Cleantech Financing Trends: 2010 and Beyond

1. Summary

Clean technology has fared better than many other sectors in the recession, making up the largest venture-capital category in the United States in the second half of 2009. And perhaps more than any other industry, cleantech has the American Recovery and Reinvestment Act to thank.

The act, better known as the stimulus, set aside billions for green technologies and projects and brought attention to the goal of creating green jobs. Stimulus supporters and critics in Washington are hashing out the impact the act has had on the country as a whole; gross domestic product is rising, but unemployment is still high, and there’s disagreement over how much credit the package deserves for preventing a second Great Depression or not.

The effects on cleantech have been just as complex. Government funding has definitely helped some companies and projects survive a potentially lethal financing drought and attract private investors. On the flip side, our research suggests that companies that aren’t “anointed” by stimulus funding may be having a tougher time raising money. Despite any positive impacts from the stimulus, the economy’s negative impacts are not to be understated. The recession has shuffled the deck for clean technologies, strengthening some companies’ hands while weakening others’ — and spurred new thinking about how to make progress even when traditional financing is harder to come by.

New strategies and partnerships, along with the government’s programs, have helped some companies grow their market shares; others have wilted for lack of funds. Many have hunkered down, trying to make progress while using as little cash as possible, in an attempt to outlast the tough economic times. It’s not yet clear who the winners and losers will be, and whether the lessons learned during this time will leave the industry, as a whole, better or worse off. But it’s obvious that big changes are happening, and it’s become increasingly important to understand the new sources of capital — and the new challenges in raising money from traditional sources — for companies and technologies to succeed. Some of the events moving the cards include:

• Traditional capital has become harder to get at all stages: Companies are seeing lower valuations, higher milestone requirements and more time required to close funding at every stage, from seed and angel capital to private equity and project financing. They also are being asked to “do more with less,” or show progress while conserving cash, and are facing hard choices about which opportunities to pass up in order to maintain their balance sheets. Gaps between the stages are growing wider, with earliest- and latest-stage companies in greatest danger of falling in.

• Investors have been trapped by a lack of exits: Liquidity events, including initial public offerings and acquisitions, have slowed dramatically in the United States and Europe, and startups at that exit stage have had to wait for better market conditions. That has resulted in venture capitalists and others having to reserve more money for their existing investments, even as it’s become more difficult to raise money from capital-constrained banks and institutional investors. Meanwhile, offerings in China have soared, boosting interest in investments in Asia.

• The debt market remains frozen for all but the most established technologies: In most cases, only large wind and conventional solar projects need apply. That has halted progress for companies that counted on low-cost project finance to build other large and capital-intensive clean-energy projects.

• Capital remains more expensive, when it’s even available: When they can pin down deals, startups are paying much higher interest rates, particularly for renewable-energy project financing, in many cases taking higher amounts of private equity than previously. This is raising the overall price of these projects at a time when companies are under intense pressure to drive prices down. The frozen debt market has played a big role, as debt has traditionally been one of the cheapest sources of capital available. It doesn’t help that the tax-equity market faded dramatically, with the number of tax-equity investors falling from 25 active investors to about five active investors and 10 lukewarm investors.

• Government cash grants and loan guarantees have helped, but not as much as some had hoped: In 2009, it became clear that hard-won federal renewable-energy tax credits would only be usable by a few companies, as profits — and expected tax bills — fell apace with the rest of the economy. The stimulus addressed this problem with a provision that enables renewable-energy projects to receive cash grants in lieu of tax credits, and industry experts say the vast majority of projects are applying for them after the Treasury began accepting applications in August 2009 and announced the first awards, totaling more than $1 billion, in September. But complicated rules and delays have kept the grants from being as helpful as many had hoped, especially considering that the grants are set to expire at the end of next year, before many expect the tax-equity market will have returned. Meanwhile, guarantees also have trickled out more slowly than expected, although the pace is accelerating. These programs have the potential to significantly boost the industry once the timing of the allocations become more predictable.

• Government opportunities have sparked project and investment activity, but also added confusion and culture shock: Government financing has come with a whole new set of rules and processes that can add to the cost — and time requirements — of applying for the money, and most of the opportunities still require matching private-equity financing. Companies have started focusing not just on generating financial returns, but also on government goals such as creating green jobs and forming industry standards, to position themselves favorably. The government influence extends beyond the value of the awards themselves, because companies that score government funding are more likely to get private capital, while those that fail to do so are likely to have a harder time raising private capital. That means the government is helping to pick winners by granting cash to some projects over others, and — because it’s not concerned with a financial return on its investments in the same way private investors are — may end up picking technologies that ultimately fail on the market. As Washington becomes what some are calling “the new Wall Street” for green capital, that’s changing company and industry priorities in the same way that Silicon Valley culture and ideals have influenced startups for years.

In this report, we take a closer look at how the new economy, combined with the infusion of stimulus cash from Uncle Sam, is changing the landscape of clean technology financing.