$7.7B in cleantech venture investments in 2008.  That's the record number Eric Wesoff has tallied up -- and it may not include some deals done at the end of the year, so that number may go up.  More great work from Eric, who's been consistently able to come out with the fastest numbers each quarter... (Eric also touched upon one of the topics of the @Ventures "what's wrong with cleantech VC" presentation when he argued that early stage hasn't completely dried up, since "at least 30 of the 115 greentech deals this quarter were seed stage or A rounds."  But since no one has ever said that early stage is non-existent, I would argue that having only 26% of deals be in early stage is pretty indicative of an imbalance in the market.  But I digress...) So what do Cleantech Investing readers think 2009 will look like?  I'd asked folks to take part in an online survey over the holidays, to gauge how optimistic or pessimistic everyone was feeling.  The short answer:  Not super-optimistic, but not really pessimistic either. Basically, it's a good thing I'm not a bookie, because I wasn't very good at setting the over/under! Question 1:  Who are C.I. readers? There's always selection bias in a survey like this where people choose whether or not to participate, but about 1/4th of the participants were venture investors; 1/4th were entrepreneurs, other investors, or other corporate participants in cleantech; 14% were some kind of service provider; and the rest weren't actively involved in cleantech, just interested.  So a nice mix of folks across and from outside the industry. Question 2:  Will cleantech VC dollars in the U.S. drop by more or less than a third in 1H09 vs 1H08? Two-thirds of readers think that the venture dollars will drop versus last year.  But almost half of all respondents felt that there would be a drop, yet of less than 1/3rd. So more than three quarters of participants took the "over" here, meaning readers are more optimistic than my prediction... Question 3:  Will cleantech VC deals (numbers, not dollars) in the U.S. drop by more or less than 20% in 1H09 vs 1H08? 83% of C.I. readers took the "over" here, including 24% who feel that the numbers will actually rise.  But again a majority of respondents feel that the deal numbers will drop. So basically, C.I. readers expect deal counts to fall, but only slightly. Question 4:  Will cleantech VC dollars into China rise by more than 25% in 1H09 vs 1H08? A solid 71% of C.I. readers think that venture dollars into China will actually rise.  But those readers were pretty evenly split as to whether the rise would be as much as 25% or not.  And almost 3 out of 10 readers feel the dollars into China cleantech will actually fall. Question 5:  What will be the "hot" sector in 1H09? I made this question intentionally undefined, and also failed to include carbon markets in my list (thankfully one reader called me on it). The answers were all over the map, with every listed category (and some unlisted) getting at least one vote, but the two most popular choices were Energy Efficiency and Solar, each getting over 30% of the votes.  Energy storage came in third, with 1/4 of the votes, and after that came everything else.  Readers don't expect a huge year for biofuels, vehicles, water, green buildings, or advanced materials, in other words. But everything got at least ONE vote. Question 6:  What will be the headline that best captures the 1H09 cleantech venture capital market? This one was just for fun, and there were a lot of great answers.  A sizable minority of answers were pretty pessimistic -- talk of bubbles bursting or unsustainable levels of investing.  And a sizable minority of answers were pretty pessimistic -- talk of sustained market growth and good support from the new administration. A couple of ones just to pull out in particular that I found interesting:

"Return to VC Basics" "Winners Emerge as Wheat Separates" "Transportation Electrification Dominates Thinking" "I have no idea."

It's probably a safe assumption that last one didn't come from a VC.  None would ever admit something like that! Thanks to everyone for participating!  When the 1H09 tallies come out, we'll revisit and see how accurate everyone was... . . . .

Jeff Bussgang (of Flybridge, and focused on internet investments) wrote a very interesting column over at PE Hub yesterday (sub req'd), where he made a few arguments about the overall VC environment right now that are worth noting:

1.  Valuations are dropping to the point where "it will be a privilege to close a flat round with an outsider." 2.  The impact is felt hardest on Series B and Series C rounds because "almost no one is paying up for pre-revenue companies never mind fast growth revenue companies."  (Not sure what "never mind" means in this context) 3.  All this is because exit assumptions are being pushed back by 2-3 years, and therefore investors will need to plan on startups requiring significantly more capital to get to that exit. 4.  Because of the additional reserves thus necessary to keep in hand, VC new deal activity is likely to dry up a bit as they target fewer deals with their remaining cash available.

This is all very well articulated and generally smart, and may be holding true for VC overall, but I don't believe it's entirely accurate for the cleantech sector in particular.  Let's take the points in turn: 1.  Valuations are dropping, but anecdotally at least I'm not seeing a lot of cram-downs, at least not yet.  Now, there are definitely some exceptions, and I think we certainly will see some high-profile down rounds, downward valuation pressure, and some smoking craters.  But it's unclear in which stages they'll be most felt.  If you look back at what I wrote a couple of months ago, my feeling is that the really high-flying, high cashburn businesses will be hardest hit, as the "pre-revenue mezz rounds" are the ones most likely to be affected by exits being so slow.  So far I think I've been mostly right (for once!), which brings us to point #2: 2.  Bussgang posits that Series B and Series C will be the hardest hit.  What he really means to say is that Series A valuations aren't seeing as much downward pressure, I don't believe he meant to be so specific about stage, he was just drawing a distinction between Series A and follow-on rounds.  But I think he missed the mark a bit, because Series B rounds appear to still be going strong. I did a very informal and probably inaccurate tally of the rounds mentioned on this site for Oct/Nov versus those for Aug/Sept.  If Bussgang's take is accurate in the cleantech sector, we should be seeing a drop-off in deal numbers for both Series B and Series C, with Series A remaining strong. Well, 2 for 3. _________Seed+A____SerB_____SerC+__ Aug/Sept          23               17                17 Oct/Nov           29               14                 8 It's a small and unscientific dataset that was probably mishandled by yours truly along the way, but it sure looks like Series A and Series B both have held up in terms of deal count, while Series C and later is what has dropped off. And for the valuations for Series B?  Well, it's darn near impossible to get a read on this, for the obvious reason that no one reports valuations on venture rounds.  But we do have a very general indication from assessing round SIZE, which should be somewhat (weakly*) correlated to valuation.  And for Aug/Sept the median Series B round size in my dataset was $16mm, whereas for Oct/Nov it was $18mm.  With such a small data set that's pretty fuzzy in terms of results, but at least what it DOESN'T show is some kind of dramatic contraction in Series B round sizes which might be a very loose indication of valuation decline.  Notably, the Aug/Sept Series B rounds included 5 rounds of $40mm or more, versus only 2 such rounds in the most recent period, so the mega-rounds might be taking a hit in particular... It's tough to draw too many hard conclusions from all of this amateurish and very quickly done analysis, but at least the above numbers don't lend any credence to the idea that Series B rounds in cleantech are showing any overall decline in terms of dealflow or valuations.  Big-ticket rounds of any moniker, and Series C and later rounds, however, might be demonstrating some of what Bussgang is talking about... 3 and 4.  No question, everyone is thinking about keeping more reserves around for follow-on rounds for their companies, and I've spoken with several investors who are slowing down their new dealflow in order to keep their powder dry.  It does seem like entrepreneurs are having to work harder to pull syndicates together as a result.  So I think Bussgang's spot on with his third point about the effects of a longer exit horizon in this regard. But I don't get why the companies will necessarily need more capital to reach an exit.  The aforementioned investors who are keeping their powder dry are doing so just so they don't have to worry as much about an outside investor stepping up at the necessary time for a follow-on.  But Bussgang's point about the startup themselves needing more capital (as opposed to existing investors putting in a greater share of additional required capital) makes the assumption that companies will be cashflow negative (in his back of the envelope calculations, it's to the tune of around $10mm in net cash burn per year) all the way through to an exit. But smart entrepreneurs are already figuring out how to get to cashflow breakeven as quickly as possible, if they're not already there.  So I'm a bit confused by his example... Both Bussgang and myself are engaging in nothing more than speculation at this point, and this is one of those things that will also be very case-by-case whereas we're dealing in broad generalities.  Plus, his internet investment world looks different in several key respects from cleantech, in ways that mean we may both be right.  But I bet that when the numbers do eventually come out next year, we'll see that 2H08 was a period of contraction in late stage cleantech venture capital, particularly for the really high-profile, high-valuation pre-rev deals... but much lessened impact on Series A and Series B.  How will that play in the headlines?  "Cleantech venture dollars take a significant hit!!!"  Hey, reporters gotta do what they gotta do.  But look at the details to see how it actually plays out. (*My use of round size is a really desperate move, because obviously valuations shouldn't really be tied to round size.  For example, if the Series B round sizes have stayed the same, but now they typically get 1/3rd of the company whereas they used to get 1/4th of the company, the analysis breaks down.  But on the whole, I think there's some value in extrapolating based upon this data.  So reader beware...) . . .

There's a lot of uncertainty right now about how the global financial turmoil will affect cleantech VC over the near to medium term.  I've seen news stories (mostly looking at backward data) talking about how cleantech has been insulated from the downturn, and I've also seen news stories suggesting the sector is about to drive off a cliff ala Toonces. So in the current context, it was a real joy getting to be one of the judges for the energy track of Saturday's MIT Elevator Pitch Contest.  A bit of a different format from the many other bplan contests I've judged in the past -- in the EPC, we blitzed through over 20 presentations in under an hour, as each student/entrepreneur had 60 seconds to make their best pitch and then the three judges got to ask 2-3 quick follow-up questions.  The presenters in the energy track weren't all from MIT, but were all students, typically grad students either at the business school or in labs somewhere, and often representing a team with a mix of both. What made it so fun for me was how impressive many of the ideas were.  Granted, we didn't get a chance to dig into the details, but in terms of seeing a couple of dozen young entrepreneurs who've come up with some potentially exciting and lucrative and innovative business concepts, it was quite encouraging to see.  And a great variety of details -- from nifty combinations of distributed computing with heating/HVAC to waste-to-energy to ultracaps, while solar and fuels were represented, the breadth of innovation was terrific. So while the sector seems like it's going to slow down a bit here over the near term, at the innovation stage things looked really healthy this weekend, at least. Meanwhile some more numbers came out and confirmed that Q3 was pretty solid for cleantech VC in the midst of a general VC slowdown.  VentureSource tracked 583 US financing rounds totaling $7.3B in the quarter, of which 32 financings were in cleantech, totaling $1.1B.  Obviously the cleantech totals were dominated by a few huge deals, which was a consistent message across the other tallies we discussed a couple of weeks ago as well.  But in this VentureSource survey it's still remarkable to see 5.5% of deals but 15.1% of dollars attributed to the sector.  It's also remarkable to see that the Cleantech Group tracked 77 US cleantech deals while VentureSource only tracked 32.  Then, too, the Moneytree survey came up with 73 cleantech deals in the quarter...  It remains very difficult to tie together the various data trackers in the sector... Deal announcements were pretty slack over the past week.  A sign of things to come?  We'll have to see.

• GTM's latest Funding Roundup here.

• Lighting controls developer Adura Technologies raised a $5mm Series A, co-led by VantagePoint and Claremont Creek.

• CPV startup Soliant raised a $21mm round led by Convexa Capital and including $2.5mm from GE Energy Financial Services and investments by existing investors RockPort, Nth Power, Trinity Ventures and Rincon Venture Partners.

• PV startup Innovalight took in $5mm in debt and equity financing from Leader Ventures and SVB.

• CleanScapes, a revenue-stage waste collection company, took in a $10mm Series A, including $1.6mm provided by SJF.

• Downturn watch:  Tesla is scaling back and Elon is taking the helm, with the goal of being cashflow positive within 6-9 months...  In this survey, 55% of tech leaders feel the IPO window won't re-open until 2010...  And CTI reported last week that Global Solar has canceled a planned private equity round.

Other news and notes:  It is well worth reading this "tough love" column from Neal Dikeman, cautionary words for VCs in the sector...  And here's a good article regarding the Transmission capacity constraints holding back growth in wind power.

We can only hope that Sec. Paulson is studying up on his Akerlof information theory (hence the title of this post, lame pun alert), before going on his big bad-debt buying spree. While the financial markets were in turmoil this past week, however, the news for cleantech VC was looking much brighter.  Early tallies of cleantech venture capital showed that the third quarter was another banner quarter for venture capital in the sector. The Venture Power Report from GTM counted $2.8B in greentech venture capital in the quarter (if it's like last quarter, this covers North America, Europe, Israel and Australia), the biggest quarter ever tracked by the GTM analyst, Eric Wesoff.  A few big solar deals certainly inflated that top-line number (solar was $1.5B of the total), but tellingly Wesoff counted 95 deals in the quarter, versus 74 deals in Q2. Beyond the overall trend of sectoral growth, there's some evidence of increased interest in energy efficiency/ smart grid and geothermal.  But really, this was a quarter driven by solar, with more than a quarter of the deals and more than HALF of the dollars tracked by Wesoff.  The average solar deal size in the quarter was $61M, if you can believe it. The Cleantech Group's numbers were a bit different, at 158 deals totaling $2.6B across a different geography:  North America, Europe, China and India.  We'll have to wait for the details to see what drives the differences, but regardless, both surveys saw a big increase over Q2 in terms of both number of deals and dollars. The Cleantech Group's U.S. tally at $1.75B (up from $1.49B in Q2) is especially notable in light of the news earlier in the week that U.S. VC totals were overall down to $5.7B from $7.6B in Q2, according to VentureXpert.  So all of a sudden, cleantech really is propping up the venture capital market in the U.S. Here's the problem:  The overall financial turmoil means that exits of all kinds have dried up.  The IPO window is currently glued shut.  And M&A exits overall are also way down. I think the consensus among VCs is that overall the sector has a lot of long-term growth potential, but right now any cleantech companies that were primed for (if not outright needing) an IPO or trade sale exit are hurting.  As we saw during the summer, if things calm down in the overall market, cleantech is likely to lead the charge of exits once the IPO and M&A windows re-open.  But for now, there are some big solar, energy storage and biofuels companies with big cash burn biting their fingernails and cheering on the bailout in hopes of stabilization, if not an upturn.  Being early stage, with longer investment horizons, looks a lot better than late stage right now, is one implication... One other major good piece of news was that the much-anticipated clean energy incentives re-ups were included as part of the "sweeteners" that got the bailout through the House.  This should particularly help solar, but also geothermal, wind power, biodiesel and EVs. All in all, a good week in the news, and a good Q3, for cleantech VC.  But everyone's rooting for some economic stabilization, if not recovery, over the rest of the year...

We talked about Q2 numbers a while back, but Ernst & Young's Q2 release this past week is particularly useful to look through because of the depth of data they released -- a great breakdown by stage, category, etc. with historical data.  Inclusive not only of energy, but also other cleantech sectors often ignored.  The E&Y data was worth the wait... The headline which you've probably already seen is that it was a record quarter for U.S. cleantech venture capital, at $962mm, way up from Q1 and the biggest quarter since 2002 (barely beating out Q3 2007). Of course, that's on a dollar basis.  The NUMBER of deals was big, yes, at 41, but that only puts the quarter at the 3rd most active quarter E&Y tracked since 2002.  Not fewer deals, really, but certainly bigger deals. What's driving this?  Two big trends are clear in looking through the data: 1.  Solar continues to bring in the dollars.  $487mm, or more than 50% of the quarterly total.  But only 14 out of 41 deals.  In terms of dollars, this was only the 4th biggest quarter since 2002 for non-solar cleantech deals.  It's all solar, all the time these days. 2.  Overall deal size is up.  Because E&Y very helpfully breaks out deals by stage in their analysis, we can see that "First Round" deals averaged $12mm in size, up from an average of $10mm last year...  But "Second Round" deals averaged $37mm for the second quarter in a row, hugely up from 2007's average size of $23mm.  There's evidence of deal size inflation at all stages, but it's most strongly felt in second round deals. It would be easy to look at the second point above and conclude that valuations are up.  It's only indicative, but generally speaking bigger round sizes will mean a bigger valuation. But it's unclear how much deal size inflation is being felt across the non-solar portions of the sector.  Let's compare to 2007 totals. 1.  The average deal size for a solar deal (note: inclusive of all round stages, unfortunately even E&Y doesn't break out the full crosstabs) was $35mm in Q2.  That's 45% higher than 2007's average solar deal size of $24mm. 2.  The average deal size for a non-solar deal was $17.6mm, 25% higher than 2007's average non-solar deal size of $14mm. 3.  In 1H08, 61% of cleantech deals were "Second Round" or "Later Stage", up from an already high 46% for 2007. So it's hard to argue that deal sizes are up across the rest of the sector.  While non-solar deal sizes are up, it's unclear how much of that is driven by the general shift toward later-stage investing. Solar and later-stage investing are driving the bus right now, and showing no signs of slowing down. What does the data tell us in terms of "what's next"?  Notably, energy efficiency deals and deal sizes are up in a big way.  Other than that, other sectors looked down or flat for the most part.

PWC Moneytree/ NVCA and VentureSource both released their Q2 venture capital tallies over the weekend.  The picture they presented matched well with the results that came out earlier from the Cleantech Group and Greentech Media. As always, these groups (because they're looking broadly across sectors and not just looking to be inclusive about what's clean or green tech) come up with lower numbers than Cleantech Group or GTM.  The Moneytree total for U.S. cleantech VC in Q2 was $883.6mm into 65 deals (note: link opens pdf), and the VentureSource total was $817mm into 32 deals for the "energy and utilities" sector -- including $650mm in 26 renewable energy deals -- versus the Cleantech Group's $1.49B U.S. total. Despite continued growth, the Moneytree cleantech total would put the sector at still less than one-eighth of all VC investments in the U.S. Both the Moneytree and VentureSource survey results showed record quarters in terms of total dollars, but as driven by big deals.  While they don't break down the stage question for cleantech in particular in their releases, in terms of venture capital overall the two surveys both noted that later stage investing is continuing to grow, while early stage VC remains fairly steady (so the Moneytree write-up talks about early stage declining as a percentage of dollars, while the VentureSource write-up talks about how early stage remains "fairly steady"...). Perhaps the most telling thing is that the Moneytree survey write-up noted that Thomson Reuters had had to change their definition of cleantech to provide "greater precision and scope" -- in other words, cleantech is now mainstream enough that they needed to tighten up their definitions and give it more emphasis.  Thus, they revised their Q1 totals up from $625mm and 44 deals (note: link opens pdf) to $871mm and 60 deals.  Will VentureSource follow suit? Deals from the past couple of days:

• Carbonetworks, a provider of software to help companies manage their carbon-related activities, raised a $5mm Series A led by NGEN Partners.

• HaloSource, a bromine-based water purification startup, raised an $11.5mm (Series D?) round of financing from new investors Origo Sino-India and Origo Resource Partners Limited, as well as existing investors including Physic Ventures.  It's unclear if previous investors Masdar Clean Tech Fund participated in the round.

This week we've had the first tastes of Q2 numbers coming out from the Cleantech Group and Greentech Media. The indications are that dollar-wise, Q2 was a huge quarter for cleantech VC. But that it's mostly because of multiple large, later-stage deals. It should be noted that, because of their focus on clean/greentech, these numbers will be larger than most of the subsequent tallies that come out (such as Ernst & Young, etc.). But usefully, both group's tallies were remarkably consistent... The top line is that the Cleantech Group reports that cleantech VC across North America, Europe, India and China added up to $2B in the quarter. And Greentech Media's Eric Wesoff counted $1.3B in renewable energy VC in North America, Europe, Israel and Australia. Obviously a full apples-to-apples comparison will be impossible. But notably, within the energy category alone, the Cleantech Group counted up about $1.4B (leaving about $600mm for all the other cleantech categories). So they're clearly in the same neighborhood. Solar blew the doors off during the record quarter, at somewhere between $671mm (GTM) and nearly $800mm (CG). And biofuels also came on strong, although a distant second place, at nearly $300mm (both). Here's what particularly struck me: Both counts showed a big increase in the dollars -- CG's was a huge increase on their $1.25B Q1 tally, and GTM had counted around $1B in their Q1 tally -- but the indications are that the number of deals didn't change that much. GTM had it at 73 deals in Q1, compared to 74 deals in Q2. CG's was a bigger increase, from 79 to 96 transactions, but still it's quite clear that the average deal size went up quite a bit. It's especially clear in solar, where GTM's average solar transaction size went up from $19mm in Q1 to $29mm in Q2. CG pointed to five deals in solar thermal power in particular that added up to $278mm in funding. This is echoed in some other numbers from GTM, showing that Seed/ Series A rounds have declined from almost 60% of all deals in 2006-7, down to around 40% in Q1 2008. And since those deals will be much smaller than the Series B, Series C, etc. rounds, on a dollar basis the decline must be even bigger. It's no wonder that outsiders (and increasingly, vocal generalist VCs) are out there claiming that cleantech is a capital intensive sector. Because a very few, huge solar (and, to a lesser extent, biofuels and lighting) deals are just plain dominating the sectoral numbers right now. Fortunately, what these numbers show is that in rest of the broader cleantech market (water, materials, etc.), deal sizes remain reasonable. Deals from the past few days:

• See GTM's Funding Roundup for news of DuraTherm's acquisition by Masdar Cleantech Fund and Virgin Green Fund, as well as fundings for Intelligent Energy, TranSiC, Silvigen, Ensartech, Integrity Block, and Manchester Bobber.

• Energy Recovery, a desal-related technology developer, had a successful IPO. But wait, I thought cleantech was responsible for the lack of VC-backed IPOs last quarter?

• Smart sprinkler controller Cyber-Rain raised an undisclosed-sized Series A, led by Funk Ventures, and including Momentum Venture Management and angels.

• In the catchiest-named deal so far this year, Cleantech Invest AG announced an investment in En-tech Energietechnikproduktion GmbH (Austria). En-tech Energietechnikproduktion GmbH is developing pellet-fueled heating systems. Stay tuned for future developments from En-tech Energietechnikproduktion GmbH, I'm sure.

• Innovalight took in $5mm in equipment lease financing from ATEL Ventures.

• Smart metering vendor Eka Systems took in an $18.5mm Series D led by Flybridge Capital Partners, and including returning investors RockPort, The Westly Group, and Metropolitan Investments.

• German solar developer Sulfurcell raised an EUR 85mm round of financing. Intel Capital provided EUR 24mm, Climate Change Capital Private Equity, AIG, Demeter Partners, Zouk Ventures and Bank Invest provided another 38mm, and the remainder came from existing investors.

• Naturally Advanced Technologies announced an approximately $2mm private placement in conjunction with their listing on the Toronto Venture Exchange.

• Cleantech investors in the news: Here's my nominee for the best VC profile of the year (of course, any profile of Chuck is going to be compelling to begin with)... GEF has added Jay Powell, formerly of the Carlyle Group, as a Managing Partner and to spearhead their buyout efforts.

Other news and notes: Cleantech clusters continue to form, this time in Florida... And Nigeria?... Here's an interesting perspective on clean energy from Kuwait... Finally, here's a sign of the times.