After five consecutive years of investing ever larger sums of money in clean technologies, venture capitalists were on track to retreat from the sector last year. But VCs note that deal making started to pick up in the second half of 2009 and they expect to be more active this year.
There are some milestones to support that hope. In August, Silicon Valley cleantech investor Vinod Khosla raised the biggest first-time fund of any venture capitalist in the last decade—and he exceeded his targets, which were $750 million for Khosla Ventures III and $250 million for a new seed stage fund. Watch for more funds like Khosla’s, says Nicholas Parker, executive chairman of the Clean Tech Group. While most pundits expect venture fund-raising to remain slow in 2010, Parker expects 2010 to be “a record year for general partner fund-raising” for cleantech funds.
Meanwhile, VCs picked up their deal making pace from Q2 to Q3. They invested $925 million in 52 cleantech companies in Q3, an 18% increase in the number of companies, but a 147% surge in the amount of capital invested in the prior quarter, according to the MoneyTree report produced by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters (publisher of VCJ).
Still, investment in cleantech in 2009 is expected to fall well short of 2008. As of Dec. 6, U.S. VCs had invested $1.65 billion in 130 cleantech companies, compared to nearly $4 billion invested in 212 such companies in 2008, according to preliminary MoneyTree data.
Even though investment is down, VCs see reason to be upbeat. “We are quite optimistic,” says Paul Holland, a general partner at Foundation Capital who specializes in cleantech. “We didn’t lose any cleantech companies in the last year [despite the economic downturn]. If anything, nearly all of them got stronger.”
Foundation has focused on energy efficiency, fuel efficiency, green buildings and food and water, Holland says, and now has several portfolio companies that are good candidates for either an IPO or acquisition in 2010, including Control4, which helps homeowners control energy use.
While he’s optimistic that more deals will get done in 2010 Dennis Costello, managing director of Braemar Energy Ventures, is less confident that there will be a significant number of cleantech IPOs. “We want to believe that the IPO market for energy companies will become more active in 2010,” he says. “There are some very good companies that are ready to go out. However, we would be surprised to see a large increase in the number of IPOs, as buyers and sellers are likely to remain cautious throughout 2010.”
Last year saw just a single VC-backed cleantech company go public: Lithium-ion battery maker A123 went public in September for $13.50 per share and was trading at $17.56 on Dec. 6.
We are quite optimistic. We didn’t lose any cleantech companies in the last year [despite the economic downturn]. If anything, nearly all of them got stronger.
On the M&A front, industry watchers are particularly happy to see strategic investors getting more active. “Most significant to me was the increase in strategic investors [in 2009],” says Michael Kanellos, an editor with Greentech Media. “These are the people that have to take this stuff to reality. … Big companies like GE or Siemens point their fingers and say, ‘You have talent,’ and companies are plucked out of obscurity and get contracts.”
Siemens, for example, spent $418 million last fall on Solel Solar Systems, an Israeli company that makes solar thermal power plants. Siemens was also one of three companies reportedly in talks in early December to buy Ausra, a VC-backed maker of utility-scale solar technologies. Ausra has raised at least $108 million from KERN Energy Partners, Khosla Ventures and Kleiner Perkins Caufield & Byers since 2007, according to regulatory documents filed with the SEC.
M&A for VC-backed cleantech companies actually showed a modest increase last year. Seven venture-backed companies were bought, including three with disclosed values totaling $464 million, according to Thomson Reuters. That was an increase from six VC-backed cleantech companies that were bought in 2008, including two with a combined disclosed value of $232 million. But it’s important to note that a single company, OptiSolar, accounted for $400 million of the total last year.
M&A could tick upward this year, as the economy improves, Costello says. “The larger companies in energy will benefit from the economic recovery and should become more active on the M&A front as they focus again on their long-term strategy rather than just cash conservation,” he says.
With questions lingering about whether there will be a surge in liquidity events, VCs want to stretch every dollar, so they are focusing on capital-efficient deals. “The challenge is how not to get overcapitalized before you have an exit—and exits are typically mergers or acquisitions, which are not high multiples,” notes Steve Murchie, an angel investor and chapter president of Keiretsu Forum Denver/Rockies.
VCs also have a bad taste in their mouths from some of the large investments they made several years ago. For example, biodiesel maker Imperium Renewables raised $113 million in venture and private equity funding before being forced to recapitalize and restructure last year after oil prices fell. Nth Power Managing Director Nancy Floyd, who chairs Imperium’s board, did not return calls seeking comment.
Deals like Imperium should be a reminder to VCs that “venture veers toward things that are capital efficient,” Holland says.