Parsing the E&Y Q2 numbers

We talked about Q2 numbers a while back, but Ernst & Young’s Q2 release this past week is particularly useful to look through because of the depth of data they released—a great breakdown by stage, category, etc. with historical data.  Inclusive not only of energy, but also other cleantech sectors often ignored.  The E&Y data was worth the wait…

The headline which you’ve probably already seen is that it was a record quarter for U.S. cleantech venture capital, at $962mm, way up from Q1 and the biggest quarter since 2002 (barely beating out Q3 2007).

Of course, that’s on a dollar basis.  The NUMBER of deals was big, yes, at 41, but that only puts the quarter at the 3rd most active quarter E&Y tracked since 2002.  Not fewer deals, really, but certainly bigger deals.

What’s driving this?  Two big trends are clear in looking through the data:

1.  Solar continues to bring in the dollars.  $487mm, or more than 50% of the quarterly total.  But only 14 out of 41 deals.   In terms of dollars, this was only the 4th biggest quarter since 2002 for non-solar cleantech deals.  It’s all solar, all the time these days.

2.  Overall deal size is up.  Because E&Y very helpfully breaks out deals by stage in their analysis, we can see that “First Round” deals averaged $12mm in size, up from an average of $10mm last year…  But “Second Round” deals averaged $37mm for the second quarter in a row, hugely up from 2007’s average size of $23mm.  There’s evidence of deal size inflation at all stages, but it’s most strongly felt in second round deals.

It would be easy to look at the second point above and conclude that valuations are up.  It’s only indicative, but generally speaking bigger round sizes will mean a bigger valuation.

But it’s unclear how much deal size inflation is being felt across the non-solar portions of the sector.  Let’s compare to 2007 totals.

1.  The average deal size for a solar deal (note: inclusive of all round stages, unfortunately even E&Y doesn’t break out the full crosstabs) was $35mm in Q2.  That’s 45% higher than 2007’s average solar deal size of $24mm.

2.  The average deal size for a non-solar deal was $17.6mm, 25% higher than 2007’s average non-solar deal size of $14mm.

3.  In 1H08, 61% of cleantech deals were “Second Round” or “Later Stage”, up from an already high 46% for 2007.

So it’s hard to argue that deal sizes are up across the rest of the sector.  While non-solar deal sizes are up, it’s unclear how much of that is driven by the general shift toward later-stage investing.

Solar and later-stage investing are driving the bus right now, and showing no signs of slowing down.

What does the data tell us in terms of “what’s next”?  Notably, energy efficiency deals and deal sizes are up in a big way.  Other than that, other sectors looked down or flat for the most part.