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Cleantech Deals Getting Messy but Lawyers Remain HopefulLawyers acknowledge that a slowdown in cleantech deals is altering their practices: Capital is more difficult to come by for many companies, and more of the work within the cleantech sector is focused on restructuring and turnaround situations. Still, lawyers who advise cleantech companies say rumors of the industry's demise have been greatly exaggerated.
The Recorder2013-01-23 06:13:22 PM
Solyndra files for bankruptcy. BrightSource Energy cancels its IPO. SolarCity's IPO prices at little more than half of what the company had originally planned for and during the roadshow bankers for the panel installer play up the company's consumer finance angle to distance it from a number of high-profile failures in the sector.
Investors in the solar industry and clean technology in general have been skittish and the industry's been plagued by bad headline after bad headline in the past year.
Lawyers acknowledge that a slowdown in cleantech deals is altering their practices. Capital is more difficult to come by for many cleantech companies, lawyers say, and more of the work within the sector is focused on restructuring and turnaround situations.
Nonetheless, lawyers who advise cleantech companies say rumors of the industry's demise have been greatly exaggerated.
"It is not uncommon in Silicon Valley where early movers are unsuccessful, there is a retreat, and then another wave comes through," said Sayre Stevick, a Fenwick & West partner focused on green technology and life sciences. "I don't expect the next wave to be more than three or four years away."
In the past year venture capital financings have declined as a whole, and money going towards clean technology has dropped much more drastically. According to figures from the National Venture Capital Association for the third quarter of 2012, the most recent period for which numbers are available, total venture funding fell 6.5 percent to about $6.5 billion from the year-earlier period. Total deals actually ticked up slightly by about 1.6 percent to 890.
Meanwhile for cleantech, which the NVCA says includes alternative energy, pollution and recycling, power supplies and conservation, the total invested fell 11.2 percent to $791 million while the number of deals plummeted 27.5 percent to 58.
On the public company side there were at least 19 U.S. equity deals, including initial public offerings, follow-ons and convertible debt sales, in 2010 from cleantech companies, compared to eight in 2011 and 10 in 2012, according to data provider Dealogic.
While fewer startups are venturing into the cleantech space, more mature startups are still "alive and kicking and getting funded," said Fenwick's Stevick.
There are also more "pay-to-play" rounds, which are a type of restructuring, and refer to the process of forcing a company's existing investors that do not want to participate in further financings to convert their preferred shares into common stock, Stevick said. Preferred shareholders control a greater percentage of the voting rights in a company than do common stockholders.
Possibly the area most affected is the work on behalf of companies to obtain federal money from agencies that include the Department of Energy, several attorneys with cleantech practices said. Susan Mac Cormac, co-chair of Morrison & Foerster's cleantech group, said firms whose practices were focused on loan guarantees are seeing less business.
The high-profile failures of solar panel maker Solyndra, which received a $535 million loan guarantee from the federal government, and others, have made it next to impossible for startup technology companies to obtain federal money.
"I think that everyone in cleantech is glad that 2012 is over and is looking forward to 2013," said Robert O'Connor, a partner in the Palo Alto office of Wilson Sonsini Goodrich & Rosati.
Yet O'Connor stressed that the cleantech industry is far from dead. "If Sand Hill Road were our only barometer, it would be one thing. But all of the big energy and industrial players are stepping up their investments across the clean technology sectors."
He cited companies as diverse as Chevron Corp., General Electric Co., Johnson Controls and BASF for their green investments.
"While the first stage of cleantech and venture capital have learned some tough lessons, there are many parallels between the first and second wave of dot-com [companies]," O'Connor said. In both instances, there has been a shift in focus from more capital intensive hardware and materials businesses to software and data, he said.
Restructuring scenarios such as pay-to-play are not unique to cleantech companies and as with any development-stage sector, there are some that are thriving, some that won't survive and most of the latter could not have foreseen the problems, O'Connor said.
"What we are seeing is that many of these companies are hitting a cash wall and we need to have the difficult conversations," he said. "There's also those ones that don't know if they'll make it and need to raise money in a difficult financing environment."
While there have been well-publicized venture capital firms that have curtailed clean technology investing, new money from both family offices and corporate investment arms is being pumped into the sectors, said O'Connor. "A majority of the deals we are working on involve at least one strategic co-investor." Strategic investors, generally the venture capital arm of a corporation, often put money in companies with an eye toward a joint venture or outright acquisition in the future. Due diligence on these transactions can be more intensive as it is more akin to that on traditional merger and acquisition deals than standard venture capital investments.
MoFo's Mac Cormac said the revenue brought in by the firm's cleantech practice has increased year over year, though she declined to provide numbers. However, much more of the work involves some type of restructuring and the financings are predominantly later-stage, she said. "We've had a couple of clients acquired for a song, but no one has gone completely out of business," Mac Cormac said.
As of late, a lot of the work of MoFo's cleantech group has been on behalf of acquirers of unfinished renewable energy development projects which are being sold very cheaply, Mac Cormac said. A solar energy company may not be able to complete all of its power generation projects, which are very capital-intensive, and there is a great deal of investor interest in those unfinished sites.
MoFo also has about 100 patent lawyers that are doing lots of clean technology work with companies that would never be able to get funded right now. "Lower Manhattan can be underwater, and yet the world still can't speak intelligently about climate change," Mac Cormac said. At some point, likely sooner than later, these companies will come back in vogue, she said.