Once booming, green-tech investing shifts down

The latest numbers on venture capital investing emphatically show what insiders have seen for some time: many venture capitalists have cooled on once-trendy green-tech investing, creating a tough funding environment for fledgling green businesses.

PricewaterhouseCoopers and the National Venture Capital Association today released their quarterly MoneyTree Report, which shows a sharp increase in Internet investing and drop in the amount of money going to the clean-tech category.

The second quarter saw the most amount of money going to Internet-specific companies in 10 years, with $2.3 billion going to 275 companies, a 72 percent dollar increase from the first quarter. Software rose 35 percent and biotechnology rose 46 percent in dollars compared with the first quarter.

By contrast, the clean-technology sector was down 23 percent in dollar terms from the first quarter, receiving $942 million. The number of deals went up, though, to 81, which is an 11 percent increase.

A downdraft in green-tech investing was apparent in more-detailed second-quarter data released earlier this month by the Cleantech Group. Measuring global numbers, it found venture capital decreased 33 percent compared with the first quarter and the number of deals fell slightly, to 161.

The once-hot solar sector fell to second place in terms of dollars invested, behind the energy efficiency area, which, bolstered by efficient lighting, took the top spot. The data also showed that venture capitalists are focusing on their existing companies, with the bulk of the deals being late-stage investments rather than seed funding for new ventures.

Corporate heavies
It's not possible to draw sweeping conclusions from just one quarter of venture-capital investing, but the data does align with some of the trends identified by investors over the past several months.

Without a doubt, Internet start-ups are hot and venture capitalists are being lured by recent IPOs and big valuations of Pandora, LinkedIn, Groupon, and the like. Echoing comments of some venture investors, Cleantech Group CEO Sheeraz Haji earlier this year said green-tech venture capitalists suffer from "deal envy" around social media.

Over the past decade, many venture capital companies created green-tech practices with the hope of replicating their track records in biotech and IT. But now these "generalist" investment funds, which invest in many categories, are moving out of green tech, something the second-quarter numbers illustrate, said Rob Day, investor at Black Coral Capital.

The shift away from solar and into energy efficiency reflects more interest in what investors call "capital efficient" businesses, or those that don't require big sums of money to bring products to market. Billions of dollars were invested to start solar companies, but venture capital funds are not equipped to dole out hundreds of millions of dollars for a factory to prove out a new solar manufacturing technique. By contrast, efficiency products, such as LED lighting, can be cheaper to make and sell, as successful efficient products tend to pay for themselves within a few years.

Another factor that looms large in the green-tech area is government policy on energy and environment, as well as regulations, which play a huge role in the electric power industry. The stimulus plan of 2009 brought a jolt of federal funding for scientific research in energy and a continuation of renewable energy subsidies, but the political climate in Washington means no stringent environmental laws will be passed in the near future. Research programs, such as theARPA-E agency for cutting-edge clean-energy technologies, are expected to be chopped back.

Even with the challenging funding picture, the signs for green-tech start-up hopefuls are not all negative. While many venture capitalists may end up phasing out their green-tech activities over time, there remain a number of firms that specialize in energy, materials, and the environment.

Just as significant is the bulked-up activity of large corporations in green tech. Big businesses in the energy field have provided funding to grow start-ups and have acquired a number of companies, providing an alternative financial "exit" to going public on the stock market.

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One example of corporate venture investing is Energy Technology Ventures, a joint venture of General Electric, utility NRG Energy, and fuel company ConocoPhillips. In the smart grid area, power and building equipment company Schneider Electric bought five smaller companies in the second quarter this year.

In terms of government funding, many states are seeking to attract, with tax breaks or grants, clean-energy technology companies to spur economic development.

As the second quarter numbers show, many venture capitalists are veering toward the Internet where a small investment can quickly lead to huge pay off. The pullback from green tech also reflects how investors and entrepreneurs have had to change their game plans in order to succeed in green tech, recognizing its inherent differences from software or the Internet.