Blog of Intellectual Capital

1. There will be increased availability of equity, debt, and project finance capital, along with an increased flight to quality.

Despite 2009 being a slow year for venture capital firms raising funds (Q3 featured the fewest number of VC firms raising money in 15 years), the cleantech category appears to have drawn continued commitments.  Several domestic firms raised large cleantech-focused funds earlier this year.

Internationally — from China to Singapore, India to South Africa — a number of local venture and private equity firms are now raising multi-hundred million dollar funds to target cleantech investment.  As such, the global pool of equity capital targeted at cleantech will be greater in 2010, as investors continue to look at the sector as a source of investment opportunity.  The emergence of the debt markets from the depths of the fallout from late 2008 and the growth in capital flows from an improved stock market should also increase the availability of debt, tax equity, and project finance capital.

Despite the rise in availability of capital in 2010, investors will likely remain cautious.  We expect a larger share of dollars to go into emerging leaders and high-potential portfolio companies, as the number of new companies funded in first-time investments grows more moderately.  Larger funds may preserve capital to make more substantial bets in later-stage, “winner’s circle” companies.

2.  Massive project deployments and manufacturing capacity growth will be undertaken, as winners and losers become more apparent.

In 2010, we expect a number of prominent VC-backed cleantech companies to be tested, as they emerge from R&D and initial customer acquisition and move into full-scale production and/or deployment mode.  Some companies will rise to market leadership, while others may fall, as the myths and reality of their technology, competitive edge, and ability to scale come to light.

The “shakeout” will likely impact the sectors that have seen the most investment in recent years, such as:

• Solar: Many up-and-coming solar manufacturers have made bold claims about their capabilities.  As these companies start to ramp their manufacturing capacity, their validity of their claims on efficiencies, yields, cost economics, capital efficiency, and field reliability will become more readily apparent.  Companies will find it much more difficult to “scale first, optimize later,” as pressure on cash reserves increase significantly.

• Smart grid: As some of the massive project deployments with nationwide utilities roll out, whether new technologies can truly scale to millions of endpoints cost effectively and reliably will become clearer.  The utilities will also better judge the extent of the value created by the deployed networks and how far it extends beyond advanced metering into areas like demand response, distribution automation, and network management.

3. Momentum in plug-in hybrids and electric vehicles to continue, as a greater variety of vehicles starts to arrive to market.  Electrical storage will be the key enabling technology.

Nearly every major carmaker claims it will launch a plug-in hybrid electric vehicle (PHEV) or all-electric vehicle (EV) some time between 2010 and 2013, as concept cars start to become production models.  Notable target launches for 2010 include the Chevy Volt and Nissan EV-02.  Numerous startups will also look to enter the market, despite the challenges in raising the funding needed to compete in the automobile industry.

Another trend to watch in 2010 will be an increased focus for fleet operators to consider adoption of HEVs and PHEVs, as the industry looks to rebound from the downturn and retire more of their aging fleet.  Adoption will still be early, but sustainability initiatives and new emissions regulations should help.

The key enabler for the HEV and PHEV revolution will continue to be the battery technology.  While established companies like Sanyo, LG, and Hitachi are all attempting to adapt their lithium-ion battery technology for the automotive market, limitations with traditional chemistries have made it difficult for a clear victor to become apparent; startups have an opportunity to disrupt the market and become alternatives for OEMs.

For example, Leyden Energy (formerly Mobius Power, a Lightspeed portfolio company) is bringing to market Li-ion batteries that offer the high energy density that is critical for EVs, while providing a high degree of safety and long cycle life over a wide operating temperature range.  We expect there to be some healthy competition and progress made here in 2010.

4. 2010 could see several public exits from some of the emerging leaders; consolidation, M&A, partnership, and JV activity expected to grow

With the IPO markets opening a crack in mid-2009 after nearly a year-long drought among VC-backed companies, investors appear cautiously optimistic about some public offerings in the cleantech area in 2010.  We expect that IPO demand in this sector will be driven by factors like the success of the A123 offering (although the stock has come down 35% from its high and stabilized at where it opened in September 2009) and the scarcity of quality cleantech public companies.

Consolidation and vertical integration in areas like solar and biofuels will continue – many involving distressed companies that can no longer support the high cost of their assets and debt load.  A number of solar M&A deals were announced in 2009, including First Solar acquiring Optisolar for $400 million and MEMC acquiring SunEdison for $200 million.

A number of biofuels companies have been active in the last couple of years developing strategic partnerships and joint ventures in order to speed up their market entry.  LS9 and Solazyme (Lightspeed portfolio companies), for example, have teamed up with established giants like Chevron, Proctor & Gamble, and the U.S. Navy to further their development efforts.

We expect to see these types of transactions and relationships to continue in earnest in 2010, as large companies seek ways to tap into startup innovation, and startups seek ways to scale up in more capital-efficient fashion.

Peter Nieh is Managing Director and a founder of Lightspeed, covering the areas of cleantech, software and the Internet. He has twelve years of venture capital experience and seven years of operating experience. Prior to Lightspeed, Peter worked in business development and product marketing at General Magic, a startup that before the emergence of the Web pioneered the development of e-commerce and electronic media services by partnering with the world’s largest telecommunications service providers and consumer electronics companies. He also managed Acer’s portable PC business in North America, where he launched the company’s first laptop and notebook PCs. Before Acer, Peter was a strategy consultant at Bain & Company where he worked predominately with high-technology clients on product, sales and distribution strategies. While an undergraduate at Stanford, he worked at Apple Computer, where he helped to develop the power management system for Apple’s first portable computer.”

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