Wednesday, August 03, 2005

What's driving rising VC interest in cleantech

In an era of high energy costs and rising energy, water and other resource shortages, it is perhaps not surprising that venture capitalists are starting to take more of a look at cleantech investments.

However, that's not the whole story. For everything that is pulling investors into the cleantech space, there appears to be an impetus to look beyond the traditional areas as well.

The NVCA yesterday released the results of their quarterly returns study for private equity firms. The results for overall venture capital were not very positive, with one-year returns to venture investors at 3.6% (down from 15% for the same period a year before). As this Red Herring story notes, some of this is attributed to the IPO market drying up.

Which makes the article on mainstream VCs getting into cleantech investing in the August Venture Capital Journal ("Mainstream VCs Hope to Clean Up with Clean Tech") very interesting. Unfortunately it's available to subscribers only, but if you can get access to the article it is worth checking out. The article describes how investors in traditional tech/ telecom are increasingly looking into -- and to an early extent, investing into -- clean energy and cleantech in general (at this point, more the former than the latter). For instance, the article cites NVCA survey results which show that "21% of VCs worldwide plan to invest in energy and the environment over the next five years, up from 12% annually." There are some supportive statements by several investors in the space (and a link to this website: self-promotion alert). And as the article points out, investors in cleantech aren't necessarily dependent on IPOs to make their returns... [ed. note: Here's a similar recent article from CNET from a couple of weeks ago, also worth checking out. rd]

Yesterday's NVCA announcement didn't break out returns in cleantech investments (although as the recent Cleantech Venture Network study mentioned here -- co-edited by one of the partners at Expansion Capital Partners -- shows, returns in the space can be very competitive). But there are reasons to believe that cleantech investments may compare favorably with recent mainstream VC performance. The underlying markets are growing quickly, while other tech areas have reportedly slid sideways somewhat. The dealflow in clean technologies, at least anecdotally (including our own experience here at Expansion Capital Partners), remains very strong. Large, cash-rich and acquisitive companies are active in the space, improving exit potential. For these and other reasons, it is perhaps not surprising that there is increasing interest in cleantech among the broader VC community.


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