Cleantech: Recession-proof worldwide?

December 5, 2008 | Bart Markus | Comments | |

[Editor's note: We've run several posts in recent weeks touching on cleantech's teflon qualities in the face of the downturn. Below, Munich-based venture capitalist Bart Markus explains why he thinks it will stay afloat, and two landmines it will need to navigate sooner than later. In doing so, he takes a more global perspective, highlighting European thinking on the problem that could go a long way in the U.S.]

Despite the post-dot-com-bubble depression and weak economy, 2001 was a watershed year for the cleantech sector. Overseas, it marked the start of production at solar leader Q-Cells, and the founding for wind energy firm REpower Systems. Seven years later, we find ourselves in roughly the same situation, if not worse off, yet these companies and others like them continue to see tremendous growth — hard evidence that fears of the green winter due to global recession are exaggerated, if not unfounded.

Four developments fuel my optimism:

1) The cleantech industry is more recession-proof than others. Even bearish Deutsche Bank has predicted a growth rate of 20 percent for the global solar industry in 2009. This is primarily due to the immediate global need to replace limited fossil fuel resources with sustainable alternatives. While this pressure has been temporarily eased by falling oil and coal prices, growing demand in emerging markets and developing regions will keep this topic high on the agenda. With the United Nations’ influential Copenhagen Climate Change Conference nearing in December 2009, cleantech is sure to grab headlines again — leading to a surge in consumer interest and capital financing.

2) Cleantech isn’t a mature industry yet. It’s still very young, and in need of many further technology breakthroughs in order to improve production and distribution of renewable energies. Just think about the need to transport power over long distances, like from the sun-rich Sahara to Europe, or the need to store solar energy for long-term consumption. This brand of innovation is not dependent on the general business cycle, and will allow innovators to gather considerable momentum in spite of the downturn.

3) Cleantech has broad and enthusiastic political backing. And that doesn’t even include subsidies, especially in the solar arena. Generous support and incentives for homeowners to convert to this type of energy will help stabilize demand for green technologies through 2009. In Germany, for example, the Renewable Energy Sources Act guarantees remuneration for homeowners who not only install photovoltaics, but agree to feed their electricity into the general grid. And in the U.K., we see a similar combination of compensation and direct subsidies for renewable energy deployments.

4) Cleantech generates products that lower energy costs. One obvious opportunity lies in office buildings, where huge amounts of power are wasted every year (just think of all those industrial parks where lights stay on all night). For example, Siemens spin-off EnOcean has developed powerless switches that operate wirelessly. As the economy becomes more cost-sensitive, ideas like these will rise in demand, recession or not.

Not to say that cleantech won’t face any hurdles during the economic slump. Life isn’t that easy. And as a venture capitalist, I see two major challenges looming in 2009:

1) A lack of equity debt funding for later-stage deals. Energy production is a capital-intensive business, and capital will become an increasingly scarce resource in coming quarters. While incumbents will be able to finance their cleantech activities out of their huge positive operating cash flows — or raise debt on this basis — newcomers are likely to have a tough road to hoe.

2) More pressure on early-stage companies to generate cash. Not only that, but they have to do so within an efficient timeframe too. Business models projecting years between now and breaking even will have a near impossible time finding financiers — and the industrialization of new technologies in this sector is generally pretty time consuming.

Still, considering the global demand for renewable energy, I remain highly optimistic that many attractive early-stage contenders will break onto the scene next year, and even after that. The one catch — many of these companies will emerge at lower valuations that usual. This isn’t great for company founders, but a pretty good deal for VCs.

Bart Markus is general partner in the Munich office of Wellington Partners Venture Capital, where he focuses on electronics and cleantech investments. Several of his portfolio companies have successfully spread from Europe to the U.S.

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  • It's hard not to be bullish on greentech. Besides the financial opportunity, it feels good too. Given challenges #1 an d 2, perhaps not recession proof, but certainly recession resistant.

    I would add a third challenge: #3) it's hard to find substantial, actionable opportunities (whether investor, or corporate green champion). I don't own my office building (the landlord does). But I can use a video conferencing online service -- see.nefsis.com -- to cut flying and driving. Perhaps online services and "secondary" greentech opportunities are worth a look, many are less hampared by items 1 and 2.
  • We have to look at "the big picture." The days of tunnel vision need to cease. Our nation better wake up and smell the coffee. With all our bail outs along with the 168 billion economic stimulus package, that btw did nothing for our economy it is hard to understand why our government can't see the need to bail us out of our dependence on foreign oil. The high cost of fuel this past year did serious damage to our economy and society. While we are doing the "happy dance" around the lower prices at the pumps they are planning to cut production to jack prices back up. Instead of spending billions on stimulus pkgs that don't work and millions to bail out everyone and his brother why don't we invest a few on renewable energy projects. WE could provide cheap clean energy, create millions of badly needed green collar jobs and reduce our dependency on foreign oil. This would be a win-win situation all the way around. Jeff Wilson has a great new book out called The Manhattan Project of 2009 Energy Independence NOW, these guys all need to read this book.
  • Lisa P
    We now feel the devastating effects of recession in our country. Apparently, December 2007 is the "official" point where economists mark the beginning of our current recession. The National Bureau of Economic Research (NBER) group identifies peak activity at that point, and the U.S. economy has been declining ever since. NBER defines recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. At this moment we need a financial assistance to help us in this kind of financial mess. The state budget of California needs some serious help; perhaps they should get payday loans. The state is already running a budget deficit of a few billion, is poised to hit over $11 billion very soon, and if left unchecked, could hit $25 billion or more by next summer. According to a recent article in the San Francisco Gate, governor Arnold Schwarzenegger has called legislators into session for an emergency budget overhaul. He has called for slashed spending and increases in taxes in order to combat the budget shortfall. The state budget has had severe negative impacts this year, by Southern California's wildfires that destroyed thousands of homes, layoffs and a shrinking housing market. The housing market hits especially hard in a state that derives so much income from the one of the most expensive housing markets in the nation, and a decrease in the amount of homes purchased coupled with less property tax revenue makes for a near crippling blow to the state's income. The Governator has decried the lack of action all year, and calls for quick action, which is exactly what you should do if you find yourself in a budget crisis. Remember that you have options, and one of them is a payday loan. Click to read more on Installment Loans.
  • Tommy_Mancino
    With $50 dollar a barrel oil due to falling demand and a world wide credit crunch, companies in newly industrializing countries will be willing to pay a premium for cleaner, but more expensive energy? I don't think so. Would you?