Green Tech

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.

Data on third-quarter venture capital shows that green-technology companies are attracting dollars from both investors and government programs.

Ernst & Young on Thursday said that venture investing in green tech rose 46 percent compared to the prior quarter to total $965 million in 50 deals. Solar, auto, green buildings, and biofuels continue to be fast-growing segments within the overall category, according to the Ernst & Young analysis of data from Dow Jones VentureSource.

The numbers show that companies shipping products are garnering more money and that a mix of investors, including private equity firms and corporations, are increasingly part of the picture. Because energy-related businesses are expensive to scale up, venture capital companies need to invest with large corporations, such as GE and Siemens, or late-stage equity companies.

Money from the federal government stimulus program is starting to be disbursed which is also aiding new green-tech companies. On Tuesday, the Department of Energy announced $3.4 billion worth of grants for smart-grid programs. The money is aimed primarily at utilities, but they then contract with smart-grid companies such as meter manufacturers or software providers which do in-home energy management systems.

Another large program is $2.4 billion in grants to promote plug-in electric-vehicle battery manufacturing. New Energy Finance estimates that $9.5 billion in stimulus money has been already spent and that government money will continue to enter the market for two more years.

These programs, including state-level efficiency mandates and ARPA-E research grants, add to the confidence in the overall market, according to Ernst and Young.

Investors and entrepreneurs are also keeping an eye on an energy and climate bill which is now being debated in Congress. One of the key pieces of the bill is a cap and trade system for regulating greenhouse gases. Under this system, large polluters, such as utilities, have a certain number of permits to emit carbon dioxide. To stay under a government-set cap, they can buy and trade these permits.

A survey by law firm Cooley Godward Kronish of green-tech executives found that 80 percent believe that cap and trade would help the U.S. economy. But investors and entrepreneurs are not expecting passage to affect business plans in the short term, according to the survey which was released on Tuesday.

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.

Bill Weihl, Google's green-energy czar.

(Credit: Google)

Failing to find many investment opportunities, Internet search giant Google has begun developing its own green technology and may soon have some breakthroughs.

That's according to Bill Weihl, Google's green-energy czar, who spoke at the Reuters Global Climate and Alternative Energy Summit that began on Tuesday.

In November 2007, Google announced a plan to invest hundreds of millions in technology to find a renewable-energy source for electricity cheaper than coal. Since then, the company has admittedly invested "less than $50 million."

Google had intended to invest much more, but it has not been able to find many qualifying companies or projects, Weihl told Reuters.

Rather than wait for better ideas to come along, the company has been developing its own technology, including better mirrors for solar-thermal plants and solar-powered turbines for generating electricity.

Google engineers believe that they've found a way to cut the manufacturing costs of heliostats, the mirrors used in solar-thermal farms, by making the mirrors and the mounts from "unusual materials," Weihl told Reuters.

"Typically, what we're seeing is $2.50 to $4 a watt (for) capital cost. So a 250-megawatt installation would be $600 million to a $1 billion," he said. "It's a lot of money."

The solar turbines Google is developing are actually gas turbines that, instead of running on natural gas, are being modified to be powered with solar energy, Weihl told Reuters.

The projects have been conducted independently of eSolar and BrightSource, two of the green-tech companies Google has invested in since the November 2007 announcement.

The United States risks missing the business opportunity posed by moving to low-carbon energy, two prominent business leaders argued in an editorial aimed at policy makers.

General Electric CEO Jeffrey Immelt and venture capitalist John Doerr of Kleiner Perkins Caufield & Byers, published an editorial in The Washington Post Monday to warn that the U.S. is lagging China is developing clean-energy technologies.

John Doerr, investor at Kleiner Perkins Caufield & Byers.

(Credit: Martin LaMonica/CNET)

"We are clearly not in the lead today. That position is held by China, which understands the importance of controlling its energy future. China's commitment to developing clean energy technologies and markets is breathtaking," they wrote.

A giant conglomerate, GE is deeply involved in the energy industry and is one of the top global suppliers of wind turbines. One of Silicon Valley's top venture capital companies, Kleiner Perkins has been aggressively pursuing green technology, having invested $680 million in 48 upstarts.

But Doerr and Immelt run through a number of statistics to demonstrate that the U.S. is so far a bit player in the global marketplace for solar, wind, advanced batteries, and fuel efficiency.

The U.S. continues to produce innovative companies in the Internet but they argue that policies in energy, a highly regulated field, stifle innovation and U.S. competitiveness: "Our government's energy and climate policies are our principal obstacle to success," they said.

Both Immelt and Doerr are economic advisers to President Obama and executives from both companies regularly have testified on energy and climate policies for Congressional committees.

At a high level, the position of these companies--and many others--is that developing low-carbon products and services will serve both economic and environmental goals: low-carbon technologies, such as efficient lighting or solar, can revitalize American industry and curb greenhouse gases.

In the editorial, Doerr and Immelt said U.S. policies should indicate that the U.S. values "low-carbon energy."

They offered five policy prescriptions: put a price on carbon and cap emissions; regulate utilities with incentives for efficiency and renewable energy; strengthen efficiency standards for cars, buildings, and appliances; establish more federal funding for research, development, and deployment of energy technologies; and create new trade agreements to promote the export of U.S. products.

Crux of the issue
Doerr and Immelt's piece strikes at the heart of the energy and environment policy debate in the U.S. There are a number of technologies that can displace fossil fuel use right now and new technologies, such as plug-in electric vehicles, hold more promise.

But proposals to encourage deployment of these technologies at scale has met resistance from entrenched interests and some lawmakers. Among the concerns are that climate and clean-energy policies will significantly raise energy prices for consumers and hurt U.S. industry compete globally.

GE CEO Jeffrey Immelt.

(Credit: Martin LaMonica/CNET)

Still, work continues on energy and climate policy in Washington even though much of the media attention is on the health care debate.

The House narrowly passed an energy and climate bill that would mandate more renewable energy from utilities and establish a cap-and-trade system for regulating greenhouse gas emissions from large polluters. The Senate is devising its version of the bill and could vote on it in the fall.

Some environmental groups, notably Greenpeace, have criticized the House's climate and energy bill for giving big businesses such as utilities too much leeway in meeting the cap on carbon emissions, which will be phased in on over the next decade.

People in green technology business, in general, favor the bill because it establishes a system for pricing carbon emissions and has other policies to invest in energy-related infrastructure, such the electricity grid technologies and battery manufacturing.

Clean-technology investing could be seeing a rebound.

Cleantech Group, a research firm backed by Deloitte, released a preliminary report on Thursday showing a slight uptick in clean-tech funding during the second quarter of 2009 in North America, Europe, China, and India.

After two quarterly declines, the increase is good news, but the Cleantech Group noted that the quarter-to-quarter comparison for the same period a year ago is still down.

"The (second-quarter) total is up 12 percent from the previous quarter, although down 44 percent from the same period a year ago. The average round size in (the quarter) was $12.9 million, up from $12.3 million (the previous quarter)," the report stated.

Silicon Valley venture capital funds remained the top clean-tech investors in the second quarter.

(Credit: Cleantech Group)

Cleantech Group said that while solar investments are still down, clean-tech investments in the utility and automotive sectors have risen. In fact, automotive firms saw the biggest influx of clean-tech investments, which Cleantech attributes largely to the government's stimulus package for the automotive industry.

North America was the biggest investor in clean technology, making up about 66 percent. Europe and Israel were the second biggest investors, at 21 percent. India and China were less invested in clean technology, making up only 11 percent and 1 percent of the total investments in clean tech for the quarter, respectively.

The Cleantech Group also pointed to some big automotive deals completed during the quarter:

• Kleiner Perkins and T. Boone Pickens together invested $100 million in San Diego start-up V-Vehicle.
• Fisker Automotive, which plans to make a plug-in electric luxury sedan, raised $85 million from Kleiner Perkins and Eco-Drive Partners.
• Think Global, a Norwegian company that specializes in electric cars, raised $39 million.
• Israel-based ETV Motors received $12 million from Quercus Trust.

Battery companies also saw the love. Lithium ion battery maker A123 Systems raised $100 million from General Electric, and Deeya Energy, working on a "redox flow battery," raised $30 million from Technology Partners.

The Cleantech Group also listed the venture capital firms that invested the most in clean technology for 2Q09. Not surprisingly, Kleiner Perkins Caufield & Byers topped this list of green-tech investors, with Khosla Ventures, Braemer Energy Ventures, Robeco Alternative Investments, Draper Fisher Jurvetson, VantagePoint, and Venture Partners following.

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.