The kind folks at Ernst & Young sent over their Q3 cleantech venture deal data this morning. You've probably already seen the headlines, but suffice to say they've confirmed what many have been saying, that Q3 was a pretty big pullback quarter. They tallied a 55% decline in deal dollars versus Q3 2009, and not only were deals getting smaller on average, but the total number of deals was also down 22%.
Can't say this was a surprise. As we've been talking about for a while, it's seemed that the deal and dollar totals this year and last have been somewhat propped up by insider rounds. And also, VCs are themselves running out of money, and it's a brutal time to be fundraising from LPs. If the VCs don't have money, they have to pull back their check writing. Plus, it could always be just a temporary thing -- Q1 and Q2 2009 were even lower quarters than this last one, in the E&Y data, and the sector bounced back from that.
But by and large, pretty ugly numbers.
Thought I'd do a quick dive into the actual data and see what might be of particular interest underneath all that.
By far my biggest takeaway is that this was an across-the-board pullback. It wasn't due to one stage of deal, or one subcategory, falling off the table.
There are degrees of emphasis,of course -- First Round and Second Round deal counts have declined this year while Seed Round and Later Stage deals have kept pretty steady. But across all stages, average deal sizes are slightly down this year versus where they've been in previous years.
More than just the one quarter's bad news, what's interesting to me is that I see evidence of an ever-increasing shift by investors toward later-stage deals and away from first round investments. But that's not what drove an overall down Q3, of course, since later stage rounds are typically bigger than earlier stage rounds. If anything, the longer term trend toward later stage investing probably buffered even worse sector-wide dynamics.
But also in the sectoral breakdown there wasn't any huge shift either. No big anti-solar movement is evidenced (yet), nor any anti-biofuels shift. In fact, the area that saw any decline of significance so far this year is "power and efficiency management services". And that's only because Q4 2009 was such a crowded quarter for such deals (17, versus 10 in the latest quarter).
To me, this is pretty suspicious. Not in that it undermines the E&Y data in any way. But that it tells me a lot of investments are still being directed toward existing portfolio companies and not new rounds. After all, it's pretty clear anecdotally that investors are shifting their sectoral interests, away from solar and biofuels and transportation, and toward energy efficiency and batteries. If the deal counts aren't showing evidence of this, my educated guess is that it's because true new deals are few and far between, and the deal counts continue to be dominated by insider rounds and other insider-heavy rounds. This fits with the "first round" decline illustrated above. Either that, or everyone is blatantly lying about what they're interested in right now. But my guess is that investors are hunkered down, helping their existing companies, and hoping for some exits so they can go out and tell LPs they've figured this sector out.
The cleantech venture sector is basically still just digesting the deals that were done in 2007-2008. That, and the fact that the economy continues to be stagnant and VCs continue to be low on dry powder, means unfortunately that things will probably continue to be pretty moribund in US cleantech venture capital going forward... In this environment, bringing new investors into a company (whether for the first round, or for later rounds) should be considered a pretty big victory.
PS: If you've read this far, you might enjoy looking back at what CI readers predicted would happen during the first three quarters of 2010. By and large, readers were spot-on. At least as a group... Thanks again to everyone who participated in that survey.
