December 27, 2011 {authors} {/authors}

Turbulence ahead for cleantech funding

Solyndra bankruptcy should herald consolidation in the solar industry

{authors} By Turbulence ahead for cleantech funding {/authors}

Cleantech startups, fasten your seatbelts. There’s going to be financing turbulence in the months ahead as the industry continues to ignite both skepticism and enthusiasm from investors.

Here are just a few of the key predictions for clean technology in 2012, according to Silicon Valley’s green business financing gurus:

With its image still bruised from the high-profile bankruptcy of California solar panel maker Solyndra, the solar industry should be bracing for a massive consolidation from which only the strongest companies will emerge.

Other sectors — particularly LED lighting, energy storage and “smart grids” that automate control of electricity distribution — will be green superstars that continue to capture investors’ attention.

And, with seed and early stage funding expected to be in tighter supply, sustainability-focused startups will turn to strategic alliances with government groups and corporations as sources of cash. 

Despite the financial challenges, investors remain intrigued with cleantech and its promise of game-changing environmental breakthroughs: 14 percent of all venture dollars invested worldwide this year will go to clean technology firms, according to Dow Jones VentureSource.

In fact, during the first three quarters of 2011, venture capitalists invested $3.0 billion in U.S. sustainable technologies, slightly exceeding the $2.9 billion invested in the sector during the same period in 2010, according to the PricewaterhouseCoopers/National Venture Capital Association’s most recent MoneyTree Report.

All told, green sector firms in the U.S. raised $3.7 billion last year, according to MoneyTree. That’s 8 percent below the $4.0 billion raised in 2008, the industry’s peak financing year so far.
Opinions are mixed on what to expect in 2012.

Silicon Valley’s Mohr Davidow Ventures will be investing more money in cleantech next year, said Josh Green, a general partner with the venture capital firm. “I would describe cleantech funding as still very vibrant” although it is becoming more “discerning,” Green explained. The company will focus on energy storage technologies for the transportation and utility industries, as well as smart grid development, he said.

Some venture capital professionals and chief executives at venture-backed firms aren’t as confident about next year’s financing outlook. A shortage of seed and early stage funding is expected for 2012, according to 58 percent of the venture capitalists surveyed by the National Venture Capital Association and Dow Jones VentureSource between Nov. 30 and Dec. 9. About 55 percent of the VC respondents expect investment levels in clean tech firms to decline next year.

“Externalities are keeping optimism at bay,” said Mark Heesen, president of the National Venture Capital Association, about the results.

Venture funding will be harder for some early-stage companies to obtain, said Ravi Viswanathan, general partner at New Enterprise Associates, a Silicon Valley venture capital firm with numerous clean energy investments.

“There’s just a greater degree of skepticism” about early-stage deals relying on materials science or science-based technologies, Viswanathan told a capacity crowd in December at the year-end meeting of the Environmental Business Cluster, a cleantech incubator in San Jose, Calif.

“Some of those really, really early-stage (things) that seven years ago we would have funded out of the lab, now we are asking the entrepreneurs, for better or for worse, to show a little bit more,” Viswanathan told attendees. That approach might make it harder for some companies to get funding, at least in the short term, he said.

The “ferocious” rise of Asian competitors and the global financial meltdown also have impacted their investment strategy, Viswanathan added.

Another expected trend is the rise of strategic alliances, especially with U.S. government agencies, which can be important lifelines for some young cleantech firms. The U.S. Navy, for example, is investigating new solutions, including the development of electric bulldozers and hybrid-powered backhoes, said Vern Novstrup, an environmental engineer with the Naval Facilities Engineering Service Center of the U.S. Navy.

Novstrup explained: “If we can reduce 20 percent fuel consumption on a forward operating vehicle, that’s huge.”

One young company that has prospered using government grants is Leva Energy, a cleantech firm based in California. Last year, the company was a semifinalist in the Cleantech Open, the nation’s top competition for sustainability-focused startups. Since its founding in February 2010, the developer of a high-efficiency boiler that recovers excess heat and converts it to electricity has raised about $3.5 million from various federal and state government agencies. That money has gone to develop its product and install a prototype at Hitachi Data Storage/Western Digital Corp. in San Jose, said Franco Castaldini, Leva’s co-founder and CEO. 

Because of the corporate progress made possible by the government funds, Leva is now seeing interest from venture capital firms and others. “We’re starting to see that level of interest from venture capitalists, now that we’ve also built our product and demonstrated there’s a strong pipeline of customers willing to buy our product. That’s a totally different conversation than the one I had last year,” he said.

Another industry observer, prominent Silicon Valley cleantech venture capitalist Steve Westly, remains enthusiastic about the financial potential of solar energy. He recently told an audience at Stanford University that despite the uncertainties Solyndra raised, now is the “best time to invest” in young solar firms. “Five to 10 years from now, you will see a consolidation and four or five very large global brand names will emerge,” Westly told the group, according to a December report in The Financial Times. 

Westly went on to predict that one day, surviving “solar companies will become household names, almost akin to auto companies today.”

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