The past few weeks have seen a few market updates put out by those who track cleantech venture numbers, so it's time to re-cap and review: First of all, it's the usual wide dispersion of figures, sometimes even from the same trackers, based on differences in scope and definitions. But what's clear is that the third quarter was a huge quarter for cleantech venture capital. The Cleantech Network (note: link opens pdf) reported a couple of months ago that the Q3 total for North American cleantech VC spending was $1.3B, which was a 50% increase over their Q2 tally, and a 36% increase over Q3 2006. In particular, energy technology made up $901mm of this total, and solar alone was $410mm. They also noted that water investments saw a big increase, and that cleantech VC investments in Europe more than tripled from Q2 figures. Confusingly, there are two sets of numbers I've seen publicly issued from Thomson/NVCA. The ones they put out in a press release recently showed that over the first three months of this year, the dollars put into cleantech investments by U.S. venture capital firms (but note: including international investments) were already 46% higher in the first 9 months of 2007 alone than they were for all of 2006 -- Q1-Q3 totals of over $2.6B, with $1.7B of that in the U.S. Their numbers also showed that solar has dominated in the sector. It's particularly noteworthy to see Mark Heesen's very blunt statement that, while there are strong opportunities in the sector, "short-term 'tourists' should steer clear." The second set of Thomson/ NVCA numbers are from this Moneytree presentation (note: link opens pdf), which shows the dramatic upturn in the cleantech deals they tracked from Q1, to Q2, to Q3 of this year. Their tally shows a more than 4x increase in cleantech venture investing from Q4 2006 to Q3 2007. Finally, while I haven't seen a publicly-released Q3 update, there were similar numbers for 1H07 from Dow Jones/ E&Y, including their calculations that the median pre-money valuation for cleantech venture rounds in both 2006 and 1H07 were up around $30mm, double that of non-cleantech transactions. As always, there are major differences, driven by vaguaries of U.S. versus global tallies, differences in definitions of whether any particular deal should be counted as "cleantech" or fitting into another category, institutional investors versus angel/seed rounds, etc. No need to re-hash that here, we've talked about it before. But the important takeaways from all this are: 1. Cleantech venture investments are in another big upswing, to the point where I would expect (guess?) to see a bit of a "breather" over the next quarter or two. But it's still a very small portion of overall venture capital, and we're still in the early stages of cannibalizing some of the world's biggest industries... After all, the U.S. energy market is about 3 times the size of our IT and telecom markets combined, and yet internet-related investments alone remain higher than cleantech in terms of both number of deals and total dollars. 2. Even during this period of strong investor interest, it still tends to be very much focused in a few "hot" areas -- solar, biofuels, and now water added to the list. Which suggests there are still plenty of other investment areas as yet relatively untapped. 3. The exceptionally high pre-money valuations tracked by Dow Jones don't fit what we're seeing in the marketplace for Series A or B stage deals (with a few spectacular exceptions, of course). So what that tells me is that later-stage investing continues to dominate in the cleantech space. In all likelihood, the MEDIAN deal in the last 18 months or so was a fairly large Series C. Either the early stage is being somewhat neglected, or there are a lot of stealth deals out there. That having been said, there have been some disquieting moves lately by some investors, demonstrating a willingness to write a very big check just to get the resulting attention... One investor I spoke with recently had a two-word warning for those who would purposefully over-capitalize (and thus over-price) a startup as part of a PR/ bizdev strategy: "Sock puppets". In any case, overall valuations have clearly been creeping upward, but the dramatic levels noted by Dow Jones suggest more of a stage-focus issue than anything else. 4. Where are the exits? We'll revisit this subject again soon, but suffice to say that most investments made in this recent surge of VC interest have neither exited nor shaken out, so there's a bit of a portfolio backlog there across the industry. Pulling it all together, cleantech is clearly hot, hot, hot. Yet, while the strong market fundamentals suggest there's still plenty of room to run, it wouldn't be surprising if stage focus shifts and other market/ economic cycle factors dictate a bit of a pause over the next few quarters. There are still many questions, with few answers. Other news and notes: More on the intersection of nanotech and cleantech... How do you pronounce "RE<C"?... MIT is offering a $200k Clean Energy Entrepreneurship Prize in partnership with NStar and the DOE, so get those business plans ready... Finally, 1.2 billion elephants??? A powerful visual.

We've heard a few folks recently point to the fast-growing cleantech market and draw two conclusions: 1) that additional government policy shifts aren't necessary for cleantech to be a lucrative investment area; and 2) that the "invisible hand" of economics may mean that all this cleantech activity could address climate change even without additional government policy shifts. The first of these conclusions is right, but the second probably isn't. One need only look at the tremendous CAGRs for markets of solar, wind power, and even "unsexy" sectors like energy efficiency to see that rising energy demand, and increasingly constrained supplies, is behind the attractiveness of clean energy as an investment area. Yes, government is playing a vital role as well, but few are investing in cleantech with the expectation that further policy shifts are NECESSARY for it to be a lucrative market (or, to put it another way, if you DO believe that, you're probably not investing in this sector). On the other hand, change isn't happening fast enough to adequately address climate change. There's a big difference between the clean energy market growth being attractive, and it being sufficient. To paraphrase Coase (note: link opens pdf), the invisible hand of the market will by itself drive to an optimal outcome in terms of appropriate resource allocation if and ONLY if three assumptions hold true: 1) perfect property rights; 2) perfect information; and 3) zero transaction costs. When these three assumptions are valid, then things sort themselves out quite nicely. Unfortunately, they are almost never totally valid assumptions in real life situations. And for "tragedy of the commons" situations like global climate change, assumption #1 clearly doesn't hold true (who owns the atmosphere?). There's no need here to re-hash all of the various statistics and stories from the past year or so to illustrate just how critical the challenge is that we are facing as a planet, but clearly some urgency is warranted. All of which is a dork-y way of showing that there is a vital role for government policy to shape the course of the invisible hand in such situations. Which explains the urgency around the need for additional significant government policy shifts, so that externalities related to climate change are adequately addressed. In this case, the invisible hand is strong enough to drive powerful growth in clean energy markets, but not sufficient for fully addressing global needs. And of course, further governmental shifts are likely to have a further beneficial effect on our markets... Cleantech investors face a bit of a messaging challenge in arguing that on the one hand, our investments don't require further policy shifts to be successful; but on the other hand, further governmental change is necessary. The wonky argument above clearly doesn't resolve this messaging challenge, but it does help explain it... Deals from the past week:

• Seattle-based Optimum Energy, a developer of software for building energy efficiency, announced a $5mm second round of financing, "virtually all picked up" by Columbia Pacific Management.

• Semplice Energy, a UK-based provider of turnkey energy efficiency and renewable energy services to customers like McDonald's and the London Fire Brigade, announced a $1.23mm round of financing from BIP Fund, a Bahamas-based VC group.

• UK-based Bac2, which has developed proprietary plastic materials for use in fuel cells and other applications, has raised a GBP2mm round of angel financing from London Seed Capital and London Business Angels.

• Magnetic bearing manufacturer Synchrony has raised a $10mm Series B round, from affiliates of Third Security LLC. Third Security affiliates had also provided the company's Series A financing. Synchrony's technology has applications in maglev.

• Sweden-based NanoFreeze has raised an SEK 7.4mm round of financing (note: opens pdf) from Northzone Ventures and TeknoSeed AB. The company's technology helps capture waste heat to generate electricity.

• VWire reported this week that American Aerogel has raised a $3.2mm Series B, led by Vimac Ventures and including participation by Mount Royal Ventures.

• Australia's Smart Storage Pty Ltd has raised a "significant" amount of venture financing from Oz-based Cleantech Ventures and the national science agency CSIRO.  The company is developing grid-scale electric storage technology.