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Weekly UpdatesLike practically everyone else at her office outside Portland, Oregon, Cindy Tatham was tired of e-mails from the IT department pleading for her to shut down her computer at night. Many employees refused to do it, for fear they'd be logged off the network. But Tatham--who studied energy policy in graduate school and once worked for Enron--knew the computers were an energy sink, no less because the air conditioners had to counter the heat they produced.
One evening she asked her husband James, a computer programmer, if there was some way the IT guys could turn off the machines themselves, from a central location. Inspired, James drew up a business plan, and Verdiem was born.
Founded in 2001, Verdiem sells power management software for PC networks. It now employs nearly 30 people at its Seattle headquarters and claims to have saved its customers almost $35 million in energy costs. In July, the firm received an $8.33 million cash infusion from the venture capital firm Kleiner Perkins, one more sign that the VC world is mesmerized by the prospect of clean technology.
It's ironic how the threat of global catastrophe can suddenly turn everything on its head. Just a few years ago, most businesses considered environmental issues only in terms of minimizing costs and risks. Today, thanks to climate change and expensive energy, innovation in "cleantech" is driving big savings even as it creates big profits for firms large and small.
A new sector has blossomed, and investing and financing opportunities have flourished. Tech companies are making profits whether or not they're in the energy business. And corporate leaders are seeking competitive advantage by pushing for new environmental regulations--which, in turn, will further speed the adoption of clean technologies.
That said, not all companies that develop or implement these technologies will thrive. Which companies will excel at riding the "green wave," and which are risking a wipeout?
A Sector in Overdrive
Having recovered from the hangover of the dot-tom bust, venture capital is seeking a new romance--and cleantech is looking very good right now. VC investment in the sector reached $2.9 billion in 2006, a 78 percent increase over the $1.6 billion invested in 2005, according to the Cleantech Group, a research and advisory firm. The trend shows no sign of slowing: About $1.7 billion was spent in the first half of 2007 alone, according to preliminary data from the firm.
Cleantech--encompassing alternative energy as well as clean innovations in materials, waste disposal, water purification and the like--accounted for 11 percent of all venture investment last year. That makes it the third-largest North American venture capital investment category, behind only software and biotech. It's also by far the fastest-growing category to emerge since the dot-corn bust, having grown by 343 percent between 2001 and 2006.
Nearly half of this investment has gone to just one state: California. The reasons go beyond the presence of Silicon Valley and its brain trust, says Rachael Simonoff Wexler, a Los Angeles-based partner in Goodwin Procter's Clean Tech Practice. "Thanks to its protective environmental stance and vocal public leadership, the state has developed a number of initiatives that have spurred innovation and built the demand for cleantech," Wexler says. These initiatives range from stronger emissions standards and clean energy mandates to the $30 million California Clean Energy Fund and a $3.3 billion solar installation incentive program.
As the sector continues to grow in terms of investment dollars, many companies are starting to see profits on the horizon. While the total number of venture capital deals signed in 2006 remained nearly flat from 2005, the Cleantech Group reports that the average deal size bloomed from less than $7 million to $13.2 million. "Emerging technologies that were heavily funded by government in past years are now reaching the commercial stages," says Cleantech Group COO Craig Cuddeback. Another signal: The vast majority of the venture financing--more than $2.5 billion--was in the follow-on stages. This hints at "a rash of cleantech IPOs in the coming years," the Cleantech Group anticipates.
For those cleantech companies that have already gone public, the financial news has been good. The WilderHill New Energy Global Innovation Index (ticker ^NEX), composed of 89 alternative energy firms, posted a 31 percent gain in the first half of 2007, says Ethan Zindler, an analyst with New Energy Finance, which compiles the index.
What's Hot, What's Not
While there is plenty of opportunity in the cleantech field, it can still be a bumpy ride. In the first half of this year, the NEX was driven by the wind and solar sectors, which rose by 49 percent and 54 percent, respectively. Meanwhile, the bio-fuels and biomass portion of the index was down 5 percent thanks to a surge in corn prices.
Still, innovation is moving at such a pace that such challenges are unlikely to seal the fate of the entire sector. One example: Silicon is an important component in solar photovoltaic cells, but steep rises in the cost of silicon have threatened the industry. Firms reacted by developing thin-film photovoltaics, which use less silicon. Now, shares in thin-film makers are hot. As for biofuels, the next frontier is making ethanol from more efficient, less competitive crops like switchgrass and algae.
Meanwhile, it's becoming increasingly clear that you don't have to be in the energy business to profit from the cleantech trend. This year has seen increasing investment in energy efficiency. Among the beneficiaries are hardware or software firms like Verdiem that are helping large organizations manage their use of energy-consuming assets. (IBM, for example, is developing the infrastructure for traffic congestion pricing.) These firms are profiting from high electricity prices and the growing realization that "it's much less expensive to subtract a megawatt than to add one, under almost any circumstances," Zindler says.
Business Leads the Way
The cleantech boom has attracted skepticism from those who remember how the cleantech "boomlet" spurred by the energy crisis of the 1970s withered after oil prices plunged. Cleantech proponents, however, say things are different now: Energy prices are more persistently elevated; the technology has advanced; global politics has made energy independence even more important; and climate change has become an urgent and very public issue.
Perhaps the biggest change is that business itself is actively pushing cleantech along. Many companies now see a progressive environmental policy as a means of gaining competitive advantage, says Elise Zoli, chair of Goodwin Procter's Energy Practice. "American business can advance its corporate strategy by furthering its environmental vision," she notes.
These progressive companies are responding to a variety of market pressures, Zoli says. Some wish to sell to Europe, which has ever-stricter environmental regulations. Others wish to sell to emerging economies like China, which are desperately seeking clean and sustainable ways to grow. And of course, there is the rise of the eco-conscious American consumer who seeks out green products.
Getting Ahead of the Curve
As they anticipate the many benefits of going green, a growing number of corporate leaders are lobbying for tougher environmental regulations. The U.S. Climate Action Partnership, a consortium of corporate titans in sectors ranging from manufacturing to chemicals to financial services, made headlines this past January when it called for a nationwide limit on carbon dioxide emissions.
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Anticipating new laws or regulations can help companies "preserve their role in a market or even create an advantage over competitors that have not prepared as diligently for those regulations," Zoli says. She cites DuPont, which championed the ban on ozone-depleting chlorofluorocarbons after it had developed safer substitute products. The ban ended up boosting DuPont's market share.
New Orleans-based utility company Entergy was the first domestic utility to cap its own emissions, and it has also pushed for federal regulation of greenhouse gases. The reasons go beyond the altruistic, notes Brent Dorsey, Entergy's director of corporate environmental programs. "We have to begin making decisions right now about what kind of power generation we will replace our aging system with," Dorsey says. "If there's no certainty [about future carbon regulation], we're likely to make bad decisions and end up with stranded assets."
With a global competition under way to produce the best clean technologies, pushing for stronger regulations may actually be in the self-interest of U.S. industry. "Cleantech could be a huge driver of the economy in the coming decades," says Nick d'Arbeloff, executive director of the New England Energy Innovation Collaborative, a clean energy consortium. "There's a huge opportunity to be gained or lost by the U.S. Even modest legislation will accelerate a market that the U.S. could handily dominate."
Taking Advantage of Government Policy
As a fledgling sector, cleantech is heavily shaped by government policy, notes Christopher Davis, chair of Goodwin Procter's Clean Tech Practice and a senior environmental attorney. While many startups are launched on the basis of a promising technology, great tech alone isn't enough to ensure a company will thrive. It must also take full advantage of legal and regulatory frameworks.
If your company is developing (or purchasing) clean technologies, ask yourself: Are you taking full advantage of state or federal tax credits for research or production? What about subsidies? Are you aware of low-interest government loans available for the development or purchase of cleantech? And is your intellectual property protected to the full extent of the law?
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