At Canaccord Genuity's very good sustainability dinner in Boston this week, I had an enjoyable conversation with CG's Marc Marano, a leader on their cleantech team.  He told me about some pretty interesting data they'd pulled together on the solar industry.

We're all familiar already with what a down year 2009 was for financings, but perhaps no sector was harder hit than solar panel manufacturers.  Marc's team had pulled together a list of all the financings in the solar sector for the five quarters Q1 2009 through Q1 2010.  And looking over their tally, I see 18 follow-on rounds during that period to solar panel manufacturers or their suppliers.

Twelve of those rounds were insider rounds, often bridge financings.  And two of the remaining ones were led by a corporate investor not an institutional investor.

Basically, during those five quarters almost no VCs were writing big new checks to follow-on rounds.  They were backing their existing solar panel plays, and making small Series A investments.  Marc notes that things have been better since then (including a couple of deals his group helped), but still... 

It's a wonder we haven't seen even more of a shakeout than is already going on in that sector.  I suspect we'll soon start being able to tell eventual winners from losers with a little more clarity... 

Well, it appears it's finally happened -- energy efficiency is now the hot sector in cleantech venture capital.  That's based upon the writeup of Q1 as reported by The Cleantech Group and Deloitte, who put out their numbers today.

Overall, the picture is one of continued return to healthy dealflow in the sector.  They tallied $1.9B in global cleantech venture dollars, across 180 disclosed deals.  On a dollar basis, this is their largest quarter since 2008, but in terms of deals they claim it was the largest quarter ever.  With Project Better Place providing $350M in one single tracked deal, this implies that deal sizes are relatively down.  

As I have said for a while, it's important to track the number of deals, not just the dollars.  And this Q1 tally illustrates this well. 

Thanks to PBP, the transportation sector had the highest dollar totals.  But in energy efficiency they counted 39 deals totaling $217M, versus 27 each in transportation and solar. 

What's interesting to me is to look at those three sectors in comparison to recent history.  For this, let's look at annual totals, not the ups and downs of quarters. 

• Solar:  In 2008, 110 tracked deals.  In 2009, 86 tracked deals.  In Q1 2010, 27 tracked deals for an annualized rate of 108 deals.
• Transportation (which I assume is their catch-all for both Vehicles and Advanced Batteries):  In 2008, 40 tracked deals.  In 2009, 60 tracked deals.  In Q1 2010, 27 tracked deals for an annualized rate of 108 deals.
• Energy efficiency:  In 2008, 87 tracked deals.  In 2009, 120 tracked deals.  In Q1 2010, 39 deals for an annualized rate of 156 deals.

So energy efficiency indeed leads the way and has been coming on strong. 

But transportation has been growing quite rapidly as well.  And the venture capital love affair with solar is still far from over.  I see plenty of anecdotal evidence, in my conversations with colleagues among VCs, that folks are starting to turn against solar and vehicle and battery deals to an extent, but that may be a biased sample.  And also, the rapid growth of corporate venture dollars into the sector, and the need for follow-ons into existing portfolios may also be the reason why VC attitudes may be shifting but the dealflow isn't yet.

-------------

On another topic, I had the opportunity to review the recent Greentech Media report on Ultracapacitors, and it's a quite good report.  Not just the usual market overview, but some good meaty explorations of specific innovations and specific companies.  Tactically useful information for investors and industry participants.  Definitely recommended.

... a $350M Series B for Project Better Place.  At a pre-money of $900M.  And bear in mind, this doesn't include additional financings that have gone into the company's regional subsidiaries, such as in Israel and Australia.

This should really mess up the Q1 cleantech VC tallies when they come out!  Because as longtime readers already know, the headlines are driven by dollar totals, not deals.

And we've already got some head scratching results now to think about as Q4 totals continue to come out.  Last week saw the release of the MoneyTree survey (US tally from PricewaterhouseCoopers, the National Venture Capital Association and Thomson Reuters), and the results were a little bit at odds with what we'd seen from other early counts we've discussed so far (here and here).  Dan Primack at PE Hub described the cleantech results as "particularly sluggish" and I'd have to agree.

The MoneyTree "cleantech" tally showed 2009 to be way down from 2008, with $1.9B into 185 deals showing a decline of more than 50% in dollars and more than 30% in total deals.  In their tracking of first institutional dollar rounds (seed or Series A, mostly), they showed a more than 50% decline in the number of deals in "Industrial/Energy" from 2008 to 2009. 

Contrast that with tallies like Wesoff's at GTM, which showed much less of a decline in dollars, and in fact a slight increase in the number of deals, from 2008 to 2009.  What happened?

It's tough to say, but here's my guess as to why such different results are seen.  First of all, I don't blame it on any significant error by any of the analysts -- what we've found in the past when we've seen such different numbers is that it's about methodology and definitions and not any major goofs.  And so one obvious definitional difference is that Wesoff's tally is global, whereas MoneyTree and ChubbyBrain are both US-focused.  Perhaps international financings helped make up some of what looks to have been a significant drop-off in US cleantech venture financings from '08 to '09.

Secondly, there are usually big differences in inclusiveness (ie: what's a "cleantech" deal, and what's a "venture capital" deal) between the sectoral specialists and the generalists.  Wesoff counted Synthetic Genomics' $300M multi-year commitment from Exxon, for example, in his tallies.  Willing to bet that the MoneyTree tally doesn't include that one.  And then there are always time-based distinctions (timing of dollar flows versus timing of announcement, etc.) that come into play.

So those factors might explain the differences.  What's nicely consistent with what we've seen before is that the 2009 US quarterly cleantech deal total numbers in the MoneyTree survey generally match up well with the "green" category deal totals in the ChubbyBrain survey.  And in the MoneyTree numbers we again see that Q3 2009 was a bit of a blip, it wasn't that Q4 wasn't really a weak quarter as has been generally reported, but instead the quarter fit the pattern of a weak 2009 overall.

Particularly worrying, however, is that the MoneyTree data suggests early stage financings really fell off, as noted above, from 2008 to 2009.  It would be one thing if the 2009 low deal and dollar numbers were mostly driven by delayed follow-on financings, as we've talked about before.  But to see the early stage financings fall off so much suggests even more underlying weakness, and suggests even more limited dealflow for growth stage investors even if/when things do pick back up again.

So far in Q1 we're seeing a lot more dealflow and dollars, even leaving aside exceptional examples like PBP's announcement this morning.  But with the increasing likelihood of a double-dip in the macro economy, these MoneyTree numbers are pretty sobering.

First of all, maybe take a minute today to give to the relief efforts in Haiti.  The US State Department is recommending the Red Cross...

--------------------------------------------

Kanellos of GTM posted what I think is one of the more important cleantech VC quotes of the year, citing Bruce Pasternack of CMEA as saying, "I don't know if we'd make a Solyndra-type investment today."  He was apparently referring to the capital-intensity of Solyndra and companies like that, and saying that if another investment opportunity like that came along then CMEA might pass on the basis of that alone.  Kanellos concludes that "The big deals are done."

Kanellos' statement is a bit of an over-generalization, naturally, since he's paid to provoke.  There certainly will be big deals done in 2010, I know of a couple blockbusters in final stages already.  And Pasternack's statement was more about capital-intensive business models and not about single big rounds of financing.  But as a general principle it's right, and it's what we've talked about here for a while now: Cleantech VCs are saying that they're running away from capital intensive business models.  Lots of talk about lessons learned.

Interestingly, that's the conclusion some investors are drawing from a new set of numbers from a group with the somewhat unfortunate name of ChubbyBrain, which has joined the ranks of those doing tallies of U.S. venture capital investing.  I haven't really looked at their numbers before, but I like that they break out "Green" as an over-arching category across technology sectors, and they also provide good details about their methodology as to what deals they count (although they're less clear about how they then define those deals in terms of sectors, etc.).

In their review of their Q4 tally, they conclude that "green investments which are usually a significant contributor to the overall venture totals given their capital intensity fell significantly versus Q3 with investment funding dropping 38% even though deal count stayed steady."  In Q4 they tracked 55 deals totaling $565M, and in Q3 they tracked the same number of deals totaling $913M.  They also break their numbers down in a number of useful pie charts.

I read a bit of a contradiction in what ChubbyBrain's saying, since they tar all green investments with the "capital intensity" brush but then indicate, as we also saw in Wesoff's tally for GTM, that what happened in Q4 was a significant reduction in average size of cleantech deals.  So what happened?

Pretty much boils down to this:  Q3 saw two massive deals that didn't happen in Q4, Solyndra ($198M) and Suniva ($75M).  Take out those two and the delta in dollar amounts from Q3 to Q4 is largely removed, and yet the deal totals remain about the same. And in fact, if you look at their charts for Q2 through Q4 it's clear that Q3's high dollar total was just an outlier.

Much ado about nothing, in other words.

So once again we learn the same old lesson:  Pay more attention to the total number of deals and not the dollar totals, because the latter gets skewed by one or two deals out of the entire quarter.  And what the CB analysis showed was that the number of deals was "consistent" from Q3 to Q4.

I do really like the pie charts from CB, and am enjoying comparing the breakdowns of dollars versus deals.  So kudos to them...

In any case, there's very little evidence there that cleantech VCs are as of yet putting their money where their mouth is, and pulling away from capital-intensive investment models.  CB appears to have changed their categorizations a bit from one quarter to the next, which is unhelpful, but still they showed about 24 deals in Q3 (nearly half of the Green category) going into "Renewables" and "Automotive Manufacturing", while in Q4 something like two-thirds of the deals they tracked went into either "Energy & Utilities" or "Automotive & Transportation".  A bit of apples and oranges there, but it's consistent with Wesoff's count of 24 out of 82 deals in Q4 (note: global #s, not U.S.) going into solar.  Meanwhile, CB tracked only a handful of deals in Q4 going into Green subcategories like "Internet" and "Software" and "Business Products & Services", which could be expected to be less capital-intensive.

So basically, cleantech VCs are all claiming to be looking for less capital-intensive investments nowadays... but there's little evidence yet of any such trend, other than increased interest in energy efficiency and smart grid.  But even there, the pattern appears to suggest that VCs generally continue to want to big, not lean.

Over twenty participants already in the 2010 CI Readers' Prediction survey, in just a few hours after launching.  If you haven't taken the survey yet, click here to do so.  It's only a couple of quick questions.

The first of the year-end cleantech VC deal and dollar tallies has come out, with GTM's Eric Wesoff releasing his always-useful quarterly review.  Eric has a pretty good write-up on his results, so I won't go over it all here, but I wanted to highlight a few specific things that struck me:

1.  While Eric's blog posting talks about 2009 overall numbers, I'm frankly a bit taken aback to see that his totals for Q4 venture dollars were down at $817M, way down from Q3's $1.9B and even lower than Q1's $864M, which was supposed to be the low point, right?  What happened?  Has there been a quiet train wreck in cleantech venture capital?

Well, it's still a bit early to draw too many conclusions.  A number of Q4 deals that happened may not have been revealed quite yet as the Reg D filings have their deadline today.  And so by putting out his total today, Eric's obviously missed those, to be included in later updates.  Perhaps there are more dollars out there left to be found.

But not THAT many.  Clearly the dollar amounts took a big step back in Q4.  What about the deal amounts?  They dropped, too.  From 117 in Q3 to 82 in Q4.  Again, this tally may increase in later updates.  But it's still a pretty healthy drop.  However, it is NOT as big a drop as we saw in Q1, when Eric counted only 65 deals.

So what appears to have happened is that the size of deals went way down, at least in Eric's tally (to be confirmed when we review other tallies later).  From a mean round size of over $16M, down to a mean round size of less than $10M in Q4. 

Remember what we've seen again and again in the tallies:  That the dollar amounts are driven by big later-stage deals, as much as by the number of deals (I remain amazed that journalists often ignore this basic fact and draw conclusions based only on dollar totals).  So did big later-stage deals dry up?  Or did later stage deals just get smaller? 

Based upon what I'm seeing in the marketplace, I'm wondering if a bunch of the growth-stage companies that would have normally raised money in 2H09 instead pushed such financings into 2010 -- by either running leaner, or taking in smaller bridges or round extensions.  With the funding environment still very unfriendly to startups, but more macroeconomic optimism out there for 2010, it would be tempting to entrepreneurs and their backers to push off a new fundraising for a half a year or more, in hopes of suffering less dilution (ie: getting a higher valuation) as the sector rebounds.  I've seen a lot of anecdotal evidence of this happening.

If so, it's a risky strategy, however.  Because not everyone is convinced the 2010 economy will see a really strong rebound.  And even if things pick up in the overall economy, venture dollars could lag because so many investment funds remain tapped out and need to raise their next funds themselves.  Perhaps 2010 will see the return of high valuations.  But perhaps not.  So it's a bit of a gamble to wait.

2.  Q4 was once again a big month for solar.

Eric counted 24 venture rounds into solar companies.  Compare that with 9 rounds into biofuels, or 5 rounds into his Smart Grid, EE and DR category.  Or two rounds into water tech.

Not much more to say about that.

We'll write up Q4 a bit more when more tallies come out.  Until then, thanks to Eric for sharing these first results!

About this time last year, I put together a few predictions and readers chimed in with theirs.  How did we all do?

Question 1:  How far will U.S. cleantech venture dollars drop from 1H08 to 1H09? 

I wrote it could be as high as 40%.  I argued that what was going to go completely missing were the mega-deals, and that on a dollar basis at least those made up a significant chunk, around 40% of quarterly tallies. Readers voted for a drop, but totaling less than a third on a dollar basis.

Well, according to the Cleantech Group's tallies, in 1H08 the total North American disclosed venture capital tally was $2.9B, and for 1H09 it was down around $1.6B.  Which is a 45% drop... 

Question 2:  How much, if at all, will the # of U.S. cleantech venture deals drop, 1H08 to 1H09? 

My argument was that the number of deals would probably drop, but by a lot less than the dollar amounts, as investors still did follow-on rounds but backed mostly away from the mega-deals.  I pegged the drop in the number of U.S. deals at around 20%.  Whereas CI readers tended to believe in a drop in the number of deals, but by less than 20%. 

In 1H08, the Cleantech Group counted 136 total North American venture deals.  In 1H09, the total was 139.  So the number of deals was indeed pretty flat!  But obviously the average size per round went way down.

Interestingly, it wasn't because of any significant shift in stage preference, i.e., investors didn't shift back to earlier stage in any significant way.  In 1H08 seed and first round were 32% of the North American total number of rounds, and in 1H09 they were 31%.  Investors still dramatically favored later stage deals.  They just weren't putting so much into them.  In fact, the mean size (sorry, I don't have median readily available) of disclosed "Follow-On" rounds in this data set dropped from $31.1M to $16.5M.

Question 3:  How much will cleantech dollars into China rise, 1H08 to 1H09?

I suggested they could rise 25%.  CI readers agreed with a rise, but were split as to whether it would be more or less than 25%.

We've got a bit of a data availability issue, as CG only started tracking China deals in 2Q08, and so we're missing 1Q08 data.  However, it's enough to show that the dollar amounts did in fact drop -- 2Q08 alone saw $257M, but 1H09's tally was only $170M.

Question 4:  What will be the "hot" sector in 1H09?

Of course, such an undefined question is tough to answer, but CI readers pointed most to energy efficiency and solar as the two most likely categories.  I'd said that solar was going to have to see a retrenchment, and that energy efficiency seemed most poised for growth.

Since the CG's sectoral definitions don't overlap well with my own (they bundle in biofuels and batteries together under the "Transportation" tag, for instance), it's a bit tough to make a definitive statement about how accurate everyone was in their predictions.  However, it is notable that solar dropped from being around 35-40% of venture dollars as it had been throughout 2008, down to a low of 13% share in 2Q09 (before rebounding back up to a 28% share in 3Q09).

Meanwhile, that amorphous "Transportation" category grew to rival the solar sector in terms of share of venture dollars.  So I suppose that means it's a likely candidate for "hot sector", although drilling down into it we see a healthy mix in there of everything from EVs and hybrids to batteries to biofuels.  Still, if 2008 was the year of solar, perhaps 2009 was the year of cars.

In another post, we'll have to do another prediction survey.  This was a pretty useful exercise.

Did you see the Q2 venture returns report from Cambridge Associates and the NVCA (note: pdf)?  If so, you were probably as intrigued by the chart on page 7 as I was.

On that page is a chart of "US Venture Capital Dollar-Weighted Internal Rate of Return on Vintage Year Companies" broken out by sector.  They don't break out cleantech as a category, but they do break out Energy.  And the numbers are pretty noteworthy.

Energy category IRRs vs. All Companies IRRs

2002  Energy = 43.0%, All = 8.75%

2003  Energy = 46.0%, All = 12.3%

2004  Energy = 10.4%, All = 12.8%

2005  Energy = 33.5%, All = 9.66%

2006  Energy = 23.7%, All = 4.46%

2007  Energy = 20.1%, All = 0.65%

2008  Energy = 9.10%, All = (0.04)%

So what is this really saying?

On the surface, it looks like there have been great IRRs in Energy as compared to other sectors like IT, Software, Health Care / Biotech, etc.  In almost every year post-Internet Bubble, VC investments are producing pretty healthy returns in the Energy category, in all but one year beating the performance of the overall VC pool.  If energytech VCs are getting these kinds of IRRs, that looks good compared with current criticism of venture capital that it's been producing sub-par returns versus the risk level inherent to the category. 

But wait a minute, there's a big catch.

If you read the fine print in the methodology, some (and most likely, the predominant portion) of these IRRs have been calculated based upon NAVs (net asset value), not actual cash returns.  So, for example, if a company took in a Series A in 2002, and since then they've had significant up-rounds but no exit, the value of the company is pretty much* set at whatever was the valuation of the last round.  In the aggregate, 2002 vintage companies who took in money that year and later are looking at pretty significant up valuations versus where they were when the money went in.  At least in the numbers CA is tracking.

What this really reflects, therefore, is just what we've talked about here many times over.

1.  The aggregate dollar totals in cleantech venture capital have been dominated by a relatively small number of really huge late-stage deals.

2.  While overall economic conditions are definitely having an impact, many of those well-capitalized companies hadn't had to take in lower-valuation follow on capital through Q2 2008.  So on paper, they're still being carried at those previous high valuations.

In fact, in another part of the report they show that the actual cash distributions across all VC categories are just about nil from 2004 vintage funds onward, probably moreso in cleantech (I'm guessing).

So don't read this chart and get all excited.  These numbers will likely be revised downward in future such reports (but we can hope!).

The most important takeaway is probably that cleantech valuations have held up better than others, at least through Q2.

...Note I'm not at all criticizing the methodology used in this report.  It's great data and hard to do anything more than what CA's done with it.  Just pointing out what we can conclude from it.

+++++++++++++++++

(*it's really not nearly so simple, but let's not get too wrapped around the specifics here)