If the rumblings of the venture capitalists along Sand Hill Road are any indication, “clean tech”, or “green tech” looks poised to follow the dot-coms as the next big thing.
Like its predecessor, this one comes complete with venture capital bidding wars alongside rumors of overvaluation and a bubble, but whether it’s truly investment in future technology or more hype, for now cleantech is where the venture capital money is.
According to Cleantech Venture Network, cleantech investment has enjoyed nine consecutive quarters of growth. In the first three quarters of 2006 investment in this sector totaled $2.29 billion, more than double the $1.1 billion invested in the same period of 2005, but it was in the second quarter of this year when cleantech went “mainstream”.
“In Q2 2006, cleantech surged ahead of the two previously dominant venture investment categories of Telecommunications and Medical. It now ranks third behind only Biotech and Software, indicating its shift into the mainstream, observed Keith Raab, CEO and Co-Founder of the Cleantech Venture Network.”, in a press release for the Cleantech Venture Network.
It’s been a trend for a year or two now, but the mainstreaming of clean tech investment got a boost from the continuing rise in oil prices and the corresponding mainstreaming of global warming fears, along with more energy legislation and the current fears about refinery shortfalls. Today, the elements for the next big thing are all there.
- Bidding wars: after several decades of marginalization, clean tech firms are more scarce than the money chasing them. One such firm, SolFocus, a Palo Alto- based solar startup, which began the year as “two guys in a garage” began its funding rounds valued at $8 to $14 million. A few months later, VC firm New Enterprise Associates moved in with a $70 million valuation and SolFocus received $32 million in funding, much more than the $12.5 million they were asking for.
- Record-breaking deals: last April, five VC firms closed the biggest clean-power deal in industry history with their $50 million investment in ethanol company Altra Inc.
- Record-sized funds: investor enthusiasm, perhaps driven by the knowledge that the five biggest IPOs of the past year were in clean tech, have assured that there is plenty of money flowing into this sector. This summer, venture firm DFJ Element raised $284 million, a record-breaking sum for green technology investment. It was almost double its target of $150 million.
- Big Name Backing: ex-Kleiner Perkins partner Vinod Khosla, co-founder of Sun Microsystems and an early investor in Netscape and Google, has recently started his own VC firm, Khosla Ventures, that has invested in five ethanol companies over the past year, along with a few biofuel firms. One of the two partners he hired for Khosla Ventures is a biofuel expert.
- Renowned venture capitalist John Doerr, who helped finance Google and Amazon, now claims he spends half his time on green tech investment. Last March he set up a $100 million fund to invest in “green technologies”. ”Greentech could be the largest economic opportunity of the 21st century. Disruptive innovations are possible because of recent advances in chemistry, genetics, and material science. American and world leaders are calling for alternatives to $60-a-barrel oil, and entrepreneurs are rising to the challenge.”
Where the Money’s Going
Obviously, cleantech, or greentech, isn’t lacking buzz, but just what is it? According to the Cleantech Venture Network it encompasses technologies ranging from wave power to fuel cell vehicles to biological water filtration.
“The impact of clean technologies is ubiquitous: there are large and highly disruptive market opportunities emerging in the multi-billion dollar agricultural, manufacturing and transportation sectors, as well as in the fundamental enabling areas of energy and water”, one can read in theCleantech Venture Network website.
It’s a broad sector, but right now all bets are on the energy startups. According to the Cleantech Venture Network, in the third quarter of 2006, $837 million of the $933 million invested in clean tech went toward energy companies.
With the road to an IPO a lot longer these days, the wait time for investors to see profits is longer, most investors are waiting longer to see profits, but those profits are real.
“The returns are way better than people think they are… It’s not definitive, but the data we’ve assembled suggest that investors have been able to achieve venture-grade returns consistent with the overall venture capital average returns over the past decade, taking into account the dot-com boom.
For a lot of people, that’s a very astonishing piece of data. But it’s there” (Nicholas Parker, Cleantech Group Chairman and Co-Founder, Cnet News.com).