Reading the Q3 numbers: Time for a break?

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.