VCs Show Off Their Green Thumbs –

Nicholas Parker’s phone has been ringing off the hook – something he’s been waiting a couple of years for – as more and more entrepreneurs and venture capitalists are calling the Toronto-based investor to express their interest in clean technology.

As chairman and co-founder of the 2-year-old Howell, Mich.-based Cleantech Venture Network, Parker has been one of the sector’s biggest advocates for years. But only recently has his interest in clean technology become shared by a larger group of people as environmentally conscious businesses are starting to see an uptick in available funding.

“I’m starting to get CVs virtually every day from highly successful entrepreneurs who want to get into this area,” says Parker, who is also a senior advisor at OPG Ventures. “It’s a bit overwhelming.”

What It Is

Clean technology, or cleantech, is also known as environmental technology, greentech and other catchy names. It basically refers to technologies that enable more valuable use of natural resources and greatly reduced ecological impact.

Whatever you choose to call it, clean technology is a hot funding sector that is just coming into its own after being on VCs’ back burner for so long. Clean Edge, a San Francisco-based research and strategy firm, reports that U.S.-based investments in clean energy (such as wind power) totaled $420 million in 2003. As a percentage of all private equity investments nationwide, clean energy accounted for about 2.4% of the investment activity last year, triple the 0.8% of total venture activity that clean energy accounted for in 1999, according to Clean Edge.

Fund-raising for the clean energy sector has been encouraged by the activity of such firms as Braemar Energy Ventures, which expects to close its premier energy fund between $50 million and $70 million. The New York-based firm expects to hold a final close on the fund in a couple of months.

Overall, clean technology deal flow is encouraging, as well, even from firms that may not normally focus on clean technology. Take for example Bartlett Nuclear, a Plymouth, Mass.-based provider of radiological protection services to the U.S. government and the nuclear power industry. The company recently gained a sizable investment from Berkshire Partners and Summit Partners. While the size and terms of the deal were not disclosed, Bartlett Nuclear and the two Boston-based private equity firms confirmed the deal closed under $100 million.

In addition, smaller companies are dipping into the venture capital pool. Ann Arbor, Mich.-based Sensicore, which develops multi-sensor devices for water and wastewater applications, announced it raised a $10 million Series B round in March.

Clean Edge co-founder Ron Pernick cites interest in clean energy investment as a measure of sector health. His group tracks wind, solar power, fuel cells and hydrogen and reports that spending on those technologies added up to $12.3 billion internationally. Total spending on solar and wind power technologies are growing an average of 30% a year, says Pernick.

Growth Ahead

Likewise, the Cleantech Venture Network found that venture investment in clean technology companies increased from $1.1 billion in 2002 to $1.2 billion last year. Cleantech predicts that number will exceed $2 billion this year. Meanwhile, energy storage investments shot upwards from $35 million in deals in 2002 to $106 million in 2003. Other clean technology sub-sectors that saw increases in investment include advanced materials and nanotech and agriculture and nutrition companies with clean technology-related focuses.

This is good news for Parker and other clean technology evangelists who believe in the sector and who are now finding a venture community friendly to the idea of investing in it. According to many clean technology believers, venture capitalists have ignored the sector to their own detriment.

Jeffrey Steen, a principal at management consulting firm Barneson Group recently published a study last year exploring venture capital’s reluctance to enter the clean technology sector. The biggest barrier was that “money flows to where money knows.” In other words, VCs didn’t know enough about clean energy investing to drive dollars into the sector.

“There really aren’t any severe economic barriers, which is what people typically claim,” Steen says. “Folks are funding the things that they understand.”

Steen certainly doesn’t hold it against venture capitalists that they’ve been reluctant to jump into clean technology investing with both feet. Investing in things they’re familiar with is one way VCs mitigate risk. Plus, venture firms are populated with software engineers and other technologists, not with former energy company execs, EPA regulators or environmental activists. And the networks of people investors rely on to source deals are largely experienced in similar technology sectors, not the environment. Steen says this lack of familiarity is the biggest barrier to venture reluctance to fund environmental companies.

“There is no well developed network in the environmental investment arena yet,” says Steen. “There’s a belief that there are no returns available for investors in these industries. They believe that either the capital requirements are too big or the time horizons too long or that there are not enough opportunities for successful exits.”

However, these “truths” don’t hold together in the final analysis, Steen says. Government regulations and big capital requirements certainly haven’t stopped venture capital from flowing into sectors such as biotech, which also typically have a long time-span prior to exits.

“The difficulty with this sort of investing is you need to have a broad expertise,” says Peter Grubstein, a managing partner with NGEN, a venture firm active in the clean technology space. NGEN focuses exclusively on the materials space and closed its inaugural fund in 2002 with approximately $55 million. The Santa Barbara, Calif.-based firm led Sensicore’s recent $10 million Series B venture round.

VCs cite a lack of high quality management teams in the clean technology space as one reason they’ve largely held off. The entrepreneurial bug has not bitten enough power company executives or others from the industrial or utility sectors to start cleantech companies from their garages. The dearth of management is beginning to improve, though as more capital becomes available and more success stories are created.

“I would still describe it as somewhat embryonic, well behind where the IT industry is in terms of capital and sophistication of service providers,” says John Rockwell, a partner with Advent International, which is active in the clean technology space. Energy, and increasingly renewable energy, is one of Advent’s chief investment focuses. The firm’s portfolio companies include polymer full cell power source provider Ballard Power Systems and Research Environmental Technologies, which manages hazardous wastes.

Show Em the Door

What also hurts the clean technology space is the lack of available exits. Though most industries are not enjoying the same pace of exits as they did four years ago, exits in clean technology are especially slow.

Steen and others point out that the exit strategies for clean technology companies are not as well fleshed out as for pharmaceutical companies or other tech companies. Software developers, drug companies and medical device makers all have dependable industry giants, which they can count on to buy the best technology that emerges from their venture-backed ranks. There is no such clear-cut path for companies trying to save or clean the environment.

Ira Ehrenpreis, a general partner at Technology Partners, says that what clean technology needs is for a stalwart to stand out among the rest. Such a successful company could be representative of the entire sector and help to bring in more exit opportunities.

“The space needs its poster child of success,” Ehrenpreis says. “That’s what this space needs – long-term sustainable companies. Other sectors have good models of success. There are fewer of those in cleantech.”

The world of clean technology got a lot brighter in February when California State Treasurer Phil Angelides announced that the state’s Green Wave initiative would include the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS). The two pensions together will commit $1.5 billion to investments in “cutting edge technologies and environmentally responsible companies.”

Catch a Wave

In mid-March, the treasurer, who sits on the boards of both CalPERS and CalSTRS, announced that the two pension funds would invest $200 million “over the next few years” in clean technology private equity and venture capital. CalPERS got off to a bold start when it committed $125 million to First Reserve Fund X, managed by First Reserve Corp. of Greenwich, Conn. That fund was slated to close on $2.2 billion. It will take controlling positions in energy companies, with a focus on the services and manufacturing sectors for natural gas.

Clean technology advocates like Parker couldn’t be happier.

“The Green Wave initiative is the best thing to happen to the institutional investment market in the history of environmental investing,” says Sandy Selman, founder and managing director of Asia West, a small Westport, Conn.-based fund that specializes in Asian environmental investments.

Selman says he’s been trying to convince institutional investors to do private equity investing in this space for years, but has not met with any success. But now venture capitalists are confident that the news from California will sway other limited partners.

“I think you will see tens if not hundreds of large pension funds coming into this sector,” says NGEN’s Grubstein.

The California announcement, coupled with the overall increase in cleantech investing has advocates confidant that the sector finally will be getting the attention from VCs it deserves.

“When we started in 2000 there was not a lot of activity outside of a few handful of players,” says Pernick. “Today there’s much more diversity. You have the larger venture firms coming in and taking note and becoming more active in the space.”

Just ask Eric Nyberg. Nyberg, president and co-founder of water purification company Pionetics, raised a $5 million Series B round of funding last year. The round was led by NGEN and included Firelake Strategic Technology Fund, Pangaea Ventures, Rockport Capital Partners and Topspin Partners. Nyberg says that when he set out to raise capital for the San Carlos, Calif.-based company last year, he had a term sheet within six weeks. He’s now getting calls from VCs outside the current syndicate expressing interest in the funding round he plans to raise next year.

“We have a number of VC firms that have expressed interest,” he says. “I’m not al all worried about finding enough money for whatever we want to raise.”

Parker is confident that clean technology investing will nearly double and reach $2 billion in 2004. He is also confident that there will be more venture investors calling clean technology a sector of choice.

“We’ll continue to see new entrants into the cleantech space with a number of these new entrants putting cleantech more explicitly into their list of core areas,” he says.

“Is this going to ever look like the semiconductor or the IT venture capital markets? Probably not any time soon,” says Steen, “but there’s a lot more opportunity than there is capital chasing it.”

“Were there visible returns on investment at the beginning of the biotech, Internet or other waves of investment?” says Nicholas Parker. He says that the healthy performance of clean technology companies will begin to generate more visibility for the sector this year. “It’s hard to see that visibility at the front end of the wave. We’re seeing the beginning of the visibility of this sector.”

Email: matthew.sheahan@thomson.com