Are green Start-Up valuations over inflated or good value for climate change?
Here at BayWa r.e. Energy Ventures, our number one priority is supporting the global energy transition. Investing in and helping to get green start-up companies off the ground and operational, is an ideal role for us.
However, there is a question to be asked about the increasingly high valuations that we are seeing placed on green energy start-ups and whether these valuations are sustainable. Even before the pandemic hit, start-up prices were generally high – and now, two years on, the valuations have risen even further.
So, what’s driving these increases?
Put very simply it’s supply and demand. On one hand the green energy venture capitalist (VC) market is not huge (especially when compared to the consumer VC market) and the energy market itself is highly regulated which makes it difficult to grow. And on the other hand, the number of VCs focusing purely on green energy investment has risen sharply, and these climate impact funds have targets to hit, which drives up bidding and valuations.
However, with this increasing pressure on VCs and PEs to invest in green tech, and the resulting high prices there comes the issue of meeting their financial return targets, which inflated costs may well be hard to meet. Which begs the question of whether these high prices will lead to trouble?
Does it matter? What’s the issue?
There is a concern that we are seeing a similar ‘bubble’ to that of the ‘dotcom bubble’ of the late 1990s, when excessive speculation caused a large rise and fall in ‘tech’ valuations, VCs do need to be mindful of whether start-ups are worth their valuation. We do not want to get to a point where VCs are either paying huge prices for ‘good’ companies or alternatively start funding companies which are priced lower but not worth funding in the long term.
Another issue we’ve already seen, is that previously ‘late stage’ investors seem more likely to opt for investing at earlier stages, which is all well and good, but they’re investing larger amounts which in turn continues to drive valuations up. They’re also wanting reassurance that they’ll be able to achieve a decent return on their investment – which is much more difficult if those start-up prices are high.
The environmental value
There is another side to this coin that isn’t simply about investment vs return, while obviously very important, there is also the social value to consider. If you take the social and environmental cost of not investing in renewables, then you could argue that these aspects are fundamental and therefore back up the higher valuations.
So, what is the fair value of a company that has a tremendous impact on reducing or saving CO2 emissions directly or indirectly?
The answer to this question depends on what we as a society are willing to pay to limit or even stop climate change? What is the value of this? Investors can take those points into account but are still bound to the commitments to their LPs and the expected financial returns.
Governmental imposed rules, restrictions and carbon taxes will be needed to internalize the cost of climate change. Only then will the true value of green start-ups become visible, and it will likely show that green start-ups are cheap today!
We need to invest
Fundamentally, if you believe – as we do here at BayWa r.e. Energy Ventures - that renewables are the right solution for any successful energy transition, then investment is going to play a critical role in paving the way to a lower carbon world.
Clearly, then, would-be investors need to weigh up the pros and cons. Will the start-up achieve profitability in order to survive and grow in the longer term and make a difference? Does the start-up team have any track record in renewables, any expertise in the area which is going to make success and longevity more likely? The start-ups themselves also need to be considering these points when they’re looking for the right investor. We think finding the right match matters!
Don’t just invest because they’re green – invest because they can really make a difference in the energy transaction – do they add value and make an impact?
VCs have an important role to play
It’s not an easy challenge to overcome. At BayWa r.e. Energy Ventures, we’ve looked at thousands of potential start-ups. We target early-stage investment opportunities in scalable business models in the areas of digital energy solutions, storage and e-mobility, all over the world. We’re not short of candidates, but out of all those we’ve considered, to date we’ve invested in just a handful.
The key to success is ensuring great chemistry and collaboration between the founders, management team and investors, and it’s this core belief that shapes the way we work. At BayWa r.e., we pride ourselves on trying to rethink energy. It is our collective vision to set new standards for renewable energy and continue to drive the market forward. We are looking for partners who share this vision and are exploring new ways to make it become reality. We’d encourage other investors to adopt a similar approach and mindset.
We believe that in spite of the challenges, start-ups will play their part in helping to change the world and make it a green place. By working with the right VC, these partnerships will drive things forward, deliver innovation and enable change.
Ulrich Seitz, Managing Director, BayWa r.e. Energy Ventures
Photo by Jeremy Bishop