Some Belated Predictions for 2016
It already being mid-February, I feel like I’m cheating a bit with this year’s predictions. Sorry, it was a really busy start to the year. But let me try to make up for it with some cleantech investing predictions that you won’t get anywhere else!
Mostly because they’re assuredly wrong.
- Cleantech (but not “cleantech”) venture capital will have a rebound year
Measured in terms of either deals or dollars, I think the sector will see at least a 10% boost year over year in terms of venture dollars invested. There’s too much juicy market growth going on for VCs to ignore altogether, and I’m sensing the first cracks in the icejam of LP disinterest in the sector.
But several big caveats here…
First of all, who can define “cleantech” these days, and who’s even tracking the sector? PwC and CB Insights continue to track some of the data in the sector, whereas other trackers have fallen off, so we thank them mightily for that. But still, the data question is an issue…
Secondly, don’t call it a “cleantech”, it’s been here for years… What few generalists are now showing interest in the sector would be scared off if this now-toxic legacy label were applied. So this makes it even harder for any deal trackers to figure out the real story. Even while they start to nibble at the edges of the opportunity.
And thirdly, it’s really not about venture capital anymore. More on that below.
2. The venture capital sector overall will face a big pullback, and cleantech entrepreneurs will just shrug.
Sure, “lean times” for the dot-com community may be a new harsh reality. But what further capital scarcity can there be for our sector? So get ready for a wave of ponderous “time to batten down the hatches” articles within the mainstream VC and entrepreneur community, to which cleantech entrepreneurs will simply react with a ¯\_(ツ)_/¯, and keep pushing onward regardless.
3. Cashflow-generating assets will, however, continue to generate cashflow.
In other words, 2016 will be a big year for deployment investing. Deployment capital is what the sector truly needs in the near term. No, I’m not disparaging deep tech innovation support, which we all need in the long term. But we need near-term impact as well, and this year will see an unleashing of significant capital into deployment activities. Especially around distributed assets. Many such cleantech innovations are now ready for prime time, and in a low-yield market many investors will be happy to fund putting those innovations out there into the real market.
4. A generalist VC will come up with an alternative label than “cleantech” and it will stick.
I mean, someone has to, right?
5. The Clean Power Plan will be given new life in a 4–4 SCOTUS
It’s easy enough for the Obama Administration to make a few changes to the rule, send it back to the DC court, and then send it to the Supreme Court for further review. And a deadlock there means the lower court ruling stands. You have to figure they’re already thinking about this path.
6. The proposed $10/bbl oil tax will go nowhere
But that wasn’t really the point, right? It’s a negotiating chit in the short term. And in the long term, it starts desensitizing politicians to the very idea. I think it was smart to include here. Even if it doesn’t go anywhere in the near term. This is a long term issue.
7. Real assets will start to become more important for cleantech investors
Look, it’s really an accident, and an unfortunate one at that, that venture capital models defined cleantech investing. Meanwhile, so much of the core market opportunity relates one way or another to land use. There are a (very) few smart investors out there pursuing “real assets” investment models relevant to sustainability, and from what I’ve seen in the family office community, there’s a lot of current interest in that area. So I expect to see a lot of mainstreaming of sustainability-oriented real assets models this year. The venture capital model may have a hard time fitting into this type of investment, but for others it’s a natural fit.
8. “Divestment” will start to become a trigger for better investment management
There’s a canard out there (specifically, the “efficient portfolio theorem”) that divestment means getting out of sectors, which means limiting your investment universe, which means reducing returns. So divestment = lower returns, by that logic.
I’m not either for or against divestment, to be clear. I think there are limitations to its impact, and definitional challenges. But I think there’s a huge hole in the logic most often applied AGAINST divestment: That it limits the investment universe. The assumption being, of course, that the LP actually has fully, 100%, totally, completely, thoroughly, etc etc investigated every possible investment opportunity and strategy BEFORE engaging in divestment discussions.
I can absolutely guarantee that no LP out there has fully investigated every single investment opportunity in the entire world. That would be physically impossible. And quite often, I find that such investors have investigated investment opportunities via their existing taxonomy, but meanwhile there are new investment models and strategies being developed all the time that don’t fit into pre-examined “buckets”.
If divestment is used not just as a reason to say “no”, but instead as an excuse to investigate new opportunities to which to say “yes”, it’s actually a healthy re-evaluation at the portfolio level. Not a limitation. For LPs the divestment challenge actually should be a reminder that that they can’t have enough analysis around non-traditional investment strategies and emerging GPs.
9. Food and ag as a “next big thing”.
I was right about it in last year’s predictions, and I’ll be even more right about it this year… Food and ag is the new “hot” sector. Whether you’re in VC, real assets, project finance, or whatever. Whether your focus is on tech innovation or business model innovation. Whenever I go to a conference, it’s a common denominator. Everyone’s interested in it. So I expect to see more activity in this area.
10. Emerging economy distributed generation as a “next big thing”.
This is the other “it” sector, according to the foundation community members and family offices I speak to. And with good reason. The ability to leapfrog centralized infrastructure with distributed generation models is compelling, especially in high energy cost markets. What’s needed are strong business models made to address the specific market needs on the ground. And that is what I’m seeing emerging. It’s going to be an exciting decade for DG in emerging economies. And 2016 will reflect that.
11. 2016 will be the year limited partners transition from asking “why the heck are you invested in these sustainability opportunities” to “why aren’t you invested in more sustainability opportunities?”
Again, the results will be hard to quantify. But it’s just logic. LPs generally are long-term investors. The anti-cleantech crowd has been giving them short-term answers for near-on a decade now. That can’t continue.
Meanwhile, more and more investors have been showing that investing into >50% CAGR markets in clean energy and related markets can yield good results. These investors are generally still small. But increasingly the big institutional fiduciary universe will be wondering why they don’t have exposure to this opportunity.
This year is the year all of that starts to shift.