October 17, 2012
Many entrepreneurs who once envisioned their fledgling clean-tech start-ups becoming the next big thing are now downsizing their dreams.
Newer start-ups attracting investor interest have more modest aims than their clean-tech peers of a decade ago. The new batch expect to generate revenue more quickly and cheaply, and are focusing on making existing industries more efficient and sustainable, building upon the clean-tech infrastructure such as smart meters that have become widespread.
The shift to services and software in clean-tech is happening even as some highfliers of the previous generation flame out. The latest examples include this week's bankruptcy filings by Satcon Technology Corp., SATC +72.65%a provider of power conversion products for renewable energy providers, and battery-maker A123 Systems Inc. AONE +45.45%
The battery maker cheered venture capital investors when it went public in 2009 only to suffer as the market for electric vehicles and power grid storage applications developed much more slowly than it had forecast.
After a clean-technology start-up boom driven by massive investments in the mid-2000s, many investors have pulled back sharply from the sector.
Those venture capitalists still willing to back clean-tech companies are shunning expensive, ambitious projects aimed at creating solar modules, electric cars and bio-based fuels, for instance.
Their reluctance follows major losses on some earlier bets. For instance, GreenVolts Inc., which developed solar systems that concentrate sunlight, had raised about $120 million from venture and corporate investors since its 2005 founding. It shut its operations last month and laid off about 80 people.
As prices for solar systems dropped, investors decided that GreenVolts couldn't catch up to competition. "Our technology was ready to scale at a time when market competition is crazy," said Eric Romo, co-founder of the Fremont, Calif.-based company.
Not a single clean-energy start-up made The Wall Street Journal's 2012 Next Big Thing ranking of 50 start-ups, released last month. In comparison, The Journal's 2011 ranking included one clean tech start-up, and its 2010 ranking had two.
Some companies in this challenged industry are more robust than others. One of those, identified through a methodology that examined equity raised, the track records of the entrepreneurs and other factors, is LS9 Inc., a South San Francisco company that makes sustainable fuels and chemicals using microorganisms.
There's "a higher bar for us" today to persuade investors to back clean-energy firms, said Jonathan Foster, chief financial officer of LS9. "There's more skepticism" on the part of investors, he added.
Another promising player identified by the Journal's methodology: Opower Inc. With its software and data analysis tools, Opower helps utilities run energy-efficiency programs and has saved homeowners about $166 million on their bills, the company said.
The Arlington, Va., company now has 75 utility customers, and is the fastest-growing software-as-a-service company in the portfolio of New Enterprise Associates, according to NEA partner Jon Sakoda.
Nicholas Eisenberger, founder and managing partner at Pure Energy Partners, a venture advisory firm, calls this nexus of information technology and clean technology "cleanweb." A yet-to-be-released study that his firm conducted with others, including Spring Ventures, showed that 24% of all clean-tech venture deals in 2011 were for cleanweb companies, up from about 15% in 2009.
In solar, competing panel makers have dropped prices, leading to more deployment. New solar start-ups are concentrating on offering financing, software monitoring, and power-optimization technology as a way to tap the growth in solar installations.
The same shift is happening in the automotive space. Start-ups such as NanoSteel Co. are working on advanced materials that could be used by many auto makers rather than developing a next-generation electric car. New businesses are also developing systems that optimize the performance of batteries.
Yet, some entrepreneurs in clean-tech's information technology sector say they must work harder to keep ahead.
"I've been building VC-backed start-ups over 20 years and this is the most challenging environment I've encountered," said Adrian Tuck, chief executive of eight-year-old Tendril Inc., a cloud computing firm in Boulder, Colo., that helps home owners and utilities better understand and manage power usage. It now has 150 employees, down from 200 last year, to run leaner.
The firm has had a surge in the number of users in the past five months, and is expanding internationally, but it's harder than ever to raise capital.
"In the last 12 months, I've talked to over 100 venture capitalists and 40 strategic funds to put together funding," said Mr. Tuck. In total, the company has raised about $100 million over four rounds.
The rise of abundant and cheap natural gas, a lack of clarity on carbon regulations policy and poor returns caused many backers to flee from the sector.
"All the clean-tech window shoppers moved back to the other sectors," said Steve Vassallo, general partner at venture firm Foundation Capital, referring to the exodus.
Some entrepreneurs had to change plans because assumptions didn't pan out. Hara Software Inc., an energy management software company, initially was founded to help large corporations track and reduce carbon emissions.
It restructured to focus on managing energy for large clients when federal carbon legislation wasn't forthcoming, said Dan Leff, who replaced its former chief executive last year.
Doing less with more is the tactic that many clean-tech start-ups have to employ, even as they plot to get revenue quickly. Mr. Vassallo, for example, recently increased his firm's investment in AutoGrid Systems Inc., which signed customers within a year of its founding.
The start-up's cloud-based software-as-a-service offering helps customers, especially utilities, understand and optimize how power flows on the electric grid. "From the investor perspective, it's very capital light," said Mr. Vassallo.
Write to Yuliya Chernova at yuliya.Chernova@dowjones.com and Emily Maltby at emily.maltby@wsj.com
A version of this article appeared October 18, 2012, on page B4 in the U.S. edition of The Wall Street Journal, with the headline: Start-Ups Shifting to Clean-Tech Services.