The media vacillate daily about whether the economy is growing, whether the recession is lifting, and the market is like the audience at the US Open, heads moving back and forth in unison. One way to look at the recovery — fast or slow, V-shaped or the dreaded W, robust or lackluster — is that it will probably happen, based on past history and the underlying strength both of the US economy and the economies of other industrialized nations. And there are some things one can bank on already, including the new crop of technologies and spunky little companies that will emerge, or are already emerging. There are books and articles on the subject, but a good summary was supplied by McClatchy newspapers last spring: http://www.mcclatchydc.com/2010/04/08/91844/from-the-ashes-of-recession-new.html. And it’s worth remembering that companies like HP and Microsoft were started during recessions.
The back-of-a-napkin technology stories tend to be exaggerated, and having spent 30 years with small companies, I know it’s 99% perspiration, as Thomas Edison is said to have said (and General Electric was born in a recession too, come to think of it). The dynamic is simple: companies anticipate lower sales and so they retrench, firing people, sometimes in waves of thousands. No one likes firing people, so the firings tend to be LIFO-based to give them a rationale, or wholesale site-closings (favored by heavy industry). The LIFO unemployment lines hit younger employees disproportionately hard, and some of those go on to start companies (most new companies are started by young people, not by middle-aged people who have moved to the center of the economic spectrum already).
And you thought algae were just pond scum?
It’s a bit early to take a roll-call of new companies spawned by the 2008-2010 recession, but it is likely to be an impressive list in fairly short order. We are already seeing some major public offerings queueing up for VC-backed new companies like Melbourne FL-based Petroalgae (OTCBB: PALG; http://www.petroalgae.com/), which has no revenues, but also has the good fortune to be banked by Goldman Sachs, UBS and Citi for its projected $200 million raise this autumn. It has a totally theoretical market cap in the billions already, but the truth of that will be in the aftermarket. At any rate, it ain’t gonna be chickenfeed.
As Marie Daghlian pointed out in a perceptive article in Seeking Alpha (http://seekingalpha.com/article/220538-renewable-energy-stocks-fuel-ipo-queue), Englewood CO-based Gevo Inc, also with no revenues, is a biomass-to-fuel company looking for $150 million with a syndicate of banks only slightly different from that employed by Petroalgae — this time it’s UBS, Goldman Sachs and Piper Jaffray. Gevo has a splendid website: http://www.gevo.com/.
There’s actually been a good deal of talk about these two pending IPOs already, but I bring them up in order to point out that the companies that grow up in a recession tend to be companies with a different “take” on reality. Exxon and BP continue to believe that the energy future is totally dependent on fossil fuels, but the European Union has decreed that 20% of Europe’s electricity will be derived from renewable sources by 2020, and that a 20% decrease in electricity usage will be accomplished in the same time period (the so-called 20-20-20 rule: http://ec.europa.eu/environment/climat/climate_action.htm ) — which creates some cognitive dissonance with the fossil-fuel-forever point of view.
And truthfully, you don’t have to have your ear firmly to the ground to know that there are all kinds of smaller, brainier, cutting-edge companies popping up in all kinds of sectors and all around the world. In the Netherlands there is privately held Hydroring*, which has developed and is installing as we speak, micro-turbines to be submerged in rivers to create electricity without building dams — and these are donut-shaped turbines that fish can swim through (http://www.hydroringcapital.nl/). At present we are told there are orders for 5 of these in the UK, 1 in the Netherlands, several in Germany and 2 in India. Each one is expected to produce around 40 kWh on a constant basis year-round, without disrupting wildlife or shipping.
Bright Automotive — not just about cars any more
And in a variation on the theme of new companies, the “new” General Motors, itself preparing the biggest IPO in history, has extended a hand to one of the most promising of the really “new” greentech companies: privately held Anderson IN-based Bright Automotive (http://www.brightautomotive.com/), whose battery-pack work is probably more significant than its slightly odd-looking delivery truck design. However you look at it, though it’s a move sure to infuse some new ideas into the face-lifted former automotive sales leader from Detroit: http://www.ecnmag.com/News/Feeds/2010/08/applications-power-gm-bright-automotive-announce-strategic-relation/.
And while Petroalgae is pursuing its mega-deal in the US, Algae.Tec is in the process of closing a very modest deal in Australia for what seems like a far more innovative method of producing the same product at lower cost: http://www.algaetec.com.au/. It also seems to have deals to build in Australia and China: http://www.prnewswire.com/news-releases/algaetec-signs-mous-for-china-and-australia-pre-listing-101591198.html.
And although we have a policy against long articles, there are new green shoots as well in medical devices, pharma, biotech, software, media, internet, fish-farming — you name it, and clever people are doing it.
However you look at it, one of the most important pieces of the puzzle facing a new company is how to get enough money to survive. In the next installment of this series, we’ll talk about a new crop of “mid-market” investment banks bidding to take the position formerly held by the (sometimes 5 or 6, but usually 4) Four Horsemen, only one of which is still around (Needham & Co). Signal Hill anyone? Janney? Madison Williams? Baird? Revolution Partners?
* Denotes Allen & Caron client