Monday, July 24, 2006

Cleantech investments: Rising quickly... too quickly?

According to news released today by VentureOne, cleantech investing activity more than tripled over the last year. Part of an overall increase in VC dealflow overall, and yet one of the fastest growing sectors. As described in today's VentureWire (note: referring to 1H06 numbers, whereas the linked item above is about 2Q06):
Alternative energy and clean technology has been a small but growing market for venture investing. Venture capitalists put $315 million into 23 deals during the first half of this year, more than tripling the $90 million invested in 10 deals in the first half of 2005, according to VentureOne.
A few things to note regarding all of these continuing indications that the cleantech space is a hot one for VCs, and other items:
  • As always, it's worth comparing and contrasting various data sources on cleantech dealflow. In today's announcement, $315mm would be approximately 2.4% of the overall $12.97B VC investment pool tracked by VentureOne in 1H06. The 23 deals tracked by that group would also be approx. 2% of the 1,213 deals done in VC overall. Compare this to the latest Q1 figures reported by the Cleantech Venture Network (note: my firm is connected with CTVN), which pegged cleantech venture investments at $513mm in that quarter alone, and thus measures cleantech dealflow at 3-4x the VentureOne numbers. Also compare to Nth Power/ CleanEdge's numbers for 2005 for energy tech investments alone at nearly $1B. Clearly some significant definitional differences here, which is understandable given how amorphous the definition of "cleantech" continues to be, and how much increasing overlap there is between energy and water and materials tech and more traditional IT sectors, something discussed regularly on this site. In short, when a technology could be best classified as "cleantech/ IT" (sensor networks with significant applications in energy efficiency, for example), CTVN and Nth/CleanEdge will probably count it in their cleantech/ energytech data, while VentureOne needs to bucket it into one category or the other to avoid double-counting. So it's very understandable that VentureOne's numbers would be significantly lower than the other two groups', and readers will judge for themselves whether they want to be conservative or inclusive in reviewing the current position of cleantech investing in the broader VC community's activities.
  • Regardless of how narrowly or broadly these data sources define cleantech, it's clear that investments in the space are ramping up quickly. The CTVN figures for Q1 2006 were 53% higher than Q1 2005 figures; the Nth/CleanEdge 2005 totals for energy tech were 28% higher than their 2004 figures; and the VentureOne data released today describes the investments in this space as "more than tripling" since last year. Underlying the understandable definitional differences between the methodologies used by these three groups, there's a very clear trend at work.
  • All of this rising interest is now prompting the usual journalists' "is it the dot-com redux" or "is it a bubble" questions that seem to have been targeted at any hot space since 2001. It's a legitimate question at all times, and certain sectors of cleantech are certainly seeing some eyebrow-raising valuations right now, but most investors I talk to are convinced that the underlying market dynamics remain very favorable for this space to continue to grow quickly, and we continue to see good deals at good valuations in the lion's share of the market. However, for the "it's a bubble" argument du jour, Daniel Gross's recent article is worth a read. (I would quibble with his statement about much of this being a "new technology", however -- which technology would that be, exactly? The heightened investor interest is somewhat new, and the market traction seen now is somewhat new, but most of these techs have been around for years, if not decades) Tyler also has his take on the story.
  • On the topic of definitional issues... The flipside of investing in alternatives to increasingly scarce resources is to invest in those incumbent resources as well, since scarcity should lead to increased prices there as well. Especially when that incumbent resource is energy from fossil fuels, with such a central role in the global economy. This means that there is a natural overlap between "cleantech investors" and "energy investors" (particularly when it comes to innovations that improve the efficient use of fossil fuel-based energy), but they don't overlap completely. Each investor has to make their own determination as to where they draw the line, and why. Here's a good discussion of this, coming out of the recent Energy Tech Investor Conference (self-promotion alert: Expansion Capital's Mark Donohue is highlighted in the piece). Perhaps the most interesting thing about the article is the way it's described as "VCs are willing to look beyond clean energy to traditional energy resources." For many years, it's really been the other way around -- just another sign of the booming times in cleantech.
Other news to note: Matt Marshall notes that global warming is starting to hit close to home... The latest company profiled in Cleantech Spotlight has a great name... Some recommended climate change reading... Since we've talked about the Series C here on this site, it's worth mentioning that the Tesla Roadster looks pretty cool...


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