Envirotech Firms Can't Sit on Green Laurels

Companies have to show they can save more than just the planet - they must save money, too

Regardless of how well a new environmental technology cleans up contamination, it'll never make it to the marketplace unless the innovation saves money. This is among the hardest lessons once-hot environmental start-ups and their disappointed investors must learn.

"Envirotech companies won't survive without showing they save users money," said Marshall Heinberg, managing director for investment banking services at New York City-based Oppenheimer and Co. Successful envirotechs must decrease waste disposal costs, reduce the amount of raw materials needed in production or result in some other economic benefit or they simply won't be marketable.

But proving a financial payoff is just one of a myriad of challenges that the $2 billion envirotech industry faces. Unlike the information technology market, the environmental technology industry has had few success stories and poor stock results. Therefore, attracting venture capital is extra challenging for these young companies. And the prominent role of regulators in the environmental business doesn't help.

"Developing sound, long-term marketing strategies is difficult when whole markets can be created or destroyed by the stroke of a legislative pen," said Steven Maxwell, a market analyst with Boulder, Colo.-based TechKNOWLEDGEy Strategic Group. That's why proving an economic incentive for adopting a new technology is crucial for envirotech vendors.

Molten Metal Technologies, which has garnered generous press coverage and has managed to keep its stock price stable while many other environmental stocks are sliding, recognizes the importance of giving users a financial justification. "We didn't want to build a business around a technology that required new regulations or one that was only in place because of regulations," said Ben Downs, Molten Metal's chief financial officer. Molten Metal's process cleans up industrial waste and creates materials that can be used again.

The Waltham, Mass.-based company's waste recycling technology, originally developed in the steel-making industry, uses a molten metal bath to dissolve waste compounds into elements and turns them into safe gases, ceramics and metals. Five-year-old Molten Metal is building three commercial plants and investor analysts are crossing their fingers, hoping the high-profile company prospers. "There's no reason to expect Molten Metal won't be a success, but if it doesn't, it will be a black mark on the whole industry," Heinberg said. Investors are already scared of the environmental industry because there have been so few companies that perform well. Until there are some first-generation successes, companies that are thinking about going public will continue to stay out of the uncertain market for fear of failure, he said. "The environmental industry has been a disaster in the last few years," said Paul Zofnass, an analyst with the Environmental Financial Consulting Group in New York City. On average, environmental stocks are trading at 45 percent of their peak value, and two thirds of the environmental funds that grew up in the 1980s have closed down, he said. Part of the problem is that ridiculously high expectations were set for a wave of environmental companies that went public about three years ago. Similar to the highly speculative biotechnology business, the environmental business couldn't meet the expectations, Zofnass said. Firms such as Purus Inc. in San Jose, Calif., watched as their $15 per share stock fell to 50 cents.

As a result of unrealistic market prospects, there has been tremendous consolidation in the environmental business in the last couple years as the industry right-sizes itself to match market demand. Twenty percent of the industry has merged or been acquired in the last 12 months, according to Zofnass, and there are only 500 to 600 companies in the whole environmental business. The environmental technology sector will probably see consolidation as well, especially if venture capital gets scarce, Heinberg predicts.

The whole domestic environmental business is worth between $140 to $150 billion today and the technology part of that is between 10 and 20 percent of that, according to TechKNOWLEDEy's Maxwell. At about $2 billion, the young envirotech market is still considerably smaller than the $8 billion biotechnology industry that claims more than 1,200 companies. Most of the couple hundred envirotech firms in the United States are less than 10 years old, and earn yearly revenues of less than $100 million, Maxwell said.

The market outlook for the immature envirotech industry is expected to follow that of the environmental business as a whole and unfortunately the forecast isn't too bright. A recent survey of more than 40 bellwether firms in environmental consulting and remediation construction found that CEOs of these firms predict more challenging times.

Some 77 percent expect to see declining markets in the next three years and 46 percent expect a big impact from the 104th Congress. The survey also revealed that 57 percent of the companies plan to merge or acquire, and many are looking to diversify their business, according to the study conducted by Washington, D.C.-based Farkas Berkowitz & Co.

With that prognostication, it will be even more challenging for the environmental technology industry to capture something it desperately needs -- venture capital. With the environmental industry in such poor health, it's no surprise that few investors are eager to back small firms that want to build a business around a new green technology. "Venture capitalists and the stock market have been death on environmental technology," said Purus CEO Russell Burbank.

Another nail in the coffin of environmental technology firms has been the specter of changing environmental regulations, which fuels insecurity in the industry. Federal air pollution laws had called for certain cities with high pollution levels to start enhanced testing of cars' tailpipe emissions.

But when local legislators decided they didn't want citizens who elected them to be forced to spend money testing their cars, the Environmental Protection Agency eased the rules and said localities could reduce pollution another way.

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