Issue Date: April 13, 2009
ENVIRONMENTAL TECHNOLOGY start-ups are busily rewriting their playbooks for a new era of funding. As recently as the last quarter of 2008, entrepreneurs with a promising technology could gain millions in venture capital investments. But now such money is scarce, and entrepreneurs must design a new pitch to appeal to government agencies that have billions of stimulus dollars to spend on green projects.
Venture capital investments in the so-called cleantech field fell to $1.0 billion in the first quarter of 2009, a 48% drop from the year-ago period, according to estimates by industry watcher Cleantech Group. The cleantech sector includes renewable energy technologies such as solar as well as energy storage, environmental monitoring, electric cars, and energy-efficient building materials. The majority of investments, 68%, went to North American firms, whereas companies in Europe and Israel accounted for 28%.
Private investment money had been flowing freely through the end of 2008, despite a swooning stock market. Brian Fan, Cleantech Group’s senior research director, explains that stock market declines don’t show up in private equity investment for one or two quarters. The partners in venture funds, often university endowments or pension funds, have seen their portfolios shrink by about 40%, leaving less to invest in such ventures.
WHEN PARTNERS do invest, Fan points out, “they say, ‘We’re looking for capital-efficient business models.’ The psychology of a recession impacts their willingness for big capital investments.” In fact, average deal size in the first quarter dropped to $12.9 million from $20.0 million in the previous quarter.
At the same time, the U.S. and other governments are allocating historic amounts of money for green projects in hopes of reviving the economy. In the U.S., the $787 billion American Recovery & Reinvestment Act includes about $83 billion for cleantech spending and tax incentives, according to PricewaterhouseCoopers (PwC).
Similarly, in a report prepared for this month’s G-20 meeting of government leaders, researchers at the Potsdam Institute for Climate Impact Research estimate that the $1.6 trillion in stimulus measures announced by the G-20 nations include $240 billion for environment-oriented projects.
But to get that money, cleantech firms and their existing investors will need to revamp fund-raising strategies. To attract private money, start-ups usually highlight their cutting-edge intellectual property, large market opportunities, and efficient operations. But to receive government funds, Fan observes, “the emphasis is on how many jobs you will create. It’s a different sell. If you tell a private investor you will create 1,000 jobs, he will think you are wasting his money.”
According to the PwC report “Cleantech Nation,” venture capital firms looking to invest will also shift their strategies. They will follow government funding priorities to gain access to low-cost loans. That means investments will flow to companies involved in energy infrastructure and low-carbon energy generation. And the favored technologies will be commercial-ready, rather than brand-new.
Solyndra, a start-up solar-energy company that is the first recipient of a Department of Energy loan guarantee, seems to fit this mold (C&EN, March 30, page 8). Glenn Harris, head of the consulting firm SunCentric, says it is significant that even though solar energy is more expensive than energy from fossil fuels, “the government says we need to scale-up renewables now.”
But Harris cautions that large capital inputs to energy projects do not guarantee there will be sufficient demand, at least until prices drop. “There is already an overinvestment in solar manufacturing. Plants that ran three shifts a few years ago are running one or one-and-a-half shifts,” he says. Harris says some private investors may wait for the right combination of demand and government incentives before they jump back into cleantech.
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