Although significant consolidation has already occurred across the LED value chain, Memoori Research remains of the opinion that further consolidation is required for the market to mature into a stable state. Achieving economies of scale, cost reductions, sustainable market share and access to innovative IP to meet rising output requirements, will all remain as drivers. This will further increase the likelihood of deal activity to 2018.

A large number of the many Chinese LED manufacturers at lower stages of the value chain may not survive through to 2018. Large international firms looking to increase capacity in the face of rising demand will be attracted to their assets as they attempt to reduce costs through economies of scale and make savings on labor costs relative to their domestic markets.

Although both overall VC Investment flows and Cleantech specific VC funding have both been on a downward trend in 2012 and 2013; of all the Cleantech sectors, energy efficiency companies continued to attract the most VC investment throughout 2013.

According to data from the Cleantech Group. The sector soaked up 19% of all venture investments during the first 6 months of 2013. The number of energy efficiency deals rose 45% in the second quarter to a total of 79 through June.

Private money still believes that there is money to be made in LED Lighting. Analysis of 2012 and 2013 data indicates a small decline in the number of deals done compared to the 2011 peak of 19 deals along with a 29% fall in median deal value to $9.3m; indicating that investors are proceeding with an element of caution. From analysis of deals to date this year, our forecasts show this cautious trend continuing at around the same pace through 2014.

Much of the hype surrounding the LED market has now dissipated, but entrepreneurs and VCs who invested over the last 2-3 years expecting fast returns and big exits are likely to be disappointed. Growth has failed to meet the expectations, which were buoyed by optimistic projections touted by the market only 18 months ago.

Smart control systems are becoming increasingly important due to LED commoditization. Intelligent lighting controls are being seen as potential hot sectors for investment. This should encourage wider scale adoption of smart technology in both the commercial and residential sectors.

Memoori believes that venture and startup activity will be much greater in the later stages of the supply chain. Innovations in control systems and services tend to be software (not hardware) intensive, capital efficient, and well aligned with the traditional venture capital investment approach of small amounts of capital yielding, potentially, large returns.

Going forward, further strategic investment in R&D to develop attractive new LED lighting products and systems will still be required. Large corporations and industrials will have strategic motivations to foster this continued R&D investment to help them differentiate from the competition. So we may yet see as much investment coming from these sources as from VC funding.