The San Francisco Hub

As of 2016, the San Francisco Bay Area has 12,500 start-ups, over three times as much as the next-highest region, and 28% of global investments into startups occur in the Bay Area. Of these, over 40 percent were founded by foreign born entrepreneurs making the Bay Area a “melting pot” for global start-ups. Beyond the great potential of the U.S. market, Swedish entrepreneurs and cleantech companies can access valuable networks and the world’s most active VC funding source in the Bay Area.

Verge 2017

19 Sep, 2017

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Introduction to the market

From 2011-2016, almost 40% of total cleantech venture capital funding came from San Francisco and Silicon Valley.

In terms of cleantech, The Bay Area and Silicon Valley is a significant hub for the following industries: Smart Grid / Energy Efficiency, Agriculture & Food, Transportation, Energy Storage and Clean Energy Production.

WHAT IS THE BAY AREA?

Although the Bay Area can mean slightly different things to different people, the reality is that the term refers to a relatively fixed geographical area of Northern California. Bordered by Napa County to the north, Alameda County to the east, San Mateo County to the west, and Santa Clara county to the South, the region includes major cities such as San Francisco, Oakland, and San Jose.

It’s impossible to talk about the Bay Area without touching on Silicon Valley, the pre-eminent sub-region that has defined, inspired, and driven much of the American technology industry over the past 40 years. The Valley is an area contained within the broader Bay Area, primarily situated within the northern section of Santa Clara County. Due to rise of the Silicon Valley brand and the spread of major tech companies into the surrounding area, most maps of the Valley now include the majority of eastern San Mateo County. This region includes many of the famous town names we’re sure you’re familiar with – Cupertino, Palo Alto, Mountain View, and many others.

Ultimately, both the Bay Area and Silicon Valley have come to be defined primarily by their tech industry underpinnings. In support of this, the area also plays host to perhaps the world’s richest venture capital infrastructure, a robust educational & research support system, a pool of about 2 million young, STEM-focused workers, and an undeniable and pervasive set of shared values, beliefs, and structures. By joining the Bay Area Hub, you are tapping into a resource-rich, innovation-driven network of people, companies, and culture.

BAY AREA CULTURE

When chatting with a local about the Bay Area, it’s almost inevitable that you’ll hear something about the region’s distinct culture. Whether they’re referring to the “fail-first attitude,” the “collaborate and share mentality,” or the “fun first, work second” corporate approach, there’s definitely something in the air.

It’s important to take these cultural realities into mind when integrating into the area. Employees will, if not demand, certainly expect some combination of work-hour flexibility, office perks, and relaxed atmosphere — if they’re required to come into the office at all! Near constant events, meetups, and fireside chats are mandatory to attend in order to build your network and to position yourself as a thought leader in your respective area of expertise. When seeking funding, don’t be surprised if the VC asks you to recount your failures, rather than your successes – strength in the face of adversity is prized above untested winning.

This culture has developed as a result of the area’s startup forebears, and the continued pre-eminence of small, bootstrapping organizations. There are between 12 and 15 thousand startups in the region at the moment; for every hundred that fail each year, there are another two hundred to take their place. As these companies enter the market, they are entering into an unspoken agreement to become part of the culture — as much as innovation and creative operations are valued here, companies that play by the rules and “fit in” are likely to be rewarded. Although this may require some sacrifice, the rewards are substantial: 28% of global investments into startups occur in the Bay Area, and a quarter of all unicorns are based here.

KEY INDUSTRIES

Although the Bay Area, and Silicon Valley in particular, were built first upon the work of enterprising microprocessor manufacturers and later on software developers’ capitalization on this hardware infrastructure, the modern ecosystem supports a much broader representation of industries.

IndustryLocal HQs2016 Revenue (BUSD)
Wireless Telecommunications Equipment Man.16216.29
Drug Wholesalers1190.88
Banks & Credit Unions34124.34
Semiconductor & Other Electronic Component Man.118120.89
Computer Networking Equipment Man.14108.63
Media1090.88
Computer Software14170.03
Internet Publishing, Broadcasting & Search Portals1748.99
Biotechnology Product Man.1136.04
Financial Transaction Processing926.52

As with any region housing global revenue juggernauts, the rankings above may appear inflated (and perhaps even surprising). In several cases, one organization’s incredible earnings and consolidated workforce propel an industry above others that are more representative of the Bay Area’s reality. For example, the top three spots are dictated almost entirely by three organizations: Apple within the wireless telecommunications industry, McKesson Corporation within the drug wholesale industry, and Wells Fargo within the bank industry.

The modern Silicon Valley’s progenitors, semiconductor manufacturing (#3) and software development (#7), remain relevant to this day, providing employment for 729,000 employees globally and generating 191 BUSD in revenue. However, the industry with the largest presence in the area – the primary driver and direct beneficiary of the area’s startup culture – is IT services industry. With over 350 companies in the region but only 91,000 employees, for an average of 260 employees per organization, this sector is representative of the lean startup model popularized over the past few decades.

THE CLEANTECH INDUSTRY

Choosing a few key cleantech sub-industries to highlight is no simple task. Startups and established players alike are tackling issues as targeted as energy grid flexibility or smart waste collection, as grand as reinventing food or shaping the future of transportation. Given the importance of innovation and funding to the Silicon Valley way of life, we have chosen these two metrics as our guiding principles.

We’ve tallied the number of California-headquartered companies represented in Cleantech Group’s 2017 Global Cleantech 100 List, a who’s-who of high potential, innovative organizations. We’ve also crunched the numbers to get a feeling for where most of the VC money flowed last year, and where we think it will continue to flow in the coming years. Based on this analysis, five industries stood out as being particularly representative of the Bay Area cleantech ecosystem.

Agriculture & Food

Given our trend toward increased consumption, worsening climate change, and a steadily increasing global population, there is a genuine concern surrounding our ability to sustainably feed ourselves. Agriculture and food solutions aim to circumvent these issues by creating innovative new food supplies, decking antiquated agricultural equipment with sensors & software, and empowering farmers to stay informed and engaged with new technology that will benefit the planet. Three of the most innovative cleantech companies represent this sector, which brought in a total of 1.1 BUSD globally in 2016.

Smart Grid / Energy Efficiency

Providing solutions such as smart appliances, utility management software, or financing for intelligent home design, companies in this sector are dedicated to improving how efficiently we consume and distribute our electricity. Not only did this sector have the most representatives in the Cleantech 100 List (13), it attracted the second most capital of all the sectors investigated — 1.7 BUSD globally in 2016.

Transportation

Although the Midwest is America’s original and long-standing center of automotive-related development, the Bay Area is quickly establishing itself as a major hub for the future of transportation. Electric and automated vehicles, alternative fuels, car sharing, smart infrastructure – the list goes on and on. With a roster including three of the most innovative companies (in addition to the major players in today’s tech world), transportation pulled in 2.3 BUSD globally in VC funding last year.

Energy Storage

Despite a number of high-profile failures over the last few years, the energy storage market remains as strong as ever in the Bay Area. In addition to the more obvious solutions like renewable energy capture devices or advanced battery material development, forward-thinking companies are also producing energy storage network management solutions to help drive the market to a financially viable position. Although 4 Bay Area companies made the Cleantech 100 List, investors were relatively bearish last year, with similar companies receiving the smallest amount of funding among our top industries — 365 MUSD in 2016.

Clean Energy Production

Clean energy production is perhaps the sub-industry most commonly associated with the cleantech movement, which is not surprising given the ubiquity of its technology, the widespread adoption of it by most major brands, and the large amount of funding it continues to receive. Solar, wind, nuclear, and hydro are just the tip of the iceberg in a robust and increasingly diverse market. Surprisingly, only one clean energy company made the Cleantech 100 List, but the industry received around 2.0 BUSD globally last year.

UNIVERSITIES, RESEARCH INSTITUTIONS AND OTHER TALENT DRIVERS

In order to maintain a culture of innovation and technological advancement, a hub must support strong opportunities for research, education, and talent development. On the surface, the Bay Area appears to be doing remarkably well in this regard. Big names like Stanford and Cal attract students and scholars alike, and if nothing else, provide intellectual cachet to the region. Since 2005, Bay Area university R&D research spending has increased by 12% (adjusted for inflation), with the latest available figures equaling 2.9 BUSD. In addition, the number of STEM degrees awarded increased by 4.2% from 2014 to 2015.

However, the reality is that this growth pales in comparison to other major innovation hubs, such as Southern California, New York City, Boston, MA, and Austin, TX. These regions are seeing much more success in attracting STEM students and developing them for future careers within the region. Although the area’s strong educational and research foundation provides support for the cleantech industry, the majority of the industry stems from foreign talent (entrepreneurs and staff) driving internal growth (intra-company talent development and R&D). Over 80% of the STEM workers within the Bay Area come from another state (25%) or another country (57%), by far the largest “foreign” proportion of any of the major innovation hubs. In addition, approximately 50% of all startup founders in the area are foreign born.

Future success within the Bay Area will likely require tapping into this migratory network. Indeed, the prevalence and importance of these “outsiders” is a fantastic indicator of the potential for success for you. Ultimately, however, there is room to develop the relationship that universities and research institutions play as the local cleantech sector continues to grow.

Universities

We foresee your success within the hub being driven substantially by your ability to collaborate with and learn from important local partners. Local universities are a fantastic resource. They can provide young but brilliant new employees, access to the latest in scientific and environmental research (directly from those performing the research), co-branding opportunities that leverage the schools’ hard-earned reputations, and more. Participation in the hub will include a concerted effort to connect your team with the relevant research centers, professors, and students that can provide an extra boost to your existing expertise.

Although there are several universities that dot the hills in and around the Bay Area, there are two that stand above the rest.

Stanford University, located in Palo Alto, CA, is a private research university that hosts around 16,000 students. In addition to being recognized as a global leader overall (#3 in last year’s Times Higher Education World University Rankings), Stanford has a number of world class environmental- and cleantech-related centers for education.

SOME OF STANFORD’S RELEVANT CENTERS FOR EDUCATION

Precourt Institute for EnergyTomKat Center for Sustainable EnergyCenter for Sustainable Development and Global Competitiveness
Steyer-Taylor Center for Energy Policy and FinanceWoods Institute for the EnvironmentProgram on Energy and Sustainable Development

The University of California at Berkeley (more commonly referred to as Cal or Berkeley) is a public research university with a student contingent of more than 40,000. Located  just east of San Francisco in the city of Berkeley, CA, it was ranked #13 in last year’s Times Rankings. UC Berkeley has fewer dedicated research centers than Stanford, but it boasts a very active student cleantech student population.

Research Institutions

In addition to the many research groups and centers located at the local universities, the Bay Area is home to a diverse collection of research-specific organizations. Many of these institutions focus on the science and technology underlying the cleantech industry. As with the universities, close collaboration with these organizations offers increased support for your local growth. We recommend taking a look at the centers’ websites, noting their ongoing research, finding topics that align with your mission, and jotting down the names of the associated researchers. We can work with you moving forward to initiate relationships with these people and groups during your time in the hub.

SELECTION OF RELEVANT RESEARCH INSTITUTIONS

Joint Bioenergy Institute

Berkeley, CA

Electric Power Research Institute

Palo Alto, CA

Lawrence Berkeley National Laboratory

Berkeley, CA

Lawrence Livermore National Laboratory

Livermore, CA

Silicon Valley Toxics Coalition

San Jose, CA

Pacific Research Institute

San Francisco, CA

SRI International

Menlo Park, CA

USDA Western Regional Research Center

Albany, CA

TRENDS

Under the new Presidential Administration, the cleantech sector is seen as losing major initiatives and funding they had received under the Obama administration. While this has not had a complete chilling or silencing effect on the industry, it has been cause for concern. Several indicators of U.S. cleantech innovation competitiveness are raising warning lights. Eleven countries around the world now spend more on energy research and development as a percentage of their economies than the United States does, such as China which spends three times as much.

While U.S. cleantech innovation has grown significantly since 2001, patenting may now be slowing. The share of U.S. cleantech patents owned by foreign companies has grown over the years, raising concerns about the global competitiveness of U.S. companies. Cleantech patenting tends to be concentrated in relatively few technology domains such as advanced green materials, energy efficiency, and transportation. Large metropolitan areas such as San Francisco host a disproportionate share of cleantech patenting. The nation’s metro areas, both big and small, display distinctive profiles in cleantech patenting, with some cities such as Houston focused more on biofuels.

President Trump has indicated he would like to eliminate the Obama-era Clean Power Plan, which aims to reduce carbon dioxide emissions from electrical power generation by 32 percent within twenty-five years relative to 2005 levels. While coal production and burning in the U.S. will likely not increase significantly regardless of the plan due to economics, the plan was seen as jumpstarting investments into clean and renewable fuels. Several states such as California have indicated they will move forward with the Clean Power Plan, regardless of Federal activity or inactivity.

The cleantech sector has also seen a decrease interest from the venture capital community, primarily due to lower than expected returns. Between 2011 and 2016, VC cleantech investment declined by nearly 30 percent, from $7.5 billion to $5.24 billion. In 2006, Silicon Valley began to bet big on clean energy technology. Venture capitalists invested a then-record $123m in the first round of fundraising for 16 new companies that year. In 2008, they would sink nearly $1bn in over 100 new companies. Since 2009 however, VCs have barely funded 25 new cleantech companies a year, slowing new investment to a trickle, due to lower than expected investment returns. Additionally, high profile company failures, such as that of Solyndra during the 2008-2009 recession, caused further skepticism amongst VCs to pursue more cleantech related investments.

Although there are some headwinds, Silicon Valley and the San Francisco Bay Area are still seen as the national and international capitals of innovation. Silicon Valley’s innovation industries continue to set the pace nationally, with 8% growth in 2015. Austin’s innovation industry growth was close at 7%, but Silicon Valley’s growth was double or more than the rate of other regions including New York City (4%), Boston (3%), Seattle (2%), and Southern California (2%). The Valley also continues to have the highest proportion of workers in innovation industries (26%) among U.S. innovation regions.

Investor market and climate

The Bay Area is undoubtedly one of the most important investment centers in the world. Within the area, there are around 4,600 total investment firms (of all types), which capture approximately one-third of the total value created from investment exits each year. In 2016, just under 5,000 deals originated from Bay Area firms, for a total investment of 257.89 BUSD.

Within the area, a substantial portion of investment groups are venture capital focused – around 1,100 altogether. In recent years, the majority of VC funding has been directed towards the big industries of our day: internet and mobile/telecommunications. In 2015, VC investments into these two industries represented 75% of the total VC investment pool for the year. Interestingly, this dominance has been shrinking. In 2016, internet and mobile/telecoms earned “only” 60% of the total VC investment — undoubtedly still a strong position, but representative of a shift in approach. While some are forecasting this as an overall contraction of the VC market, we believe this shift in priority may represent an opportunity for new industries to win the favor of VC investors.

Bay Area investment firms, breakdown of investment industries 2016

VC firms are typically the most talked about, biggest name organizations; as such, it can be easy to think that the VC model of financing is the only path forward.

However, we like to emphasize that VC funding is only one part of the broader investment market. Indeed, VC-style investments, which demand large ROI, rapid user acquisition, and growth at all costs, are somewhat ill-suited for most cleantech solutions. Patient, high-capital funding of R&D will be most cleantech companies’ path to success. Debt financing, R&D grants, or hybrid funding agencies are attractive, often overlooked alternatives to the pure VC investment market. In addition, companies can also court VC firms featuring a track record within the cleantech industry, as they will be potentially more amenable to the specific needs of R&D-intensive funding.

CLEANTECH-FOCUSED ACCELERATORS AND SEED INVESTORS

There are 26 accelerators, incubators, and other very early stage investors in the Bay Area with a stated interest in cleantech.  In 2016, the top 5 of these firms finalized 21 investments in cleantech companies for a total of 10.45 MUSD. The low average investment per deal is characteristic of these early stage investors, who prefer to work with companies lacking the intact infrastructure of our Cleantech Hub participants, and whose offerings typically include broader support services and infrastructure development in place of pure capital injections.

 

CLEANTECH-FOCUSED LATER STAGE INVESTORS, VENTURE CAPITAL, AND PRIVATE EQUITY FIRMS

Of the 114 later-stage investors with a stated interest in cleantech, 75% (86) are VC firms, while the remaining 25% (28) are private equity firms. Of the VC firms, the top 5 made 23 cleantech investments in 2016, for a total of 571.52 MUSD. The top 5 PE firms made 8 cleantech investments in 2016, for a total of at least 1,600.60 MUSD (some amounts undisclosed).

  • San Francisco

    San Francisco Hub

    Address: 100 Montgomery Street, Suite 1780, San Francisco, CA 94104 , USA
    Phone: +1 415 835 3000
    Email: usa@business-sweden.se

    Mayra Mateos
    San Francisco Hub Responsible, Senior Project Manager
    +1 415 835 3001
    +1 415 866 5552
    Email

    Shaun Hundle
    Project Manager
    +1 415 835 3002
    +1 630 337 0517
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    Mats Shore
    Project Manager
    +1 212 507 9001
    +1 212 507 9002
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    Alev Gunvay
    Investment Advisor
    +1312 810 5885
    +1 312 810 5885
    Email

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