It’s a wonder a frog farm didn’t get funded in 2007. The zeal for cleantech was so strong, venture capitalists were desperate to put money into just about anything green.
Overall, U.S. venture firms plowed $2.6 billion into 168 cleantech deals in the first nine months of this year, according to the NVCA and Thomson Financial (publisher of VCJ). That compares to $1.77 billion invested in 180 deals for all of 2006 and is nearly five times as much as VCs invested in cleantech in 2005.
It wasn’t that long ago that alternative energy deals were the province of a handful of firms, such as Nth Power. Now those specialty funds have been eclipsed by much larger tech generalists, such as Draper Fisher Jurvetson, Kleiner Perkins Caufield & Byers and New Enterprise Associates. In a testament to how mainstream cleantech has become, five of the 10 most active investors in the space aren’t cleantech specialists.
Leading the charge was DFJ, with investments in 11 cleantech companies as of Nov. 27, followed closely by Khosla Ventures (10) and cleantech affiliate DFJ Element (nine). Ranked by dollars invested, Kleiner Perkins came out on top with $76.8 million, followed by Khosla ($69.8 million) and DFJ Element ($52 million).
“I think the pace will continue and may increase,” says Jennifer Fonstad, a DFJ managing director and the lead investor in two of the cleantech deals the firm has done this year. “With our broad network of partners around the globe, we’re seeing lots of opportunities in China, India and Israel, as well as the U.S.”
Last year, the bulk of cleantech investments were in solar-related deals, where VCs did 35 deals totaling $665 million. The other key segments were alternative energy including nuclear power (and excluding wind, solar, geothermal and co-generation), which pulled in $317 million for 33 deals, power supplies, which attracted $184 million for 25 deals, pollution/ recycling technologies, which landed $147 million for 19 deals, and wind energy, which saw a gust of $63 million for four deals.
I think the pace [of cleantech deals] will continue and may increase.
Of DFJ’s dozen investments, five were in solar-related companies, two in companies that have found ways to cleanly draw energy out of coal and other sources, two in startups developing biofuel, one in an energy storage company and one in an electric car maker.
Segments that continue to be of interest to DFJ include clean water solutions, wind, geo-thermal and biofuel. For example, it might make sense to use small-scale windmill farms to power certain parts of a home, such as a hot water heater, in areas such as China and India, Fonstad says.
Cleantech investors must be encouraged by a couple of significant exits in the past year. VC-backed EnerNOC, a maker of software that helps utilities cut electricity consumption that went public last May. EnerNOC shares held by DFJ, Foundation Capital and Braemar Energy Ventures were collectively worth $426 million on Nov. 30—or more than 15 times their investment of about $27 million.
Another big win came from the June purchase of cellulosic ethanol maker Celunol by Diversa for about $155 million. Celunol’s backers—Braemar, Charles River Ventures, Khosla Ventures and Rho Ventures—had previously invested about $13 million in the company. Assuming they owned half of Celunol, the VCs saw a return of close to 6x their investment.
Partly fueled by these promising early exits, the cleantech sector is expected to remain red hot. In December, the NVCA asked its members which market sectors would see the most investment in 2008 and cleantech ranked No. 1, with 80% of respondents predicting increased investment. But VCs are also worried that the sector is getting overheated, with the majority (over 60%) picking cleantech as the sector that would be most overvalued.
Still, don’t expect VCs to start turning away cleantech pitches—even for areas that look fully invested, such as solar. Fonstad says she’d be reluctant to pass on any new deal without at least giving it a look. “It’s too early to rule anything out at this stage.” —Lawrence Aragon