Hints of a bubble in green-tech IPOs

With investors getting smarter and start-ups getting bought, the mood is brightening in green tech. But the high-profile companies seeking to go public this year have some industry watchers talking bubbles.

For proof, investors point to the spate of planned initial public offerings, including electric car maker Tesla Motors, solar company Solyndra, and biofuels maker Codexis. Smart-grid company Silver Spring Networks and biofuels maker Amyris are rumored to be on deck.

Long-term trends may favor innovative green companies, as concerns about energy resources and the environment grow. But that doesn't mean this year's leading companies can navigate the complex regulatory and financial environment to become successful companies, said Jack Robinson, founder of Winslow Management, which focuses on environmentally oriented public companies.

"Valuations seem to be ahead of themselves," Robinson said. "Some of the people [in venture-backed green-tech companies] don't have the history and don't understand the pitfalls that need to be addressed from a technology, market, regulatory, and political point of view."

An example of a company he considers highly valued is lithium ion battery maker A123 Systems, which went public last September. In addition to raising $371 million, it raised the hopes of many other young energy companies.

Investor Rob Day of Black Coral Capital did an analysis of four recent IPO filings in the green-tech area and was concerned when he found that their unofficial revenue numbers were far below the amount of money put into them.

Nonetheless, even early misfires don't mean investors should write off the whole sector. The high-profile companies that have filed to go public aren't the best indicators of what's to come as many other companies could raise funding through private equity sources, rather than tapping the public stock market, Day argued.

"My worry is that if these IPOs are perceived later on this year as having been unsuccessful, it'll once again set back the entire clean tech venture industry, because of the example it sets in terms of lack of (financial) exits," he wrote.

Netscape moment ahead?
Even with the worries over financial returns for investors, there's a reason that IPO hopefuls have gotten as far as they have. It's widely recognized that Tesla Motors and Solyndra, for example, have developed innovative technologies. Tesla's $109,000 Roadster has become a darling among the well-heeled and its planned Model S sedan, priced at about $57,000 before tax credits, has legions of fans even though it won't be built for two more years.

Solyndra has developed a solar collector designed specifically for flat commercial rooftops. In its first installations, the company touts how quickly these collectors, which use curved thin-film solar cells, can be installed, which brings down the overall system cost.

As with many green-tech upstarts, though, both companies have big-time challenges. Solyndra and Tesla borrowed hundreds of millions of dollars from the U.S. Department of Energy to build manufacturing facilities and they face powerful competition, in the form of incumbent automakers and low-cost Chinese solar panel producers.

When Tesla Motors filed documents to raise $100 million on the stock market, naysayers were quick to see the young company's warts. Tesla's S-1 document noted that the company lost $31.5 million through the first nine months of last year and it listed several risks. In particular, it said that Tesla partner Lotus cannot continue making the chassis for the Tesla Roadster sports car after 2011, effectively placing most of Tesla's bets on the planned Model S electric sedan.

Similarly, Greentech Media solar analyst Shyam Meta pored over the "story" that Solyndra is presenting to potential investors and concluded that it is "fraught with uncertainty."

Fine-tuning the model
Some of that skepticism is healthy, argues Peter Le Lievre, who co-founded solar thermal company Ausra and is now CEO of another solar start-up called Chromasun. "We have gone past the silly dot-com-style Champagne days now and we're seeing real value investing," he said.

Since the beginning of the year, there have been a number of funding deals for green-tech start-ups. Chromasun, in fact, in a few days will announce a funding deal to further develop its solar air conditioner for commercial buildings.

Nowadays, a few years after many venture capital firms jumped into green tech from other areas, there's a growing understanding of how to fund energy-related technology companies. It's notably different from information technology in that it demands far more money and requires working through a thicket of regulations and policies. On the other hand, the markets are far bigger and the entire sector is buoyed by the long-term trends of energy security, climate change, and resource scarcity.

Winslow Management's Robinson expects that many green-tech start-ups will find a financial "exit" through a merger or acquisition. He predicts traditional oil and natural gas companies will need to move into alternative fuels. Acquisition is a likely way to do it.

Venture capitalists, meanwhile, are shifting their focus from expensive and over-invested sectors, such as solar and biofuels, and targeting energy efficiency--in buildings, motors, or the electricity grid. The overall amount of venture money dropped 45 percent to $564 million in the fourth quarter of 2009, compared to same period in 2008, according to Ernst & Young's analysis of Dow Jones VentureSource data. But the number of deals in energy efficiency grew 11 percent, an area Ernst and Young calls a "sweet spot" for venture capital.

Stephan Dolezalek, the head of the clean tech practice at venture company VantagePoint Ventures, said the jury is still out on whether green tech is heading to the public markets too soon.

The funding model for many venture-backed start-ups is still a work in progress, he said during a panel at the RETECH renewable energy conference in Washington last Thursday. But clean energy-related industries are maturing, which means that the next wave of ambitious green companies doesn't need to raise as much money as the first companies did. For example, as more electric cars are made, manufacturers can choose from a wider array of suppliers for batteries, motors, or other components, which lowers their production costs.

"The reality is that some of this will sneak up on us just the same way that PCs snuck up on mainframe computers," Dolezalek said, noting that Tesla was an "impossible dream" only a few years ago. "A lot of these technologies get better faster than we think and suddenly take up a lot of marketshare."

For a happy ending, consider the story of Ausra. During a lunch break in 2002, Le Lievre sketched out the mechanics of an idea to concentrate sunlight using Fresnel lenses to make electricity. He started the company in a garage with money borrowed from his father. On Monday, French nuclear engineering giant Areva bought Ausra, reportedly paying hundreds of millions of dollars for access to Ausra's utility-scale concentrating solar power technology.

"Just goes to show, if you dream big," said Le Lievre, "you can still make it in renewables."