Is Clean Tech the Next Big Thing for Venture Capital Firms?

by Rona Fried, Ph.D.

179 clean-technology companies received $1.1 billion in venture capital in 2002 – 5 percent of total venture capital investments in North America and double the sector’s market share from 2001. The numbers are expected to be slightly higher for 2003. Activity at recent venture capital fairs suggests that investors, and increasing numbers of conventional venture capital firms, are entering the clean tech space. Last year, 60 percent of venture went to energy-related businesses. Now, interest seems to be spreading to segments such as efficient materials, air quality and water purification, according to Clean Tech Venture Monitor.

What do investors like about the market? As Draper Fisher Director Raj Atluru said of clean tech in a recent New York Times article, “”I’m spending a lot of time on new deals in emerging technology like solar, fuel cells and water purification. The area is still immature, unlike the more developed, and some say, over-funded, software and communication sectors. Although most of the big plays delivering large returns have already been made in those sectors, clean technologies are still ‘open pastures for startups.'”

Several investors at last fall’s major VC conferences made similar comments. The clean tech market is attractive because it is young and inefficient. Unlike mature markets, there aren’t 40 competitors for every given technology in clean tech.

What will it take to get more capital flowing into clean tech? We need the EBay or Yahoo or Cisco of clean tech-a company that is sustainable and successful over the long term. Companies generally need better management teams, but they are improving. Veteran CEOs are moving into the field.

Just about every venture capital firm in the clean tech space has a solar company in its portfolio, notes one investor. “It’s getting to the point where there may well be a significant breakthrough in solar technology, making some VC firm [and the company] a lot of money.”

The year 2002 was dismal for venture capital investing of any kind. Now that funds are loosening up, clean tech companies are finding receptive, but cautious, investors. No one wants alternative energy to be another dot-com fiasco.

To avoid disappointment, many startups are de-emphasizing world-changing technologies that won’t find a market for at least a decade. Instead, they are rolling out incremental technologies that can return investment dollars quickly, while the market ripens. For example, Polyfuel of Mountain View, California, received funding for its fuel-cell battery components, which will be used in the near-term in laptops and cell phones.

What kinds of companies are investors interested in? Investors discussed what they are looking for at October’s Clean Tech Venture Fair. They are looking for companies with products that can facilitate the market rather than “technologies looking for a market.” Some examples follow:

Components such as micro fuel cells, control systems and wind blades.
Coatings/catalysts/advanced materials.
Products that help to reconfigure manufacturing processes, improving industrial efficiency.
Sensors, monitors and controls in water/energy/metering.
Water technologies to rebuild infrastructure and organic wastewater streams.

The first thing any VC firm looks for is strong management. Often scientists or engineers start tech companies; they need to be complemented by great management. Investors also look for capital-efficient companies. They seek nimble companies, because often, a startup’s business model will change before it goes public. The product should be one with many market opportunities. Finally, investors look for companies that will provide good “exits” (ways for the investor to make money and move on to other investments) and with the ability to define the market niche during the next four to seven years.

Rather than investing in companies that develop technologies, explains Jeff Leonard, president of Global Environment Fund (GEF), investors like companies that make existing systems cleaner, simpler, faster or cheaper. They avoid business models for which success is based on government policy and regulation, e.g., electric cars. GEF is interested in automated, intelligent systems that increase efficiency and are embedded into many types of technologies. “We bought the whole sector of companies that make control systems for new technologies like wind,” notes Leonard.

In emerging markets, simplicity and reliability are the keys. For example, an investor would do well assisting a company that simply fixes water leaks. A company like that can generate significant revenues with a low-tech business model.

Rising Stars?
All three major venture capital fairs that connect clean tech companies with potential investors took place in October and November: the Cleantech Venture Forum in New York City; the 16th NREL Industry Growth Forum, organized by the Department of Energy National Renewable Energy Lab and held in Austin, Texas; and the European Energy Venture Fair in Zurich, Switzerland.

This is the 16th year for the NREL Forum, and the second year for the other two venues. The 21 presenting companies at the CleanTech conference, for example, generate over $100 million in revenue and collectively raised $250 million in capital prior to the conference. Company presenters span the landscape of clean technology-from energy generation to water treatment to advanced materials. The other two fairs concentrate on energy companies.

A sample of presenting companies at the three conferences appears below.

16th NREL Industry Growth Forum
Clean Energy Systems Inc., Rancho Cordova, California: Combustor with carbon-dioxide capture.

ThermoChem Recovery International, Baltimore, Maryland: Chemical and energy recovery systems for the pulp and paper industry.

WindKraft Inc., Germany: Small wind turbines.

See more companies.

European Energy Venture Fair

Air-On AG (Switzerland): developing a patented air-conditioning system that cools and dehumidifies indoor air using 5% of the energy as conventional systems.

ClimateWell (Sweden): its patented product puts solar cooling on par with costs for conventional air conditioning.

Effpower (Sweden): manufactures a high power battery with very long life hybrid vehicles are one of its potential markets.

Energetech (Australia): technology to extract energy from ocean waves

Great Cell Solar: commercializing products based on Dye solar cells to serve the European BIPV market.

Rolls Royce Fuel Cell Systems: this subsidiary of Rolls Royce is developing SOFC fuel cell systems for stationary power generation.

Vetrix (US): zero emission vehicles; electric scooter

Zephros Wind Turbines (The Netherlands): gearless wind turbine

CleanTech Venture Conference:

Abtech Industries: patented technology absorbs hydrocarbons from water.

CellTech Power: novel variation of SOFC fuel cell technology for small scale distributed generation.

Electronic Partners Corp.: technology to process high volumes of electronic waste

Hamilton Thorne Biosciences: high sensitivity, ultra high speed environmental test kits and automated devices.

Konarka Technologies: develops polymer PV products based on dye technology.

Nathaniel Energy Corp: patented technology is gasification system that combusts any solid carbon-based materials such as biomass or tires.

Pentadyne Power Corp: flywheels

PolyFuel: fuel cell membrane technology for methanol fuel cell power systems.

Sustainable Energy: products that help integrate renewable energy systems into the electricity system.

Verdiem: software that improves the energy efficiency of computer networks.

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