Caution in Cleantech

Venture capitalists searching for the next big green idea to invest in are being more cautious in their due diligence but are still more than willing to place risky bets in the emerging sector.

Four major venture capital funds—Draper Fisher Jurvetson, Khosla Ventures, Kleiner Perkins Caufield & Byers and VantagePoint Venture Partners—told Reuters last month that the funding atmosphere for green startups is improving and the valuations for many of these companies have come down from previous years.

“Our strategy maybe is slightly more cautious,” Vinod Khosla, founder of Khosla Ventures, said on the sideline of the GoingGreen West conference in San Francisco in September.

“In general I don’t think there’s a change in what we are investing in,” Khosla said. “We are still being pretty aggressive about technology risks and taking lots of technology risks.”

Khosla Ventures was the second most active venture firm during the second quarter, behind Khosla’s former firm and green heavyweight Kleiner Perkins.

Ray Lane, a partner with Kleiner Perkins, said while the firm’s strategy has not changed, the bar is much higher for investment in the green sector,

“For us to make an investment in a company—whether it’s the first investment or it’s an investment we are doing in one of our own companies—the bar is a lot higher and the whole industry is that way,” Lane told Reuters.

Some funds, such as Draper Fisher Jurvetson, are reacting to the economic downturn by focusing on less capital-intensive businesses, says Raj Atluru, a DFJ managing director.

On the bright side for venture funds, valuations of companies in the green sector, including once-hot solar firms, have come down.

“Valuations in general are healthier for us as investors,” said Marc van den Berg, a managing director at VantagePoint. He said VantagePoint stayed away from many companies in the past couple of years because of their “frothy” valuations. But that has changed with the downturn in the economy.—Poornima Gupta, Reuters