Venture capitalists are chasing cleantech unicorns, but will they just create another Solyndra?

Yuan-Sheng Yu, Senior Analyst & Chloe Holzinger, Senior Research Associate

With Uber's and Lyft's recent IPOs, the discussion of valuations and the coveted unicorn label is making the rounds in innovation circles again. It seems that this conversation is cyclical – some days, valuations are just another data point within dozens that go into innovation decisions; other days, "Find the next unicorn!" is a battle cry for venture capitalists and corporations alike.

Unfortunately, the correlation between valuation and business success is generally weak – particularly within the cleantech space. Bloom Energy is one of the few cleantech unicorns the industry has seen, but its share price has fallen flat for much of 2019, trading at less than half of its historical high since its 2018 IPO. This is not surprising – Bloom Energy received a Lux Take of Caution back in 2014, well after it reached unicorn status. Despite major backing from venture capital powerhouses like Kleiner Perkins, the Lux Energy Team saw several major challenges for the future of fuel cell technology that would only be addressed with significant breakthroughs in cost, performance, and durability.

As venture capital funding (both traditional and corporate) and overall investments in startups continue to grow, we examined trends in cleantech startup investments to help investors avoid falling into the FOMO trap and being led astray by high valuations. To narrow down the pool of more than 200,000 private energy companies globally, we focused specifically on companies developing cleantech systems, services, or products. In addition, only companies that have raised a funding round since 2010 were included to capture both companies that have established themselves in the industry and emerging players. This final list was then cross-referenced against Lux Research's database of primary research-derived company profiles. The following figure shows a distribution of company Lux Takes in five buckets of valuations – greater than $1 billion, $500 million to $1 billion, $100 million to $500 million, $20 million to $100 million, and less than $20 million. Electric mobility was not included in the analysis, as that space has its own trends and outlooks.

Lux Research - Unicorn

It is important to note that Lux's vetting process in selecting companies for interviews equates to a 2.5 times higher chance of a company succeeding, which leads to a lower number of companies with a Lux Take of Caution in the database relative to what is in the market. While not a fully exhaustive list of cleantech startups, it does provide a snapshot of the venture capital landscape in cleantech. Upon a closer look at the details behind the figure, three key takeaways emerge:

  • Where the investment comes from is more important than how much. Of the companies analyzed, 37% received a Lux Take of Positive, and 40% of these favorably rated companies have a valuation greater than $100 million. Going a layer deeper, nearly 75% of these favorably rated, high-valuation companies had at least one active investor from a corporate venture capital fund or direct investment from a company in the energy industry. On the other hand, less than 15% of companies with a Lux Take of either Wait and See or Caution and a valuation greater than $100 million featured corporate investors. When considering the entire pool of companies with a Lux Take of Caution, traditional venture capital firms dominated, with less than 8% of the companies targeted by corporations in the energy industry – including companies like Sundrop Fuels, EtaGen, and CoolPlanet Energy.

  • Strategically navigating the energy value chain is proving critical. The global energy system is ultimately controlled by a few dozen major players that dictate the introduction of new technologies along the entire supply chain. ChargePoint uses its strong partnership network of hardware OEMs, automakers, and industry trade groups to successfully gain market traction for its public network electric vehicle charging stations. StoreDot, on the other hand, has yet to deploy its synthetic organic compounds for fast-charging Li-ion batteries despite its $500 million valuation, which may not have been the case had it formed collaborated with materials suppliers.

  • Commercial projects separate out leaders regardless of valuation. Traditionally, venture capital is primarily active in low-capex and opex technologies – such as software – but cleantech systems broadly require significant capital to build and operate, as well as comparatively longer timelines to test and commercialize. Ranging in valuations from the low hundred millions to nearly $1 billion, several Lux Take Positive companies are making significant commercial progress. Fulcrum BioEnergy has broken ground on a $200 million renewable aviation fuel facility set for operations by late 2019, GlassPoint Solar has nearly 2 GW of concentrated solar power projects under development, and LanzaTech has a project pipeline across the globe with conservative timelines of three years to five years to completion.

These are just three of the many factors that play into creating a successful cleantech startup; others include product technical value and business strategy, the two cornerstones of Lux's startup assessments. Yet these key findings are all the more relevant today, as traditional venture capitalists are once again starting to invest in cleantech after nearly a decade since the downfall of Solyndra. Back in 2010, Solyndra was a titan in the cleantech startup space, with a $2 billion valuation largely based on venture capital funding. However, while the company struggled to solve technical issues with its cylindrical photovoltaic design and reduce its high manufacturing costs, Solyndra's board and management team shifted resources away from technical departments in favor of sales and marketing efforts. Unsurprisingly, a number of these pivotal board members were traditional venture capital investors primarily driven by increasing their returns on investment – not by improving their existing processes or creating new business divisions like many corporate venture capitalists are doing. In this manner, the powerful but ultimately misaligned priorities of Solyndra's traditional venture capital investors were one of the root causes of the company's 2011 bankruptcy.

Unfortunately, traditional venture capitalists do not appear to have learned the lessons of the past, as recent high-value funding rounds led by venture capitalists in cleantech startups are strongly reminiscent of Solyndra. One company that may fall victim to the frameworks and expectations of the traditional venture capital model is Sila Nanotechnologies (full profile set to publish in June), likely the next cleantech company to reach unicorn status given its recent $170 million Series E round. We remain wary of the role the company's venture capital investors will play in its direction, despite our confidence in the existing management team and the technology. Being pressured to enter the market too early without rigorous product testing or enough strategic partnerships could lead to another cleantech unicorn led astray by venture capital. A hard-learned lesson from nearly a decade ago is on the brink of repeating itself, as short-term memory, overvaluation, and the allure of chasing the next cleantech unicorn are leading many venture capitalists down a path of possible disappointment.  

 

Further reading 

- Analyst Insight: Despite Another Record-Breaking Year for Electric Mobility Investment, Startup Consolidation is Imminent as the Industry Matures (Members Only)

- Analyst Insight: Reality of Fuel Cells: Despite Recent Growth, Future of Fuel Cell Technology Remains Uncertain (Members Only)

- Blog: Automotive Battery Trends: Incremental Innovations Featured Heavily at the AABC Europe 2019

- Blog: Startup Consolidation Imminent Despite Another Record Breaking Year for Electric Mobility Investment

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