Tuesday, February 27, 2007

Looking at the numbers

Ernst & Young/ Dow Jones VentureOne today released their 2006 totals for cleantech venture investments [2/27 update: link to PR here], and the results (illustrated above) confirm the trend of overall strong growth. They counted $1.3B in investments in the US, Europe, Israel and China, with 140 transactions.

They didn't break the dealflow down by sector in their public release, but they did cover a broad definition of cleantech. In the US, they counted 87 financings, with the total of $883mm. Interestingly, cleantech venture investments in China took a big leap, from $7mm in 2004 to $220mm in 2006.

As we've discussed before, counting cleantech investments is tricky. Alert readers will have already noted that the VentureOne numbers are significantly lower than the Cleantech Venture Network's $2.9B total for 2006 in North America. These kinds of differences (seen across other surveys as well, such as the Moneytree and Nth Power/ CleanEdge surveys) raise a few questions:

1. Why are the numbers so different?

We've talked a bit about this before. There are three basic reasons why numbers vary across surveys: Completeness, inclusiveness, and definitions.

In terms of completeness, there's the possibility that some of these surveys are missing deals that others spotted. But, without doing a line by line comparison, it's tough to make a case that such errors of omission might be a major factor, given the strong reputations of the various groups.

In terms of inclusiveness, however, there are some pretty major differences across surveys, as dictated by their varying needs. For a group like the Cleantech Venture Network, they need to be as inclusive as possible -- that's part of their role as thought leaders in a fast-emerging space. Many clean technologies straddle sectoral categories -- how do you bucket software to manage energy assets, for example? In the software category or the energy category? For groups like the CTVN, it's an easy answer: If it's relevant to cleantech, it's in the tally. But for groups like VentureOne, they need to add up not just the cleantech numbers, but also the IT numbers, etc. And they need the counts to be mutually exclusive, so they don't end up counting that hypothetical energy software company twice. So given the different mandates, when asked to come up with a list of cleantech investments, some groups' tallies will be a lot longer than others.

Definitions also vary across these surveys. Some take a narrower view of cleantech ("Sure, we got both kinds of cleantech, solar AND biofuels!"), some take a broader view. Some include private equity of any stripe, some take a narrow viewpoint of what is a "venture backed firm." In the specific case of the VentureOne numbers, they appear to be taking a broad view of cleantech, but a very narrow view of eligible companies. They don't include any private investments into public entities (PIPEs), angel rounds, etc. This by itself shortens the list quite a bit. Also, it's important to note that the VentureOne numbers exclude investments in Canadian-based companies, whereas the CTVN numbers include those in their North America totals.

The net result? VentureOne counted 87 cleantech venture financings in 2006, while the CTVN counted around 250.

2. How much are the numbers getting skewed by project finance-related transactions?

As we've discussed before, a handful of very large deals that seem to be more project finance-related than classic venture capital have played a signficant role in the dramatic growth in the total dollar tallies for cleantech investing. But how much of a role?

The VentureOne numbers help shed some light on this question. And the answer appears to be that such mega-deals are skewing the numbers somewhat, but not enough to be the biggest factor in the sector's strong top-line growth.

Yes, mean deal sizes have risen. In US cleantech investments tracked by VentureOne, the mean deal size rose from $6.25mm in 2002 to $10.16mm in 2006. But most of that growth actually occurred a while back -- 2004 mean deal size was $9.68mm. It should also be noted that median deal size did rise over the past year, from $2.6mm in 2005 to $6mm in 2006.

But what really appears to be driving the growth is dealflow in general. The number of deals tracked in cleantech by VentureOne has risen from 90 in 2003, to 103 in 2005, and jumping to 140 in 2006. So from 2005 to 2006, what drove the doubling in cleantech venture dollars? Deal sizes did get bigger, including more impact from mega-deals, but the overall dealflow also significantly grew.

3. Why do investors care about all this to-do about numbers?

Simply because they help us get a better handle on what's going on in the market.

The various surveys all consistently confirm that this is a fast-growing sector. Some folks have argued (mostly in private grumbling) that the top-line growth in the sector was really mostly a result of an overly generous set of definitions -- that there have been a few spectacular deals that drove the numbers up, but overall the sector has stayed pretty flat. But the dealflow numbers show this argument to not be true. A very few others have privately suggested that groups like the CTVN may have made the growth look bigger than it really has been, by casting their definitional net wider and wider over time. But as the VentureOne numbers show, CTVN isn't the only group pointing to the very strong growth in VC interest in the sector. The sector has been growing quickly, there is no real debate over that.

However, there continues to be a constructive debate over the possibility that cleantech investments have saturated the sector, the "Is it a bubble yet?" question that the media loves to talk about. And that's where it's important to know the differences between the surveys.

Because there's a big difference between "Cleantech is the third biggest investment sector," and surveys like VentureOne's which suggest that cleantech remains a relatively small portion of overall venture investments -- VentureOne tracked 3,748 financings totaling $34B in 2006, which would put cleantech at about 3.8% of venture capital investing. The first interpretation can be a bit daunting. The latter interpretation, however, is a bit encouraging for cleantech investors. Also encouraging? The fact that VentureOne's survey estimated that median valuations for cleantech VC investments were 75% of median valuations across all VC investments... None of which, of course, answers the saturation question. But it is suggestive.


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