Cleantech: another bubble?
Article Date: Mar 27 2008The continuing enthusiasm for sustainability suggests a fantastic opportunity for entrepreneurs. Sam Richardson, investment director at venture capital firm E-Synergy Ventures, asks whether the clamour for cleantech is genuine or yet another fad.
Clean technology (cleantech) companies attracted $2.2 billion (£1.1 billion) in investment last year, a 47 per cent jump over the year before. And the number of cleantech deals rose 58 per cent to 202 venture financings compared with 2006. CalPERS, one of the world’s largest asset managers, recently doubled its commitment to cleantech funds to $800 million.
In a short time, cleantech, which can broadly be described as anything that can lead to a reduction in natural resource usage, has become the third investment sector in venture capital alongside Information Communication Technology and Life Sciences. But, is this justified or are VCs exhibiting the sort of herd mentality that ended in the legion of write-offs that followed the dot-com boom?
Few venture successes
It won’t be easy for entrepreneurs looking to build cleantech businesses. They will need to take a long hard look at how best to develop their business model in what to date is an industry that has not yielded many huge venture-backed success stories.
Opportunities to develop scalable, licence-based revenue models are more challenging in the cleantech space, where pilot plants and processes are the norm and small companies have to become operators rather than just developers of their technology to stand any chance of attracting large-scale commercial interest.
Ambitious entrepreneurs must not only be on the look out for the best technologies, but for opportunities that can be scaled quickly without the need for traditional asset finance, which is becoming increasingly difficult to secure.
The problems of gaining funding are exacerbated by the cleantech sector being a deliberately broad church, where investment statistics can be skewed. Exclude the headline areas of biomass and renewable energy and what you’re left with is a much smaller amount of capital focused on a broad range of technology and small project opportunities. Investments that, for years, would not have fallen into any particular sub-sector are now being labelled as cleantech by both their investors and their management teams.
Cleantech-focused funds are being raised, although not in large numbers, with respect to the venture end of the investment spectrum. Large infrastructure funds specialising in waste and renewable energy have raised significant sums but it is difficult to argue that this really contributes to the weight of true risk capital. A more accurate picture is that larger, later-stage investment funds are creating a ripple effect that some smaller VC funds are using to their advantage in the fundraising environment.
Size matters
But what of the bubble? The cleantech sector is being driven by a number of macro factors. The restructuring of both the waste and energy-generation sectors, alongside high commodity prices and fears of climate change, allied to strong regulatory pressure are combining to make for a potent growth mix. However, the majority of capital and returns will be delivered across areas against which even the very best resourced VC-backed companies cannot compete.
The future of cleantech growth lies in the infrastructure investment by the new BRIC (Brazil, Russia, India and China) economies, which is being made with strong reference to low carbon and, more importantly, efficiency technologies driven by high commodity prices. On closer analysis, a cleantech bubble looks unlikely while much of the growth is not reliant solely on the more mature markets of the developed economies.
Traditional VC model
This presents VCs with a quandary about where to deploy their funds effectively into companies that can be scaled without resorting to large, capital-intensive business models. These opportunities do exist but can encompass a broad range of disciplines. Even defining cleantech as a field and then resourcing your investment team accordingly can prove problematic. Expertise may be required across many different verticals including chemical processing, materials science, civil engineering and electrical efficiencies all the way to commodity and carbon trading. Understanding and originating deals across this broad landscape can be challenging and often leads VCs to concentrate their investments in clusters within specific verticals.
Without doubt, the sector is exhibiting strong long-term fundamentals, and the opportunities there for entrepreneurs and VCs to take advantage of are both real and nascent. The challenge is to adapt the venture-backed business models to deliver the equity returns that all investors are hoping to achieve.
E-Synergy’s Sustainable Technology Fund will invest £30 million over the next few years. Its focus is on the green tech sector.
