Small is beautiful for green-tech newbies

Les Fritzemeier heads up a tiny solar-energy start-up that most people have never heard of, Wakonda Technologies. But rather than worry about being steamrolled by the sliding economy, he feels like he's in a great spot.

"In a lot of respects, the best time to start a company is in the middle of a recession, assuming you've got money," he said. "Our target is to go to market when most people expect the economy to turn around."

Without a doubt, the recession and lower oil prices are hurting many companies in clean tech, a situation likely to slow what has been a frenzied pace of innovation.

But investors and entrepreneurs say that so far, smaller green-tech firms appear to weathering the storm the best, allowing them to continue developing new energy technologies.

To a large degree, that's simply because younger firms, in general, demand less capital to operate. Those green ventures most vulnerable are the ones that need late-stage funding--the tens or hundreds of millions of dollars to build a biofuel plant or solar-manufacturing line, they said.

Across the board, though, investors and entrepreneurs report that the valuations of green-tech start-ups--once considered in bubble territory--are going down, and there is a growing emphasis on having cash.

"What's out there is a level of nervousness in every business," said Mitch Tyson, CEO of Advanced Electron Beams, which makes equipment to make industrial processes more energy- and water-efficient. "People still don't have a good sense of where the bottom is."

Seeking new sources
As a result, green-tech entrepreneurs--after being lavished with money and attention for the last three years--need to get creative with how they fund their ideas.

Consider Qteros, a young firm with a potential breakthrough process for making ethanol from agricultural waste, such as corn stover. One of its initial investors, ethanol maker VeraSun Energy, declared bankruptcy, shutting it out of any follow-on round.

Other sources of money, including BP and George Soros' fund, filled the void. But the added work--compounded by cautious lenders--strung the process out from six months to nine.

"This Wall Street meltdown is having effects on early-stage green-tech companies getting the money they need to grow," said Jonathan Gorman, the manager of business development at Qteros. "There was a huge due diligence process, with outside scientists, as we looked for money, which they probably wouldn't have done before."

In another case of Wall Street colliding with green-tech garage start-ups, one newly formed firm nearly lost an investor when he lost half a million dollars on the stock market.

Late last month, SunRun, which installs and finances consumer solar-panel purchases, secured a $105 million commitment from U.S. Bank, but it wasn't as easy as it would have been a few months ago: one investor said getting a bank to sign on to a tax equity fund was like getting on "the last helicopter leaving Saigon."

Fritzemeier of Wakonda Technologies seems have gotten the timing right too: he was fortunate enough to raise money in July, before the financial markets' meltdown.

He's optimistic about the future because demand for technology that reduces the cost of solar electricity will remain strong, even in a down economy. The company is trying to develop disruptive solar-cell technology by combining low-cost, thin-film manufacturing techniques with very efficient cells.

Like most people in clean tech, he's eager to see the shape of the Obama administration's energy and green-job initiatives.

"The continued emphasis on renewable energy and economic development from the incoming (Bush) administration may put additional support in place to accelerate our efforts," Fritzemeier said.

Flight to quality
Certainly, being in the right industry helps a small company's chances. While biofuels are closely tied to falling commodity and gasoline prices, products that save energy can appeal to cost-cutting businesses or utilities looking to make the electricity grid more efficient.

"We feel better that we're in the efficiency business selling to businesses," said Robert LeFort, the CEO of Ember, a wireless-networking firm that has shifted its focus to smart-grid products. "That's better than putting something on the shelf at Wal-Mart, and hoping the consumer picks it up...It's the lesser of two evils."

As more bad economic news comes out seemingly every day, many predict that the best companies--with paying customers--are the ones that have the best chance of thriving. A number of successful companies, including Google and Cisco Systems, were founded during an economic downturn.

Nicholas Parker, executive chairman of the Cleantech Group research firm, said the difficulty in getting financing in the coming year will thin the ranks of clean-tech start-ups and, from an investment point of view, result in a "flight to quality."

Advanced Electron Beams' Tyson is out, trying to raise another $20 million to $25 million Series C round, and he's gotten a commitment from existing investors and a good reception from others. The interest could well stem from the fact that the company already has customers using its product.

"I say to potential investors, 'We have a product in the field now and look at the customer base--the market risk is low,'" he said. "Knock on wood...So far, my experience, has been typical of normal times."