SPAC Demand to Draw VCs to Clean Tech
Interest in taking clean technology companies public surged after a decade when few such companies reached public markets
Clean technology startups have become a hot commodity on the public markets as special-purpose acquisition companies flush with cash hunt for targets.
The trend is likely to draw more venture investors to clean technology, after a decade when few such companies backed by venture capital went public.
“The venture industry moves toward returns,” said Dan Oros, partner at G2VP, a venture firm focused on sustainable industrial technology that spun out of the Kleiner Perkins Green Growth Fund and has had three companies that agreed to merge with SPACs in recent months. “If investors start making huge returns in [electric vehicle] companies, battery companies…industrial-tech companies, then they will invest in those things.”
At the same time, some VCs worry that early-stage companies with capital intensive business models in industries where market conditions are hard to predict, such as energy, won’t meet the expectations of public markets. That could have negative implications for earlier-stage startups, investors say.
Some 30 companies in the sustainability, environment, energy and advanced transportation sectors, several of them backed by venture investors, announced mergers with SPACs in 2020, according to Nomura Greentech, a division of investment bank Nomura Securities International Inc.
About $14.3 billion was due to be invested through SPAC and related transactions into such ESG companies, according to Nomura Greentech. ESG companies focus on the environment, social good or corporate governance.
Roughly half of the SPAC mergers in the broader ESG category were specifically focused on the electric-vehicle market.
Pavel Molchanov, director and equity research analyst at investment bank Raymond James & Associates, cites a single reason for the sector’s attraction.
“It’s one word: Tesla,” according to Mr. Molchanov, who says Tesla Motors Inc.’s success is inspiring both entrepreneurs and investors.
About 30 more SPACs that raised $9 billion in capital were still looking for clean technology acquisition targets as of the end of the year, according to Nomura Greentech.
SPACs are solving two problems for clean technology venture investors and startups—providing a clearer path to an exit and offering scale-up funding for capital-intensive businesses. In that way, SPACs are decreasing the risk of investing in earlier stage startups, Mr. Oros said.
“That’s the difference in investing in this space today versus investing in 2005 as a venture capitalist. You can now see that there are public-market investors to put the scale capital behind it,” said Jeff McDermott, head of Nomura Greentech. Nomura Greentech had a record year by revenue and deals primarily because of the SPAC deals it facilitated, Mr. McDermott said.
One of the most recent SPAC deals for a venture-backed startup was the planned acquisition of electric-bus company Proterra by ArcLight Clean Transition Corp. , in January. The deal allows the company, backed by G2VP and other venture investors, to raise more than $600 million, and gives it an enterprise value of about $1.6 billion.
Last year, G2VP’s portfolio company Luminar Technologies Inc., provider of sensors for autonomous vehicles, merged with a SPAC then listed on public markets. Luminar’s market capitalization was roughly $7 billion in mid-January, rising from the deal at an equity value of $3.4 billion.
Historically such companies have had difficulty in going public. Just a handful of venture-backed clean tech companies that went public in the past decade, such as Sunrun Inc., and Enphase Energy Inc., reached market caps of $1 billion or more.
Venture-backed companies in the clean technology sector that announced SPAC mergers include greenhouse-farming startup AppHarvest Inc., backed by firms including Revolution Ventures. Energy-storage company Stem Inc., backed by Activate Capital Partners and others, is expected to have an enterprise value of $1.35 billion upon completion of its SPAC deal.
Today’s public investors are eager to buy into clean technology startups, Mr. McDermott said, because technology costs are coming down, government policies are favorable, and ESG strategies and mandates, especially around reducing carbon emissions, have gained traction. Investors believe, Mr. McDermott said, that trends such as a move to renewable energy and electric cars, will be longstanding.
So far, ESG SPACs have performed well. ESG SPACs roughly tripled in value in 2020, according to Nomura Greentech, which calculated this performance weighted by market capitalization assuming an investor owned the same percentage of each of the SPACs. Their cumulative enterprise value stood at $137.27 billion as of the end of the year.
But many of the public-market newcomers are early-stage businesses, some with no revenue. Others are signing contracts for products they plan to make at not-yet-built factories.
“Public markets can be fairly unforgiving,” said David Kirkpatrick, managing director at SJF Ventures, a growth equity firm focused on sustainability technologies. “What’s the patience going to be for hanging in there based on press releases and technical milestones?”
Clean technology investors are familiar with failed projections and dashed dreams. Venture investors rushed into the solar sector in the early 2000s with plans to make solar panels at a certain price and efficiency. But by the time they managed to get to scale, the competitive landscape changed, prices dropped, and many upstarts went bankrupt.
The current SPAC boom must show performance over the long term, with companies meeting promises, producing products at market-required cost and not running out of capital, Mr. Oros said. “Otherwise,” he said, “it’s going to be a repeat of the clean tech bubble.”