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Clean tech companies survive on long-term opportunities

22 July 2010 No Comment

By Helen Kaiao Chang

See original story on SDNN

Tuesday, April 28, 2009

The clean-tech industry represents one of the greatest business opportunities of the century, but the road is long and rocky, requiring great investor patience, said venture capital experts at an event organized by the San Diego Venture Group.

The event, which was hosted Tuesday at the La Jolla Hyatt, drew 500 participants from – among others – the clean tech, life science and venture capital industries. It featured panelists from outside San Diego, whose companies all have stakes in local clean-tech companies, ranging from solar and wind to biofuels.

“We have a rough road in the near term,” said David Chen, executive director of West Coast clean-tech investment banking for Morgan Stanley. “But this still represents to me the biggest investment opportunity since the industrial revolution.”

Chen gave statistics that painted a brutal picture of clean-tech investments in recent years. Clean-tech industry investments from venture capital and private equity worldwide hit $3.1 billion in the fourth quarter of 2008. But this amount dropped to $1 billion in the first quarter of 2009.

Meanwhile, many biofuel companies have gone bankrupt.

“There have been very few successful (investor) exits,” Chen said. “It’s certainly not a sector for the faint of heart.”

Relative to the dotcom industry, clean-tech companies are more capital intensive and take longer to exit, said Don Wood, managing director, Draper Fisher Jurvetson, which has one-third of its portfolio invested in clean-tech businesses.

In this “rough era,” many clean-tech companies need to keep raising capital, moving beyond the traditional “A, B and C rounds” to the “D, E and F rounds,” said Wood. Meanwhile, the valuations of the companies remain flat, which is considered successful in the current climate. “A flat round of investing is the new up round,” he said.

Investors need to predict which sectors will be profitable a decade from now, said Steven Parry, managing director of NGEN Partners, whose investments include Fallbrook Technologies.

“For clean-tech investors, one of the real challenges is to make those decisions to go early into sectors, which have to be a part of the solution of the future,” said Parry. “And then try to predict in the 10- to 12-year life of a typical venture fund, whether the exit timing is going to match the timing of the development of those markets.”

Because of the need to concentrate funds on companies that show the most promise, venture capitalists often need to invest proactively for winners, and defensively for potential losers. “We’re all learning how to play the win-loss game of that,” Parry said.

Investors also need to be prepared to wait for fresh funding, said Marianne Wu, a partner of Mohr Davidow Ventures, which focuses on clean-tech infrastructure investments. Wu told the story of one company that won a loan guarantee four years ago, during the Bush administration. But the company is still waiting to actually receive the government funding.

“You need to make plans without the money,” Wu said. “Then if you get the money, it’s an add-on.”

In 2008, the top sectors in the clean-tech industry were wind and solar. Chen said these are later-stage investments which can be sold to larger companies or possibly the public markets sooner than early-stage, biofuel companies, which take longer to mature.

In the last 12 months, the top single-investment rounds in clean tech were in these industries: utility-scale solar, third-generation biofuels, clean coal and energy transportation, said Chen. But macro economic trends are making investors pull back in 2009. “Investors are overly pessimistic going into 2009,” he said.

Still, the panelists remained optimistic for the long-term. “We really think of clean tech as 21st-century solutions,” said Wu. “The magnitude of the opportunity is unprecedented.”

Advice for clean tech entrepreneurs

Know your value proposition: What value do you bring to the marketplace?

Know where you stand in your sector:Will your technology shift the entire industry or serve as a niche player in a larger chain?

Know your strength relative to competitors: What do you offer that others do not?

Use a flexible business model: Outsource non-core functions.

Base plans on existing funds: Scale your business according to the funding you receive, focusing on core competencies.

Prepare your elevator speech: Be able to explain to potential investors your business in five minutes or 30 minutes. Include the investment amount sought, projected length of investment, and projected return on investment.

Base plans on existing funds: Scale your business according to the funding you receive, focusing on core competencies.

Demonstrate creativity: Show that you can solve business problems in non-traditional ways.

Follow Helen on Twitter @HelenChang.

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