At first glance, the latest numbers from the Cleantech Group look like terrific news. After all, they conclude that 2008 was a record year for cleantech investments, with venture deals in North America, Europe, Israel, China and India reaching a total of $8.4 billion, up 38 percent from $6.1 billion in 2007.
But most of that money was dealt out in the first three quarters, with investment slowing significantly – as expected – in the fourth quarter.
According to preliminary numbers, venture capitalists in these regions committed $1.7 billion in 99 deals in the fourth quarter, down 35 percent from the third quarter and 4 percent from the fourth quarter of 2007. In North America, by far the biggest venture-capital region, fourth-quarter investments totaled $1.14 billion, a decrease of 38 percent from $1.83 billion in the third quarter and of 5.8 percent from $1.21 billion in the last quarter of 2007.
“The way I would interpret [the 2008 numbers] is we are seeing that the cleantech sector is not immune from the global economic environment,” said Brian Fan, senior director of research at the Cleantech Group. “What we’re seeing in the fourth quarter is the beginning of a trend where I think we’ll see the numbers come down a bit and the megarounds, the $150 million and $200 million rounds, come fewer and farther between.”
Fan added that he doesn’t expect a decrease in the total number of deals, but in the average deal size.
So far, everyone has “more or less” suffered equally, Fan said. Europe’s numbers fell the most, nearly 60 percent to $308 million from $782.5 million in the third quarter, he said, but that doesn’t necessarily mean that Europe startups will be the hardest hit.
European numbers are generally fairly volatile, with the quarterly totals being heavily influenced by one or two “megadeals” per quarter, so that when one big deal is pushed to the next quarter, it looks like a drop, but is made up be a higher total the next quarter, he said. “It could be one deal just slipped into the next quarter,” he said. “If we see this again the next quarter, we could say [the economy was having] a bigger effect in Europe, but from one data point, it’s hard to draw that conclusion.”
The forecast for 2009 will likely depend, not surprisingly, on the economy, he said. “If the current predictions for the economic conditions hold, we’re in for a tough economic cycle and my prediction would be that the total for 2009 would be down from 2008.”
Fan expects that the economy will make investors more risk-averse, leading them to shy away from the next copper-indium-gallium-diselenide thin-film solar play and from throwing in $150 million a pop. “What I see going away is the 10th company in CIGS or the solar-thermal space receiving a $100 million round,” he said. “That’s not to say it won’t happen, but the frequency will become more rare as investors get more conservative and hunt for less capital-intensive business models.”
That said, Fan believes the long-term prospects for cleantech are as strong as ever. “The fundamental drivers for clean technology remain strong, especially moving into the new administration,” he said, citing a long-term shortage in energy supplies and concerns about climate change.
He predicts that energy-efficiency and smart-grid technologies will see more investment, and that – in a shortage of capital – venture capitalists will continue to favor algae and synthetic-biology investments that increase the yield of biofuels, rather than companies hoping to build hundreds of millions of gallons of biofuel capacity themselves.
The Cleantech Group also is predicting that the failure rate for cleantech startups will double in 2009, and that global climate-change policies will take several years to negotiate, among other forecasts. For more information on these predictions, click here. To read other investment predictions, click here.