ENVIRONMENT | Protecting our natural resources
05 March 2008
Venture Capitalists Boost Clean-Energy Technology
Predicted profits draw more investors to clean-tech enterprises
Washington -- It took Nancy Floyd almost three years to raise $65 million for the first venture capital fund focused on energy technologies. In the world of venture capital, $65 million was a meager amount.
“It was like pushing a boulder uphill,” she told America.gov. “Markets [for those technologies] weren’t there yet.”
Since her fund was launched in 1997, Floyd’s firm, Nth Power, has come a long way. It has become a leading venture fund in clean-energy technologies, or clean tech, with $400 million under management.
Competition has caught up with the pioneer, as venture capitalists flocked to the clean-tech sector in recent years. In 2007, the sector received globally $3 billion in investment, a 43 percent increase over 2006, according to Dow Jones VentureSource. U.S. venture capital funds poured $2.5 billion into clean-tech enterprises, a 79 percent increase over 2006. Such enterprises, which only six years ago received less than 1 percent of all venture capital, attracted 12 percent last year.
Venture capitalists typically inject money in high-risk, innovative startups. The venture capitalist brings in money, but also management expertise and a network of major energy industry entities, companies that can provide a channel to the market for future products or services of those startups.
U.S. venture capitalists are bullish about clean-tech prospects because they say the development of renewable energy, green buildings and other energy-efficient technologies is driven by long-term trends -- such as rising energy consumption and prices and concern about climate change and future supplies of petroleum and natural gas.
Shifts in the public mood and U.S. government priorities toward innovation as the core part of a solution to these problems also have contributed to a growing interest in clean-tech. In 2007, the Energy Department decided to invite three venture capitalists each year to spend up to a year at government laboratories. The program is meant to bridge a gap between the labs and the marketplace.
Although 83 percent of global clean-tech investment went into U.S. startups in 2007, most markets for their clean-energy products and services were outside the United States, according to Floyd.
CLEAN-TECH INFANCY
Despite rapid investment inflows, venture capitalists say the clean-energy sector remains far from saturated with money.
“We are still in early years of the clean-tech development,” Floyd said.
Some observers say it may take years before the clean-tech sector becomes as important to venture capitalists as information technology and biotechnology are now. But the change already has started.
Silicon Valley investors are turning their attention to clean-tech startups as profits stagnate or decline in computer semiconductor, hardware and software industries. Those investors say clean-tech represents the greatest new opportunities.
Financing experts caution that the clean-tech sector is broader and more complex than information technology (IT) and that IT financing experience may not be easy to transfer to specialized clean-tech areas such as exotic materials or power-distribution efficiency.
The fund @Ventures is among the funds that have switched focus from high-tech to clean-tech. @Ventures’ Rob Day said the energy sector is more challenging than IT because energy ventures are more capital intensive and energy industries more reluctant to change.
“It raises the bar on the quality of a clean-tech product or service,” he told America.gov.
But he said his and other Silicon Valley funds have made successful transitions to the new sector.
MAKE MONEY, SAVE THE ENVIRONMENT
Venture capitalists’ rush to clean-tech should not to be confused with a high-minded mission, experts say. Vinod Khosla, a Sun Microsystems co-founder who has evangelized for an early action against climate change, is not typical of investors.
Ira Ehrenpreis of Technology Partners said at an October 2006 panel discussion that nonfinancial returns -- such as environmental benefits -- are of little importance to most energy corporations and pension funds that invest in venture capital firms. Consequently, these returns are not at the top of venture capitalists’ priority lists.
“Producing high-quality financial returns is one of the best things we can do for the environment,” Ehrenpreis said.
So far, venture capital funds have seen relatively few initial clean-tech public offerings or large acquisitions on which they can rely for profits. But in the long run, the funds expect to be rewarded with solid profits.
“We are moving from an era of expensive capital and cheap natural resources to an era of less expensive capital and more expensive natural resources,” Day said. This radically changes what and how business is done, he said.
