The Cleantech Group released their Q3 preliminary tally recently, and there appears to be some positive news in there.

In their global count, they saw not only an uptick in the dollars going into the sector ($2.23B in Q3 2011, up from $1.81B in Q3 2010), but also an increase in the number of financing rounds (189, up from 179 in Q2 2011).  Even more encouragingly, the number of Seed / Series A deals went up, so this wasn't just a quarter of insider follow-ons like we've seen at times in the past. The total of 128 deals they counted in North America was a new high for the region, they report, and represented a second straight quarter of deal-count growth. While they point to energy storage as being a hot area, it's important to note that a small handful of large battery- and fuel cell-related deals drove that sector to be a major recipient of dollars. Energy efficiency and solar saw the highest number of deals, and continue to feel like they're still "hot" even if the deal counts in each subsector are a bit down from their highs.

So, some encouraging news. But there were signs of distress as well.

They show average early-round deal sizes declining for a second straight quarter to $6.1M. That remains well off the peak average of over $12M for such deals from back in 2008. The fact that deal sizes are coming down isn't necessarily a bad thing, however. But the Cleantech Group readout (see their whole slide deck here for lots of data goodness) also notes that exits are hard to come by right now. So we're left with a lot of VCs holding existing portfolios, needing to raise new funds, but not having exits from existing funds that they can point to. Perhaps that's the reason why that out of the top 10 "venture deals" they list for the quarter, I count only a couple that had venture firms as their primary investors.

Furthermore, the entire VC asset category is out of favor right now.  As Dow Jones reported yesterday, VC fundraising is way down. Especially hard hit have been early-stage investments, which saw fundraising drop 41% year-on-year. If VC firms can't raise new funds, they can't invest in new deals.

This resonates with the sharp decline in the number of VC firms in the U.S. actively investing, as reported in August by Ernst & Young (sorry, don't have a link; working off a document) across all sectors (not just cleantech). Even as recently as 2008, they counted 911 venture firms making investments, of which 345 made four or more investments per year. By 2010, that number had fallen to 793 total, with only 274 making four or more investments. So far in 2011, that total is down to 564, with only 150 making four or more investments.  

There is a contraction underway in the venture capital asset category overall. And while some LPs still like the cleantech thesis, there's plenty of anecdotal evidence to suggest that this year (even before the Solyndra circus rolled into town), many LPs are generally backing away from the sector. So I would expect the contraction to end up being especially harsh on cleantech VCs.

This isn't to be over-generalized. Certainly, there are VC firms still investing heavily in cleantech, and certainly there are some specialist cleantech VC firms out there able to close on decent-sized new funds.

But in general, it doesn't look like the investors in this sector will be entering 2012 with deep pockets -- especially if a now-expected second recession hits the macroeconomy, further hurting LP allocations and exit pathways.

So while the Q3 results are somewhat encouraging, it will be surprising to see that upward trend continue over the next few quarters.

Once again, my advice to cleantech entrepreneurs is simple: if you have the opportunity to raise money, do it. And raise more than you think you'll need, so you have enough to last through a "winter season" in cleantech venture capital if that's what 2012 ends up looking like.

Root for that IPO window to re-open, because exits would really help bring back LP interest into the sector.