The health care venture bubble?

Now that we’re almost a month into the new year, it’s time to corral and sort out all the various cleantech VC tallies that have been put out there.

So: Why isn’t there more talk about the “health care tech bubble”?

Check out the Dow Jones VentureSource annual roundup.  By their count, cleantech investments in the U.S. totaled $2.5B over 187 investments, the dollar growth being 67% from 2006.  Yes, significant growth.  However, then note that the “health care” sector took in $10B over 671 investments.  Yes, “only” a 17% growth in dollar amount over the $8.5B 2006 total, but that’s an increase of $1.5B versus an increase of around $1B in their cleantech sector tally.  And unlike in cleantech, where the popular consensus appears to be that the growth drivers won’t go away soon, in health care policy discussions all the talk is about how to limit the growth in spending.

Perhaps most notably, the median deal size in cleantech was about $7mm—just about the same as that for all VC deals overall, and flat from 2006.  But in health care the median deal size jumped up above $11mm, a 33% rise from 2006.

I’m not at all trying to argue against the attractiveness of health care as an investment sector, I’m not informed enough to say anything like that.  Nor am I trying to use this simplistic comparison to argue that there isn’t a bubble in cleantech (I’ll argue that in other ways, elsewhere).  But I am indeed arguing that the business media seems far too willing to throw around the B-word in cleantech in comparison to the treatment given to other investment sectors.

Why?

1.  Probably because percentage growth is high—allowing some to focus on relative rates in growth versus the absolutes.  But remember how small a percentage cleantech has represented in venture spending up until recently.  Health care is a huge market, but so are global markets for energy, water and materials, so sometimes it might be useful to take a step back and recognize just how early we are in the process of creative destruction of these huge industries.  Potentially a lot of room left to run…

2.  Another reason is that a few cleantech entrepreneurs and investors persist in making bold statements about how their ideas/ investments are going to re-make the world in the blink of an eye.  Health care entrepreneurs and investors learned the hard way a few years back that claiming to have cancer cured is a sure-fired way to trigger a lot of skepticism and scrutiny by the press.  The current generation of cleantech entrepreneurs and investors are only now learning that lesson (although one would think the lessons of 2000-2001 would be more vivid than they apparently are).  Big, bold changes are indeed happening, it’s an exciting time, but one can hardly blame the jaundiced business journalists for raising an eyebrow at some of the claims and mega-deals that are being made.

3.  Finally, there’s always confusion about publicly-traded stocks versus venture investments, in terms of thinking about valuations, etc.  For good reason, we refrain on this site from getting into questions about appropriate valuations for publicly-traded cleantech stocks.  It’s not the author’s purview, there are smarter people looking at it, and it’s also only indirectly relevant what those companies are doing.  It affects potential exits, but it doesn’t necessarily impact what venture investors are doing.  Certainly VCs will tend to follow the exits… but that doesn’t mean that when journalists see solar stock prices rise and fall precipitously that the same volatility is felt by early stage investors making multi-year investments in privately-held companies.

Again, not looking to revisit the “is there or isn’t there” discussion here.  And we probably shouldn’t expect that mainstream business journalists will somehow back away from the whiff of controversy inherent in such discussions.  But the juxtaposition of the sectoral data in the VentureSource release was pretty fascinating…

The Cleantech Group also put out their annual total recently, as GTM wrote up a couple of days ago.  As usual, they have the highest numbers among those counting, which is understandable given the group’s central role in the industry and their inclusiveness.  By their count, North American total cleantech venture investments were $3.95B, up 38% from 2006, and European cleantech venture investments totaled $1.23B, up 34% from the previous year.  Interestingly, the number of deals in North America only increased 15%, to 268.  This means, of course, that average deal size went up significantly—but if you also believe the VentureSource data suggesting that median deal size stayed the same, then the conclusion must be that there were more mega-deals out of the bunch.  And this is exactly what the Cleantech Group reports, pointing out not only that the number of $100mm+ deals increased from 2006, but that 8 of the top 10 solar financing rounds since 1999 took place last year.

So we are left to conclude that valuation pressure isn’t really impacting the sector for most deals… yet.  But that certainly the pace of mega-deals doesn’t appear to be slowing down.  At least that’s what this data would suggest, although shifts in the mix toward earlier stage (although we haven’t seen anything like that, it’s possible) would also hide valuation pressure as counted by median, and some VCs are sharing anecdotal evidence about some valuation pressure out there (mostly in solar deals, of course).

We already talked about Eric Wesoff’s first-cut tally (as well as yours truly’s poor track record with annual predictions) earlier in the month.  His VenturePower report, looking worldwide, totaled $3.4B for 222 deals.

And rounding up the surveys, the MoneyTree/NVCA totals for the U.S. in the cleantech sector (note: link opens pdf) were $2.2B for 201 deals.  It’s helpful to see them aggregate cleantech deals from across several of their traditional categories, kudos—and another good validation of interest in the sector.

So as usual, big disparities in the counts.  Which is understandable, reflecting the different levels of inclusiveness—how do they define cleantech, what geographies are considered, how do they count project-finance type rounds.  The difference in deal count between the VentureSource survey and the Cleantech Group survey, for example, was 81 deals.

And most importantly, all the surveys pointed to very strong growth in the sector, both in terms of dollars and numbers of deals.  So no matter how you’re counting it, cleantech remains hot… just not as hot as health care tech.