Why reasonable cleantech IPO valuations are a good thing

After what seemed like an interminable drought in cleantech IPOs, we’ve had two in three months. While this may be a sign of an overall loosening in capital markets, what’s more interesting about the IPOs of smart grid networking equipment maker Silver Spring Networks and solar installer SolarCity is just how reasonably the companies were priced. And the fact that both companies got such a warm reception, once trading began.

Now to be fair, both companies would probably complain that skepticism about cleantech companies cost them both a fair amount of cash in terms of how much new capital the public offerings brought in. SolarCity had been looking for a pricing range of $13-$15 a share but went public at $8. In 2011 Silver Spring Networks had announced it would be seeking $150 million in cash during its IPO, but went public raising a little more than half that amount–$81 million.

But I think that these IPOs coming in at reasonable share prices that provide a margin of safety for investors is a very good thing for cleantech as a sector. Not to mention that Silver Spring Networks popped 29 percent the first day of its IPO and SolarCity now trades at double its offering price. So here are two thoughts on why more IPOs that are offered at decent valuations would be great for cleantech.

 

1)  More IPOs are needed. In 2011 the time to IPO for a company was 8.3 years. In 1999, it was 4.3 years. We need to accelerate the time to IPO. Silver Spring Networks took 11 years to go public. Fuel cell maker Bloom Energy is 12 years old, has raised over $800 million and there’s not much talk of an IPO there. It’s just too long for VCs to have their money out there, and it makes VCs more hesitant to make big bets.

Yes, cleantech has unique problems here because lots of game changing technologies like next generation solar or new battery tech have very long roads to profitability, or even revenue, in the case of biofuels companies like Kior. And clearly not all the financing can come from VC. But more liquidity sooner will keep VCs in the game.

Add to this that 90 percent of job growth for companies occurs post-IPO, and that’s a another reason to get companies public sooner.

2) Stop investors from running for the exits. It turns out that early Facebook investors Accel Partners and Peter Thiel, along with Goldman Sachs and Greylock Partners were all dumping shares even before the IPO. The smart money realized the valuation was unmanageable.

With the recent Silver Springs and SolarCity IPOs that’s much less likely to happen. You’re much more likely to get investors who see the public financing as an incremental step towards further building the business and have an incentive to hold their shares as the company grows, and the share price appreciates.

In an age of electronic trading and hedge fund dominance, there’s greater volatility in the market than ever, and if we want successful IPOs and a base of long term investors, we need to disincentivize those who are keen on shorting new IPOs. The best way to do that is to let companies go public at reasonable valuations. If Silver Spring or SolarCity need additional cash, they can raise at even better valuations now and do a secondary offering. This is exactly what Tesla has done.

 

At the end of the day, if we see a series of cleantech companies go public at reasonable valuations and show sustained appreciation, it will be hard for VCs to ignore the industry. Add in the possibility that companies can go public a bit more quickly, and we might just be able to reverse the almost third decline in cleantech venture investing that occurred in 2012.

 

 

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Adam Lesser

Cleantech Curator Gigaom Research

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