This week Stem announced that it raised an additional $45 million in venture capital with $33 million apparently provided by the German power company, RWE Group. Stem’s ability to raise $45 million is a credit to the company, its management team and its business model. But it is possible that there is more to this story that could be of interest to everyone working in firms that are developing advanced battery technology.
Despite some recent declines, public securities markets remain overvalued relative to their historic averages. As of August 7, The Wall Street Journal reports that the P/E average of the stocks comprising the S&P 500 index was 21.69 versus its historic average of something close to 15.
For long term investors, this possible overvaluation may or may not be a problem. But it is a problem for large growth fund managers, whose performance is measured quarterly. Those fund managers are seeing limited opportunities in the public markets for future outsized returns in the large, today richly-valued growth stocks that have been so good to them over the past few years. As a consequence there is an emerging trend of large mutual fund managers such as BlackRock Inc., T. Rowe Price Group Inc. and Fidelity Investments making investments in companies that have been traditionally the realm of venture investors. The Wall Street Journal reports that these investments are growing at a record pace.
This phenomenon is not, however, confined to mutual fund managers. The same thing seems to be happening in private equity, with funds that have traditionally invested in later stage buy-outs increasingly chasing growth opportunities by investing in earlier stage technology companies. The market research firm PitchBook this week reported an increasing participation of traditional private equity firms in venture capital investments. The significance of this trend for the battery market is that these private equity funds tend to manage much larger pools of capital than traditional venture funds. This could mean that it may become easier for companies looking for venture capital investments as more money chases such deals.
Of course, the market is a fickle thing. But two years ago, following the implosion of firms such as A123 and Ener1, investment capital for early stage battery and storage firms seemed difficult to come by at best. Today there is a chance that this period of capital scarcity may be coming to an end. This may not be the beginning of the end of scarce capital for battery technology firms. But as Winston Churchill once said, perhaps it is the end of the beginning.