Cleantech investing -- a view from Israel

This site tends to focus on North American cleantech investing, since that's where yours truly resides, but there is also a lot of rapidly-growing cleantech VC interest in other areas such as Europe, Asia, Israel, and elsewhere.

Today, Jack Levy of Israel Cleantech Ventures was kind enough to add his thoughts and perspective on the current state of cleantech investing in his neck of the woods:

With a remarkable track record in innovative technologies, Israel is widely regarded as one of the leading markets for venture capital investing, but the growing cleantech market is only now attracting attention. As U.S. venture funds raise more capital to deploy in cleantech companies, we expect that more and more will begin to look to deep but uncharted Israeli cleantech innovation for additional deal flow. Most of the Israeli cleantech companies are early stage and not versed in dealing with venture investors. This creates the opportunity, and need, for sector-focused, early stage investors with a strong local presence to develop the Israeli cleantech venture market.

Israel already has its share of cleantech successes along with some promising companies. The successes include industry leaders in geothermal power (Ormat), solar thermal (Solel) and desalination (IDE Technologies). As previously reported in the Red Herring and more recently in Business Week (and this blog), Israel has big plans to leverage its leadership in water technology. Recent reports (Hebrew only) have mentioned a proposal before the government for a five-year NIS 750 million ($162 million) incentive program for the water industry being championed in part by Mekorot (Israel National Water Company) Chairman Booky Oren. If adopted, these initiatives will supplement a robust governmental incubator network designed to support early stage ventures, many of which have already graduated cleantech companies. Israel's leading academic institutions such as the Technion, Ben Gurion University, and the Weizmann Institute of Science, among others, have significant activity in water technology, alternative energy and new materials technologies.

Even with the significant pace of company formation, many established Israeli venture capital firms have remained on the fence regarding the Israeli cleantech opportunity. Some are concerned about the challenges facing cleantech investing in general -- particularly the capital intensivity and longer sale cycles (hence longer time to exits) of many business models. Others are focused on the lack of venture funded Israeli cleantech exits, fewer opportunities for cleantech companies to pilot their technologies locally and the absence of the military as the clear driver of innovation and source of management talent.

Any prospective investment must be closely examined in light of these very real risks. Nevertheless, many early-stage companies that we have met with have scalable business models that are no more capital intensive than many “traditional” IT or communications plays. Israeli companies have historically excelled at rapid fielding of solutions and at taking existing products or processes and improving upon them – an approach which can help mitigate many risks and costs associated with new technology adoption. With this strategy, some companies, such as AqWise, whose AGAR® technology improves the capacity and performance of wastewater treatment facilities, have succeeded even in sectors with notoriously long sales cycles. However, other such product or process improvement approaches may limit the size of the opportunity and need to be diligenced carefully to ensure that any advantages developed are significant enough to build a sustainable business platform. On the plus side, given the global nature of the cleantech markets, and the leadership of the EU and Japan in certain segments, the geographical location and immediate global focus of Israeli startups may prove to be an even stronger asset than in other areas such as software or medical technology.

Perhaps most encouraging to the Israeli cleantech investor, are the managers who have academic or early career backgrounds in relevant areas (i.e. water engineering, electrical engineering), but who as a result of the job opportunities of the past 10-15 years acquired significant management skills and experience in high growth and successful IT, software or telecom companies. Like a returning diaspora, many of these individuals who take leading positions in Israeli cleantech companies are coming back to their true passions with strong conviction and a sense of mission. If they remain mindful of the differences in their new markets, we believe these entrepreneurs will be able to leverage their years of personal experience in high growth companies and help build an Israeli franchise in cleantech as strong as that which exists in more traditional VC sectors. And we look forward to doing it with them.

Israel Cleantech Ventures was founded in November 2005 to establish the leading sector-focused venture capital fund dedicated to investing in Israeli clean technology companies. We welcome any feedback or interest in Israeli cleantech companies; the author, Jack Levy, can be reached at jack@israelcleantech.com.

Thanks, Jack! ~rd