Venture Capital Shifted to Energy Efficiency in 2009

US venture capital (VC) investment in cleantech companies is shifting away from capital intensive technologies to energy efficiency solutions, according to a new report.

An Ernst & Young LLP analysis shows that the number of financing rounds in the Energy Efficiency
category–encompassing technology areas such as smart grid and
residential and commercial energy management solutions–grew in
absolute terms by 11% to 61, making it the number one area of cleantech
deal activity. The Energy Efficiency category share of total financing
activity in 2009 rose from 24% to 32%. At the same time, the share of
financing rounds directed to the more capital intensive
Energy/Electricity Generation category fell from 30% to 18%. Similarly, the share of deals going to Alternative Fuels declined from
13% to 8%.

“These results reflect the easing of an investment cycle largely driven by the significant capital demands of solar companies and a shift toward energy efficiency products with lower funding requirements and potentially faster commercialization,” says John de Yonge, Ernst & Young LLP, Associate Director, Americas Cleantech Network. “Energy efficiency is in the sweet spot of many venture capital investors in terms of skill sets and funding parameters, particularly given its basis in information technology.  Consequently, we may see investor participation in cleantech broaden.”

VC investment in the entire cleantech sector for 2009 reached $2.6 billion in
193 financings rounds, a decline of 50% in terms of dollars and 16% in
terms of deals compared to the record investment levels of 2008. In
4Q09 investments fell off 45% to $564.5 million compared to the prior
quarter while the
number of deals increased 21% to 62, according to analysis based on
data from Dow Jones VentureSource.

Investment in top cleantech categories

The Energy Efficiency category received the most US VC investment in Q409, with $252.8 million and 22 deals, compared to $133.7 million and 14 deals in Q309. This category raised $593.3 million for all of 2009. The largest deal of 4Q09 in Energy Efficiency–and across all cleantech segments–was the $105.0 million investment in Silver Spring Networks Inc, a provider of networking infrastructure and services for smart grids, based in Redwood City, CA.

The Energy/Electricity Generation category garnered $118.5 million with 11 deals in 4Q09, down from the $316.5 million invested in 8 deals in the prior quarter; $654.6 million was invested in this category in 2009. The largest deal in 409 was the $38 million raised by Nordic Windpower Holdings Inc., based in Berkley, CA.

The Industry Focused Products and Services category raised $76.7 million in 4Q09 with 11 deals and $608 million throughout 2009. The funding in this segment was led by the transportation industry, which raised $33.8 million in 4Q09 and $362.7 million for the year, propelled by investments such as the $82.5 million in the electric car company Tesla based in San Carlos, CA.  According to a recent study conducted by Ernst & Young’s Global Automotive Center, over 10% of US drivers–or approximately 20 million people–would consider purchasing a plug-in hybrid or electric vehicle.

Regional cleantech investment

The San Francisco Bay Area was the leading region for cleantech investment in 2009, with $1.2 billion invested for the year and $295.6 million in 4Q. Southern California came in second place with annual investment of $329.5 million and 4Q investment of $30.5 million. New England was the third-largest regional cleantech center with $283.7 million for the year and $38.0 for 4Q.

Cleantech market drivers beyond venture capital

The US government continues to serve as an influential cleantech investor. Under the Section 48C Advanced Energy Manufacturing Tax Credit of the American Recovery and Reinvestment Act, $2.3 billion was recently awarded to 183 cleantech manufacturing projects in 43 states. An Ernst & Young analysis of these awards shows that venture-backed projects received $402 million in awards. President Obama’s 2011 budget proposal would provide an additional $5 billion appropriation for the Section 48C program, offering further support for cleantech development.

The US Patent and Trademark Office is further supporting government commitments to cleantech solutions by examining certain “green” technology applications to reduce the time required to patent these technologies by an average of one year.

Large corporations are accelerating adoption of clean technologies to create a competitive advantage through resource efficiency, sustainable growth and cleantech-driven revenue opportunities. In a recent Ernst & Young study of executives at global corporations with revenues in excess of $1 billion, over 50% of respondents indicated their companies’ intentions to spend at least US$10 million on cleantech products and services by the end of 2010, with 22% predicting a cleantech spend of at least US$100 million.

US public markets investment in clean energy totaled $2.8 billion in 2009, according to Bloomberg New Energy Finance.   With capital markets showing signs of improvement, three cleantech companies recently filed to raise up to $500 million in initial public offerings, according to Thomson Reuters. The largest transaction is expected to be the offering by Solyndra, Inc., which anticipates raising $300 million.

US cleantech merger and acquisition activity reached 53 transactions with a disclosed value of $3.5 billion, according IHS Herold. Nearly half of this activity took place in 4Q09, which saw 22 transactions with a disclosed value of $1.7 billion. One notable fourth quarter deal is the acquisition of Clipper Windpower by United Technologies Corporation for $327.4 million.