Ten years of clean energy start-ups

Eleven percent of the investment deals for clean energy technology start-ups in 2019-20 were for companies founded in middle and low-income countries.1 The People’s Republic of China, (hereafter, “China”), in particular, has grown its share of the deals in recent years, especially in electric mobility, and India has a stronger presence across a range of sectors.

The potential market for clean energy technologies is set to expand rapidly in emerging markets and developing economies in the coming decade. If innovators in these countries are to capture market share for their own technologies, much more domestic and international venture capital (VC) will be needed to support start-ups, alongside a ramp-up in R&D spending.

Emerging markets and developing economies currently account for around two-thirds of the world’s carbon emissions and their share is rising, making adoption of clean energy technologies a critical imperative for achieving global sustainable development goals, according to the new IEA report, Financing Clean Energy Transitions in Emerging and Developing Economies. Annual clean energy investment in these countries will need to increase by more than seven times, to over USD 1 trillion, by 2030 if global net-zero emissions are to be reached by 2050, the IEA projects. This would represent more than 40% of total global energy investment to 2050.

Commercialisation of a novel technology via a new start-up company is one of several possible routes to bring cleantech2 to the market, but not the only one. Countries also depend on government agencies, educational institutions, and corporations for scaling up some technologies without launching any new private companies. However, this path is often more limited in lower- and middle-income countries, compared to advanced economies. Nonetheless, many emerging markets and developing economies possess a very strong entrepreneurial business acumen, which can provide a foundation for energy innovation ecosystems that attract VC funds as well as an array of investment vehicles available from governments and international finance institutions.

Start-ups have typically been most suitable for disruptive ideas for digital, small-scale and consumer products. However, many new start-up firms increasingly represent a significant share of promising clean energy technologies and there is rising appetite for allocating risk capital to early-stage, high-potential innovations for tackling climate change. Recent signals of this trend have come from major corporations, philanthropists and institutional investors.

The success or failure of new start-ups will depend on factors beyond the ultimate performance and costs of the technologies they are striving to scale up. The readiness of the market, determined in large part by government policies, will play a central role, including by influencing the perceptions of investors who might provide follow-on funding.

Investing in early-stage start-up companies is notoriously high risk given steep failure rates. Analysing the outcome of the now legendary 2010 clean technology boom and bust offers a unique opportunity to assess and calibrate investment strategies for emerging and developing companies.

To help understand likely success factors and enable us to follow the progress of recently funded clean energy start-ups from middle- and low-income countries, we have explored the available data from a decade ago in three different ways. First, we looked back at what happened in general to the energy start-ups that received funding in 2010 at the height of the so-called cleantech boom, when just over 80% of the energy start-ups securing seed funding failed to meet their investors’ expectations. This was the last time that large amounts of capital flowed into clean energy start-ups based on the expectation that markets would shift more firmly towards low-carbon alternatives. Because energy hardware innovation tends to take longer than commercialisation in software or services, ten years is also a reasonable period over which the fate of a new energy company will become apparent.

Secondly, we look in more detail at the fate of 40 companies from the much larger 2010 cohort that we believe appeared to be the most promising ten years ago based on the amounts of capital they raised and their diversity across technologies. We also analysed what, if any, roles government policy and public funding played in their outcome.

As a third step, we apply the same methodology to assemble a new cohort of 40 recently funded clean energy start-ups from middle- and low-income countries in order to provide a representative foundation to track the policy and market factors that influence the performance of innovators in these countries in coming years.

The year 2010 was a watershed for VC funding for cleantech start-ups, driven by an array of dynamic issues. New ideas for energy efficient technology proliferated as oil prices trended higher, hovering around USD 80 per barrel in 2010 and then going on to breach the USD 100 per barrel threshold in early 2011. The Deepwater Horizon oil spill disaster in the US Gulf of Mexico in April 2010 contributed to an even more positive mood among investors for fossil fuel alternatives.

After teetering on the financial edge in 2009, Tesla had patched up its finances with a loan from the US Department of Energy, which was followed with the launch of the company’s first Initial Public Offering (IPO) on the NASDAQ in June 2010. The company raised USD 226 million on the sale of 13.3 million shares at an offer price at USD 17 per share. By the end of trading on the IPO’s opening day prices closed up 40%, which added further lustre to the cleantech market. Tesla’s first shareholders were buying shares at a price of around USD 23 on the launch day of trading, one hundred and twenty times lower than the equivalent value in May 2021. There was also plenty of excitement around multiple competing technologies for solar photovoltaic (PV), and in mid-2010 amid much fanfare President Barack Obama visited a promising company called Solyndra that was developing thin film solar cell designs. Solyndra’s high profile collapse, after receiving government-backed loans, would subsequently cast a long shadow over clean energy VC funding.

The clean energy technology start-ups funded in 2010 were mostly offering solutions in the areas of solar, energy efficiency, bioenergy and transport. There were differences in technology focus depending on the stage of the deal, with a larger share of money flowing to transport and fossil fuel-related technologies in the more mature growth equity stage.

Start-ups typically raise their first capital by selling equity shares in a seed funding round of up to USD 1 million, which is used to refine the technology and first market products. For an energy hardware company, this is generally followed by several more early-stage venture capital rounds called Series A and Series B until a market toehold is secured, after which larger “growth equity” funding rounds are sought until the firm lists on the stock exchange or is bought outright. 

Among energy start-ups in 2010, energy efficiency and solar accounted for around 44% of the disclosed deal value across all of these stages. By contrast, electricity storage, hydrogen, smart grids, nuclear and wind were largely absent, either due to a paucity of innovations or a lack of investor confidence. North America was responsible for much of the innovation and entrepreneurship in 2010, with its start-ups representing more than two-thirds of all the investment. This outsize importance of a single region has diminished somewhat since, with the share standing at around 50% in 2020.

With hindsight, we know that the 605 companies receiving a known amount of investment were not all as impactful in the following decade as their investors hoped. The majority never again raised as much money as they did in 2010. The start-ups receiving seed funding were arguably the highest risk propositions, mostly still in a phase of testing and improving their underlying technology. The 111 seed-stage companies in 2010 for which we know funding levels provide insights into how their investors’ expectations withstood the test of time.

Half of the seed-stage companies from this sample did not attract as much follow-on funding as their seed funding in 2010. In the areas of bioenergy, fossil fuels, solar and wind energy, most seed-stage start-ups did not secure any more funding after 2010, according to our data.

At the other end of the scale, five companies have since raised 100 times more than their 2010 seed rounds. An estimated 19% of the cohort have raised more than a multiple of twenty times, which is typically the ratio achieved by the time a company reaches the growth equity phase. In other words, 81% of these start-ups probably failed or sold themselves cheaply and just 115 start-ups survived the rout. Why was this?

Some broad conclusions from the large cohort on why so many of the funded start-ups disappointed their investors include:

• Venture capitalists did not stay the course as commercialisation timelines lengthened. A high percentage of seed-stage start-ups did not attract follow-up funding when the initial exuberance from investors faded as a number of factors coincided to push back expected payback times. US natural gas prices declined sharply with the rise of domestic oil and gas shale production, which diminished the urgency for alternatives while solar start-ups were proving costly to scale up just as China’s manufacturing advantage became evident. At the time, cleantech investment needs, from incubation to manufacturing, were closer to 8-10 years compared to the much shorter 3-5 years to secure returns that VC funds had built into their models.
• Globally, government policies to support early-stage, riskier technologies took longer than anticipated to be written into legislation. At the same time, in both Europe and North America, VCs who had arrived in cleantech from the internet bubble began to learn about the longer timelines needed to develop and scale up new energy hardware in highly regulated markets.
• Some start-ups overpromised and underdelivered. The investment euphoria fuelled in part by high-level policy statements around 2010 meant that some of the technologies advocated by start-ups had flaws in design and business models that had not yet been revealed. Other start-ups pushing new frontiers in cleantech saw development plagued setbacks in scaling up mass manufacturing. Some new disruptive technologies like EVs struggled to produce lower cost, and higher-capacity batteries.

It is expected that a high share of start-ups will fail, and this expectation is built into venture capitalists’ equity valuations and onward sales, but it is nonetheless important to understand why seemingly promising firms collapse and what policy lessons can be learned. To do this, we designed a cohort of 40 start-ups from the initial 605 firms that received known funding in 2010 across all the deal stages and which we think we might have selected as a high-potential subset had we undertaken the exercise without the benefit of hindsight. We then investigated the outcomes of the cohort to see how they fared.

The starting point for the selection process was to assume that investors had done their due diligence and that the amount of the deal values corresponded well to investor expectations. We then calculated the shares of each energy technology area as a function of deals per investment stage (seed, Series A, etc.). This allowed us to rank the top ten start-ups per stage by their 2010 funding totals, weighted to reflect the shares of technology areas in that stage of maturity. (see table listing these companies at end of article.

Among the 40 companies, only two have gone public by listing on stock exchanges, while nine have been acquired by other companies. In 2010, all would have had the ambition of “exiting” via one of these two routes by now. Six of the 40 went bankrupt and one went out of business, though half of the bankrupt companies are now in business again after having been purchased. The others remain in private hands while continuing to target profitability. The relatively low bankruptcy rate reflects in part our inclusion of companies at later stages of financing, not just early-stage start-ups. The underlying data shows that smart energy technologies have returned most capital to investors so far. Energy supply hardware, including solar and bioenergy, have been less successful.

The two publicly listed companies shifted their missions away from the technologies they were focusing on in 2010. McPhy Energy, a French firm, started out as a developer of stationary solid-state hydrogen storage but is now a successful manufacturer of high-pressure alkaline electrolysers and hydrogen refuelling stations. Intrexon, renamed Precigen in January 2020, is now a biopharmaceutical company after starting out by trying to apply its technology to biofuels. The renamed Intrexon has a troubled past, however, including sanctions from the US Security and Exchange Commission (SEC) after the company misled investors about the effectiveness of its process for converting natural gas into products such as isobutanol.

Companies in the energy sector bought most of the nine acquired firms. These start-ups were mainly in the business of developing customer-focused energy management services and renewables installation, reflecting a convergence of interests between energy retailers and digital technology specialists. Energy retailers and utilities have seen much more value in the last decade in moving into the provision of more client services – for customer retention, data acquisition and energy efficiency compliance – but do not necessarily have the right in-house skills or ideas. Digital technology specialists have seen opportunities for their advanced techniques at the interface of renewable electricity, electric vehicles and energy efficiency. Deals included British Gas acquiring AlertMe, Engie buying out OpTerra, NRG Energy’s acquisition of Solar Power Partners, and Toshiba’s Landis & Gyr purchase of Consert. Among the two notable exceptions to this pattern, one was also in the area of smart consumer energy management: Nest Labs, which was bought by Alphabet in 2014. The other exception was Saint-Gobain’s acquisition of SageGlass, a manufacturer of automatically tinting windows.

Half of the start-ups that filed for bankruptcy were electric car companies and all went bust in 2013. Unusually for a VC-backed start-up, Better Place raised large sums to buy and own infrastructure assets; in this case for battery-swapping stations at a time when only a few EVs were available on the market. Coda Automotive promoted a battery-electric sedan for which it made its own batteries, but its sales were too low. Fisker Automotive promised luxury plug-in hybrids but ran into trouble when its Chinese battery supplier had to recall its cars; Chinese conglomerate Wanxiang subsequently purchased its assets.

Among the others, Azzurro Semiconductors gallium nitride technology failed to capture the LED market despite USD 3.3 million in project finance from the European Regional Development Fund and Free State of Saxony. Likewise, despite receiving USD 75 million structured debt from Alberta Investment Management in 2012 and going public the year before, KiOR filed for bankruptcy in 2014 before commercialising its wood chip to crude oil technology. Finally, SpectraWatt, backed by Intel, was a victim in 2011 of the drop in the global price of polycrystalline silicon solar PV cells, a product that it aimed to manufacture itself. While it did not go legally bankrupt, German wind energy firm NTS Energie- und Transportsysteme became insolvent in 2015.

In our 2010 cohort, energy storage, hydrogen and fuel cell technologies have stayed the course the best. Energy efficiency, smart grid and transport technology areas are the others from which more than half of the companies are still operational or acquired. By contrast, the significant enthusiasm for solar and bioenergy start-ups in 2010 did not translate into sound investments.

Across all regions, many in our cohort received taxpayer money. We are aware of thirteen that obtained public grants or investments after incorporation and up to 2020.3 These came from sources including the Government of Alberta, the European Commission, the Flemish government, Mississippi, the Saxony Free State, the UK Regional Growth Fund and others. This funding is additional to any public R&D money that funded the underlying research being commercialised by these start-ups and time spent in publicly funded incubators and accelerators.

Public funding can be crucial for early-stage companies in clean energy technology areas because the time horizons for product development can be longer than the patience of most venture capitalists, and because markets for low-carbon energy need regulatory support, which often evolves alongside the related technologies. The public funders generally allocate capital in full awareness that some recipients will inevitably fail for technology, management or market reasons. They fund start-ups on the basis that the successful ones will supply a public good. A portfolio approach is the only way to balance risk against the uncertain but potentially large benefits of innovation. For our analysis, we can also see in hindsight if public funding made any difference to the chances of success for our cohort.

Across the thirteen companies receiving public support after incorporation, we are aware of governments or public entities providing seven grants, four instances of structured debt, two growth equity investments, one series equity investment and two project finance investments. The grants included USD 6.7 million from the European Commission to Better Place (which also received USD 50 million in structured debt from the European Investment Bank) and amounts of USD 120 000 to USD 1 million from the New York State Energy Research and Development Authority (NYSERDA) to SpectraWatt, Consert and Sage Glass. Examples of structured debt include an undisclosed amount provided by the European Commission to McPhy Energy and USD 528 million from the US Department of Energy to Fisker Automotive. The one example of a government equity investment is the participation of KfW, the German investment bank, in a USD 1.2 million funding round for NTS Energie- und Transportsysteme in 2012.

The stories of many of the successful start-ups indicate a critical role for public interventions to bridge financing gaps during tricky and risky moments of expansion, despite there being no quantitative indication that public funding led to a higher rate of success or failure for our top 40 start-up cohort overall.

The more significant role of policy appears to be in market support, with both positive and negative consequences. Electric vehicle companies in 2010 faced a longer-than-anticipated wait for governments around the world to establish policies for widespread purchase incentive programmes and investments in charging infrastructure. The delay in proactive market policies proved a death knell for many EV start-ups.

Solar PV companies in Europe and the United States did not foresee in 2010 that the industry’s centre of gravity was about to shift to China, which was in large part because of Beijing’s policy to support domestic deployment of locally-produced modules.

For biofuels entrepreneurs, policies did not arrive quickly enough to ensure that more advanced biofuel production techniques could find market share alongside conventional bioethanol and biodiesel and were not coupled with funding for high-risk demonstration projects. Politically, the lustre faded from biofuels as controversies about emissions accounting emerged.

In contrast, energy efficiency and smart grid technologies often had lower development costs and timescales and ready customers in the shape of government mandates for utilities with obligations to increase efficiency and adapt rapidly to variable renewable electricity.

The question of how to use public funding and market support policies to increase the chances of innovation success is core to the realisation of governments’ climate goals. This is especially true of emerging economies and developing markets, where a rising share of energy innovation is happening and from where three-quarters of emissions reductions need to come.4 These countries often have tighter public budgets and different innovation dynamics to advanced economies, including less access to risk capital for clean energy technologies.

To understand how these conditions play out in practice, we have repeated the methodology applied above to the 2010 cohort and selected 40 clean energy start-ups that received funding in 2019 and 2020 and are from emerging markets (including China) and developing countries. We will observe the progress of this cohort over coming years (see table below).

Our cohort is broadly representative of clean energy start-up deals in non-OECD countries, both in terms of countries and technologies represented. China and India lead the national shares, by deal value and deal volume. At later deal stages, especially growth equity, these countries dominate. However, Brazil, Ghana, South Africa and Singapore are well represented in seed and Series rounds. The dominant technology areas are electrified transport and solar PV, not unlike the global 2010 cohort. However, in the emerging market cohort the start-ups are much more focused on urban low-cost mobility and rural energy access. Indian electric two-wheeler company Ola Electric plans to install 5 000 charging points in 100 Indian cities this year. Rural solar system providers include Energicity in Ghana, Rensource in Nigeria, SunCulture in Kenya, SOLshare in Bangladesh and Oolu in Senegal.

Since 2010, electricity storage has become a much bigger area of focus in advanced and emerging economies alike. In advanced economies, the spread of technologies is much more varied. The biggest difference between the technologies funded in low- and middle-income markets, compared with the advanced economies, is in the later funding stages. Start-ups in OECD countries in energy efficiency, followed by electricity storage, smart grid technologies and transport, attracted much of the capital across all stages in 2019 and 2020, not just seed and Series A. In these countries, policies and prices have combined to convince investors that variable renewable electricity and electric vehicles are major growth markets, raising the value of technologies to raise grid flexibility and electrify end-uses. In lower- and middle- income countries, these remain risky investments in the more costly later stages. Instead, innovation and funding decisions in these countries currently reflect more immediate concerns of energy access and urban congestion and pollution, as well as the faster speeds of development for software and small-scale products. As a result, some of the most promising ideas in clean energy innovation are financed and refined in advanced economies. 

Among the 40 start-ups in the 2020 emerging and developing market cohort, at least four-fifths have received funding from a government body, according to our research. This is a much higher share than for the 2010 clean energy cohort, which included just two start-ups from emerging or developing markets.

The types of public support reveal differences among countries. For Chinese start-ups, public sector support is common in the later stages, with investors such as the Chinese State Development & Investment Corporation (SDIC), China International Capital Corporation (CICC) and provincial investment funds playing a major role and providing capital in deals of USD 20 million or more. At the earliest stages of a start-up’s growth after the initial R&D projects, public capital appears to play a smaller role in China than private capital. For example from Baidu, Tencent or Alibaba, or overseas VC funds such as Singapore’s Temasek Holdings, a state-owned enterprise that invested in Chinese electric vehicle manufacturer NIO. In India, on the other hand, publicly supported incubators play a large role in the early stages and are less present in later funding rounds. The support to Gtarang Energy Solutions from the Clean Energy International Incubation Centre launched under Mission Innovation is an example of early-stage support.

Another notable feature of public support to the 2020 emerging market cohort is international finance. The International Finance Corporation (IFC) supported four start-ups in the emerging market cohort: Myanmar’s Yoma Micro Power, Yellow Door Energy in the United Arab Emirates, plus India’s Hero Future Energies and Cleanmax Solar. UK Climate Investments has invested alongside the IFC in India’s Cleanmax Solar. Norfund, a branch of the Norwegian Ministry of Foreign Affairs, invested alongside the IFC in Myanmar’s Yoma Micro Power and alongside the Dutch Financierings-Maatschappij voor Ontwikkelingslande and the UK Commonwealth Development Corporation when providing debt financing to India’s Greenlight Planet. Other sources of public capital included the US Overseas Private Investment Corporation, the EU Electrification Financing Initiative and funding via Energy Access Ventures. These international and multilateral financing organisations, who primarily have aid-related mandates, are developing portfolios of early-stage equity investments to help grow strategic sectors in low- and middle-income countries.

Cross-border financing for innovation could be crucial for helping new technology reach markets, especially in other low- and middle-income countries where it can solve similar societal challenges. In general, these countries tend to have lower availability of local risk capital for energy technologies, and many start-ups are reliant on international funders. Outside China, it could also play a catalytic role in helping local innovation finance ecosystems to mature from a focus on digital solutions to clean energy hardware and so-called “deep tech” like advanced manufacturing. Mature local VC ecosystems can focus on relevant local technology and social challenges and give start-ups more options for where to locate and find funding.

As the IEA deepens its understanding of clean energy innovation policies that can support energy transitions globally, the progress of the 2020 emerging market cohort will hold valuable lessons. It will inform forthcoming IEA policy analysis on financing clean energy transitions in emerging economies, as well as our twice-yearly updates on start-up funding trends.