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Looking at the numbers

Rob Day: February 26, 2007, 11:18 PM

Ernst & Young/ Dow Jones VentureOne today released their 2006 totals for cleantech venture investments [2/27 update: link to PR here], and the results (illustrated above) confirm the trend of overall strong growth. They counted $1.3B in investments in the US, Europe, Israel and China, with 140 transactions.

They didn't break the dealflow down by sector in their public release, but they did cover a broad definition of cleantech. In the US, they counted 87 financings, with the total of $883mm. Interestingly, cleantech venture investments in China took a big leap, from $7mm in 2004 to $220mm in 2006.

As we've discussed before, counting cleantech investments is tricky. Alert readers will have already noted that the VentureOne numbers are significantly lower than the Cleantech Venture Network's $2.9B total for 2006 in North America. These kinds of differences (seen across other surveys as well, such as the Moneytree and Nth Power/ CleanEdge surveys) raise a few questions:

1. Why are the numbers so different?

We've talked a bit about this before. There are three basic reasons why numbers vary across surveys: Completeness, inclusiveness, and definitions.

In terms of completeness, there's the possibility that some of these surveys are missing deals that others spotted. But, without doing a line by line comparison, it's tough to make a case that such errors of omission might be a major factor, given the strong reputations of the various groups.

In terms of inclusiveness, however, there are some pretty major differences across surveys, as dictated by their varying needs. For a group like the Cleantech Venture Network, they need to be as inclusive as possible -- that's part of their role as thought leaders in a fast-emerging space. Many clean technologies straddle sectoral categories -- how do you bucket software to manage energy assets, for example? In the software category or the energy category? For groups like the CTVN, it's an easy answer: If it's relevant to cleantech, it's in the tally. But for groups like VentureOne, they need to add up not just the cleantech numbers, but also the IT numbers, etc. And they need the counts to be mutually exclusive, so they don't end up counting that hypothetical energy software company twice. So given the different mandates, when asked to come up with a list of cleantech investments, some groups' tallies will be a lot longer than others.

Definitions also vary across these surveys. Some take a narrower view of cleantech ("Sure, we got both kinds of cleantech, solar AND biofuels!"), some take a broader view. Some include private equity of any stripe, some take a narrow viewpoint of what is a "venture backed firm." In the specific case of the VentureOne numbers, they appear to be taking a broad view of cleantech, but a very narrow view of eligible companies. They don't include any private investments into public entities (PIPEs), angel rounds, etc. This by itself shortens the list quite a bit. Also, it's important to note that the VentureOne numbers exclude investments in Canadian-based companies, whereas the CTVN numbers include those in their North America totals.

The net result? VentureOne counted 87 cleantech venture financings in 2006, while the CTVN counted around 250.

2. How much are the numbers getting skewed by project finance-related transactions?

As we've discussed before, a handful of very large deals that seem to be more project finance-related than classic venture capital have played a signficant role in the dramatic growth in the total dollar tallies for cleantech investing. But how much of a role?

The VentureOne numbers help shed some light on this question. And the answer appears to be that such mega-deals are skewing the numbers somewhat, but not enough to be the biggest factor in the sector's strong top-line growth.

Yes, mean deal sizes have risen. In US cleantech investments tracked by VentureOne, the mean deal size rose from $6.25mm in 2002 to $10.16mm in 2006. But most of that growth actually occurred a while back -- 2004 mean deal size was $9.68mm. It should also be noted that median deal size did rise over the past year, from $2.6mm in 2005 to $6mm in 2006.

But what really appears to be driving the growth is dealflow in general. The number of deals tracked in cleantech by VentureOne has risen from 90 in 2003, to 103 in 2005, and jumping to 140 in 2006. So from 2005 to 2006, what drove the doubling in cleantech venture dollars? Deal sizes did get bigger, including more impact from mega-deals, but the overall dealflow also significantly grew.

3. Why do investors care about all this to-do about numbers?

Simply because they help us get a better handle on what's going on in the market.

The various surveys all consistently confirm that this is a fast-growing sector. Some folks have argued (mostly in private grumbling) that the top-line growth in the sector was really mostly a result of an overly generous set of definitions -- that there have been a few spectacular deals that drove the numbers up, but overall the sector has stayed pretty flat. But the dealflow numbers show this argument to not be true. A very few others have privately suggested that groups like the CTVN may have made the growth look bigger than it really has been, by casting their definitional net wider and wider over time. But as the VentureOne numbers show, CTVN isn't the only group pointing to the very strong growth in VC interest in the sector. The sector has been growing quickly, there is no real debate over that.

However, there continues to be a constructive debate over the possibility that cleantech investments have saturated the sector, the "Is it a bubble yet?" question that the media loves to talk about. And that's where it's important to know the differences between the surveys.

Because there's a big difference between "Cleantech is the third biggest investment sector," and surveys like VentureOne's which suggest that cleantech remains a relatively small portion of overall venture investments -- VentureOne tracked 3,748 financings totaling $34B in 2006, which would put cleantech at about 3.8% of venture capital investing. The first interpretation can be a bit daunting. The latter interpretation, however, is a bit encouraging for cleantech investors. Also encouraging? The fact that VentureOne's survey estimated that median valuations for cleantech VC investments were 75% of median valuations across all VC investments... None of which, of course, answers the saturation question. But it is suggestive.

2007 Cleantech Venture Forum recap

Rob Day: February 26, 2007, 5:52 PM
We were lucky to have Matt Horton, a colleague at @Ventures, agree to write up his reflections on last week's Cleantech Venture Forum:

This week saw another successful Cleantech Forum in San Francisco. Attendance was rumored to be over 800, serving as another obvious indicator of growing interest in the sector. While the Cleantech Forum is still the premier cleantech networking event, the ratio of check-writers to other interested parties is on the decline. Here are a few of the highlights from the week:

Company presentations – There were a total of 18 companies that presented at this conference in rapid-fire succession, each company was only allotted 5 minutes to present. The presenters included interesting companies like Fat Spaniel, Green Catalysts, Flex Energy, Orion Energy Systems, Solexant and NanoH2O. The big winner, however, was a company called Serious Materials, who was named the “Most Promising Presenter???. What does it say about the state of the cleantech market when the most promising company makes drywall?

Speakers and panels – The conference was packed with outstanding panel discussions and speakers, including Steve Jurvetson, Amory Lovins, John Denniston, Neel Kashkari, Governors Mark Warner and Ed Rendell, Steven Chu, and Mayor Gavin Newsom. The discussions at the conference ranged from biofuels, solar, and smart grid applications to public policy, real estate and climate change. It appears that key public policy makers now understand that the government’s role is to establish a framework that sets the rules for competition and allows the market to decide how best solve our energy problems.

Key messages from the conference – 1) Plug-in hybrids seem to have captured the industry’s imagination for our transportation future, although next-gen electrics are gaining momentum. 2) Water opportunities continue to receive lots of interest, but few investment dollars. 3) A national cap and trade program is gaining currency among both investors and politicians.

Limited Partners event – The final event of the Cleantech Forum was focused on LP’s and their interest in the cleantech market. Attendance at the event made it clear that there is a lot of institutional and private money that is looking to gain exposure to the cleantech market. Many of these LP’s are currently debating whether to invest in pure-play cleantech funds, or traditional venture funds that are dabbling in the sector. Stoking that debate, Nick Parker pointed out that forecasts call for $20B of investment in cleantech over the next five years, and that all of the current pure-play cleantech firms only have about $2B to invest. Who will fill the void – traditional VC’s, or new cleantech managers? Time will tell...

Bonus round – After the Limited Partners portion of the Cleantech Forum, the Commonwealth Club held their annual awards dinner honoring contributors in the clean energy industry. Art Rosenfeld, Michael Peevey, Dan Kammen, Tim Draper, Denis Hayes, and the Energy Foundation were all honored. The best quote of the evening was given by Denis Hayes, when he said, “In Silicon Valley, there is a saying - ‘One company’s margin is another company’s market.’ Exxon Mobil earns around $100 million in profit every day. Go get ‘em!???

Matt also noted this big announcement from the city of San Francisco...

Altra, H2Oil, BPL Global, Imperium, and other news

Rob Day: February 20, 2007, 4:49 PM
  • Jonathan Shieber of VentureWire reported yesterday that ethanol production startup Altra has increased the size of its Series B investment another $63mm, up to $183mm. The additional capital will be used to accelerate construction of the firm's three new plants, which we discussed at the time of the last mention back in August. Another quasi-venture/ quasi-project finance round (...and keep reading a few items below).
  • Extremely happy to point out (self-promotion alert) that @Ventures has made a $3mm investment in H2Oil Recovery Services, as part of an overall $4.7mm Series B. The company uses a patented technology to reclaim valuable petroleum and clean water from the oil and natural gas exploration and production processes, cost effectively treating two of the industry's most common waste products - tank bottoms and produced water.
  • Broadband over powerline developer BPL Global announced a $26mm Series C round, with $5mm of the investment from Morgan Stanley. It's unclear how this announcement relates to a similar announcement from the firm back in September, which was also described as a Series C round. We've discussed before why such "third pipe" efforts are relevant to smart grid and other cleantech-related sectors.
  • More follow-up on the previously discussed financing round for Imperium Renewables... Turns out it was a bit more than the anticipated $100mm, with the announcement that the company has raised $113mm in Series B equity and is raising $101mm in debt. The company expects to have 400mm gpy in capacity by the end of next year. "Existing investors Technology Partners and Nth Power were joined by a number of new investors, including funds affiliated with: Ardsley Partners, Attractor Investment Management Inc., BlackRock Investment Management (UK) Ltd., Capricorn Management, LLC, Ecofin, Robeco C.V., Silver Point Capital, Southport Energy Alternatives, Stark Biodiesel Investments, Ltd., and Treaty Oak Capital Management."
More news and notes: The latest MoneyTree survey is out, and apparently "no one had paid attention to [cleantech] before recently," but now the "secret" is out, I guess -- shhhhh... Finally, an interesting story about lightbulbs.

The rise of online green media

Rob Day: February 18, 2007, 9:32 AM
With the rise in general public interest in issues like climate change, alternative energy, green purchasing, etc., it's no surprise that investors are starting to look for ways to tap into this trend. In many ways, they are following the rise of green marketing, as large consumer products companies and others increasingly vie for the dollars of consumers who want to direct their purchasing toward more environmentally-friendly products and services -- where the ad dollars go, investors will follow.

For many investors, online media models are something with which they have some familiarity, so online green media and green purchasing tools have been getting some VC attention lately (as VentureWire covered last month). While some such investments haven't been publicized yet, VentureWire reported this past week that Joel Makower's Greener World Media has raised over $250k in seed financing from seven angels, including Andrew Shapiro of GreenOrder, Lisa Gansky of Ofoto, and others. There's a good profile of Joel's efforts here, from a while back.

Anecdotally, there's no shortage of entrepreneurs also looking at getting into the game right now, as this one example helps illustrate. Usually the efforts appear to be green applications of previously successful startup models ("the green craigslist," e.g.). Such evident low barriers to entry can be a challenge for investors looking into the space, but network externalities (ie: the more people who come to a website, the more valuable it becomes, and so it attracts even more visitors) can create compelling businesses if things work out... Especially as online ad revenues are on the rise, especially for sites that provide good targeted demographics...

Other deals to note from the past week:
  • P21, a German developer of fuel cell-based backup power systems, raised a Series C of undisclosed amount. Goldman Sachs led the round, alongside existing investors Target Partners and Conduit Ventures. The company's products are targeted at backup power for telecoms.
  • VentureWire reported this week that smart metering system developer SmartSynch raised a $10mm Series D insider round. Existing investors all participated; they include Battelle Ventures, J.P. Morgan Partners, Siemens Venture Capital, Kinetic Ventures, Nth Power, Endeavor Capital Management, OPG Ventures, Lime Rock Partners, Cinergy Ventures and GulfSouth Capital.
Other news and notes:
Other small items: A couple of interesting events coming up -- Energy Crossroads 2007 at Stanford, and the Cleantech Innovation Challenge in Colorado... Corn-based ethanol continues to come under market pressure -- but remember, venture investors are typically backing nextgen biofuels technologies (alternative processes, feedstocks, or biofuels)... Finally, SustainLane Government has announced the top five US cities for clean technology (yes, Boston made the list), as Joel discusses.

Targeted Growth, EoPlex and other news

Rob Day: February 12, 2007, 5:19 PM
  • Targeted Growth, which is pursuing genetic enhancement of biofuels feedstocks, announced a $22.3mm Series D. The company claims their approach can increase yields by 20%. Capricorn Management and AllianceBernstein led the round, and GrowthWorks Canadian Fund, Integra Ventures, WRF Capital, and Investment Saskatchewan also participated.
  • An advanced materials company, EoPlex, announced an $8mm Series C, led by ATA Ventures. DFJ, Labrador Ventures, and Draper-Richards also participated. The company's 3D ceramic-metal miniaturized devices have energy-related applications, such as fuel cell reformers, self-powered sensors, LEDs, and others.
Other news and notes: Vinod is moving -- perhaps in a green limo?... With all the controversy about ethanol, here's a good overview of where the technology is in its development cycle... And on the same topic, one cellulosic ethanol player is buying another -- could more consolidation be looming?... Here's Tyler's take on the Gore-Branson $25mm atmospheric carbon sequestration prize... Finally, first Willie, now Merle -- could Kenny Rogers be far behind?

Bright Source, Zolo, and others

Rob Day: February 8, 2007, 2:31 AM
  • Bright Source Energy, a solar concentrator startup aimed at centralized (ie: for wholesale power, not rooftops) generation, using high temp solar thermal, raised "under $50mm" led by DFJ and the JP Morgan Bay Area Equity Fund. Previous investor VantagePoint (where CEO John Woolard was an EIR prior to joining the company) also participated. Jonathan Shieber of VentureWire wrote a useful description of the company's processes that is worth checking out -- he points out that Bright Source's hybrid approach (which uses a gas-fired turbine in addition to solar concentration) allows for the production of energy on cloudy days as well. Shieber writes that the company already has a 500MW PPA with PG&E starting in 2010.
  • Zolo Technologies, which uses tunable diode laser spectroscopy to monitor combustion gases for efficiency optimization (ie: for boilers in power plants and other applications) raised a $12.5mm Series D. Siemens Venture Capital and El Dorado Investment Company co-led the round, which also was participated in by existing investors. The company had previously raised $51mm in funding, mostly in a previous telecom-related incarnation.
  • ECO2 Plastics, f/k/a ITEC Environmental Group, closed a $10mm convertible debenture round of financing (the company is publicly traded at ITEC.OB). Roaring Fork Capital and angels provided the financing. ECO2 Plastics is looking to apply their proprietary plastics recycling technology via the ownership and operation of recycling plants worldwide.
  • Hanger Networks, a developer of "in house" advertising (they print ads on the hangers your dry cleaners give you with your shirts), raised an $8mm Series A co-led by Kodak Venture Partners and Sigma Partners. Why is the company listed here? Because the hangers they use are 100% recycled content, and biodegradable, and apparently wire hangers add 200mm tons of steel to landfills every year, according to the CEO (tip of the hat to Jonathan Shieber again for that nugget).
Other news and notes: When consolidation inevitably begins in earnest in the solar market, the acquirers will have very deep pockets (and large existing production plants)... Here's an interesting back and forth (read the comments section) on the topic of state support for green startups... Very interesting words from Joel on the topic of the fickle green-ness of the American consumer (and Joel, I echo your Kermit reaction)... Jefferies sees no signs of slow-down in the alternative energy investment ramp-up (but such rosy banker statements have been made at the peaks of many past investment cycles)... The Cleantech Venture Network is expanding to China... Here's an interesting, but familiar, story about the re-purposing of previously fuel cell-targeted technology... Finally, Al Gore brings his message to Silicon Valley.