Seeing green in cleantech - Wendy Tanaka
Cleantech investing reached critical mass this year , based on the dollars dumped into such companies by venture capital investors.
Venture investment in North American and European cleantech companies for the first three quarters rose to US$3.6 billion--up 28% in contrast to the same period a year ago, according to Cleantech Group, a research firm in Brighton, Mich. The organization estimates that venture investments in China, another hotbed of cleantech innovation, will reach US$580 million for all of 2007, up 38% from 2006 investments.
And given that many venture investors hope to see their bets pay off in roughly five years' time, those investments should be strong clues about what companies bear watching over the next few years.
As environmental concerns grow worldwide, investors have been steadily investing in the sector for the past decade, says Ron Pernick, author of The Cleantech Revolution. He estimates that less than 1% of total venture capital investment went to cleantech in 1999; this year, investment could exceed 10%.
Of course, it's not just about saving the environment. Investors are hoping for huge returns. But to make a dent in energy markets, even young companies need scale, requiring investors to plow enormous sums in often fledgling businesses. Recycled Energy Development of Westmont, Ill., raised an eye-popping US$500 million this year--the biggest investment so far in 2007, according to Cleantech Group. Others such as Brazilian Renewable Energy, Spain's Isofoton and Palo Alto, Calif.-based Project Better Place raised about US$200 million apiece.
Industry experts say cleantech investment amounts typically far exceed those for software or Web 2.0 companies because cleantech companies are more labour and capital intensive. These companies often need to build factories and buy expensive industrial equipment to produce environment-friendly electricity, gasoline and other types of power.
Software and Web 2.0 companies, by contrast, can be bootstrapped with more modest funds and less overhead. The main investment is a computer. "The financial instruments for the high-tech market cycle don't work as well in cleantech," says Cleantech Group Managing Partner John Balbach. "The typical venture pattern in high-tech was that you put US$25 million to US$30 million tops in a company. In cleantech, Series A [funding] might be US$5 million; Series B might be US$50 million." And it's not uncommon for cleantech companies to raise several more rounds of funding.
The payout for cleantech investments so far have been stock market pops. Demonstrating consistent revenue growth and profits takes most such companies five to eight years, says Stephan Dolezalek, a managing director at VantagePoint Venture Partners.
"Cleantech investing is mostly large in scale, large in risk and large in potential rewards," Dolezalek says. "If you're investing hundreds of millions for an outcome that can be billions, [the investment is] not out of balance."
The relative flood of money flowing into cleantech has also drawn investors and executives from diverse high-tech fields looking for opportunities. This has caused some industry experts to question whether investors and executives really understand what they're getting into.
Dolezalek is sceptical of investors who lack the right background. "You certainly can't take somebody who was an Internet investor and go after all of cleantech," he says.
Samir Kaul, a founding general partner at Khosla Ventures, one of the premier cleantech venture firms, says investors likely will have done their homework out of necessity. "As you build more and more companies, your bar for investing continues to rise and rise" because investors can't spend a lot of time on marginal business, he says.
Still, the odds of making it in cleantech might be tougher than other areas of tech. "I don't think you're going to see as many successful companies in cleantech compared with Internet and software," Dolezalek says. "In cleantech, you might see a half-dozen successful solar companies. The lowest cost provider wins. You don't need as many flavours of energy they way you need flavours of Internet."
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