforming the market.
"The herd mentality has begun to take over in the venture capital community and there is probably some not very wise money that is flowing into the ethanol segment in particular," he said.
Even before those VeraSun financials came out, Lehman Brothers was also questioning the viability of ethanol suppliers, saying the US just did not have the infrastructure to digest the amount of fuel being manufactured.
VeraSun blamed its travails on the high cost of corn – a situation that may be alleviated when a massive planting of subsidised corn by US farmers is ready for harvest. But experts like Mr Holman believe the future lies not in fuel made from corn or sugar but from cellulose-based farm waste such as corn kennel, wheat and barley straw. Leaves and stalks of plants can also be used as the source of ethanol.
Unperturbed by the hullabaloo about the viability of ethanol or the possibility of a "cleantech bubble" is America's most prominent venture capitalist in the renewable energy space, Vinod Khosla, whose firm has invested in 25 start-ups. Those companies include three that use corn or sugar and four that use cellulosic waste to produce ethanol as well as others that are looking for alternative energy sources using wind, solar and water.
Khosla won't say how much he has invested – estimated to be hundreds of millions of dollars - but he believes the rewards will be high and that they will come sooner rather than later: "I suspect most of these (investments) will be public offerings and I expect to see IPOs in months not years. This area is really going to heat up."
He admits there is a possibility of a bubble as "every market that is attractive goes through high expectations".
Nonetheless he is delighted that more venture capitalists are investing and professes to welcome the competition for investment opportunities: "I am encouraging more people to come into this business because I think it will help us switch away from fossil fuels and that's a good thing. And the more experiments that we try the more likely we are to succeed."
He attributes the bad press ethanol is getting to misinformation being supplied by the big oil companies. Those companies have a lot to lose and have launched a massive PR campaign to discredit new technologies, he claimed. Big Oil is "doing what the tobacco companies did when they tried to fight the notion that smoking caused cancer."