From The Toronto Star:

August 07, 2011

Tyler Hamilton

Venture capitalist investment in clean energy totalled $1.1 billion in the second quarter, a 44 per cent drop compared to last year.

RICHARD LAUTENS/TORONTO STAR

The clean technology market is a tough space to be in these days if you're a startup in North America on the hunt for early-stage venture financing.

Venture capitalists who have already invested in clean energy, smart grid, energy efficiency and electric vehicle technologies are starting to get cold feet.

Impatient with how long it takes to realize a return on these investments, many are taking a pass on new deals and choosing instead to nurture existing portfolio investments.

The uncertain economic climate hasn't helped, nor will a U.S. debt deal that threatens to cut the federal government's financial support for clean energy innovation and infrastructure.

Some venture capitalists are walking away altogether.

The numbers tell the story. Venture capital investments in the United States during the second quarter totalled $1.1 billion (U.S.), a plunge of 44 per cent compared to the previous year, according to data released this week from Dow Jones VentureSource.

There were also 12 per cent fewer deals, and of those that received financing about 80 per cent were relatively mature revenue-generating companies.

So much for venture capitalists being venturesome.

Those who continue to invest are increasingly staying clear of capital-intensive, high-risk hardware deals and putting their money in less risky software and service ventures, many of them aimed at energy efficiency and management for homes and businesses.

Clearly, making a new kind of energy storage device, wind-turbine generator or vehicle drive train is more expensive and requires more patient capital than that required to develop a new software program or Web-based service model aimed, for example, at encouraging consumers to conserve kilowatt-hours.

“The venture community hates energy hardware because of the long development cycles and the fact that the technology buyers in this area, including utilities, are very conservative,” Michael Brown, chairman of B.C.-based venture capital firm Chrysalix Energy, explained to me.

These buyers want to see a track record of performance. They want to know the product they're purchasing will work flawlessly, and they want the companies they purchase from to have 20 years of experience behind them.

This is difficult for most venture capitalists to swallow. They aren't prepared to wait a decade or more before seeing a return on their investments. They want out within four years, maximum. “So when Silicon Valley (venture capitalists) try to play in clean tech hardware, they get their heads handed to them,” said Brown.

But where venture capitalists are bowing out, big corporations are beginning to step in. At least that's what New York-based investment bank Peachtree Capital Advisors has observed.

“Corporate investors, perhaps willing to overlook concerns about short-term profitability for long-term potential, were active in making both investments and acquisitions in the first half of 2011,” according to the firm.

Take chemical giant DuPont, which in 2010 generated more than $1 billion in revenue by selling materials and other chemical-based products to the solar industry. Last month, Dupont acquired California-based Innovalight, a start-up specializing in manufacturing silicon inks used to improve the efficiency of solar cells.

The same month, General Electric acquired Israel-based Lightech, a developer of technologies for improving the efficiency and quality of LED lighting, and shale-gas developer Chesapeake Energy made a major investment in Colorado's Sundrop Fuels, which can make biofuels by vaporizing wood with concentrated sunlight.

Concentrated solar technologies for generating electricity have also attracted the attention of giants. ABB, the world's biggest power equipment supplier for the grid, acquired Novatec Solar in March.

That acquisition followed a series of similar deals in 2009 and 2010. Siemens acquired strategic interests in Israeli start-up Solel Solar Systems and Italy's Archimede Solar Energy; Areva purchased Ausra; and Alstom bought into BrightSource Energy. Both Ausra and BrightSource are based in California.

What's the lesson here? For one, big corporations have a strong interest in these emerging clean technologies because they represent future low-carbon, low-impact product and service offerings that are expected to rise in demand.

Second, venture capitalists will have to change the way they operate if they want to truly tap into the money-making potential of this sector.

Brown said venture capital firms have to stop obsessing about early revenues from the start-ups they invest in. They have to concede that some innovations — the ones with the greatest impacts — will take time to unfold, so the emphasis instead should be on finding strategic corporate partners willing to go along for the ride and support ongoing development.

“There are a lot of big companies out there that are going to care about new innovations but don't have the wherewithal to do it internally. They will rely on small companies to do the big discoveries for them,” said Brown.

“The end objective is that all or some of those partners buy you out, or they put their signature on a product and help launch an IPO. I actually think that's the model.”

This will require venture capital firms to be more patient and approach investment deals with a different mindset, Brown added.

“It changes the culture of the investment organization dramatically. You have to stop being an investor and start being a company builder.”