Cleantech Venture Investors See Potential Boon in Federal Stimulus Funding

4/24/09Follow @bvbigelow

If there was a theme in the first session of the Cleantech Capital Summit that convened in San Diego yesterday, it’s that government spending on cleantech projects in 2009 will easily dwarf whatever investments in “green” deals the VC industry can muster.

No surprise there. As we reported over the weekend, total U.S. venture investing in energy and environmental startups plunged by 84 percent during the first quarter—to $154 million from $971 million in the first quarter of 2008. Meanwhile the federal economic recovery and stimulus package calls for spending nearly $33 billion in direct grants for energy-related projects and more than $100 billion in loans for projects related to energy and the environment.

So one topic that arose at the summit was where venture investors fit into the ecosystem for cleantech funding.

To Brian Fan, senior director of research for the Cleantech Group, the U.S. economic stimulus plan amounts to “the largest government spending project in history.” The Cleantech Group, previously known as the Cleantech Venture Network, has played an influential role in developing cleantech as an investment category. The San Francisco-based firm provides research, cleantech news coverage, executive recruiting, and other services.

In an opening presentation yesterday morning, Fan said that while cleantech venture funding has declined sharply, global stimulus spending is soaring. He says the U.S. and other countries have earmarked $400 billion in worldwide stimulus spending for cleantech programs—and about half of that amount is expected to be invested this year.

William Lese, a managing director of Braemar Energy Ventures, which has offices in New York and Boston, indicated that VCs will welcome federal spending. “The federal government is not terribly competitive,” Lese said during a panel discussion on cleantech venture financing. “That money is not going to be directed at early stage companies, and the government funds will fill in, hopefully, where the later-stage funding has disappeared.”

To Lese, a more challenging problem in funding cleantech startups is the enormous amount of venture capital that’s required to take many cleantech innovations from the laboratory to full-scale projects. “It is a big problem,” he said. Matt Horton, a principal of @Ventures in Menlo Park, CA, agreed. “You’re going to hear a lot today about the capital requirements for project finance, and the private equity part of (project development) has been hit especially hard,” Horton said.

That’s true for some cleantech startups, but not all, said Marianne Wu, a partner at Mohr Davidow Ventures in Palo Alto, CA. It’s true, Wu said, “If you have to generate power at utility scale, or if you have to build a chemical plant or a fuel plant. But there are other portions (of the cleantech sector) that are not at all capital-intensive, such as some of the green building plays, and energy efficiency plays.”

Victor Westerlind of RockPort Capital Partners, which has offices in Boston and Menlo Park, CA, agreed that many big cleantech projects that require debt financing ran aground, especially among the ethanol-based biofuels projects. “But with good teams and good projects, you can get it done, whether it’s through government financing or partnerships.”

Some other familiar VC themes emerged during the cleantech discussion:

—Innovative technology is often less important than the entrepreneurial team building a cleantech startup. “Sometimes I think we get a little too carried away with the technology innovation,” Lese said.

—With the recession still exerting financial strain on venture firms and their portfolio companies, Horton said it’s critical to be form syndicates with other VC firms that will remain committed to future funding rounds.

—The recession and financial crisis are forcing venture capital firms to return to their core strength, which is identifying promising innovations and funding early stage companies. As Wu put it, “It’s back to basics in venture capital.”

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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