First American Scientific Corp. (fka FASC)

[Jagman]

Investing Green Without Seeing Red
Andrew T. Gillies, 11.16.05, 9:00 AM ET

WASHINGTON, D.C. - Fifteen years ago, Jeffrey Leonard and a partner pulled together $5 million to found a private equity outfit, the Global Environment Fund, devoted to making money off environmentally friendly technologies. "We thought we were going to invest in replacing the internal combustion engine or the incandescent lightbulb," Leonard says.

At an investment conference here last month, Leonard showed just how far his thinking has evolved since 1990. To an audience of venture capitalists, company executives and government officials, the Global Environment Fund chief rattled off a few of his favorite deal-making areas: liquefied natural gas, clean diesel, nuclear power and clean coal. Hardly stuff to enthuse the average enviro.

Leonard says his remarks came with a measure of tongue-in-cheek but also a serious message on making venture bets in the "clean technology" category. "In this climate," he warns, "you want to be damn careful about what kind of technology you're going to invest in."

The climate he mentions is one that is getting warmer. While giants like General Electric (nyse: GE - news - people ) and BP (nyse: BP - news - people ) tout their clean technology initiatives, blue chip venture capital firms are doing the same. Draper Fisher Jurvetson, for example, now lists clean energy as one of its priority investment areas. The Cleantech Venture Network, which hosted the conference in Washington last month, says the areas it tracks could capture 10% of all venture money by 2009.

Politicians are also getting in on the act. President George W. Bush held a photo op last May at a hydrogen fueling station, and at the October Cleantech conference, keynoter Sen. Hillary Clinton, D-N.Y., used her address to savage big oil and sprinkle praise on the likes of IBM (nyse: IBM - news - people ), Corning (nyse: GLW - news - people ) and Cummins (nyse: CMI - news - people ) for efforts to green their businesses.

Meanwhile, Leonard's Global Environment Fund has prospered. From that original $5 million in 1990, the fund's assets under management have grown to $500 million. Leonard says he's making money for investors and expects to have in the ballpark of $800 million to manage within the next year and a half.

But Leonard's mood these days is more cautious than triumphant. Reason? In his 15 years in the business, he's seen too many instances of enviro-enthusiasm leading to bust. In the early 1990s, for example, he recalls how California set a goal for commercialization of electric cars. "We must have seen 100 business plans for electric vehicles," Leonard says. But California ended up scrapping the initiative, along with the prospects for those entrepreneurs.

In Leonard's caution lies lessons for would-be entrepreneurs and money men looking to go green. First, think incrementally. Solar and wind power may eventually save the earth, but the reality today is that coal provides half of U.S. electricity. Hence, clean coal has more promise now for investors. Likewise, Leonard sees big opportunity in technologies like sensors and software that make the existing electricity grid more efficient.

Second, focus. "You have to have a niche," says Leonard. For the Global Environment Fund, that niche consists of three items: buying into incremental technologies, building eco-friendly infrastructure in emerging markets, and forestry. The latter two reflect the bios of the founders. Leonard did stints advising the World Bank and the U.S. Agency for International Development, while founding partner John Earhart has a degree from Yale's School of Forestry and Environmental Studies.

Finally, beware of government. Leonard sees an important role for the public sector in funding research and development, but watch out if it gets heavily involved in commercializing new technologies or propping them up with tax credits and other subsidies. Why's that? Those subsidies can vanish just as soon as they appeared. Just ask the entrepreneurs who looked to cash in on California's electric cars.