The premature clean-tech IPO boom

August 17, 2010: 3:00 AM ET

Early-stage green technology companies are taking a page from the biotech playbook: IPO with little or no revenues. So far, it's not working.

A number of tiny, ambitious companies in a promising industry with a very small market are lining up to tap the public markets. It may sound like the biotech IPO boom of the 1990s, but this time it's firms in the clean tech industry filing S-1s faster than they can earn a buck.

During the biotech boom last decade, young companies -- often without any revenue at all -- sold investors on the possibility of new blockbuster drugs. Along with the broader tech market, the industry crashed in 2001. Successful ones were acquired; most went bust. A decade later, a few superpowers continue to dominate the pharmaceutical world, although plenty of young biotechs are still vying for that elusive FDA approval with the backing of public money.

This time around, it appears to be a different industry with the same model: raise money today to finance a business model for tomorrow. It's early-stage green technology companies that are funding their research and development for a market that is mostly non-existent today. Their hope is on a blockbuster fuel instead of a blockbuster drug.

The latest revenue-free company to join the ranks is PetroAlgae, which filed for a $200 million IPO last week. The company makes technology to grow and harvest algae, which many believe is a promising source of renewable energy. It has lost $66 million during the past three years without bringing in a single dollar in revenues.

Analysts are in agreement that PetroAlgae has jumped the gun, according to the New York Times' VentureBeat. Other algae companies are worried that the whole industry could suffer if PetroAlgae fails because of a premature move to enter the market with subpar technology.

Following the herd

And PetroAlgae joins a cadre of green tech companies in a rush to the public markets, many with little success. The electric vehicle company Tesla (TSLA), which went public in July, reported second-quarter losses of $38.5 million -- much wider than last year's $10.9 million loss. Car sales fell from $26.9 million to $24 million. Its shares touched a high of $30.42 on their second trading day, but they now swap hands for around $18.32.

A company called Codexis (CDXS) that makes enzymes used in biofuels went public in April. While Codexis earned $24.5 million in revenue during the second quarter, a 28% increase from the same period last year, its losses widened to $3.9 million from $2.9 million last year. Its shares are down nearly 50% from their earlier highs.

Investors who got into the lithium battery maker A123 Systems (AONE), a promising IPO in late 2009, aren't seeing any green. Last week, the company reported a wider than expected second-quarter loss of $34.2 million versus a loss of $21.9 million last year. While it does have revenues, they're moving in the wrong direction – product sales fell to $15.5 million from $16.5 million last year. Shares are trading at $7.48 from a high of $28.20.

Clean-tech companies won't have to put their fates in the hands of the FDA for approval like biotechs do, but they will have to contend with a different formidable force: Big Oil. Biotech companies that make successful drugs can basically bank on getting bought by Big Pharma and assimilated into the larger company's product line. The Holy Grail for clean-tech companies, on the other hand, will be producing products that are cheaper and more efficient than oil.

Of course, Big Oil could end up playing the part of Big Pharma in this scenario. Under pressure to invest more in renewable energies, large oil companies could end up on a buying spree in the clean-tech industry. Assuming, of course, that industry survives after the less-than-enthusiastic response it's getting from the public markets.

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