One of the many benefits of SIL is the open and active role in which Venture Capitalists are allowed and encouraged to participate. Konrad Jarausch, Technical Analyst, Renewable Energy And CleanTech, with Passport Capital gave a fascinating talk entitled, “Squeezing Blood out of Stone? Investing in LED/SSL Companies.”
If you want to know what VC’s think of our industry, read on.
Key Points:
- Acuity Brands. Vern (Nagel) will brag that they have 1.7M skus. As an investor, I am terrified by this number. It makes investors run. Many people predicted AYI would go out of business as the market transformed to LED, but Acuity has managed the cycle well and they have deep industry relationships. Acuity is a poster child for navigating the transition.
- Likes specification market because of its higher value—but highly fragmented because of reps. It’s hard to get to this market.
- When public markets think of lighting, they think of Cree. We are in the 3rd cycle of LED, the adoption cycle— but we are in the early days of this cycle.
- Veeco did well in the first wave of adoption, but not seen much gain in this current phase. Contrast Veeco to Hubbell, which has outperformed in recent years.
- In the A19 market, the profit margins are terrible, for many reasons, one of which is competition from Asia. Not to pick on Lighting Science Group, but they have brutal competition form Asian suppliers. Contrast to Dialight as they have done a good job capturing value.
- There are mixed results from IPO’s. OSRAM was spun out of Siemens and initially did well, but the stock price came all way back to the IPO level before recovering. TCP did not do well with their IPO, which shows investors have no appetite for bulb business. IPO is probably not the end game for most companies.
- LED is now 10 or 20% of the BOM.
- Midstream companies—LCD panels—are largely saturated; so mid-market is turning attention to lighting.
- Downstream are well positioned. Adoption point is accelerating, but bulb companies have had trouble capturing value, while fixture companies have done well with value.
- Retrofits are not being addressed well. OEMS are more focused on new construction and remodel, their historic business.
- What do we do with the channel? No disrespect to agents and distributors, but six or seven people in between don’t help very much. Need to connect customers to the technology.
- How do VCs look at lighting markets?
- In the old days, say 2010, everyone wanted differentiated technology. But hardware is capital intensive and takes a long time. The good ole days of Venture Capital are gone. Today it’s social media and software. It is very hard to draw capital to capital-intensive business as you scale. This is now the 3rd rail of VC. Good luck.
- Downstream—not as attractive, so go for the M&A play. How does an analyst understand if company A is better than company B—hard to tell with similar hardware, which is why it is difficult to attract capital from traditional VCs.
- Ecosystem disruption. New business models are here. VC must understand the market to put money behind these companies. VC’s have little interest in hardware.
- What is exciting?
- Upstream. That is interesting: Quantam Dots—narrow band emission. (Instead of phosphor)
- Midstream—fascinated by color tuning. If in ten years, I walk into a room with an on/off switch and a dimmer, I will be real unhappy! As an industry we need to do more than on/off and dimming.
- Financing options for retrofits for Municipalities and others. There is a pooling for asset backed funding and we are just starting to see efforts in lighting.
Summary:
- The market inflection point is here, 2-year payback in many cases.
- Market conversion is following a well-established pattern.
- Downstream market does not appear to be commoditized. Will the channel retain value? Lighting is a collection of large niche markets and this is a good thing!
- Lighting market is not well understood and is underserved by VCs and PEs
- New business model opportunities exist with lighting retrofit and lighting as a service.
- Industry needs new metrics to measure value
- LP/$ is the dominant value metric for the lighting industry which is viewed as a commodity. Is cheaper always better?
- Need new metrics. With smart lighting the impact of controls goes beyond lm/$
- Is there a measurable retail impact of lighting on same store sales? What about productivity gains or wellness?
- If you can’t measure the impact, you can’t monetize it—and investors won’t underwrite it.