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Cleantech Funding Falls

Venture Capital: Weak start to second half reflects economic concerns

by Melody Voith
October 11, 2010 | A version of this story appeared in Volume 88, Issue 41

After a strong first half, worldwide venture capital investment in environmentally friendly firms hit a snag, falling 30% in the third quarter to $1.53 billion. The quarter-to-quarter drop is likely due to investor concerns about the slow economic recovery, according to Cleantech Group, the research firm that gathered the statistics. In addition, funding for cleantech companies was down 11% from the third quarter of 2009.

However, the cleantech industry continues to raise more venture money than the biotech and information technology sectors. Within cleantech, technologies related to transportation, biofuels, and the electric grid received the most money, but the largest number of deals was at firms focused on energy efficiency. Cleantech Group President Sheeraz Haji says energy-efficiency deals are attractive because they require small amounts of capital and offer fast payback times.

Chinese firms snagged two of the top 10 cleantech investments; the larger was in eHi Car Service, a Shanghai-based car-sharing company, which raised $70 million. In North America, the two biggest funding rounds went to Texas-based Kior, a developer of catalytic technology for making so-called biocrude from biomass, and to Canadian waste-to-energy firm Plasco Energy. The start-ups each raised $110 million.

The slow pace of the economic recovery made the season a difficult one for start-ups that want to access the capital markets. The third quarter saw only eight cleantech initial public offerings (IPOs), compared with 22 in the second quarter.

A slow IPO market can hamper new investments by venture capitalists worried about returns. “Less than 10% of global cleantech venture investment dollars today are going into early-stage deals,” says Dallas Kachan of Kachan & Co., a cleantech analysis firm.

“Investors are creating a disproportionate amount of ‘walking dead’—companies kept alive, sometimes bolstered by government funding, hoping for an exit,” Kachan says. “That’s capital that new cleantech innovation isn’t getting.”



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