Monday, May 16, 2005

VC funding, Cleantech, Clustering, and the Bay Area

So the Merc today posted all of the local Bay Area startups who received venture capital funding in the first quarter, according to the MoneyTree Survey and some additional research.

It's encouraging to see so much venture activity in the area. By my count, they've listed almost 200 venture-backed deals in the Bay Area alone in the last quarter. Certainly gives evidence that overall, VC and tech innovation remain quite busy here.

It's almost surprising, however, to see how few of those deals listed are clean technology deals. The deals on this list that we are tracking (Expansion Capital Partners tracks most deals and potential deals in the clean technology space) include:
  • Novariant -- GPS-enabled tools for agricultural efficiency
  • Method Cleaning Products -- environmentally-safe cleaning products
  • Pionetics -- water purification products
  • UltraCell -- MEMS-based micro fuel cells
  • Dust Networks -- low-power mesh networks, e.g. for sensors
  • Nano-Tex -- clothing treatments that enhance durability and lifetime in addition to other attributes
  • Lovoltech -- power conversion electronics that enable cooler-running, efficient systems
Seven out of 196 is not a high percentage. Especially considering that available numbers suggest that cleantech venture capital is around 5-7% of all VC funding on average -- you would expect to see double the number of cleantech deals in an average quarter (and assuming deal size isn't a differentiating issue), as a portion of VC deals in the Bay Area.

But I used the phrase "almost surprising" on purpose: There is a good reason why the Bay Area numbers will be relatively low -- there is not yet the clustering effect in cleantech as you see in other industries like IT and Biotech. Whereas for software, for example, there are a few prime locations to start a new venture (the Bay Area being one of the leading spots, of course, with 35% of all VC funding in Q1), cleantech enterprises remain fairly far-flung.

Why is that? There are a few key factors which have prevented more clustering:
  • One factor that drives clustering is the advantages of locating near other similar firms in order to attract a specialized, skilled talent pool. But the "cleantech industry" is really several industries that work well together from an investors' standpoint, but which remain very different industries in terms of technologies, customers, etc. A water technology startup, for example, won't see the value in placing their new enterprise near a cluster of energy technology firms for purposes of poaching talent or teaming up, etc. Even within larger industry segments such as energy technology, there are major operational differences between hydrogen, solar, wind, "smart grid", and other segments. So it is unlikely that recruitment reasons would drive clustering of broadly-defined cleantech enterprises -- although this still doesn't explain why (with the exception of hydrogen/ fuel cell startups around Vancouver) there aren't any sector-specific clusters (where is the "Solar Alley", for example?).
  • Another factor that drives clustering is concentration of funding sources. But right now, the cleantech investment crowd is also fairly scattered across the Bay Area, Boston, the Pacific Northwest, Philadelphia, Southern California, Colorado, etc. -- everywhere. As more and more IT/ Comm/ Biotech firms already clustered in the Bay Area start to look into making investments in clean technologies, perhaps this factor will begin to drive clustering among clean technology companies, but right now it is not a factor.
  • Yet another factor that would drive clustering would be the formation of "market ecosystems" -- clusters of vendors, customers, etc. that would make proximity valuable. However, to date customers have been scattered. Customers of clean technologies such as clean energy, clean water, and clean manufacturing are utilities, manufacturers, universities etc. Broadly speaking, these customers are either regionally dispersed for historical reasons (e.g., utilities) or are not really that similar in their own operations (e.g., customers of industrial water treatment technologies, which can include everything from semiconductor fabs to food processing). This factor may change over time as more large companies like GE begin to move more and more into clean technologies -- they may form the hubs of new clusters. But for now, proximity to customers isn't driving clustering.
  • Finally, clean technologies tend to be industrial in nature -- they are often evolved from heavy industries' technologies, or driven by the unmet needs of manufacturers, etc. And this means that the companies that are started up by entrepreneurs who originally come out of these industries will locate near where they were already living or doing research. Sometimes that will be in high-tech areas like the Bay Area, but sometimes that will be in strong industrial areas like the Midwest, etc. This is especially true given how expensive it is to do business in the traditional high-tech areas.
So that's why the Bay Area numbers look the way they do -- it actually reflects more of a clustering effect in IT/ biotech/ comm than any particular weakness in clean technology. It also reinforces the feeling that cleantech remains relatively underinvested at this point, when you contrast the seven above deals to the 70 or so software deals that were done, and reflect upon the comparative size of the market for enterprise software versus the size of the the overall global energy and water markets...

What does this mean for investors interested in clean technologies?

First of all, be prepared to look far and wide for opportunities. The right firm with the right technology and management team may actually be in Wisconsin or Toronto, not Cupertino. Many traditional VCs I speak with in the Bay Area limit their reach to the west coast to help leverage their time with board meetings, etc. But cleantech, as least how it stands right now in its early days, will require more time spent on airplanes.

Secondly, there is the possibility, as noted above, that when cleantech clusters do start to evolve they won't be in the Bay Area or other traditional "tech corridors". Already we've seen the emergence of one nascent hydrogen/ fuel cell cluster in the Vancouver area. And the fact that GE is going to be spending $1.5B a year on cleantech R&D may drive some clustering in Niskayuna, New York. Who knows. The point is that the Bay Area could conceivably miss the boat on this emerging market. Unlikely, but a definite possibility. However, as noted above as more Bay Area investors start to look at clean technology investing then that could drive entrepreneurs to increasingly locate here in the Bay Area.

One last thought -- it would be great to see the Merc come up with a better organizing structure to better account for cleantech as an emerging investment space. Something is wrong when they have to put Novariant, etc. under "Consumer" as a market category. Cleantech is a fast-growing investment space, and it would be good to see the Merc get in front of that. But at very least, even the MoneyTree survey has an "Industrial/Energy" category.


Blogger Matt Marshall said...

Rob, you start by assuming that the data showing 5 to 7 percent (clean-tech VC as a percentage of all VC) is accurate. I think they may be too high. Data vendors may be including in this category company fundings that aren't really clean-tech. In other words, I don't think the Bay Area, at your roughly calculated 3.5 percent (7 of 196), really lags. But your point about a lack of clustering is a good one, and it means the Bay Area certainly isn't ahead. As for the Industrial/Energy category, it isn't very good -- doesn't distinguish clean from other companies. But I welcome your challenge to the Mercury News, and will see what we can do going forward.

12:06 AM  
Anonymous Anonymous said...

Hi Rob
I'm an italian researcher and I'm in Berkeley for six months as visiting scholar. I'm working on sustainable development through clean technologies in a cluster environment. That's why I like your blog very much, and I'm very interesting in knowing what's going on in the Silicon Valley in these fields. I discovered this site some days ago, but I hope to partecipate to discussions, also when I will be back in Italy.
I have been searching cleantech clusters informations since some weeks, and I would like to let you know my findings as soon as I can, if you want.
In Italy we are trying to stimulate the creation of a new cleantech cluster, specialized in green buildings, renewable energy and land management (do you say land management or environment management, referring to water cycle, forests, energy...?). I'm not sure I'm using correct terms to translate the sectors we are trying to develop. Would you tell me if are you familiar with these?
- green buildings (low energy consumption, low production, management, maintenance and final recovery costs);
- heat production and management technologies (higher outputs and ‘intelligent’ use of thermal energy – distribution networks and transformation systems of traditional combustibles, but also new technologies);
- ‘intelligent’ systems for the management of buildings and urban services (domotics, air conditioning and purification, monitoring and security);
- ‘intelligent’ systems for integrated land management (infrastructure, community services and urban functions – geomatics, mobility, planning, etc.);
- ‘intelligent’ systems for integrated management of the water cycle (utilisation technologies, control and enrichment of the flows for industrial, farm and civil uses);
- ‘intelligent’ systems for energy transfer and telecommunications (electrical networks, broad band etc.);
- technologies for the production of electrical and thermal energy from renewable sources (mini-hydro, micro-hydro, hydrogen, biomass, photovoltaic, wind, etc.).
I would apreciate your help a lot. Thanks for reading

6:31 PM  

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