Funding Options Shrink for Early-Stage Cleantech Ventures
The term “cleantech” has gone through a rebranding. However it’s defined, though, investment in energy and natural resource-related startups continues. Just don’t expect venture capitalists to be writing all the checks.
As a reporter, I chronicled the rush of venture capital in cleantech in the mid-to-late 2000s and the subsequent financial bust and politicization of green energy. But is cleantech really dead just because many venture capital firms have moved on?
To get more insight into where innovation is going and who is funding it, I spoke to the Cleantech Group, which has been following the ebbs and flows of investing for more than a decade. It’s difficult to get hard and fast answers because what constitutes cleantech is a moving target, but some trends emerge when you look at the data.
Cleantech is not dead.
Without a doubt, many venture capitalists lost lots of money making ill-advised investments in capital-intensive companies that required many years to bring products to market and supportive government policies. And if you’re an entrepreneur, it’s more difficult to get financial backing for a cleantech venture than in years past, particularly for materials and energy-related technologies (more on that below.)
But it’s not completely moribund either. In the first half this year, $6.2 billion went into U.S. cleantech companies, compared to $7.3 billion for all of last year. At that pace, investment could match or exceed its peak level of $11 billion in 2011. The National Venture Capital Association, which has a far more restrictive definition of cleantech, says about $1.5 billion went into cleantech last year, down from a high of $4.4 billion in 2011.
Where is the money going? In the first half of this year, the three big areas were transportation, solar, and agriculture and food, according to the Cleantech Group’s definition. Energy efficiency also remains a consistent area.
During the go-go years, energy technologies, notably solar and biofuels, dominated startup funding. But now, agriculture and food—a category that wasn’t necessarily considered cleantech—is quickly rising; about $471 million went into that sector in the first half of this year, almost as much as all of last year.
Also, a number of companies are developing so-called cleanweb applications, or software applications geared at sustainability in general. For example, the Cleantech Group counts ride-sharing phenom Uber as a cleantech company since sharing cars is, in theory, more efficient than everyone owing their own. But that’s a very different company than one developing a new type of solar cell or battery technology, for instance. Indeed, cleantech has never been one industry but an investment thesis, so lumping together companies in such varied industries as biochemicals and power utilities has always been a stretch.
Money is coming from different sources.
Venture capitalists are still the most active investors, but their numbers have been whittled way down. In the first half of this year, there were 30 VC firms involved in three or more deals and, again, some of those likely had little to do with energy.
The hope is that corporations and the venture arms of big industrial companies, such as General Electric or Shell, will step up to fill the gap left by venture capitals. That hasn’t quite happened, but corporations are more active, consistently representing about 20 percent of the deals, says Troy Ault, manager of research at the Cleantech Group.
Family offices, particularly those with a social mission, also represent a substantial amount of capital. Arguably, these investors are better suited for companies that require a long time to develop technology. Incubators, such as Houston’s Surge, which is focused on oil and gas, have also emerged as important pieces in the funding ecosystem.
Cleantech entrepreneurs are building different things.
Solar-related companies brought in $659 million in the first half of the year, a 57 percent jump from the same period last year. But where the money in solar is going reflects the necessary changes startups and investors have had to make.
In the early 2000s, a “solar startup” was typically a company trying to build a better solar panel. Now, much of the money is going to solar installers, such as Sungevity, which raised $70 million earlier this year, and other solar-related companies. For example, Sunverge Energy, which intends to package batteries with solar arrays, and QBotix, which makes a robot to improve solar farm output, both raised money this year.
Food and agriculture is one area that’s starting to look a bit frothy to Ault. A lot of that is due … Next Page »