Green Tech

Two solar project developers this week raised funds to install commercial and utility scale projects from a somewhat unlikely source: venture capital firms.

On Friday, Tioga Energy said it has raised $20 million to build out its business of providing project financing for commercial and municipal solar installations, such as schools and businesses. Investors included solar wafer manufacturer MEMC and venture capital companies NGEN Partners, Nth Power, and Draper Fisher Jurvetson.

SunBorne Energy Holdings on Wednesday disclosed that it has secured $5.2 million in funding from venture-capital company General Catalyst. It plans to develop utility-scale solar projects in India, including a planned solar thermal project in the state of Gujarat.

Although they are addressing different customers, both companies are in the business of renewable energy project development, where they build, own, and then maintain solar installations.That model is typically used for non-residential solar because third-party financing makes investment far more attractive to prospective customers such as businesses and utilities.

(Credit: Applied Materials)

Tioga Energy provides power purchase agreements in which the customer doesn't have to pay the upfront cost of the solar panels. Instead, it purchases the electricity generated by the panels from Tioga, which finances the installation and manages ongoing operation.

Financing renewable energy projects is typically done by banks or companies specialized in project financing, but that source of money has dried up in the economic downturn. Venture capitalists, meanwhile, have typically stayed clear of project finance because they seek bigger financial returns by investing in technology or business model innovations.

But General Catalyst is starting to look at project development companies as part of its mix of investments, said investor Bilal Zuberi in his blog. "Strong execution, plus control over a scarce resource, allows a developer to not just create value from projects on the ground but also from future pipeline of projects," he said.

The series B round for Tioga Energy will serve to finance construction and development of new projects. NGEN Partner Steve Parry in a statement said it invested in Tioga's series B round with MEMC to accelerate the adoption of green technology and renewable energy.

BOSTON--Green tech has been a hot venture capital investment category the past few years, but that doesn't mean investors are actually earning money. In fact, some venture capitalists eyeing gold in green may soon be moving on, a panel of investors said here on Friday.

In the third quarter this year, green tech garnered more venture capital than the traditional categories of software and biotech, bouncing back after a sharp drop-off earlier this year. That reflects the high level of confidence that investing in energy-related technologies makes sense in the long run.

But there's a growing understanding that applying the same venture model used for biotech or IT won't always work in energy, said speakers at a panel on venture capital at the Fifth Annual Clean Energy Conference.

"Clean tech is broadly recognized as an area of expansion," said Issam Dairanieh of BP's alternative energy venture capital arm. "But those who went into it because it looked sexy will suffer. Those who went into it without doing their homework will go away."

The two most dramatic differences between IT and energy technology is the amount of time required to build a product and the capital that's needed. A product could take 15 to 18 years to enter into the fuels business and cost tens or hundreds of millions of dollars to develop, said Dairanieh. The traditional venture model is built around getting sizable returns in five to seven years.

"Venture capital in clean tech as currently practiced will not be successful or last very long," said Matthew Nordan, a vice president at venture-capital company Venrock. Venrock is focusing on very early-stage companies with an eye toward finding one that can have a technology breakthrough over many years, Nordan said.

The panelists said that the best VC investors are patient and invest for the long term. But there are many investors who chase fads, said Bic Stevens of Stevens Capital Partners. "Most VC returns are made by getting ahead of a bubble," he said.

Right now, many venture capitalists in green tech are focusing on the companies they have already invested in to ensure that they succeed, a situation that makes it more difficult for newly formed start-ups to secure funding. IT-heavy areas, such as smart grid, are also getting more attention in part because they can be businesses that IT investors feel comfortable with.

The shift to later-stage venture investments was clear in an analysis of third quarter venture capital done by Ernst & Young. For the first nine months of the year, 62 percent of the companies that received funding were already shipping products, compared to 37 percent for the same period last year.

BP's Dairanieh said that despite some limitations, there is an important role for venture capitalists to play in developing very specific technologies. For example, a biofuel company can develop a process for converting algae to fuel, but a small company should expect to bring it to market by partnering with established companies, such as refiners and distributors.

Another heavy presence in energy investing is Washington, with billions of dollars in stimulus money and research funding being put toward energy. Over the past year, many start-ups have applied to Department of Energy programs with a hope of getting a grant or loan.

A panel considers whether cleaner tech boost the auto industry. From left, Center for Automotive Research CEO David Cole, venture investor Ray Lane, Ford Motor Chairman Bill Ford, and Michigan Governor Jennifer Granholm.

(Credit: Martin LaMonica/CNET)

DETROIT--Venture investor and former Oracle president Ray Lane argued on Wednesday that U.S. is losing out to other countries in emerging energy technologies.

Lane, now a partner at famed venture capital firm Kleiner, Perkins, Caufield & Byers, said that the U.S. needs to view clean-energy technologies as a way to rebuild a shaky economy and position the country for long-term growth.

He spoke at the Business of Plugging In conference here on Wednesday, where many speakers emphasized the benefits of electric vehicles to reduce oil imports, cut carbon emissions, and revitalize the ailing auto industry.

But Lane made the case that there are implications to national economic competitiveness as well. There are technology disruptions happening in energy that will shake up a number of industries, but the U.S. is being outpaced in investing in this area by other countries.

"We can expect to live in the next 10 years where China will outspend us in order to invent the technologies," Lane said. "We may be buying their technology if we do not ramp up our seriousness. We led electronics, we led biotech, we led the Internet. We are not leading in this arena."

Lane said that other countries, including Germany and China, have policies that are more conducive to technology innovation and manufacturing. Auto efficiency standards are one third more efficient than the U.S. in China, which spends a higher percentage of economic output on research and development and has set aggressive goals for wind power adoption.

"Engineering must come back to be our number one priority," Lane said. "This is wrong time to cut R & D."

The latest data for venture capital in green-tech investing are in and the numbers all point upward, with the category now attracting more money than software or biotech.

Research company Cleantech Group and media company Greentech Media on Wednesday each released third-quarter data for venture capital in green technologies, showing that government stimulus spending and signs of a recovering economy have helped restore confidence in the sector.

Third quarter investing rose to $1.59 billion, representing 134 deals in North America, Europe, China, and India, according to the Cleantech Group. Greentech Media's tally, which covers deals in North America and Europe, came to $1.9 billion in 112 deals.

Green tech has been one of the fastest-growing technology sectors over the past few years, but it now outpaces biotech and software in size as well.

Data from the Cleantech Group and the PWC MoneyTree Report show green tech at 27 percent of venture capital investing, compared to 24 percent for biotech and 18 percent for software.

Although the numbers from the two reports vary slightly based on research methodology, the trend line is clear: up. Venture capital investing, a sign of sentiment toward different technology sectors, dropped significantly earlier this year, then stabilized in the second quarter, according to both companies.

The total amount of money going to green-tech deals has not yet fully recovered to last year's record levels, though. The Cleantech Group said that third quarter 2009 investing is up 10 percent from the previous quarter, but down 42 percent compared to the same period a year ago.

The positive investing news comes just a week after lithium ion battery maker A123 Systems went public, saw its stock soar 50 percent on the first day of trading, and hold steady. There have been few IPOs in green tech, but venture capitalists remain positive that their portfolio companies will be able to go public in the next two years or get bought by a larger company.

Solar remains the area that attracts the most money, boosted nearly by a $200 million investment into a factory for Solyndra's thin-film rooftop solar systems.

In the auto sector, notable deals were an $82.5 million follow-on investment in electric-car maker Tesla Motors and $46 million in electric city car maker Think Global.

The green building area, which covers alternative materials, energy efficiency, and lighting, saw $110 million in the third quarter, driven in large part by $60 million for drywall maker Serious Materials, according to Cleantech Group.

Other sectors considered promising because of government spending include smart-grid technologies--or using IT and networking technology to modernize the electricity grid--and energy storage for vehicles and the power grid.

Greentech Media analyst Eric Wesoff said that there is a marked trend toward early-stage deals.

Even with the upbeat data, there is a growing understanding among venture capital investors that energy and water are significantly different from other technology areas, such as IT. Energy is a highly regulated industry and often requires large amounts of capital to deliver a product to market.

Flagship Ventures investor Jim Matheson said last week that venture capitalists are in a "trough of disillusionment" phase with green tech as they seek to find the right mix of financing and corporate partners and advocate for policies that encourage development of green technologies.

The Senate on Wednesday released an energy and climate bill that proposes mandates for renewable-energy generation and efficiency and a cap-and-trade system to put a price on carbon emissions. These policies are, in general, favored by green-tech companies but passage of a bill this year is expected to be difficult.

Intel said on Wednesday its venture capital arm invested a total of $10 million in five energy-related companies, giving a glimpse into the product areas that the chip giant considers promising.

In a first-time investment, Intel Capital backed CPower, a New York company which offers energy-efficiency services such as demand-response where commercial customers get paid to dial down energy use during peak times. Intel's money is in addition to the $10.7 million CPower raised in April.

Intel participated in a series C round for Grid Net, which makes network management software for utilities to manage energy flow to buildings with smart meters. The company has licensed its WiMax smart meter design to General Electric which is testing it with utilities.

In home energy management, Intel was part of the previously announced C-round investment in iControl, which is developing a system that combines home security services with energy tracking and automation.

Intel was part of a $24.5 million investment in Convey Computer in Richardson, Texas, which does energy-efficient high-performance computing with Xeon processors.

Limerick, Ireland-based Powervation got a second investment from Intel Capital to further build efficient power controllers for computers and communications equipment.

Intel Capital said it is seeking to fund new companies in efficiency, alternative power generation, storage, transportation, and materials. It developed Open Energy Initiative, a program for funding new companies, developing standards, and lobbying.

SpectraWatt is a solar manufacturing company that was spun out of Intel last year.

Venture capitalists expect the green-technology area to grow faster than traditional areas of venture capital investment in the coming years.

In its annual Global Trends survey of 725 venture capitalists, Deloitte Research and the National Venture Capital Association found that over 60 percent expect investments in green tech to increase over the next three years. Medical devices, too, offer growth potential, investors think.

More mature industries, such as semiconductors and software, are seeing a slowdown in interest.

"The venture capital community continues to glom onto technologies that are truly ground-breaking technologies and are starting to leave the technologies they believe they have done as much as they can," said NVCA president Mark Heesen on a conference call.

The clean-tech area remains a favored sector for venture capital investment.

(Credit: National Venture Capital Association.)

Many green-tech companies can draw on existing IT, communications, or life sciences technologies, he added.

The general sentiment is optimistic that the second half of this year will see a higher level of investment after a sharp drop-off in the first half of this year.

The industry, however, is contracting, Hessen said with smaller firms better-positioned. Large investors, called limited partners, are investing less money into venture capital funds, Heesen noted. Meanwhile, investors expect to spend more money outside the U.S. in developing markets such as Asia-Pacific and Latin America.

Although venture capitalists are bullish on green technologies, some early forays have highlighted the financing challenges associated with investing in energy-related businesses.

Energy-related businesses tend to require a lot of money to commercialize technology. In the past few years, venture capital firms ended up putting tens or hundreds of millions of dollars into solar or biofuels companies, which is a lot more than a typical IT or social-networking company requires.

The survey indicated that most venture capitalists do not expect to have more money to invest. Many green-tech investors say that small companies and their backers need to partner with large companies, such as utilities or fuel refiners, to bring their technology into the marketplace.

Lithium ion battery company A123Systems has received a $69 million investment round from General Electric and others, the company announced Monday.

With its latest funding, A123Systems plans to expand its facilities in Massachusetts and Michigan, as well as build new facilities in Michigan. A portion of the proceeds will also be used to develop applications for the smart grid, such as utility-scale storage. The company has its headquarters in Watertown, Mass.

GE invested $15 million toward this latest round, bringing its total investment stake to 10 percent in the company. A123Systems also announced GE will receive a seat on its board of directors.

"We've accelerated our plans to expand our U.S. manufacturing. We do not believe our country can afford to wait to develop advanced batteries," David Vieau, A123Systems chief executive, said in a statement.

A123's battery cells are used in hybrid electric vehicles and electric cars. The company's batteries and battery systems are also used for grid energy storage and portable power.

After a multi-year run, venture investing in green tech tumbled for the second straight quarter, a victim of a contracting economy and inflated expectations.

The Cleantech Group and Deloitte on Wednesday said that global venture capital in green tech dropped 48 percent in the first quarter this year, compared to the same period last year. The total invested--$1 billion across 82 companies--is a 41 percent decline compared to the fourth quarter of last year.

Venture investing in green tech peaked in the third quarter last year at $2.6 billion and today's investment level is back to where it was two years ago, the Cleantech Group said.

Greentech Media Research issued a report on Wednesday with slightly different numbers but confirming the same downward trend. Greentech Media analyst Eric Wesoff and prominent green-tech venture capitalists said in a statement that despite the drop-off, investors are still bullish on the green-tech sector overall.

"Green-tech VC investing declined year-over-year, not surprising given the economy," said John Doerr, partner at Kleiner Perkins Caufield & Byers. "Still, green tech could be the largest economic opportunity of the 21st century. This level of green VC investment is not enough."

Analysts said that the numbers do reflect a more conservative and disciplined approach to investing in green-tech companies. With the arrival of new investors into green tech over the last four years, many say that some segments were over-invested, notably solar and biofuels.

"Venture funds continue to invest significant sums, albeit at a slower pace and smaller scale than in the past two years," Cleantech Group senior director of research Brian Fan said in a statement.

Fan expects that green-tech companies will seek out "diversified funding sources," which could include large corporate partners and governments. Utilities are also getting more directly involved in financing renewable energy projects.

This year will be marked by consolidation and development while 2010 and 2011 will be the pay-out year for investors, driven by acquisitions or initial public offerings, predicted Wesoff. He said the he tracks investment in the U.S., Europe, and Israel.

Storage is hot
Solar remains the technology area within green tech that garners the most money. Cleantech Group's total of $346 million in solar was about 35 percent of all investment in the quarter, while Greentech Media Research's totals show that 42 percent of the total went to solar deals.

Biofuels continues to be one of the top investment areas while advanced batteries, or energy storage, and electric vehicles are now among the top categories. Demand for storage is being driven by utilities, the automotive sector, and consumer devices.

Smart grid and energy efficiency, meanwhile, are still attracting relatively few investment dollars. But both areas are poised for significant growth from stimulus packages from the U.S. and other governments.

North America garnered 68 percent of investing, with 28 percent going to Europe and Israel, according to the Cleantech Group.

Even after a massive jolt from the U.S. government for green technologies, investors are tempering their expectations.

Consulting company KPMG on Tuesday is expected to release results of a survey that reflects the conflicted feelings of many venture capitalists.

The societal forces toward clean energy--including energy security and climate change--continue to gain momentum. But the financial crisis has hit the clean-energy industry so hard that even the recently passed stimulus plan cannot completely reverse its course.

"There is no doubt that the green-tech sector remains an attractive investment area, but the lack of available credit and the difficult economic environment has investors operating in a cautiously optimistic fashion," Brian Hughes, KPMG partner, said in a statement.

KPMG said it expects the level of green-tech venture investment will grow in 2009, one of the few technology sectors that will. But the survey showed that investors and entrepreneurs are far less optimistic than they were last year.

In September, 93 percent of survey respondents said they expected investment to increase. In a similar poll in February, the percentage of people who thought green-tech investment would rise slipped to 53 percent, with 26 percent forecasting a decrease.

Data from the survey also reflects the changing attitudes toward government involvement in energy technology.

Just over 90 percent of respondents expect that federal funding for green tech will increase and 93 percent said that there will be more "public/private partnership activity."

At the MIT Energy Conference on Saturday, some speakers said that government policies need to change significantly for the green-tech industry to scale beyond niche status.

For example, Ford Motor's director of sustainable business strategies said that the automaker is increasingly looking to collaborate on advanced technology development, calling the U.S. government the "biggest venture capitalist out there."

Also at the conference, Lux Research President Matthew Nordan said that there would need to be a "fairly radical rethink" of utility regulations for storage to become widely used, which would allow for more use of wind and solar power.

Investors queried by KPMG said they expected that renewable energy, such as solar and wind, as well as energy storage and efficiency will be the areas to receive the most funding this year.