Clean tech investors seem to agree that the criteria for a sound investment are still focused on the “Team, Technology, and Markets.” But according to John Denniston, Partner at Kleiner Perkins Caufield & Byers, “We’re either at the beginning of the end or the end of the beginning” (March 15 Keynote at the 2011 San Francisco Cleantech Forum). This shift in the clean tech investment landscape involves two particularly noteworthy trends: 1) the mainstreaming of clean tech investing, and 2) the presence of China as a major player.
From Silicon Valley to Main Street
As people recognize the size of the global market for renewable energy, energy efficiency, and other environmental technologies, “clean tech” has suddenly become a hot category for investors of all kinds. In addition to the handful of Silicon Valley venture capitalists (VCs) who have been backing clean tech companies for nearly a decade, unconventional investors like corporations and small family funds are now entering the scene.
At the San Francisco Cleantech Forum last month, Cleantech Group’s Nicholas Parker jokingly noted that clean tech investing had become less about “black swans” (where investors make money off rare, hard to predict events) and more about “green elephants.” Matt Maloney, Head of Silicon Valley Bank’s national Cleantech Practice, reiterated that the first real cycle of venture investing had ended. In its place has emerged a “Stage 2” composed of more corporate-level engagement, a shift in VC’s focus to later-stage clean tech companies, and investment in a broader set of industries.
As big companies begin investing in clean tech, they are either supporting the industry through their own R&D budgets or forming specific clean tech venture funds. Among the established brands that have joined the bandwagon are Hewlett Packard, Siemens, General Electric, Sony, Coca Cola, Intel, Google, and IBM. And conventional energy companies are continuing to diversify their assets by investing in renewables with new vehicles for alternative energy investment, such as Chevron’s new venture capital business unit, Chevron Technology Ventures Investments (CTVI). The influx of these mainstream players has also resulted in an increase in corporate mergers & acquisitions (M&A). In fact, a January 2011 report by the Cleantech Group showed a steady rise in the number of clean tech M&A deals since 2007, with nearly 200 more corporate deals finalized in 2010 than in 2009. Further emphasizing corporate interest in clean tech, Veolia Environmental Services (the world’s largest environmental services company), announced at the March San Francisco Cleantech Forum the addition of five new start-up companies to their Veolia Innovation Accelerator (VIA), a company sponsored program to help scale innovative green tech start-ups.
At the other end of the spectrum, many family funds are taking an interest in clean tech, both for its potential to produce positive financial returns and the alignment with the family’s social and environmental goals. The difference between these investors and their corporate counterparts is their “mission directive” and a longer-term time horizon, explains Sheeraz Haji, President & CEO of the Cleantech Group, LLC.
As smart grid systems, electric cars, integrated transportation models, battery storage, and water technology complement the dominantly solar and wind energy-focused clean tech portfolios of the past, there will be plenty of areas for new players to get a piece of the action.
China Stepping Up to Bat
Meanwhile, the growing action has not gone unnoticed in the East. In 2010, not only were 8 of the 10 biggest clean tech IPO’s worldwide in China (only one of the top 10 was in the U.S.), but the country represented about two-thirds of both activity and total capital raised last year, up from about 10% in 2007 (Cleantech Group). In 2010, China also drove the overall increase in both the number of clean tech IPOs (63 out of 93 globally) and the amount raised through these deals ($10.0B out of $16.3B). Haji also pointed out that Asian firms are ahead on their budget allocations for clean tech R&D.
While the U.S. has floundered on national energy policy, China has passed a 5-Year Plan that will provide much needed stability to alternative energy start-ups wondering where their markets will be. At the recent International Economic Development Council’s Federal Forum in Virginia, Kate Gordon from the Center for American Progress highlighted China’s expenditures of $12 billion/ month on renewable energy and firm commitments to high speed rail, energy efficiency, and new energy vehicles.
Michael Goguen from Sequoia Capital explained one reason for Chinese leadership in clean tech investment: “Clean tech is often more capital intensive [than other areas of VC investment]. This has allowed the Chinese to invest in companies we couldn’t have in the U.S.” Steve Eichenlaub of Intel Capital provided another explanation for China’s competitive edge in this field: “The on-ramp to revenue and scale is long [in the U.S.]. In China, things can move much more quickly.”
The facts have led Jonathan Silver of the U.S. Department of Energy Loan Program to conclude “we are not winning this race—we are being outspent and out-positioned.”
As the preliminary numbers for Q1 clean tech investment are posted, speculation about the future of clean tech investment begins again. Reading through the many blogs on the topic, one can’t help but wonder whether ‘the Clean Tech Revolution’ will help save the planet while spreading its wealth across the globe or if it will be China and a few large corporations that ultimately reap the benefits.
Elizabeth Redman is the Founder of Cross Sector Strategies, a consulting firm that specializes in collaborative economic development strategies and policies to promote sustainable business growth.