Thursday, August 18, 2005

What's happened to cleantech dealflow?

Observent readers of this site may have noticed that there haven't been as many announcements of new cleantech-related deals recently. In fact, since the beginning of August we've tracked only 3 such announcements, whereas for July the number was at least 16. And June had a number of notable deals, reflecting a generally strong Q1 and Q2.

Is cleantech dealflow drying up?

Most probably not. It is, after all, August, which means the lawyers, PR folks, and even (shhh) a few VCs are on vacation, which will push off deal closings and announcements for a while. It also makes due diligence efforts a little tougher, because customer references and other important contacts are out of the office.

This is one reason why Q3 has always been the slowest quarter -- looking at PWC Moneytree Survey data, and using the Industrial/Energy category as a (admittedly poor) proxy, since 1995 the average number of deals in the space by quarter has been:

Q1 = 40.8
Q2 = 40.6
Q3 = 37.6
Q4 = 42.5
(Note, excludes Q1 and Q2 '05, to help make comparisons fairer)

Which makes it look like a likely pattern is that Q3 deals are delayed by vacations, etc., and end up slipping into Q4 often enough to make a slight difference. Since July and September are probably not the down months out of Q3, this shows that August is the real doldrums of dealflow in this sector.

But still, we are more than halfway through the month, and 3 seems awfully light. Is there something else going on?

Probably (hopefully) nothing too severe. Certainly my firm, Expansion Capital Partners, and -- anecdotally -- others have seen strong dealflow over the last few months, which should be converting to closed deal announcements in September/ October. For there to have been a non-cyclic dip in deal closings now would imply that dealflow slacked off significantly in the May/ June timeframe. That just didn't seem the case. Instead, there are a few other factors probably at play:
  • A significant minority of VC firms in the cleantech space appear to be temporarily pulling back on new deals while they undertake new fundraising efforts. All of the firms who are in such a situation that I've spoken to plan to get back into full-scale investing soon (if all goes well), but are right now simply in between funds. That could have a general slight dampening effect on Q3 and Q4.
  • The new energy bill's timing may have affected a few deals, if investors saw the policies and regulations as having a significant impact on the prospects of their investments. Such VCs may have played a bit of wait-and-see to find out what the final bill would look like. Now that it's signed, if there were any deals that had been held up they should soon be given the go-ahead.
  • There's a general trend toward deals being kept unannounced. There may be deals that have been completed recently that are being kept "stealth" for whatever reason.
  • Finally, the randomness factor. Timing of deals is always a bit random. And then there's the randomness involved in yours truly's ability to ferret out all the deals -- we try our best, but we undoubtedly miss a few deals that should have been reported.
Again, however, these wouldn't seem to be critical factors, and yet still 3 announcements so far in August is pretty light, a lower number than this observer has the impression of from previous years.

Has there been a sudden general pull-back in cleantech venture investing? Or is this just a particularly light August, and September dealflow will be robust again? We'll have to wait and see. But my guess is that it's the latter.


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