Charting the Future Towards 2032: Funding the next wave of industrial innovation companies
“Charting the Future Towards 2032” was the theme of our recent 15th Cleantech Forum San Francisco. Some focus was given to the idea of imagining out how things might develop over the next 15 years, given our 2017 starting-point, itself a result of where the last 15 years has taken us.
This three-part blog series will provide some perspectives to help you get set for the year and the years ahead. It will draw on my own keynote from the Forum and many recent conversations with key players and thought leaders in our innovation ecosystem. This part one focuses on sources of capital for innovation companies. The next two blogs in this series will pick up on industries to pay attention to, and other key trends and issues to watch out for – over the next 15 years.
For a number of years, there has been this idea that “cleantech” died. Our recent Cleantech Forum San Francisco attendance, by its numbers, vibrancy and geo and industrial diversity, would beg to differ.
Our “doing more with less” theme can never die, even if a label can grow out of fashion. The push for ever greater resource and economic productivity will surely always remain a fundamental goal of any business in any industry in the 21st century.
Yes, regardless of how others may have chosen to use and adopt and ascribe meaning to the term our founders coined and popularized from 2002 onwards, CTG’s focus has always been on following the innovative companies that are offering efficiencies, resource and economics combined, to industrial, municipal, and household customers.
Interest and deal-making levels have actually held up, as shown below, because the range of opportunities are vast and ever-changing – and so offer up to a wide range of different interests and risk appetites the opportunity to play.
Why have they held up and what’s next?
Deal-making activity has held up because:
- Multi-national corporations and their strategically-minded CVC activities have grown markedly over the last 7 years. Their capital allocations have picked up some of the slack.
- The public sector has continued to support early-stage innovation – through ARPA-E in the US, SDTC in Canada, the Swedish Energy Agency, and BPI in France, for example.
- Private financial capital never went away. Just the nature and identity of those playing in the theme has changed, as the theme itself has changed. The change in the most active funders between 2009 and 2016 (shown in the graphic below) is illustrative of four themes, all of which are set to continue into the next 15 years:
- The presence of Prelude Ventures and Tao Capital speaks to the increasing influence of private/family wealth in this innovation theme.
- The presence of Fontinalis Partners speaks to the rise of more focused investment theses on particular themes within the broad cleantech umbrella. In Fontinalis’ case, that means next generation mobility, itself still a vast and broad market opportunity.
- In some jurisdictions, government-backed funds have become a key part of the innovation funding ecosystem – as represented by BDC (Canada) and BPI (France).
- The fourth key dynamic is centered on the increasing digitalization of energy and industry in general. This has meant that:
- As we chart the future of industry, many more companies we are following are software, not hardware companies. Many have “as a Service” business models. These dynamics are more comfortable propositions for VCs and others.
- An increasing number are platform companies, where one application of their technology might enable some form of industrial resource efficiency. As illustrated below, this has led to the emergence of a whole set of new investors appearing in our deal-tracking, whose core focus and expertise could be fintech, security or enterprise tech. They may only do the odd deal within our industrial innovation umbrella, but this means that certain types of companies have a potentially bigger capital pool to tap into.
Another important shift we are tracking is our East Meets West theme, something we see as set to be a big feature of the next 15 years. The demand for innovation went global some time ago. Right now, it feels like there is a clear trend, anecdotally-reported across our contacts and illustrated in the data below, whereby there is an increasing number of investing organizations from Asia interested in engaging with, and actually investing in, Western technology companies.
- Below you can see how our Quarterly Investment Monitor has identified the marked rise in 2016 Asian investment activity, especially into North American companies. The increase is mostly led by China and Japan.
- Within our 2017 Global Cleantech 100, more than one-third of the companies have at least one Asian investor, an increase from 20 percent 2 years ago.
Pendulums swing and will continue to do so.
I will stick my neck out and offer the following expectations I have of the coming years:
- Corporate venturing and general engagement in open innovation as a whole will remain strong, albeit the cyclical pattern of individual corporations coming in and out will continue. Over the last 7 years, the rise of the corporation in cleantech has had a strong European component, and a strong French one, from TOTAL Energy Ventures (now 7-8 years old) to ENGIE New Ventures (closer to 2 years old). Today, I see and feel the signals that the next wave of corporate venturing (albeit its forms and formats may be a bit different) will come from Asia, with China and Japan at the forefront of it.
- Private Wealth will remain critical as billionaires have the freedom to act as they please. With traditional investment homes (like bond and stock markets) offering unsatisfactory yield, the potential dry powder looking for homes in “private equity” (broadly defined) looks set to only get larger. Investments that have the potential to pay off with big impact, even if over and after a long gestation period, will surely be one such home. Breakthrough Energy Ventures is not the only such example of this, albeit the most visible and high profile one.
- More traditional financial LPs will return to funds, once the case that there are 5-7 year realizable returns to be made within the “doing more with less” theme is better proven. Even today, I hear GPs remark that interest from financial LPs has increased over the last year. 2016 saw stronger M&A around “cleantech” businesses; more of the same will garner more attention and convert interest to action.
- The players funding innovation will have further diversified, geographically and industrially. And the models used will vary a lot and diversify further.
- I don’t expect the 20-year horizon of the BEV fund to be the last of longer-duration set-ups.
- Nor do I expect the OGCI to be the last CEO-led industry collaborative.
- I expect to see more new funds with more specific theses within the broad umbrella, as well as more generalists appearing in our tracking of the “doing more with less,” as cleantech becomes more mainstream and so increasingly indistinguishable from the normal way of doing things.
These trends are only positive for the longer-term health of the ecosystem, even if it will make the job of putting together syndicated deals ever more challenging.