Cleantech companies face uphill climb for funding
The bloom is off the rose for the former darlings of the venture worldBy Michele Chandler
An array of innovative green companies walked away with accolades after last month’s Cleantech Open, the nation’s Academy Awards for sustainability-focused startups.
Now comes Act II for these aspiring entrepreneurs—snaring enough funding to take them to the next development stage.
Once the darlings of the venture community, cleantech firms now face a more rugged financing landscape, with U.S. investments in sustainable technologies dropping to $575.6 million during the third quarter of this year. That’s down 55 percent compared to the same quarter in 2009, according to a report released last month by Ernst and Young LLP and based on data from Dow Jones VentureSource.
Around the globe, cleantech venture investment also fell, shrinking 11 percent to $1.53 billion during the third quarter of 2010 compared to the same period last year, according to market research firm Cleantech Group.
While investment in solar firms slowed, other sectors—including sustainable transportation, biofuels and “smart grids” that automate control of electrical distribution—are continuing strong, said Sheeraz Haji, Cleantech Group’s president. As a result, according to Haji, 2010 will see “the second-highest annual volume for cleantech venture capital investment ever.”
The National Venture Capital Association is also upbeat. That trade group projects that by year-end, venture capital funding in cleantech will surpass 2009, when the industry received $18.3 billion in investment. So far, total cleantech investment for the first three quarters of this year have totaled $16.7 billion, the association says.
Brian Goncher, director of consulting firm Deloitte’s US Clean Tech Practice, is promising a “pretty dramatic” fourth quarter on the cleantech front. He expects the number of individual venture capital financing deals to exceed 2008, which was a banner year. “So, from the perspective of new companies and activity happening in the marketplace, it actually is the best of times, there’s some optimism there,” he told a packed house last week at the year-end meeting of the Environmental Business Cluster in San Jose.
Investment in early-stage companies is also on the rise. While hovering around $4 million during each of the first two quarters of this year, the average size of investments in early-stage companies reached between $6 million and $7 million during the third quarter, Goncher said, citing research compiled by Deloitte and the Cleantech Group.
Sustainable ventures that are technology-related—particularly energy efficiency-focused firms developing smart buildings and smart electricity grids—are expected to capture the attention of venture capital firms next year, Goncher said: “Those areas have received a fair amount of investment and they will continue to receive the most investment.”
However, some changes are on the horizon.
No matter whether it’s solar, wind or efficient vehicle development, National Venture Capital Association president Mark Heesen said there’s been a shift away from VC support of projects that rely on “very long term, very expensive and very cutting edge ideas.”
Heesen believes investors wanting to stay in the cleantech space are “looking for shorter deals…that help existing infrastructure become more efficient, things like grid technology, better lighting and architectural design—things that are important, shorter term and less expensive type of deals.”
Despite a path that’s sometimes uneven, cleantech businesses report they are continuing to land venture funds.
“For good companies, there are still opportunities,” said Mark Owen, founder and CEO of Puralytics, a three-old company that developed purification technology that uses LED light to remove impurities from water. The Oregon-based green startup recently won the prestigious Cleantech Open business competition.
Owen—a former Agilent Technologies employee turned serial cleantech startup entrepreneur—says he has noticed marked changes in the size of venture awards in recent years.
His first cleantech startup, Phoseon Technology, which makes drying lamps for ink coatings and was founded in 2002, got several venture capital infusions in the $100,000 to $500,000 range. However, for his current water purification startup, Owen said “most people are talking a $25,000 to $50,000 type of investment. Maybe they are spreading the risk, or maybe there are just more smaller investors now.”
Some cleantech entrepreneurs are looking beyond the venture world for startup funds.
Jack Adams, a research professor at the University of Utah, launched wastewater treatment company Inotec earlier this year. So far, they’ve been awarded about $290,000 in various types of industry contracts and grants, Adams said. One investment partner, Toronto-based Barrick GoldCorp., has allowed Inotec to test its technology in Barrick’s mines. Inotec’s technology uses minute bits of electricity to remove mining mineral residue and other contaminants from wastewater.
The current economic environment makes it even more critical for cleantech startups to set themselves apart, said John Lasko, an independent business development strategist based in Calabasas, California.
He said companies have a better chance of landing venture funding if they have unique products or services, a solid management team and backing from a strong board of directors, advisors or mentors.
“The money’s there,” Lasko said. It’s just a matter of cleantech startups “finding the right audience.”