Green-tech firms thirsty for seed capital

With all the venture capital money going to clean tech, it's easy to think that it's the dot-com bubble all over again. There's certainly a whiff of that gold rush mentality. But the inherent differences between the Internet and the energy business get clearer every week.

Today's installment is the mismatch between venture capital and clean tech--this time, at the small side of the money spectrum.

Entrepreneurs that want to start clean-tech companies from scratch are not being particularly well served by the traditional venture capital funds, a few articles this week argue. It appears that different sources are stepping in to fill the gap, moving under the radar of traditional venture funds.

The problem is that small seed investments--on the scale of $500,000 to a few million dollars--don't fit into venture capitalists' investment profile when they have hundreds of millions of dollars to invest.

Also, many technologies--think a more efficient solar cell or radical improvement in biofuels production--can require years of development. VCs need a return on their investment in five to seven years, which typically means selling that start-up to a larger firm or going public.

A piece in Sustainable Industries on Wednesday details how angel investors and state-sponsored clean energy funds are filling the need for seed funding.

Clean-tech VC and blogger Rob Day touched on this end of the funding environment as well this week, pointing to the emergence of "super angels" who can help get those ambitious entrepreneurs out beyond their fledgling stage.

Meanwhile, Stacey Higginbotham at BusinessWeek.com on Friday wrote about how venture capitalists are stalking the halls of national research labs because many don't have the patience for seed funding.

Gaps on both ends
I've written a few times about the emerging financial models to close the late-stage funding gap in clean tech, sometimes referred to as the "Valley of Death." That is, the need for lots of money--hundreds of millions of dollars--to commercialize technology on an industrial scale.

VC firms like Kleiner Perkins Caufield & Byers are adjusting to the need for late-stage capital by setting up funds designed for large investments to scale technology. Hedge funds and private equity are also moving into clean energy, although their appetite for technology risk is typically going to be lower than VCs.

There appear to be models evolving for more seed funding as well. That points to the need for a healthy angel investor network as well as state and federal level investments in the clean-energy business.

A number of companies are spun out of national labs, yet speakers at clean-tech conferences regularly complain that the funding levels for clean energies are far too low and, perhaps worse, inconsistent.

At the state level, there are funds like the Massachusetts Green Energy Fund and the California Clean Energy Fund. Entrepreneurs can also turn to foundations and university-sponsored competitions to get off the ground. But can cash-strapped states adequately prime the pump for clean-energy start-ups?

Consumers and businesses are looking for greener products, from fuel-efficient cars to clean electricity, but these innovations take years to mature, much longer than it takes to whip up a cool social-networking Web site.

So as we read the articles about technology advances and claims of breakthroughs, keep in mind, the money--and policies--need to keep pace as well.

[newghas]

Martin,
Check out our plan to build a network of hydrogen fueling stations based on renewable energy sources at http://newghas.com.

[BBernsten]

Please read-Americans need to know!!!!!!!!

NHTSA Hearings 8/4/08

I just returned from the NHTSA hearings held today (August 4, 2008) in Washington D.C., regarding the Draft Environmental Impact Statement (DEIS) for NEW Corporate Average Fuel Economy standards (CAFÉ) for years 2011-2015.

IMPORTANT FACTS: You will not believe what you are reading.

1) The 414 pages DEIS analysis was based on an average gasoline price of USD $2.16/gallon for 2011-2020. A calculation approved by the NHTSA administrators/managers. Would you believe it???????????

2) The new CAFÉ rules were also established, negotiated and pre-approved by the NHTSA?s management along with the influence of domestic automotive companies and their lobbyists. We have now established fuel standards for 2011-2020 that are presently met throughout the rest of the Western world (see elow)
As one guest speaker said today ?are they on another planet??

NHTSA ?NEW Fuel Standards? (2011-2015) decision:

Automobiles are to achieve 31.2 mpg by 2011 and 35.7 mpg by 2015. Light trucks are to achieve 25 mpg by 2011, and 28.6 mpg by 2015.

The NTHSA is also setting a goal of 35 mpg on average for 2020.

America needs to know:

The European Union is currently establishing standards, with a goal of reaching 48.9 miles per gallon for new passenger vehicles as early as 2012. The current EU standard already requires more than 40 miles per gallon about 15% higher than the U.S. goal set for 12 years from now.

Japan currently has a standard of about 40 miles per gallon. Japan aims to further improve fuel efficiency by 17% by 2015, reaching 46.9 miles per gallon.

China has a current average of slightly under 35 miles per gallon. Chinese fuel standards are on target to reach the government?s goal of 35.8 miles per gallon by 2009. China will not only meet, but exceed, the goal just established by the United States for 2020 ? more than a full decade earlier.

Australia is targeting 34.4 miles per gallon by 2010.

Canada is targeting 34.1 miles per gallon by 2010.

Under the current administration, purchasing an electric vehicle is becoming more of a necessity rather than an alternative.
BG Automotive Group, Ltd.
http://www.BGelectricCars.com

[evbart]

This makes an interesting comparison with the software/web world. Startup costs on the web are plunging, while VC funds are still over-sized, its tough for them to find enough deals to put their money to work.

The cleantech space, on the other hand, with its higher costs, will definitely need Venture investors to bring the big projects to market.

While the small deal funding gap in software is being better addressed by angels and VC's like First Round and Union Square Ventures. Those higher costs in the cleantech space, force a more prominent funding gap for clean startups.

Yet again, I think Angels can step up to fill this gap. Super Angels can certainly address a portion of that need, but investment networks syndicating large deals can also play an important roll. Both of these groups should also be able to react more quicly than VC's.

The California Clean Energy Angel Fund is one example ( http://www.greentechmedia.com/articles/qs-new-angel-776.html ), and the Northwest Energy Network ( http://www.nwenergyangels.net/ ) is another.

Thanks for the interesting post.