Q1 2007 numbers

Over the past week or so, many of the various groups who track venture capital investments put out their Q1 numbers. Below is a brief re-cap, for those interested. (For those interested in a discussion of the differences in the various approaches, see this previous posting)

• As previously noted, the Cleantech Venture Network announced this week that Q1 totals for cleantech investing were $903mm across both North America and Europe, representing a 16.5% increase versus Q4 numbers and a whopping 42% increase on Q1 2006. In both regions, energy generation technologies were the largest category, with a little more than half of all capital going into that segment of the market.
  

• Eric Wesoff's Venture Power newsletter reported $760mm of clean energy venture capital in Q1. Eric's always-insightful commentary notes that: "Q1 looked a bit like last year -- with a mix of investment sectors and a disproportionately high biofuel figure skewed by a few very large deals... [three of the deals] account for nearly half of the total. It is arguable that these deals don't qualify as VC investments despite the fact that they have VC investors -- they look more like project finance." Eric also notes that Venture Power has "joined forces" with Greentech Media, so "look for big changes in the coming weeks."

• As provided by Dan Primack at PE Hub, the Moneytree (PWC/ NVCA/ Thomson Financial) survey for Q1 was also released. In the Industrial/Energy category they counted slightly more than $500mm of venture capital financings, a 20% increase on Q4, and a 75% increase on Q1 2006. This would make the category the fifth biggest category tracked, behind biotech, software, medical devices, and telecom. Across 44 tracked deals, the average deal size was higher than $11mm, which is an interesting contrast with the category's $6.2mm average deal size for 2005. 44 deals, however, is less than Q4's 50, and not that much higher than Q1 2006's 39. One useful feature of the Moneytree data is that they also track "first-sequence" financings (the first institutional investor money into a company). Among these first-time financings, Industrial/Energy was actually the third biggest category, at $176mm -- 13% higher than Q4 totals, but 145% higher than Q1 2006 totals. Intriguingly, the average deal size for these 19 earlier rounds was also quite high, at $9.3mm, versus 2005's average of $5.6mm. This suggests that while capacity deals may be inflating the sectoral totals as Eric descrbes, there may also be some significant additional rise in valuations...

• E&Y and VentureOne also put out their quarterly survey results. Unfortunately for them, most cleantech still appears to be categorized as "Other" in their survey (really? still?). So we'll just leave it at noting that Q1 "Other" total investments were the highest for any quarter they've tracked since beginning in 2001. How much of that is cleantech is impossible to say... This press release seems to suggest that about 64% of the category total was in 10 "alternative energy" and 8 "environmental technology" deals. [4/26 update: Note additional info on this survey appended below]
  

• We previously noted NEF's numbers here. They counted $2.2B total private equity financings into clean energy worldwide in Q1. That's 58% above Q1 2006 totals and 60% higher than Q4 2006. Helpfully, they note that the big totals were driven in large part by three major transactions: Silicium de Provence ($394mm) and Solyndra ($79mm) in solar, and Imperium Renewables ($113mm) in biofuels. Differentiating between VC and private equity, "early stage venture capital" was tracked at $303mm (23% higher than Q1 2006), with Series A and seed tracked at $80mm -- "almost double" Q1 2006, but around half of Q4 2006's $159mm. Interestingly, PIPEs grew sharply, at $446mm, about triple from a year ago. Also a little bit of a dampening in the IPO market, with $899mm raised in initial offerings.

[4/26 update: Received a very fast reply from Michelle Jeffers at Dow Jones VentureOne who reminded me that they do indeed break out cleantech venture capital in a separate set of reported numbers. In fact they are attempting to address the overlapping nature of clean technologies and other technologies via their methodology, something we've written about before on this site. So I wanted to post Michelle's email, since I hadn't done justice to the Dow Jones approach in the original column:

Hi Rob

Saw your post regarding our quarterly data.

I thought your parenthetical comments indicated that perhaps you thought we were not taking Cleantech investing seriously.

In fact we are extremely serious about our methodology and the recognition of the importance of cleantech investing and release an entirely separate report on cleantech investing with Ernst & Young on a regular basis, in addition to this quarterly data.

This quarterly report breaks down the rounds (and companies) into very specific single industries – in fact into approximately 140 different industry sub-segments, and from there even into even more subcodes. The companies we identified and made mention of in the press release in the cleantech field were in our Energy or Environmental segments, which, because they do not meet the exact criteria we set for IT, Business, Consumer and Retail products and services, or Healthcare, are considered an OTHER category. Of course, there are always judgments that must be made for the appropriate sorting when dealing with the volume of financings that we track.

That is why I want you to know that when we release our Cleantech data, we look at all companies throughout every industry from IT to Healthcare to Products and Services for aspects of cleantech in their business. I think you’ll find if you look at all our data releases that we take a very thoughtful and careful look at each venture-backed business—and we research them with direct primary contact with the companies themselves, to verify their financings and their business descriptions—before determining how they should be categorized, in our effort to provide the most accurate tracking of the venture capital industry.

... Thanks to Michelle for a very helpful and thoughtful reply. To see an example of the reporting she is referring to, see this write-up of their 2006 totals. rd]

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.

Year-end thoughts: Solar and the long tail

In the next few days we'll try to provide some year-end thoughts on various cleantech investing topics. Importantly, unlike many of the other notes on this site, these are conjecture and opinion and not the usual passed-along news updates, so read them with all due skepticism.

First and foremost, we pretty much have to start with solar.

According to numbers from an AP/ Dow Jones report (with figures from the NVCA), solar VC investments reached $67.7M in the first three quarters of 2005, as compared to $31.4M for all of 2004. The AP and Dow Jones also report that solar made up more than a third of all energy VC investments so far this year. Regardless of the specifics of the numbers, solar is without a doubt the hottest cleantech investment area right now (if you'll pardon the pun).

Relative to the billions-of-dollars-per-year market that solar power is fast becoming, the amount being invested is still a small amount. But it's important to recognize that almost every investment in solar technology (with some rare exceptions) is someone making an investment in a proprietary generation technology, all from the same basic source of energy - the sun. A natural assumption would be that for any given energy-generation situation (ie: rooftop panels), there will be one single most economic technology. With some solar investors declaring that they are "looking for the next Google," it is tempting to think of solar technology as a zero-sum game, with one winning technology (perhaps already invented, perhaps not) and a lot of lesser approaches that will either be subsumed or that will outright fail.

Consider that this year there were at least 10 different solar-technology venture fundings (probably a lot more, just did a quick scan), plus other IPOs, plus the presence of well-established major players such as GE and BP Solar, etc. If solar is indeed a zero-sum game, it makes it a bit tough to understand the level of investment in solar right now. Is there going to be one "home run" and a lot of money-losers in the segment? Is there a bubble in solar?

First, let's examine the idea that solar is truly a winner-take-all market. We tend to think of solar as being a uniform market -- solar panels on rooftops, whether commercial or residential, whether new-build or retrofit. But in fact, there are a number of differentiating factors that can mean different technologies are best-suited for different niches.

For example, the standard economic measurement of efficiency for solar technologies is cost per peak watt. One would assume that the "winning" technology would simply be whatever achieves the lowest cost on that measure. But installation and application are key variables that can affect the answer, and in fact create different needs.

For a residential system, the end user often has a relatively small energy load, is usually unable to feed excess power back into the grid, and doesn't have storage. Thus, the load is the limiting factor for the size of the system, and there is often more than enough space on the rooftop for a number of different technologies to be used, including technologies that achieve low cost per peak watt, but also lower amounts of energy generated per square foot. In other words, it can sometimes be more attractive to go with a cost-efficient technology that requires a lot of square footage, because you have the space.

However, in speaking with installers who target large commercial buildings, you often hear a different story -- the limiting factor of the system isn't the load, it's the available roof space. In which case, these installers argue, it's often best to go with a higher cost-per-peak-watt system if you can squeeze more watts on a roof (this can also be affected by the specific form of any subsidies).

The real-life trade-off here, currently, is thin-film versus high-end silicon-based systems. No unconcentrated technologies beat high-end silicon in terms of watts per square foot. But many emerging thin-film technologies, because they avoid the use of silicon, can achieve significantly lower costs per peak watt. Which one will be best-suited will thus depend upon the specifics of the situation.

And so we can already see that the market environment which may seem monolithic in fact has different niches that different technologies can best address. Other similar market schisms are created by trade-offs such as:

• Centralized grid power vs. decentralized off-grid power
  
• Building-mounted versus other uses (portable systems, electronics, LED lighting, etc.)
  
• Cost of system versus lifetime of system (for your rooftop system you probably want at least 20 years of warranteed lifetime, but for your solar-powered radio you can probably be happy with a more rapidly-degrading 5-year lifespan if it means lower cost)
• Form of mounting (rooftop panels vs. concentrators vs. BIPV)
• Power only or co-generation (ie: solar heating and/or hot water)

Investors are often focusing on specific market niches when they invest in specific technologies. They are looking at the market niche for which the technology appears best-suited, and evaluating the size of that niche, rather than seeing solar as one huge monolithic market.

Perhaps one way to think about this is to borrow the much-overused phrase from other venture investing areas, the "long tail," which is really just another reincarnation of the old 80/20 rule. The concept here is that, if one is to think about an overall market for solar, there will be some large key segments that make up the lion's share of the market (e.g., 20% of niches make up 80% of total market demand), and a multitude of much smaller niches that fill out the rest of the market (e.g., the other 80% of niches make up 20% of total market demand). True long-tail thinking says that the ratio may actually be 80/30 or 80/40 (and available market data suggests that for the solar industry it's probably pretty concentrated in the big grid-connected rooftop markets, so our original guess of 80/20 may be most appropriate), but the basic concept still holds regardless.

In other technology markets, the idea is to invest in technologies that enable efficiently tapping into the long-tail market opportunities (ie: eBay, Amazon.com, etc.), because the larger market niches have already been somewhat saturated, but if you can aggregate all those individually tiny niches you can add up to a pretty big market as well. The same phenomenon appears to be happening in solar, albeit at an early disaggregated stage.

Secondly, the other factor at play is the timing question: What will win today, versus what will win in ten years. Silicon-based technologies are well-understood and well-warranteed. But as silicon prices continue to rise along with demand, and emerging second- and third-generation PV technologies continue to mature, will non-silicon technologies achieve pre-eminence in the coming years? Investors are playing both sides of this question.

Finally, even within specific niches and time-to-market windows, there is always room for more than one player to potentially succeed -- in some niches it will be winner-take-all, and (more often) in other niches there will be several permanent players. The management team's ability to execute thus becomes key -- technological advantage is not enough.

This is all a long way of getting to a very basic conclusion -- that there is a lot of room for a lot of different bets in solar, it will remain a very un-concentrated market for some time. Silicon-based solar saw a wave of investments a few years ago, recently thin-film technologies have seen a lot of bets, and perhaps third-generation nanotechnology-based PV and solar concentrators will see the next wave, but the biggest conclusion is that there is room for all -- at least for now.

There are some other conclusions investors should draw as well:

• Investors need to be aware of whether the technology they are backing is an "80%" technology or a "20%" technology. Does the technology only address specific niches in the long-tail, or in the main market? Is it a platform technology that can address multiple niches, or is it really just suited for a couple of specific applications?
  

• Very soon, the market is likely to see significant consolidation. Right now, there is so much demand that everyone has as much business as they can handle, and the focus is on simple execution. But during the inevitable slower parts of the growth cycle, core competencies such as branding, distribution, etc. will drive companies to try to aggregate niches by aggregating technologies, and thus achieve economies of scope and scale. Some companies, for example Carmanah, are already targeting the long tail by aggregating different applications and market niches. Others will find the advantages of being able to "single-source" for installers a full suite of technologies addressing their different needs, and will look to acquire those technologies.

• Given the above, we are probably passing from a period where investors will be funding startups with an IPO exit in mind, and moving into a phase where trade sale is a relatively more likely exit. This should affect valuation expectations accordingly.

• While never unimportant, the quality of the management team and other aspects of execution are going to be increasingly important relative to the specific technology being developed.

None of the above should dampen any enthusiasm for the solar market for investors, and they are just one person's (likely mistaken) perspective. However, since it has been seeing rapid market growth and high interest from venture investors, the solar market will probably end up being a model that other clean technologies will follow as they mature and develop as well. So even for investors who are not investing in solar right now, it will be an important industry to follow and learn from.

"Cleantech venture bubble" watch, pt 3: Biofuels

As we discussed before, it's tough to declare a "bubble" across all cleantech sectors, especially when looking only at venture investments (versus the public markets).

There remains the possibility of small bubbles within certain sub-sectors, however.

One such sub-sector that is frequently called out as potentially seeing overinvestment is biofuels. Some investors, such as CMEA's Maurice Gunderson, have gone on record as saying so. And in the public market, previous high-flying ethanol stocks have been experiencing a bumpy ride lately. In the same article linked in the last sentence, Lux's Michael Holman declares that: "The herd mentality has begun to take over in the venture capital community and there is probably some not very wise money that is flowing into the ethanol segment in particular." Moo. Meanwhile, big major entrenched oil companies are also aggressively moving in.

As Nth Power's 2006 energy tech VC funding tallies showed, biofuels did indeed dominate last year, with more than a third of all VC energy tech funding going into the segment.

The argument for a bubble is simple: Even by optimistic forecasts of demand for ethanol going forward, there is a glut of announced future capacity. And thus, the high amount of money flowing into the sector won't be able to find a good home.

But as always, it's not quite so simple. Even just going by the above critiques, the data points to some distinctions within the biofuels sector from a venture perspective. The notable distinctions to make are tech versus capacity investments, ethanol versus other biofuels, and incumbent versus cellulosic technologies.

As the CleanEdge/ Nth Power report showed, a lot of the heft behind the hefty biofuels totals was due to VC participation in "capacity deals" -- essentially, venture equity used alongside project finance funding, inflating the "VC" numbers. And if you read what Maurice was describing, he was mostly concerned about this kind of investment as well (it's important to note that CMEA remains active in biofuels investments). Also, most critiques focus on ethanol, whereas biodiesel, biobutanol and other more exotic bio-based alternative fuels are rarely singled out as suffering from overinvestment.

Furthermore, while most of the publicly-traded ethanol stocks being criticized, as well as most of the capacity deals being funded privately, are based on incumbent technologies (basically: corn as feedstock)... Technologies to enable the use of non-food and cellulosic feedstocks are what continue to get the most VC attention these days. Vinod is particularly clear on this point, despite having taken part in some capacity investing himself -- in the various debates he's taken part of around energy balance and the market potential for ethanol, he always makes the clear distinction that cellulosic will overtake corn-ethanol (he believes this will happen within 10 years -- the below graph of his forecast comes from Wired from last October, btw). And we have only talked about the processing portion of the biofuels value chain -- there has been even less investment activity into upstream and downstream approaches.


None of the above says that there is NOT a bubble across the full spectrum of VC biofuels investments (and this site doesn't deal with public markets, so let's pass the buck there...). But if you had to rank the order of likelihood of potential overinvestment within the biofuels sector, pointing out capacity deals in corn-ethanol as a likely prime suspect would make the most sense. And it seems less likely, given the opportunities down the road, that there is a bubble in technology development for next generation feedstocks and next generation biofuels -- but given the timeframes we're talking about, it's still possible. Certainly, if these technology development startups all try to build their own processing capacity, that could exacerbate the glut -- but trade sale exits to capacity players is a more likely scenario for many of them.

The anecdotal evidence, for what it's worth, is mixed: There are definitely some biofuels deals that have been out there with very high valuation expectations, and some of those expectations have been met by VCs in a couple of cases. But also, there continue to be other opportunities where the entrepreneurs recognize the long, risky road ahead and have realistic expectations, where the VCs are bringing value-add strategic value to help early companies grow, and it's a win-win. (Hopefully...)

In other words: Is there a bubble in biofuels venture investments? A solid "maybe". Some instances where VCs have stretched themselves, mixed with indications that there are still some promising opportunities in lesser-invested areas of the biofuels value chain and in new technologies. As the market continues to develop, naturally there will be winners and losers, and those in between.

But is all the upside currently being priced out of the biofuels investment sector, across the board? ...It just doesn't feel like it.

In other news:

• Electro Power Systems, an Italian developer of fuel cell-based power systems, announced a 5mm euro round of financing by 360° Capital Partners. The company claims that it's the biggest venture round in Italy in the past 12 months.

Other news and notes: Another reason to continue to be excited about cleantech investments -- the fact that a lot of proven entrepreneurial talent is now rushing into the space... The debate over the role for coal continues... Cleantech as a national security issue... "Efficiency is the steak, renewables are the sizzle"... And demand response/ demand management is a huge potential market... The challenges facing electric vehicles -- but Tesla's got a Plan B, as a battery distributor... Finally, for all the Amish readers of this website, you'll be glad to know that solar power is now an option.

Q2 was yet another big month for cleantech: CTVN claims $843mm invested

News released today by the Cleantech Venture Network says total VC investments in cleantech were $843mm in Q2, a 64% increase over Q1 (which itself was no slouch). There's been a lot of talk about the various available data sources out there, but without a doubt this is big news (CTVN claims this makes the sector the third largest right now, behind Biotech and Software). This makes eight straight quarters of growth.

Breaking down the numbers a bit, clean energy remains the biggest sector, at $594mm, but the growth in that category (at 69% over Q1) was comparable to the overall cleantech sectoral growth, which means that other categories must have seen strong growth as well, despite being less-publicized.

From Nick Parker: "We are seeing significant growth in other cleantech segments such as agriculture, environmental IT, transportation and water."

Welcome signs of further increased investor interest and market growth, no matter how inclusive or specific you prefer your cleantech investment numbers.

Cleantech events: Four stops in one column

Attended several good cleantech investing events over the past few days: The AAMA's very well done clean energy panel in Palo Alto, a strong cleantech investing panel at Larta, and a fun roundtable discussion which should be out in the September VCJ. Also participated in a few category judging calls for the California Clean Tech Open. The cleantech space is getting a whole lot of attention these days.

The AAMA panel session was moderated by John Denniston of KPCB, and also included Bryant Tong of Nth Power, Vikas Desai of SunPower, Dave Pearce of MiaSole (as always when I mention MiaSole, I'm compelled to note that I've got a minor vested interest in seeing them succeed), and David Wooley of The Energy Foundation. Given this group, the conversation naturally focused on solar markets and investment opportunities, but also touched on a wide range of clean energy topics.

The Larta panel was moderated by Ira Ehrenpreis of Technology Partners, and also included David Aslin of 3i, Nick Parker of the Cleantech Venture Network, John Rockwell of Element, and Bryant Tong of Nth Power.

A busy few days, and we'll try to synthesize all of it, in jumbled fashion. The following are some random thoughts, reactions and quotes from all four events, in case it is of interest to those who follow cleantech investing:

Solar is hot, hot, hot

In all four settings, solar was a dominant topic of discussion. The recent IPOs, and the promise of more IPOs yet to come, are focusing a lot of entrepreneurs' and investors' minds to the market. There were so many solar-based applicants in the Cal Clean Tech Open (CCTO), for instance, that it was tough to weed through them to get to the other applicants in the Renewables category. Solar concentrators, in particular, seem to be getting a lot of entrepreneurial efforts right now.

In the AAMA event, it was interesting to see the strong silicon-based performer SunPower side by side with the upstart thin-film MiaSole, to see the similarities and differences in outlook. The clear message heard in all of this week's events is that a rising tide will raise all ships in solar, and the tide is rising incredibly quickly in solar. But it's not to say that people don't have their concerns as well.

Some notable solar-related quotes (aggregated from various events, and as always note that these are paraphrased, this is not a journalistic website):

Vikas: "Solar is the only viable distributed generation technology. It's easy to think about it being on your roof. No other distributed generation tech can really claim that."

Bryant: "A lot of people talk about when solar is judged as an investment without subsidies it falls flat. But there are so many subsidies for oil and gas. We've seen how important state policies like California's are for helping to create this market. It's very difficult to make investments in the cleantech area where your investment is totally dependent upon subsidies. But we've also seen how important they are in the timing of the market."

Vikas: "What could slow the solar market... Despite getting close on a cost basis, we're not there yet. So the biggest risks are in policy. Need to see supportive policies in place, and stable, for a few more years, while the costs continue to come down."

Pearce: "I don't completely agree. The industry threatens to kill the goose that's laying the golden eggs. Solar system prices keep getting driven up because of demand driven by policies. In my opinion that has to change, I think regulators are looking at this trend. In terms of innovations, we need to move the module to truly integrated building integrated PV, so it's part of your roofing product, for example. That will help it be ubiquitous with every new building. We need to attack every part of this value chain to get the price down to grid parity."

Vikas: "The rising of pricing in crystalline silicon is because the supply of the raw material is short due to strong demand. Silicon production is an industry that has not made money over the last few years, and they're now taking the opportunity of a silicon shortage to make money. But capitalism works, it's a short term problem, there's a lot of capacity coming on." (Some are saying it will come on in full force by the end of 2008.)


Biofuels are also hot

Biofuels are also hot, but the venture capital investment opportunities aren't as clear, according to some. Much more of a capacity game, using tried and true technologies; but with potential for innovation to help drive the market. Supportive policies are clearly a critical part of this market as well:

Notable biofuels quotes:

Bryant: "We're seeing an amazing growth in the number of business plans for biofuels in early development stages. It's encouraging to see, but we're looking for business plans that we're supposed to make money off of, and it's tough. Literally hundreds of new business plans in this area. I don't think ethanol will take a big share of the fuel market, you'll run out of corn as a feedstock. But you'll also see a lot of waste to energy opportunities. Ethanol is getting into a lot of debates about whether it's worth the energy you put into it."

Wooley: "There will be ups and downs of energy prices, that's why we need policies to keep biofuel technologies from going under during these times. It's important at the federal and the state level, both."


Cleantech vs. "Greentech," and other investment areas to consider

It was kind of silly to see the difficulty everyone at the AAMA event had keeping things straight, given some efforts now to try to differentiate "greentech" from "cleantech" without it being clear why such a rebranding is necessary. All evening, panelists and audience members asking questions had to continually remind themselves to mention both phrases in the same breath: "So in this cleantech, er, or greentech, or whatever you call it, space, what are the key market drivers?"

Regardless of what this investment area is called (cleantech, greentech, creentech, gleantech, the label really doesn't matter), it's clear that there are a lot of good opportunities out there for entrepreneurs and investors in energy, water, materials, and other related areas. Across all these very disparate industries and markets and technologies, panelists seemed to share the consensus that "this time it's for real," that looming natural resource shortages are raising the value of the cleantech investment thesis, and that a number of other critical and supporting factors are coming together at the same time.

Nevertheless, judging simply from the numbers of applications in general categories of the California Clean Tech Open, renewable energy sources are getting a lot of entrepreneurs' mindshare right now, with transportation-related energy technologies and energy efficiency technologies a distant second- and third-place, and water and other non-energy clean technology areas very far behind. It's unclear why this is, because certainly there are huge opportunities in water and other cleantech areas, just like there are for energy. And it's not like water is not a compelling investment area: Just read this story.

General cleantech/greentech investment area quotes:

John R.: "One thing that's different now is the quality of the entrepreneurs. Also, there didn't used to be enough capital to be able to adequately address the huge needs in this space; and thus, there weren't enough of the supporting services like recruiting, specialized for the needs of cleantech."

Bryant: "Batteries are an important area for investment. Allowing people to be able to store enough energy for non-peak times is the goal here. There are a lot of techs aiming at this, and I think you'll likely see the change that comes is evolutionary, not revolutionary."

Ira: "There are potentially big opportunities in water. Some exciting opportunities in the water area, including the use of sensors."

Nick: "In water in particular, we're seeing strong corporate activity, which is an important factor for demonstrating to investorsthat this is a compelling opportunity. We continue to need more entrepreneurial focus, however."

Bryant: "I said a few years ago that energy efficiency is not an area for venture investment. I wish I could take those words back. The market has gotten a lot more receptive to energy efficiency. I've gone a complete 180 degrees."


The B-word

Are we now in a clean energy bubble? The question came up several times during the week, and is clearly being asked elsewhere as well.

The consensus of panelists in these events was a clear "no." But that's when viewed across all energy sectors, and especially all cleantech sectors. Panelists described the market opportunities versus the amount of capital deployed and noted that it still falls short.

Nevertheless, in the audience it was clear that not everyone is comfortable with recent venture deal valuations in a couple of sectors, such as solar and biofuels. Certainly a case by case thing, and none of the experts up on stage seemed very worried about the overall industry. But stories like this are also pretty telling.

The implication, therefore, as we've talked about before, is that the investment community will quickly move beyond solar and biofuels to the next thing, and the next thing after that, within cleantech.

3Q05 cleantech investments total $425M

Cleantech reached 8.1% of all venture capital investments in the third quarter, according to statistics from the Cleantech Venture Network.

The Cleantech Venture Monitor identified 69 different deals, totaling $425M, for the biggest quarter on record. According to the press release:

The most active investor in Q3 was EnerTech Capital with five investments in the quarter. Chrysalix Energy, Draper Fisher Jurvetson and Kleiner, Perkins, Caufield & Byers participated in a total of three financings each.

Key Q3 2005 Statistics:

• The Return of the Northeast: In an upset the Northeast reclaimed its number one position in cleantech investment with a record setting $141.4 million

• West Coast Depression: West Coast investment slipped to less than 10% of total capital committed to cleantech at $41.0 million, the lowest recorded quarter for the region since Q4 2002

• Energy Continues to Dominate: Q3 energy related investment increased 32.5% from Q2 capturing 59% ($251 million) of total cleantech investment, 38 of the 69 Q3 investments were energy related

• Water and Materials Doubles: Water Purification and Management ($61.5 million) and Materials Recovery and Recycling ($29 million) both saw increased investments increasing more than 50% respectively

• Materials and Nanotechnology Falter: Investment in materials and nanotechnology declined to $28.7 million in investment over only eight investments

• Environmental IT Slow to Build on 2004 Growth: With one Q3 deal, only 5 investments have been made in the sector in 2005 for a total of under $20 million combined, after a total of $60.3 million was invested into the category in 2004