While cleantech investment appears to be on the rebound, it’s clear the recession isn’t over yet. Mark Jensen, managing partner for the venture capital services group at Deloitte & Touche, said Wednesday that about half of the largest venture-capital firms expect to reduce their overall investments in the next few years in response to the recession.
But venture-capital firms expect cleantech to fare better than most other categories. According to the Deloitte survey, a whopping 95 percent said they plan to either increase or maintain their level of cleantech investment, with 63 percent anticipating more investment and 32 percent expecting to invest the same amount as they do now.
Still, overall – including in cleantech – deal sizes will likely shrink, at least in the near future, Jensen said. In a slide presentation, Jensen said he’s seeing a “new conservatism” in investment strategy as a result of uncertainty about capital markets and exits. VCs are trying to preserve capital and are looking for smarter bets in less-capital-intensive technologies, even as they move to later-stage deals (which are usually larger), he said.
Brian Fan, senior director of research for the Cleantech Group, said he’s also seeing venture-backed companies shift to more capital-efficient business models. He pointed to Mountain View, Calif.-based solar-thermal company Ausra as an example. The company in January switched its business plan from that of an independent power producer to that of a technology and equipment supplier. “It’s a shift from more capital-intensive models to more capital-efficient models; that’s what we’re seeing in this space,” he said.
By making smaller investments in general, bigger funds are positioning themselves to make a few really big bets again in the future, Jensen added. “We will see some big moves in this space, no question, and it will be interesting to see when that happens,” he said. And that conservatism might reverse itself if a policy like the Waxman-Markey climate-change bill, which includes a carbon cap-and-trade program, becomes law, he said, adding that it would boost venture enthusiasm in the space.
One big open question is what the cleantech investing scene will look like after the recovery. As Lawrence Aragon, editor-in-chief of Thomson Reuters’ Venture Capital Journal put it at a conference in Palo Alto, Calif., last week, “Is Q1 the new black?” It’s unclear whether a recovery will bring investment levels back to the peak of last year’s third quarter or whether that quarter represented a spike above normal.
Much of that will depend on how successful general partners are in raising new funds, Fan said, adding that most of the top cleantech venture firms are in the process of raising “billion plus” funds. Among others, Charles River Ventures and New Enterprise Associates, which invest in energy along with many other sectors, recently announced new funds. Element Partners and VantagePoint earlier this year also raised second cleantech funds that were larger than their first funds, beating their targets, even though their first funds haven’t yet performed, Aragon said last week.
Essentially, larger firms and name-brand firms have the advantage of a more established reputation. Those firms are not having trouble raising money, Jensen said. “I think the level of activity, though diminished, is going to stay at a fairly robust level,” he said. “But I think there are going to be fewer funds in the future and it’s going to be very difficult for new funds in the future, especially funds that haven’t seen returns in the last four or five years.”
Even though venture and private-equity investment will remain low for some time, that doesn’t mean that some cleantech bubbles won’t be back, Jensen added. “The way I look at it, every innovation trend – disk drives, PCs, biotech, Internet, all of it – has been what I would call a bubble,” he said. “You get a lot of the VC community focused on a technology and there’s a land rush to move into that technology. Cleantech is really a number of different bubbles – water, energy, transportation … it’s a lot of different areas – so there’s a lot of room to move. It’s hard to say how many VCs are going to move to renewables versus another cleantech area, but the important thing is the venture community is very focused on this space and moving into it very quickly.”