Mainstream venture capitalists started investing in so-called “clean technology” about two years ago. As we reported in our November 2003 cover story, such familiar names as Benchmark Capital, Draper Fisher Jurvetson, JPMorgan Partners and Mayfield had placed bets on fuel cell makers and other alternative energy startups.
Since that time, interest in clean tech has only grown, with more household names jumping into the space, including Kleiner Perkins Caufield & Byers; Mohr, Davidow Ventures (MDV); and New Enterprise Associates (NEA). Those firms led several high-profile deals in June:
Andre Beebe, president of Energy Innovations, says he is surprised at how familiar mainstream VCs are with his company’s solar technology and clean tech in general. “We found a high level of receptivity and a lot of people who have thought through the space,” he says. “In three years of talking [to VCs in general] I have seen a real transformation in terms of interest level and depth of partner interest. It’s not just one partner going out on a limb.”
Growing interest in solar power mirrors an increased interest in clean tech, a space broadly defined as any technology that reduces reliance on natural resources. The number of clean tech investors has risen dramatically from 228 in 2002 to 387 in 2004, says Nick Parker, co-founder and chairman of the Cleantech Venture Network, a matchmaker for clean tech investors and companies.
The amount of VC flowing into clean tech is still relatively small: Venture investments was about $520 million last year, up from $509 million a year earlier, according to Clean Edge Inc., a clean energy market researcher in San Francisco. But the annual total is expected to grow. A recent survey by Deloitte & Touche and the National Venture Capital Association (NVCA) shows that 21% of VCs worldwide plan to invest in energy and the environment over the next five years, up from 12% currently.
VCs are being fueled in part by big LP investments that are earmarked specifically for clean tech. In May, 24 pension funds from around the world-including the California Public Employees’ Retirement Systems and the California State Teachers’ Retirement System-committed to invest $1 billion in clean tech companies in an effort to slow global warming. California State Comptroller Steve Westly said that CalPERS alone has already invested $200 million in clean tech and is committed to investing another $250 million.
A hoard of VCs hopes to tap into LP interest in the space. More than 90 clean-tech related venture and private equity funds are out trying to raise funds, according to Parker. Among the firms that have launched new vehicles is Draper Fisher Jurvetson. Its DFJ AltaTerra clean tech fund has an $8.5 million commitment from the California Clean Energy Fund (CCalCEF), a $30 million public benefit fund created as part of Pacific Gas & Electric’s bankruptcy settlement. DFJ is expected to match each dollar of CalCEF’s investment.
Ira Ehrenpreis, a general partner with Technology Partners, cites his firm as a poster child for VC interest in clean tech. Previously focused on IT and life sciences, the Palo Alto, Calif.-based firm is now centered on clean tech and life sciences. Ehrenpreis believes that VCs are in clean tech to stay, but notes: “Like every other investment sector, it requires an understanding of the market, the challenges, and intimate familiarity with the networks that matter in this space. It’s not a hobby.”
Tell Me Why
Why the growing interest in clean tech? Tim Woodward, managing director with energy specialist investor Nth Power, says that it hasn’t been any single deal or public initiative that has grabbed the attention of the larger venture world. Instead, it’s the slow realization that a large opportunity exists in the energy market, where prices continue to spiral. The double barrel change of rising costs and the market opportunity in “soft costs” such as security have given the green light to otherwise wary VCs. “It’s not just the price of oil topping $50 a barrel,” Woodward says, “it’s people’s recognition that we are spending a lot of money to maintain the commodity we’re accustomed to. The cost equation has hit home.”
Mainstream VCs say that energy technology has finally matured to the point where sales and profits are no longer just a pipe dream. “While a couple of years ago I was very skeptical about alternative energy, there are now a limited number of possibilities for a handful of really good advances, and if we find some of those companies we’re going to invest them,” says Arno Penzias, a venture partner at NEA and a Nobel Prize-winning physicist.
Raj Atluru, a managing director with Draper Fisher Jurvetson, says that the multi-billion dollar power and water industries are going through enormous changes, especially as they branch into places like China and India, where VCs are keen to invest. Atluru says that DFJ is looking at two different companies now that are active in the clean coal space. DFJ is also an investor in Konarka Technologies, a photovoltaic materials provider based in Lowell, Mass. Konarka raised $7 million from Lighthouse Capital Partners in May and previously raised $18 million in VC with a post-money valuation of $33 million. The startups other backers include NEA, Partech International and Vanguard Ventures.
NEA’s Penzias believes that VCs are attracted to solar power technology like Konarka’s because it is more scalable than other areas of alternative energy. For example, a startup can sell its products directly to manufacturers and bypass the more cumbersome parts of the energy market. “You don’t need to go to GE or someone else,” he says. “A glass company can put these products on their skyscraper. It’s not a global decision that has to happen. There’s no real barrier. That’s why the photovoltaic area is so good.”
Exit Options
VCs may also be encouraged by the talk of an IPO for PolyFuel, a Mountain View, Calif.-based startup that makes membranes for fuel cells. PolyFuel reportedly hopes to raise 12 million British pounds (or $22 million) with an IPO on the Alternative Investment Market of the London Stock Exchange. The company has raised about $40 million in venture funding from Intel Capital, Mayfield, Technology Partners and others, including a $15.6 million Series B with a post-money valuation of $35 million in July 2002, according to the MoneyTree survey conducted by PricewaterhouseCoopers, Thomson Venture Economics (publisher of VCJ) and the NVCA.
Even if the PolyFuel IPO is successful, it isn’t critical to drive VC investment. “The IPO market is not the only exit,” Parker says. “There is very strong corporate interest in this space, which means that investors have multiple [M&A] exit routes.”
Rob Day, a principal with clean tech specialist Expansion Capital Partners, agrees. “People feel that [IPOs aren’t] how exits are going to happen in this space,” says Day, the main author of a blog called Cleantech Investing (http://cleantechvc.blogspot.com). “This market is going to have a lot more solid plays. It’s more of a trade sale kind of exit industry.”
Despite the entrance of major players, most VCs are wary of energy and clean tech investment, says Nth Power’s Woodward. “There are more [VCs] that are still on the fence for a variety of reasons,” he says. “They don’t know the sector; they think it’s too capital intensive and heavily regulated.”
Even VCs who are bullish about clean tech are reserving judgment about how successful their deals will be. “I have the sense that there are a lot more niche-sized startups out there than big ones, but some great opportunities do exist,” Vinod Khosla of Kleiner Perkins told the New York Times in June. Khosla has reportedly made multiple clean tech investments that he has so far declined to name.
Expansion Capital’s Day points out that while the entrance of traditional generalist VCs into the clean tech space has been significant, it has so far focused on the clean energy sector. “Now you’re starting to see some real dedicated focus on the sector,” he says. “You’re starting to see some of these large top-tier players not just talking about the sector but taking some risk and making some pretty big bets-that’s in clean energy. We’re not seeing the same dedication in other sectors necessarily but you can see it trickling down to there, as well.”
While many VCs remain cautious about clean tech, few voice concern that a clean tech bubble may develop. “Right now what we’re seeing is about the happy medium,” Woodward says. “Historically the issue we faced was a limited universe of funds. We’ve had companies struggled to raise rounds because there was a limited universe of people to turn to.” However, he says, VCs should not let the pendulum swing too far in the other direction. “This is not a sector that warrants every venture firm hanging out a shingle and saying, Send me your energy deals.'”
Specialists in clean tech-focused firms are generally confident that the larger generalists will maintain a permanent interest in the sector. Says Charles McDermott, a partner with Boston-based Rockport Capital Partners: “If the longevity of their interest is measured at least in part by the amount they’re putting into finding good investments today, then we would assume they would be long-term players.”
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