More deals, fewer dollars for cleantech in '09?

Cleantech is likely to draw more deals but fewer large investments in 2009, according to the the third annual National Venture Capital Association (NVCA) Predictions Survey.

Although the group predicted an overall slowdown in venture capital investing, nearly 70 percent of VCs surveyed said cleantech can either maintain or grow its investment category in 2009. Cleantech already raised more money by the third quarter of this year than in all previous years (see Cleantech investment breaks all-time record).

The growth is in part because the cleantech field keeps expanding, said Trevor Loy, managing managing partner of New Mexico-based private equity firm Flywheel Ventures and a board member of the NVCA.

"When you see projections about growth in cleantech, it's important to know we're not just talking about energy anymore," Loy told the Cleantech Group. "We’re talking about water, biomass, recycling, energy efficiency. We’re also now talking about green building materials, and the high tech innovations that are improving infrastructure."

Many energy projects are going to be less attractive to investors than technologies to make motors, trains and grids more efficient, Loy said.

The sweet spot is likely to be companies with proven technologies to reduce energy consumption that need $5 million to $20 million in order to commercialize and reach profitability, Loy said. The Cleantech Group has predicted that energy efficiency is one of the biggest sectors to watch in 2009 (see Nine clean technology predictions for 2009).

Ted Lin, an associate at Bessemer Venture Partners, said software is likely to make a big impact in cleantech in 2009 because it is capital efficient and scaleable. Software can be used to address carbon trading, calculate carbon footprints, manage energy use by appliances and electronics, and improve the grid (see Growing market for carbon software and Startups get big help from Big Blue). 

Another attractive field in 2009 is likely to be very early-stage companies needing modest amounts of capital to hold them over for two-to-three years, Loy said. Such companies are less affected by macro-economic trends. he said.

"It's those companies that I call 'too small to fail'," he said

Loy predicts that more cleantech companies will receive funding in 2009, possibly an increase of 5 percent to 25 percent, but that overall cleantech investment could decline as few capital-intensive companies are funded.

"Cleantech investment numbers have been so skewed by a small number of extremely large financings the past couple years," Loy said. "I wouldn't be surprised to see the amount of dollars going down but the number of company financings going up."

For example, financing for solar and biofuel projects will be difficult because the sectors are capital intensive, Loy said (see AVA Solar joins thin-film funding flood with $104M and Solazyme joins algae elite with additional $45M). Even proven technologies, such as wind, could have trouble attracting project financing because of the tight credit markets, he said.

Companies that develop a coating for solar panels or a device to make wind turbines more efficient are more attractive to investors than larger plays in those fields, Lin said.

But there is good news, Lin said.

"It's a good opportunity to invest in companies at lower valuations, and companies can recruit better employees," he said. "If you can raise enough money to last the company through the next couple years, it’s a good time to invest because valuations have become reasonable."

The survey showed that 96 percent of VCs think firms will have trouble raising new funds. Money could come to the sector from the government. Stimulus spending by the U.S. and  China on infrastructure projects could play a significant role, said Will Coleman, a partner at San Francisco-based Mohr Davidow Ventures. 

"People have concluded that macro drivers like climate change and energy security will continue to propel the long term need for new energy innovations, regardless of the current economic climate," he said. "The opportunity to leverage a technology transition to help stimulate the economy here in the U.S. will be a huge driver."

Outside the U.S., the picture looks much the same for mid- and late-stage cleantech companies, said Laura Meadors, the vice consul for renewable energy, clean technology and financial services for the British Consulate-General in San Francisco. However, early stage companies in the UK will likely see harder times than most, she said (see Funding gap threatens U.K startups).

"There was less early-stage VC available in the UK to begin with, [so] many of those companies used to look to the U.S.," she said. "They may find it harder now to find that funding in the U.S. over the next year."