Cleantech Crystal Ball

Suddenly the IPO market for cleantech companies looks more inviting. Electric carmaker Tesla Motors continues to trade above its June IPO price and biochemicals company Amyris holds a modest gain over its first day close. Other companies waiting in the wings with S-1s filed include Gevo, PetroAlgae and SemiLED.

Will the IPO window stay open long enough for these and other cleantech companies to slip through over the next 12 months? For once, the answer seems to be yes. A group of maturing green businesses finally faces the possibility of a warm public reception.

Many of the most exciting of these emerging venture-backed cleantech startups have yet to make their IPO intentions clear. On the list are names such as BrightSource Energy, Silver Spring Networks and SolarCity.

Venture Capital Journal doesn’t claim to have access to private IPO deliberations and we don’t know if filings are imminent. But after careful examination of the business prospects of the more established cleantech companies, we have highlighted those we believe are best-positioned to make the transition from private to public life.

Clearly, an IPO from any of the seven companies on our list would be a potential boon for the more than two dozen venture capitalists and others who have invested almost $1.4 billion in the companies (see table). Among the VCs most likely to profit are Kleiner Perkins Caufield & Byers, which has money in three deals, and Draper Fisher Jurvetson, New Enterprises Associates and Northgate Capital, each of which is a backer of two companies on our list.

“There is some buoyancy in this level of the IPO market,” says Nat Goldhaber, managing director at Claremont Creek Ventures. “I think it floats the hopes of everybody.”

There are good reasons to think cleantech companies could seize the opportunity. Many have solid—if young—businesses. Losses at some will continue, but revenue is more predictable and sometimes reaches into the tens of millions of dollars or higher.

Many cleantech companies also need substantial cash, and the IPO market could become a financial lifeline for biomass refineries, solar plants and auto factories. At the same time, the offerings permit venture investors to lock in returns and may help companies convince reluctant banks and financiers to extend debt.

“I think it is a good thing for the field,” says Christophe Schilling, chief executive of the biochemicals company Genomatica. “It certainly paves the way for other companies to go public.”

The success of the public offerings will depend in large part on the health of the U.S. economy. Wall Street investors remain choosy and could suddenly run away from the red ink from immature public companies such as A123 Systems, Codexis and Tesla.

“There will be a day of reckoning,” predicts T. Joseph Fisher III, chief executive of battery maker Contour Energy Systems. When it comes to IPOs, “right now we’re cautious,” Fisher says.

There is some buoyancy in this level of the IPO market. I think it floats the hopes of everybody.”

Nat Goldhaber

Yet the smattering of this year’s cleantech IPOs—none of which was a bomb—suggests a different tale. While the market remains parsimonious, “I can see the case for it getting better,” says Alan Salzman, chief executive officer of cleantech investor VantagePoint Venture Partners.

Against this uncertain backdrop, here is VCJ’s list of the most promising cleantech IPOs of next year, with the most attractive candidates listed first.

BrightSource Energy

BrightSource’s first solar thermal plant cleared its final regulatory hurdle on Oct. 7 and is expected to begin producing energy in 2012. The massive farm near California’s Mojave National Preserve will beam sunlight from 173,500 mirrors to boil water, drive turbines and nearly double the solar thermal electricity generated in the United States.

The Oakland, Calif.-based company has financial resources. It got a $1.37 billion Energy Department loan guarantee and raised more than $400 million from investors. The company has contracts to sell its electricity to Pacific Gas & Electric (PG&E) and Southern California Edison.

Some investors claim technology risks are minimal, but this is not so. While BrightSource has tested its thermal technology in Israel’s Negev Desert, any new generation development comes with operational challenges. Still, investors willing to wait for the plant’s revenue could be rewarded.

The company declined to comment on its IPO prospects, though market rumors suggest a filing is possible next year.

VCJ Assessment: A BrightSource IPO could be among the most successful cleantech offerings of the next couple years. The company’s unique technology could change the nature of solar thermal plants and generate a strong revenue stream in the process.

SolarCity

SolarCity, which installs solar systems, plays down the immediate prospect of an IPO. Chief Executive Lyndon Rive says he will consider an offering, but has no present plans.

Nevertheless, the company’s market is huge and its brand is strong. It has worked to improve the efficiencies of solar installation and has access to $500 million in customer financing.

I can see the case for [the IPO market] getting better.”

Alan Salzman

SolarCity moved into leasing in 2008 and is mining the rapidly growing commercial market. Rive says commercial sales now make up 60% of his business.

The company’s operational challenges include expanding deeper into its existing markets in Arizona, California, Colorado, Oregon, Texas and beyond.

VCJ Assessment: SolarCity is an attractive IPO prospect. The company’s brand is among the strongest in the solar installation market and its business should benefit as the U.S. solar industry expands.

Silver Spring Networks

Silver Spring Networks is among the industry’s favorite cleantech IPO prospects. Rumors have swirled for months about a filing, and big competitors are muscling into its market.

The Redwood City, Calif.-based company’s smart grid communications technology connects smart meters to utilities. It has already landed some large customers, including PG&E, American Electric Power and Florida Light & Power.

Silver Spring’s challenge is fending off competition not just from Trilliant and SmartSynch, but also Cisco Systems. Silver Spring may also have to polish its image, which was tarnished when PG&E discovered 45,000 smart meters malfunctioned last year, although it is unclear whether the technology of any PG&E supplier was at fault.

Silver Spring declined to comment on its IPO plans.

VCJ Assessment: Silver Spring’s financial strength and market leadership should make its stock an easy sell, but investors would be wise to keep a close eye on its competitors.

OPower

OPower has big customers and significant sales. The company works with six of the nation’s largest utilities (38 in total) and Chief Executive Daniel Yates said in August that he expects $35 million in revenue this year.

Obviously we think about going IPO. It could happen next year.”

William Watkins

OPower provides utility customers with energy data and recommendations for saving power. Though dozens of companies compete in the space, the Arlington, Va.-based startup differentiates itself through the use of behavioral science. Its printed reports frequently come with monthly bills, with the goal of motivating customers by comparing their energy consumption with their neighbors’.

The company’s logical next step is to develop more sophisticated techniques for greater energy savings.

VCJ Assessment: OPower’s opportunities are enormous and shares from an IPO could pay off for a long-term investor.

Enphase

Enphase has sold more than 300,000 microinverters and holds a strong position in a market with no dominant leader. Microinverters convert the direct current (DC) from solar modules to alternating current (AC), the form of electric power used in homes and businesses.

The Petaluma, Calif.-based company raised $63 million of venture capital in June and added Kleiner Perkins as an investor. Its strong balance sheet allows it to increase production and expand abroad.

Enphase’s continued innovation with microinverters could keep it a step ahead of competitors in this fast-growing market.

VCJ Assessment: An Enphase IPO may not drum up the excitement of an offering from BrightSource or SolarCity, but the company’s potential to creatively address the rapidly growing inverter market makes it a stock worth tracking.

Bridgelux

Bridgelux is emerging from a crowded field of LED startups with a solid product line. High-efficiency LED lighting is all but certain to replace traditional lights, and Bridgelux is ramping production for demand that should swell in two years. Chief Executive William Watkins says revenue of $30 million this year should more than double next year. That should give the company enough heft to go public.

“Obviously we think about going IPO,” Watkins says. “It could happen next year.”

The challenge the public markets present today is they are both a wall and a door.”

Erik Straser

VCJ Assessment: A Bridgelux IPO would be greeted enthusiastically by the public markets, especially if revenue grows as Watkins predicts. The company should become a leader in the LED space. One danger to watch out for is potential commoditization of LED chips.

Bloom Energy

Bloom Energy, a pioneer in fuel cell development, is attempting a difficult task: to fund a complex technology and compete with a proven, simple technology. Its solid oxide fuel cells run on natural gas and compete with diesel and natural gas generators.

Nevertheless, Bloom’s impressive customer list includes Google, Bank of America, Coca Cola and Adobe Systems. (Last month, Adobe installed 12 “Bloom boxes” at its San Jose headquarters.)

Bloom, based in Sunnyvale, Calif., is positioned to generate substantial revenue. But some say it has yet to prove its fuel cells are economical and that it can ramp manufacturing. A company offering would come with great fanfare.

The company decline comment on an IPO.

VCJ Assessment: A Bloom IPO will generate a great deal of buzz and for good reason. Its fuel cells could revolutionize local power generation. Investors need to look for clarity in plans to expand manufacturing capacity and for greater detail about customer cost savings.

SIDEBAR: All Cleantech IPOs Are Not Created Equal

Cleantech companies aren’t all cut from the same cloth. Some are pioneers opening new markets. Others hope to outdo competitors with better products and execution. Still others see big opportunities in networks of factories to convert plant material to biofuels and chemicals.

That’s why public market investors need to look at IPO prospects through several prisms, says Erik Straser, a partner at Mohr Davidow Ventures who specializes in cleantech investing.

Some companies will qualify as unique, first-of-a-kind plays, and investors will view them favorably for their individuality. Tesla Motors is an example of this type of company. If a buy-side fund manager wants to capitalize on the roll out of electric cars, Tesla Motors, which went public in June, is an opportunity to place a bet. Privately held BrightSource Energy, a developer of solar thermal plants, is another example of a first-of-a-kind company.

Companies with less revolutionary technology will be seen through a more traditional lens. Investors will dissect them with the same financial analyses they use to pull apart high-tech companies, looking carefully at growth rates and margins to assess a company’s profit potential and competitive advantage. Passage to the public markets will depend primarily on the quality of the findings. The majority of solar, smart grid and energy-efficiency companies are likely to fall into this bucket, Straser says.

Still other cleantech companies will approach an IPO the way biotech companies do: essentially raising development and expansion capital from the public market years before their products are ready for sale. Depending on market enthusiasm, Wall Street may have difficulty stomaching these deals, unsure of what risks remain in the businesses. These types of IPOs won’t be seen as traditional exits for venture capitalists.

Companies with differentiated products and significant profit potential will succeed, while others won’t, says Straser. “The challenge the public markets present today is they are both a wall and a door,” he says. —Mark Boslet