Money, cleantech and what comes next

2011 was a good year for cleantech startups. U.S. venture capital activity in the sector set a high-water mark, with $4.3 billion invested in a record 323 companies.

Today, the sector accounts for about 15 percent of all VC funding, double what it was in the mid-2000s, according to the National Venture Capital Association (NVCA). By most accounts, and barring any calamitous economic shocks, the upward trend will likely continue in 2012.

But this strong showing comes after a challenging half-decade of gyrations in the market that saw rapid growth in VC investments through 2008, followed by a precipitous, 40 percent drop in 2009 as the Great Recession slammed the lid on investment activity.

The wild swings have given VCs pause, and many have recalibrated their investment strategies. This is particularly true of cleantech, a catchall category that includes CO2-saving technology in energy efficiency, energy storage, green buildings, green IT, electric vehicles, power electronics, renewable energy, solid-state lighting and the smart grid.

“The sector is morphing,” said John Taylor, head of research at NVCA. For the vast majority of startups, the endgame is one of lowered expectations; understanding that an initial public offering probably isn’t in the cards, they instead hope to be acquired.

The shifting landscape “forces VCs to ask: ‘How much money can I afford to invest in a company and still earn a good return?’ Today, it’s all about capital efficiency,” Taylor said.

This recalibration is responsible for three significant shifts in how venture capitalists decide what to invest in next.

The first is that VCs are less likely to throw money at large, early-stage investments in renewable-energy infrastructure. This comes after a spate of high-profile solar panel companies declared bankruptcy last year. The highest-profile case was the August bankruptcy filing of Solyndra, which had received more than $700 million in VC funding on top of more than $500 million in federal government loan guarantees.

Part of the challenge for the solar companies was the intense competition from their counterparts in China, which have invested heavily in wind and solar manufacturing capacity with active support from the government. The consensus across the industry is that the Chinese flooded the market, drove down prices and made it difficult for U.S. companies to compete.

With their investment strategies tempered by those experiences, many VCs now are focused on later-stage, lower-risk rounds of infrastructure investments. That is, they’re stepping in only after the technology has been proved and there’s less of a wait for the payout.

“It’s a natural consequence of how renewable-energy companies have matured, and it’s driven by the fact that capital has not been available from the public markets,” said Michael Holman, research director at Lux Research Inc. (New York, N.Y.).

The era of the solar mega-deal may be over, but there's no shortage of cash for green innovations.

In 2011, three of the top 10 VC deals of the year were in cleantech, including a $200 million expansion round for fourth-ranked Better Place Inc. The Palo Alto, Calif.-based company is developing the infrastructure for refueling electric vehicles modeled on the traditional gas station. EV drivers pull up to the Better Place “pump,” and a robot replaces the depleted battery with a fully charged one.

“The case for EVs is profound, but the limitation has always been range. I call it range anxiety,” said Alan Salzman, CEO and managing partner of VantagePoint Capital Partners, the largest shareholder in Better Place. “Once you’ve solved the range problem, there is no barrier to the adoption of EVs.”

Better Place is working with companies at every stage in the EV value chain to create a complete end-to-end refueling solution. The company is partnering with automakers to design EVs that have removable batteries, with corporate fleet owners that commit to converting a portion of their fleets to EVs, with fueling-station companies to install the EV refueling units, and with energy utilities to ensure battery recharging doesn’t require capacity additions.

The company’s first two implementations are in Israel and Denmark. It also has demonstration projects running in Australia, China and Japan.

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