'Cleantech' Concerns

AT A C&EN NEWS MEETING a few weeks ago, someone called the initial public offering (IPO) of stock in battery technology developer A123 Systems a test case for "cleantech" IPOs. I reacted like an angry hornet. I dismissed cleantech as hype cooked up by smarty-pants venture capitalists to bleed investors of money in fraudulent IPOs. The whole racket was headed for a crash, I declared, perhaps not hearing my colleagues' there-he-goes-again sighs over the sound of my own voice.

Mike McCoy, my boss and the assistant managing editor of C&EN's business department, suggested that if I felt so strongly about the topic, I should write about it. I agreed, relishing the chance to give cleantech a dressing down.

The process of writing about something has a way of focusing the mind more keenly than ranting in a conference room. I have since decided I was a little right and a little wrong.

I will acknowledge that cleantech, short for "clean technology," is as good a term as any to describe start-up companies engaged in environmentally wholesome activities such as technology that might improve energy efficiency, enable battery-powered cars, or make ethanol from cellulose.

And I can't deny that, in the most credit-constrained era in a generation, cleantech has been able to attract more and more money. Venture capital firms, which specialize in placing bets on new technology, have made cleantech their largest growing investment category. According to the National Venture Capital Association (NVCA), firms plunked down $2.6 billion on such cleantech companies in 2007, an increase of about 600% versus 2002. Investments are on pace to hit some $4.5 billion this year. It takes more than mere hype to make venture capital firms cough up so much dough.

I'm still convinced that, as the stakes get higher, many companies looking for cash will wrap themselves in the new buzzword. But it can be bedeviling to determine which firms are following legitimate technological opportunities and which ones are trying to pull the wool over our eyes.

Take Rentech, a chronically unprofitable Los Angeles-based firm that has been developing applications for its Fischer-Tropsch synthetic fuels technology since 1981. The company is no stranger to cleantech conferences and is not shy about promoting its plans for making fuels from biomass. But the company's main source of revenue is a fertilizer plant it purchased in an abandoned gambit to convert the facility's feedstock from natural gas to coal.

A cynic might look at this company and say that it has been treading water on a sea of loans, stock offerings, and government grants and is seizing on cleantech to keep that going. A more generous individual would say Rentech's time has finally come.

By "headed for a crash" in my meeting rant, I meant the bust of a technology bubble, like what happened to the "dot-coms" in 2000. That crash was instigated by the breathtaking arrogance of the dot-com companies, which derided the old "bricks-and-mortar" economy and swore that the centuries-old rules of business were out the window. Profits? Who needed them? The important thing was how much virtual market share an Internet retailer could build with the help of speculative money thrown at it by investors.

Pets.com raked in $82.5 million in an IPO in 2000 from investors who agreed with the company that consumers wanted to be freed of the burden of buying their dog food and chew toys on the way home from work. It would be more convenient, the firm said, for folks to shop for these items on their computers and wait a week for the parcel to come. Pets.com was liquidated that same year.

IF REINVENTING retail was the basic premise of dot-coms, reinventing energy is the premise of cleantech. And the biggest threat to this premise is the return of oil prices to below $30 per barrel. That would pull the rug from under many alternative-energy propositions, just as cheap oil in the early 1980s made oil companies cancel their plans to develop oil shale.

However, even if oil prices do tumble, the $100-plus barrel will be fresh in people's memories. And the desire to reduce global warming and oil imports will continue to be strong incentives to wean the U.S. economy off fossil fuels. Moreover, some cleantech companies have broader reaching benefits than mere energy savings. A123 Systems may have technology to make lithium batteries safe in some future electric car, but its first commercial application was in battery-powered tools. Lighter tools that don't run dry are a blessing for those who use them.

I was wrong when I thought that the exuberance over cleantech was irrational. Ethanol maker VeraSun Energy is pulling a follow-up stock offering following a raw material cost run-up and a drop in its stock price from about $18.00 last December to less than $2.00 last month. Those are signs of a rational marketplace at work.

But I stand by my underlying point that the success of an investment depends on the particular company and the marketplace circumstances surrounding it. Within any category, including cleantech, there will be good and bad companies. People investing blindly in a sector because it is hot will get burned in the end.

And in any mood I would agree with the statement made last year by Mark Heesen, president of NVCA. "Prudent, long-term, knowledge-based investment in cutting-edge technologies has been the hallmark of venture capital in the past and should be the mantra in the cleantech space, as well," he said. "Short-term tourists should steer clear."

Views expressed on this page are those of the author and not necessarily those of ACS.