New Finance Models For NW Cleantech, Sustainability As VC Wanes

1/8/13Follow @bromano

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Once they would have tried to get in front of Rick LeFaivre, now emeritus partner at OVP Venture Partners, a Seattle-area VC firm that was active in cleantech. But OVP is closing, and while its departure is a blow, it’s not as big a hit to the Northwest as it may first appear. LeFaivre points out that only one of the firm’s cleantech investments was in a local company—EnerG2, an energy storage business that raised $9.4 million late last year—even though “we certainly took a look at virtually every potential project in the Pacific Northwest.”

“One of the things we discovered is that it is difficult to be both ‘regional’ and focused on an area such as cleantech,” LeFaivre says in an email from Idaho, where he is enjoying the “Sun Valley Lifestyle,” while also sitting on the boards of Carbon Design Group and the Pacific Northwest National Laboratory Energy & Environment Directorate.

By the same token, other cleantech-focused venture firms look beyond their home regions to invest in Northwest companies.

“Up in Canada, we have been investing in cleantech many, many years before others, before it was called cleantech, frankly,” says Yaletown’s Washington. “As a result, I suspect we’ll continue to invest for a long time, regardless of the direction the winds may be blowing in the current environment.”

He sees a potential “buying opportunity” in the wake of a broader VC retreat from the sector, particularly for “mid-stage, later-stage cleantech investments, where they’ve made a lot of progress, but maybe their existing [investor] syndicates are stretched,” he says.

Chrysalix Energy Venture Capital, also in Vancouver, BC, bills itself as “the world’s most active cleantech venture capital firm,” and touted its continued focus on the sector. Its 2012 investments also demonstrate a widening definition of cleantech. The company made a seed-stage investment in Axine Water Technologies, a Vancouver, BC, company using electrolytic oxidation technology to treat wastewater from oil and gas production and other polluting industries, and a follow-on investment in Fremont, CA-based GlassPoint, which makes solar steam generators for oil fields.

“The challenge is that the startups need to get far enough along to attract such investors, so the problem really becomes one of access to very early-state investment for cleantech companies,” LeFaivre says. He points to the importance of the NWEA, which is closing the books on a record 2012, and the new $20 million W Fund, to invest in spinouts from Washington universities, where research into clean and sustainable technologies is the raw material for new company formation.

Rick LeFaivre

LeFaivre, Butler and others say one cleantech financing model is starting to look more like biotech’s relationship to Big Pharma, with large companies making strategic investments as a way to extend their research and development efforts.

“The corporate investor wants access to the technology, and more importantly can provide a go-to-market strategy for these startups,” Butler says.

Further over the horizon, investors and entrepreneurs committed to cleantech and sustainability are working on innovative business models and financing strategies that could fill the VC void.

David Chen, a former OVP general partner who left the world of VC and startups to launch Equilibrium Capital in 2008, says we easily forget that venture capital itself was once an innovation. Equilibrium manages a family of sustainability-driven real asset funds tailored for institutional investors —think of public pension funds investing in Australian ranchlands and herds of grass-fed cattle, carefully tracked with RFID sensors, to feed a growing middle class in Asia.

“We’re inventing new strategies where the benefits and impact of sustainability can be made available to investors,” Chen says.

Most of the firm’s attention is on these strategies, with plans to double assets under management in 2013. But Equilibrium, with offices in Portland and San Francisco, also engages in research and development of new instruments to finance energy efficiency and water quality improvements, for example.

Having witnessed the shortcomings of the VC model for cleantech, Chen and his partners are pursuing a different path, investing against the same backdrop of constrained resources, climate change, and increasing demand from a growing global middle class.

“We’ve chosen to be a financial model innovator,” he says.

Photo by Images_of_Money via Flickr.

Benjamin Romano is editor of Xconomy Seattle. Email him at bromano [at] xconomy.com. Follow @bromano

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