Despite Thaw, Floodgates Could Stay Locked for Cleantech IPOs

floodgates-flickrborevagenA123Systems finally set the terms for its IPO in a new filing with the SEC this week more than a year after it first registered to go public. Like the Massachusetts-based battery maker, cleantech startups including electric car company Tesla Motors were eying the public markets before the economic downturn. But while A123’s IPO could begin to thaw the public markets for other cleantech startups if it gets a good response, it appears as if the ability to raise funds from the government and other big backers, combined with the relatively long development period required for these technologies, has led to a shift in the role of public offerings for the sector. As a result, it’s unlikely we’ll see the floodgates flung open for cleantech IPOs anytime soon.
VantagePoint Venture Partners managing director Stephan Dolezalek says two of the startups in VPVP’s portfolio that are near the front of the line for a public offering — Tesla and solar company BrightSource — won’t be going public until late 2010 at the very earliest “If the market stays the way it is today,” Reuters reports today. And public offerings, says Dolezalek, now serve more as “financing events” for alternative energy and other cleantech startups than a way for their investors and founders to cash in on equity, or “exit,” in industry parlance.

This outlook is different than what we heard from investors a couple years ago, when Nth Power managing director Tim Woodward explained, “When we make investments today we still look for an IPO exit opportunity…We see companies that will go public at valuations that you’re not going to see GE pay for a company.” Over eight years of investment, he said Nth Power had not seen significant merger or acquisition opportunities materialize for cleantech startups, and Gary Vollen, then director of Pacific Growth Equities (he’s now with Robert W. Baird & Co.) called the M&A market for cleantech “far from mature,” at least 3-5 years away from offering a realistic exit path.
Since then, there has been a major IPO drought for the technology industry at large — not just cleantech — a trend that “really stymies some of the larger startups with sizable revenues and some profits, and limits their options for creating an exit event that brings in much-needed capital but also rewards the employees,” as Om put it over on the GigaOM blog.
Several cleantech investors and observers have been forecasting an IPO revival in recent months. But for a company like Tesla, which in early 2008 expected to go public this year as part of an effort to finance an electric sedan model, there may be less urgency now for an IPO since Uncle Sam has stepped up with $365 million in loans for the sedan project, and German automaker Daimler also took a stake in the startup. As for BrightSource, it has billions of dollars worth of bookings and just added construction giant Bechtel to its list of deep-pocketed backers. “They are perfectly capable of raising money,” Dolezalek said of the two startups. “There is no pressure to say let’s rush this into a public market where things are still uncertain.”
Despite A123Systems’ upcoming IPO, battery startups in particular may remain in the wings of the public markets for some time to come. According to J.D. Power & Associates analyst Michael Omotoso, battery startups “looking to get rich quick” and facing an unfriendly IPO market have two likely scenarios: “get bought out by the big battery companies…or get bought out or invested into by the vehicle manufacturers.” However as Accel Partners venture capitalist Rich Wong told us for a GigaOM Pro piece (subscription required) on exit strategies and business models for battery startups, uncertainty is a big part of venture-backed cleantech innovation:  “Sometimes you have to start the race without knowing exactly how it’s going to finish.”
Photo courtesy of Flickr user borevagen