Clean-tech VC investing tops $3 billion, but 'funding gap' looms

Investors have shown that energy is "ripe for innovation and investment," according the Dow Jones VentureSource tally of venture capital 2007.

The numbers are in on clean-tech investing in 2007 and, once again, the direction is way up.

Dow Jones VentureSource on Friday said that venture capitalists plowed a record $3 billion last year in clean-tech companies, a 43 percent jump from the year before. The number of deals rose from 173 in 2006 to 221 last year.

"Our data shows that 59 percent of all U.S. investment in the sector is going toward companies in the product development phase, which suggests that funding for clean technologies is likely to continue as these companies continue to develop and start generating revenues," said Jessica Canning, director of global research, in a statement.

The median deal size in the U.S went up slightly to $8 million, which is a bit higher than all industries.

The biggest raising last year was $200 million for Project Better Place, the Shai Agassi-led company to set up a network of services stations with batteries for electric cars.

U.S.-based firms caught the lion's share of the money, with 83 percent of the global total. The total in the U.S. was $2.52 billion in 2007, a 79 percent increase.

Europe, led by Spain and Germany, saw a 27 percent increase to $360 million in venture capital. China, meanwhile, saw venture investing fall nearly 70 percent to $129 million, although four venture-backed companies went public.

So is this outpouring of venture dollars all good news for energy and environment entrepreneurs? Not entirely.

There is ongoing concern that certain areas within clean tech, notably solar and biofuels, are becoming an over-heated financial bubble that cannot sustain the influx of new companies.

This is a typical pattern of large investment waves, which are often followed by consolidation among companies and company failures.

More specific to clean tech is a funding gap, sometimes referred to as the "Valley of Death."

Unlike software or medical devices, energy-related companies require large amounts of capital to prove out their technology as cost-effective. A biofuels plant, for example, can cost more than $100 million--beyond the funding venture capitalists are able to do. Project financiers typically back only well proven technologies, as a report by Ernst & Young noted. Click here for PDF.

Ernst & Young recommends looking to government sources of money, reducing technology risk, and using debt selectively for financing.

Despite this funding challenge and regulatory hurdles , Dow Jones VentureSource sees significant potential. Both consumers and businesses are interested in buying eco-conscious products and, because the energy business is so big, gaining a small amount of market share from incumbents can be very profitable.

"The biggest factor driving investment in clean tech today is the huge consumer outcry for change," contends Canning from Dow Jones VentureSource, who projects more favorable policies for renewable energy after the fall national election.

 

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