Rob Day | December 18, 2007 at 7:22 AM 3 Comments

“Cleantech venture bubble” watch, pt 5:  VCs predict a cleantech bubble in 2008

We've talked a fair bit about all the buzz about a possible bubble in cleantech venture capital. So it's interesting to note this NVCA survey (link to PPT of results also found here), in which 80% of VCs surveyed expect that cleantech will attract higher levels of funding in 2008. In the same survey, when asked "Which single industry will be overvalued in 2008?", 61% of those surveyed picked cleantech (vs. 18% choosing Internet, 12% choosing media, and 9% choosing another sector). Leave aside questions about the survey methodology (why would only one sector be over-valued?) and the naturally contrarian reactions to the cleantech-focused hype cycle (when compared with the level of mass media attention and hyperbole regarding other investment sectors) that we've talked about before. Even accounting for all that, the clear signal from the general VC community is that they expect a cleantech venture bubble in 2008. It's a sobering assessment. The other survey results are pretty interesting as well (VCs predict a bad U.S. economy in 2008, oil above $92 per barrel a year from now, and Hillary to be elected president). Notably, VCs are predicting consolidation in the industry, with fewer independent funds and a larger average fund size. This is indicative of an overall trend in the industry along these lines. But with fewer, bigger funds, that necessitates at least one of three things: 1) Fewer, but bigger deals; 2) more deals per GP, and thus less involvement/support by VCs with their portfolio companies; or 3) the number of independent funds goes down, but the number of GPs per fund goes up. So far, the trend seems to be mostly toward #1, with some lesser evidence of the other two shifts as well. It may seem to be a bit of a stretch to relate the cleantech survey results and the industry consolidation predictions, but to some observers these are definitely inter-related trends. As larger, generalist firms have been jumping into cleantech over the past months, they are coming in with the need to write larger checks. This will (on the whole) mean investing later-stage and in "proven" investment areas like solar and biofuels. That's because writing a big check into an earlier-stage company in an unfamiliar technology area is perceived, with some justification, as being pretty darn risky. This is one reason why (as we've talked about here ad nauseam) the headline-grabbing growth in investments into the cleantech sector has been largely driven by a few (or even more than a few) mega-sized later stage deals. Although it's hard to parse out on the basis of just one survey question, the cleantech-related results of the NVCA survey probably indicate an expectation that this dynamic will continue in the sector. A few very large deals by fewer, larger check writers, into just a few sub-sectors of the market, at therefore higher valuations. The possibility of mini-bubbles in particularly hot sub-sectors, particularly later-stage. Meanwhile, the role of the smaller sectoral specialist would likely stay the same, as the bird-dog, going after the as-yet underexamined cleantech subsectors. And as we're already seeing, there will also be plenty of opportunities for these two types of VCs to work well together, where a "new" subsector and specific investment opportunity requires both sector-specific expertise and deep pockets. At least that's what we are all hoping for, and are seeing so far in the market... After all, the underlying economic fundamentals supporting continued rapid growth of cleantech markets are getting even stronger, right? But we'll have to see how 2008 pans out. Perhaps the simplest and most pessimistic interpretation of the NVCA survey and other available data will in the end be the right one...

Over the last couple of weeks of 2007, we'll do a couple more posts here looking ahead at what seems likely to happen in the new year.

In other news:

• Second Wind, a Boston-area developer of electronics and software for wind power project developers, has announced a $4mm Series B round of financing, provided by Good Energies.

• In Israel, the newly-launched Tamarix Ventures is aiming to become Israel's largest cleantech venture capital fund, at $100mm.

Finally, my firm @Ventures is looking to bring on a couple of Summer Associates in 2008. First-year MBA students with a strong technical background in cleantech and an interest in venture capital should check out the job posting here.