Clean-tech investors take cue from biotech

In venture-capital circles, clean tech has been on a tear, bringing in billions of dollars and attracting thousands of entrepreneurs. But now, some people are starting to add a voice of caution to the stream of upbeat financial news.

The U.S. National Venture Capital Association on Wednesday released results from a survey (click for PDF) of venture capitalists which, on the whole, reflected a dour mood over the economy and finance.

One bright spot was clean tech. It was the single category where a majority of venture capitalists predicted that investments would increase or stay even in 2009.

But amid all the positive feelings for green innovations, there are some people who see some warning signs. It's not that there's a lack of good technologies or company ideas. But some people in the field aren't fully convinced that investors will get the payoff they expect.

Leading the alarm is Rob Day and his clean-tech investor colleagues from @Ventures. In a presentation last week, they cited a number of what Day calls "unsustainable trends."

There's too much concentration on certain sectors--with the bulk being in energy generation--and on businesses located in Silicon Valley and the Boston area, said Day, who projects a significant drop in clean-tech investment dollars next year.

He's also dismayed by a shift to later-stage financing for clean-tech companies, rather than funding brand new companies. In the late 1990s, there was a similar shift as investors put more money into their existing companies with the hopes of cashing out by going public or a sale.

"We've seen this movie before. That over-exuberance can lead to an overly negative view when things get overdone and don't pan out as hoped," he said. "What we really see more of is building the broader clean-tech ecosystem."

Day noted that there have been few "exits" in clean tech, where investors get a return for their money. Even the ones that have gone public don't guarantee a stellar return.

Look to biotech
This cautious view runs counter to the excitement investors and entrepreneurs have shown over the past four years and through most of this year.

A tally of venture-capital investment in clean-tech companies in the U.S., Europe, and China hit a record $4.6 billion in the first three quarters of 2008, according to an Ernst & Young analysis based on data from Dow Jones VentureSource. That's an increase of 82 percent, compared to the same period last year, and represents 13 percent of all venture capital.

Many investors expect the economic slowdown to deflate those particularly hot areas, such as solar and biofuels, and to weed out some of the weaker companies. In some ways, the financial meltdown could actually be beneficial to the green-tech field, which many worried was in bubble territory.

"More sanity has come into things. Instead of going out and raising as much as they can, the mantra now is to raise the right amount of money and get together the right team," said Evan Lovell, a partner at the Virgin Green Fund, who spoke on a panel at the Fourth Annual Conference on Clean Energy in Boston last month.

Some predict that clean-tech investors will spread their bets more and stay clear of overfunded areas. But many industries within the overall clean-tech sector continue to struggle with what's called the funding gap--the hefty financial requirements to commercialize their products. A factory or fuels refinery can cost tens or hundreds of millions of dollars and require debt financing, which has been badly hurt by the credit crisis.

That means that the venture capital model that worked so well for the relatively capital-efficient IT industry isn't always a good model for clean tech. Another dramatic difference is that green-tech businesses are heavily influenced by federal and state policies.

Bill Wiberg, a general partner at Advanced Technology Ventures, thinks the clean-tech field should look at biotech for clues on how to work best. And so far, the track record for successfully bringing energy innovations to market is slim, he said.

"Commercialization of energy technology is still a work of progress," Wiberg said at a recent forum on energy innovation. "We're still proving that we as a community can make that happen."

Like biotech, clean-tech firms need to create multi-party "syndicates" of investors to raise sufficient money and to spread the risk, he said. In energy-related businesses, products can take several years to design and test, as in biotech.

Another tactic for start-ups is to forge deals with large companies, offered Howard Berke, the executive chairman of solar company Konarka Technologies, which has gotten investment from several industrial firms, most recently a $45 million infusion from oil company Total.

"You need to rethink the business models, not the technologies, to be capital-efficient," Berke said at a MIT-sponsored venture capital conference earlier this month. "Otherwise, you have a capital constraint that is near-impossible to get over."

Like many venture capitalists, Wiberg says he's still optimistic because there are so many entrepreneurs moving into the field. As for whether many clean-tech businesses will deliver the dazzling returns everyone hopes, he's reserving judgment.

"We're still bullish despite the challenges, but come to me in three years and ask me how it went," he said.

Updated on December 22 with correct spelling of Lovell's name.