I'm referring, of course, to angel investors -- individual investors who put money into startups, typically at a pretty early stage.  Here on this site, and even more so in the media, the heavy focus is on venture capital inventments from institutional investors.  But that ignores the critical role angels often play in getting the VC-backed startups off the ground in the first place. As the attached Center for Venture Research survey results show (note: link opens pdf), angels are a major player in the financing of entrepreneurs in the U.S.  In the first half of this year, CVR estimates that 23,100 startups received funding totaling over $12B.  Compare this to the $14.9B and nearly 2,000 venture deals tracked by Moneytree in 1H08.  Roughly comparable amounts, but more than 10x the investments -- as reflecting the CVR survey's conclusion that 46% of angel investments were in seed and start-up stage. Let's make this more specific to cleantech -- the CVR study indicated that 10% of the angel investments in 1H08 were made into "Industrial/Energy".  So we can roughly estimate that about 2,000 cleantech startups received angel funding during the first half of the year, of which about half were seed or startup stage.  Meanwhile, E&Y tracked 29 seed and first round VC investments into U.S. cleantech companies during 1H08.  I would argue that most VC-backed seed rounds are left stealth and unreported, so the E&Y figures are undoubtedly low.  But even still, the difference in number of investments by each type of investor is significant. Now, many of these angel investments will be made into enterprises that look very different from the technology development efforts typically backed by VCs.  Anyone who's perused the listings at Investors' Circle, for example, will know that a majority of the investment opportunities posted with that angel group are for service or retail or other efforts not related to proprietary technologies. But even still, the number of angel investors backing technology development efforts is impressive. In our portfolio at @Ventures, for example, more than half of our cleantech portfolio of startups were first backed by angels during their formative seed stage. And in my conversations with various angels here in the Boston area, it's clear that there are many individual investors on the prowl for game-changing inventions. We'll talk another time about the special challenges facing such investments at such an early stage, and how some sophisticated angels go about addressing those challenges.  But regardless of the investment profile, it's clear that angels are an important -- arguably, more important than VCs -- source of financing for bringing cleantech innovations to market. Reported deals from the past week:

• Indian green power project developer Orient Green Power has raised a $55mm round of financing, with $35mm from lead investor Olympus Capital Holdings Asia, and $10mm each from Shriram EPC and Bessemer Venture Partners.

• Indian solar power project developer Azure Power has raised a Series A (amount undisclosed) from Helion Venture Partners and Foundation Capital.

• French solar project developer Solairedirect has raised a EUR20mm round of financing from existing investors Demeter Partners, Schneider Electric Ventures, and TechFund, with the addition of a group of mutual insurance companies.

• Israel-based LED developer Oree has raised a $4mm venture loan from SVB and Kreos Capital.

• Emissions management software developer Clear Standards has raised a $4mm Series A from Novak Biddle Venture Partners and Kinetic Ventures.

• ISE Corp., which provides hybrid drivetrains for heavy vehicles, has raised a $17.5mm Series D round of financing from Siemens Venture Capital, Macquarie Clean Technology Fund, DTE Energy Ventures, and existing investors NGP and RockPort.

• SunEthanol has changed its name to Qteros, and raised a $25mm Series B, co-led by Venrock and existing investor Battery.  New investors BP and Soros Fund Management, and existing investors Long River Ventures and Camros Capital also participated.

• Danotek Motion Technologies has raised $14.5mm from CMEA Ventures, StatoilHydro Ventures, and GE Energy Financial Services.

• Here's a rare announcement of a seed angel round of financing -- for Green Away Plant Control.

• Project Frog, a green modular building developer, announced an $8mm Series B led by RockPort.

• Laser developer Raydiance announced a $20mm Series D -- apparently they're now going after some applications in solar (wafer sawing?).

• ReGen Power Systems, with an external combustion engine for waste heat capture, has raised a $5mm round of financing from 21Ventures and Quercus Trust.

Other news and notes:  In the category of "no kidding" analysis comes the Cleantech Group's forecast of a shakeout followed by continued growth in the sector...  Here's an interesting argument for the "evergreen fund" format in venture capital...  Merrill Lynch says cleantech is the Sixth Technology Revolution...  Finally, congrats to Michael! . . . .

On this site we've occasionally enlisted fellow VCs and other market participants in a "five questions" exercise, to help share other voices from around the industry, but one voice that's been lacking here (and, for the most part, elsewhere) has been the perspective from the limited partner community in cleantech venture capital. As a reminder, limited partners (or LPs) are the investors who give capital to venture capital funds to invest on their behalf.  They can be institutional investors, family offices, individuals, etc., but in all cases they are essentially the VCs' "customers", interacting with and evaluating which funds to back, etc.  So they're a pretty important stakeholder in this whole asset class of ours, and yet typically they're quietly in the background while bloviating (read: blogging) VCs hog all the limelight. I thought it would be useful to begin getting the LPs' perspective here on the site.  And the first victim volunteer kind enough to step up to the plate is Danny Zouber, a Partner in Piper Jaffray's Private Capital Team.  In 2005, Piper Jaffray launched the first US-based cleantech private equity "fund of funds," and they've been analyzing energy and cleantech firms even longer than that.  Danny's been an investor that I've enjoyed chatting with and getting insights from for a while now, especially since he has such a strong and deep focus in this sector.  So I asked Danny if he'd answer a few questions for readers, and he kindly agreed:

1. How is the current economic crisis affecting cleantech LPs like your group? We continue to see strong demand from our investors but we are starting to see some denominator effect that is limiting their ability to make any new PE commitments. 2. How do you see the current economic crisis affecting cleantech VCs? Investments in capital intensive companies relying on the free flowing credit markets and a near-term IPO as an exit are going to be in trouble. We saw many companies that had great technology but only worked as an investment with large amounts of cheap debt. We would expect to see some write-downs in that area. On a positive note, the current economic crisis will present a great opportunity for late stage VCs with capital at the ready as valuations are likely to contract over the next several quarters. 3. What excites you about cleantech venture capital right now? There are several things that excite us about Cleantech. We continue to be very pleased with the investments our “pure-play??? managers are making. In many cases they are finding great late stage companies that have been bootstrapped to date. Many of these companies have a reasonable amount of revenue and are proprietary investments. We also get excited about how broad the space is. I have seen great diversification across alternative energy, water, batteries, green building, lighting, waste to gold, etc. Lastly we get excited about how global the opportunities are. We have made investments in the US, Canada, China, Europe, and Israel. Each adds diversification to our portfolios and brings something to the table like water expertise out of Israel or battery technology out of China. 4. What attributes are you particularly looking for in fund managers right now? Experience, deal flow, ability to add value/grow business, late stage focus, no/low tech risk. We are still very much focused on the “pure-play??? managers. As we have a diversified VC FoF as well as a CT FoF we see much more promise thus far from our pure-play managers. That is not to say the generalists aren’t working hard to get up to speed but for now from a deal flow, industry knowledge and overall experience we like the “pure-play??? managers much better for CT investment. 5. What’s next for Piper Jaffray’s Private Capital Team in regards to cleantech? We will continue to build what we believe is the best cleantech fund of funds business worldwide. Having been looking at CT managers since 2003 and launching the first US based CT fund of funds in 2005, plus an affiliation with a leading global Cleantech investment bank, we think we are positioned well. We are actively investing out of our Cleantech Co-Investment vehicle. A couple of our recent investments are Ecore International and Miles Electric Vehicles. ECORE manufactures and markets innovative, sustainable products and solutions for the construction, consumer, commercial, industrial and sports and leisure markets worldwide. We believe Miles will be the first 4-door electric car sold in the US for the masses.

We'll continue to bring in perspectives from the various cleantech VC participants in future posts, including from other LPs, so stay tuned...

I had the pleasure of attending a briefing on GTM's new ocean power market report last week. In their report, the authors make a compelling case that ocean power (wave power, tidal power, etc.) is poised to see rapid market adoption, eventually taking a significant role in the green energy generation mix.

The findings also served to reinforce in my mind, however, just how challenging this sector and others like it are for venture capitalists.

Venture capitalists don't back entire markets, we invest in individual companies. So even when there is an attractive market such as this one, choosing the right company to partner with is critical. And thus comes one of the major challenges for this market segment: The fact that there are so many wildly different approaches being used to capturing power from waves and tides.

This is a point that the GTM report really drives home. They've done a terrific job of segmenting out the market and the early players, by technology and form factor. We see efforts using linear generators, rotary generators, floating devices, underwater devices, single large units, distributed smaller units… If you can dream it, someone’s trying it. Unlike in wind power, where the large three blade horizontal axis turbine has now become the standard format, what's clear is that there is no standard format yet in ocean power.

Furthermore, it seems the only thing these various approaches have in common is that they are capital intensive. In other words, they are all going to take a lot of venture capital or other financing to build prototype systems, and much more to fully commercialize their systems.

A variety of approaches to a big problem and a lack of an existing industry standard isn't by itself a big problem for VCs, in fact it can be an opportunity to back the company that eventually defines the standard. And certainly some venture capitalists aren't put off by capital intensity, in fact some may even find it attractive, based upon where some investors appear to be putting their money these days (although it's not my own favored approach). But when you have such an unclear market development path, and each bet is going to require significant amounts of capital before the investor learns if it'll be a dead end, the combination of these two factors takes it very difficult for venture capitalists to get comfortable around any individual investment. To invest tens of millions of dollars in the development of large prototypes and initial systems, only to find the market has gone in another direction, is not going to make a VC’s limited partners very happy.

Note that this is another example of where the needs of venture capitalists diverge from the needs of society. The growth of an ocean power market could potentially be a great win for green energy, so the GTM report was very encouraging to see. Furthermore, at this stage, having such a variety of approaches is very healthy, and bodes well for the industry’s ability to find an eventual winning solution. Finally, as we've seen in wind power, capital intensive clean energy technologies can still be very profitable for entrepreneurs and project financiers once the technology reaches a critical point of maturity. But expect VCs to mostly wait on the sidelines until there’s more standardization around a couple of key form factors. The current capital gap, therefore, would be better addressed by government and other funding sources.

Venture capitalists have made and will continue to make bets in ocean power, I’m just painting a picture with broad brush strikes here, so read these generalities accordingly. And some of the venture bets made in the sector will end up as winners, so I'm not trying to shut the door on an entire sector – in fact I already have one portfolio company which is developing solutions that could be applicable to this market.

I'm just using this as a good example of one attractive cleantech market that nevertheless presents a challenge for venture investors.

That's the answer to the question:  "How many venture-backed IPOs are there going to be in the second quarter." That's a stat about all industries and sectors, not just cleantech. But it definitely does affect cleantech nonetheless.  As we've talked about on this site for some time now, 2008 was supposed to be the year of big exits in cleantech, particularly in solar but also in other hot sectors.  But with only 5 VC-backed IPOs across all sectors in the first half of the year, it's not looking like all of the backlogged IPO candidates are going to make it out the window whenever it finally re-opens.  There are a number of companies that have been burning through a significant amount of capital trying to ramp up production in advance of anticipated IPOs, but now they're short of cash and the public markets aren't available to replenish the coffers. So it's no surprise we're seeing so many growth capital financings in cleantech.  I spoke recently with one fellow cleantech investor whose firm had led a recent big financing, into a revenue-stage cleantech company that's been rumored for some time now to be gearing up for an IPO.  I asked him point-blank if the reason that financing opportunity had come up was because the IPO window was closed to the company, and to his credit, his one-word answer was "yes."  So when you see big "venture capital" funding announcements this year, into companies that may have been otherwise expected to IPO, know that that's going on. The thing is, that's not venture capital as classically defined.  To borrow a line from Seinfeld, "not that there's anything wrong with that."  Returns are returns.  But still, it's certainly not the early-stage venture capital approach that most people associate with the asset class. Nevertheless, as more cleantech venture firms raise big new funds and shift toward later stage, and as big new "growth stage" funds are raised, expect to see more of these types of financings.  Right now, it's open hunting season for these funds as the IPO window is closed and many big-name cleantech startups need capital (and their founders may be looking to cash out a bit).  But when the IPO window opens back up, will these private financings have to compete with public markets for these kinds of cleantech investments?  Time will tell... What's interesting is to juxtapose these trends in the sector with what VentureWire reported today about a discussion among limited partners at Dow Jones' recent LP Summit, on the topic of early-stage vs. later-stage venture capital.  According to the quoted LPs, they're committed to investing in early-stage venture capital, seen as producing the best returns over time -- even while "venture capital dollars have been flowing further downstream over the past few years."  Specialization, they reported, is also correlated with strong returns.  So as many of the better-known specialists shift their focus a bit toward later-stage in cleantech venture capital, what is an LP to do?  Clearly the shifts in the cleantech venture capital sector are part of a larger shift across the venture capital category. It wasn't a column about cleantech at all, but for those with access to VentureWire, today's write-up was worth checking out. Deals from the past week:

• Make sure and check GTM's Funding Roundup columns when they come out (one of the benefits of bringing this amateur-hour column over to GTM is getting to lean on such professional resources).

• Microposite, a low-energy manufacturer of external residential siding products, took in an undisclosed amount of financing from the Michigan 21st Century Investment Fund.

• Aspen Aerogels has taken in a $37mm Series B-1 round of financing, led by Arcapita Ventures, and including participation by existing investors Lehman Brothers Venture Partners, Reservoir Capital Group and Rockport Capital Partners.  The company's products are being targeted at insulation applications.

• Fotech, a UK-based company with optical fiber-based technology for the detection of leaks in oil and gas pipelines (among other applications), has raised a GBP 6.5mm round of financing from Scottish Equity Partners, Energy Ventures and Saudi Arabia-based Shoaibi Group.

• Residential solar financing play SunRun has raised a $12mm round of financing led by Foundation Capital.

• Foundation Capital also led a $20mm round of financing into Control4, a developer of a universal controller for all IT-based systems in the home, apparently including demand response applications.

• Cleantech investors in the news:  Speaking of LPs, this column on Business Week's site points out that many university endowments aren't investing in the same kinds of green technologies that their campus operations and students espouse...  And here's more information on Todd S. Thomson's $1B Carbon Opportunities Fund.

Other news and notes:  It's impressive to see the intelligence agencies start lobbing in on the dangers of climate change...  Dan Primack on McCain's battery prize proposal...  For those looking to invest in publicly-traded cleantech stocks, look elsewhere for your tips -- here's a good blurb with some recommendations...  A nice overview on watertech investing...  A nice overview on nanotech markets...  Cleantech -- Bubble Schmubble...  Finally, Alberta smells better than Toronto!

When you spend an entire weekend installing insulation in your attic all alone, it provides a chance to ponder a few questions. Such as "Can't somebody else do this?" And "Is there a venture-backable business opportunity here?" The answer to the first one is tough but clear if you live in New England, since the residential contractors up here seem to take it as their God-given right to charge you the equivalent cost of a decent used car for even the simplest home improvement project (no bitterness, no, none at all...). So no, getting somebody else to do it isn't the option it should be. But the answer to the second question is a bit less clear. Certainly, there have to be some good business opportunities here. Installing insulation, and other energy efficiency improvements, often make very good economic sense, even if you're paying someone else to do it. As opposed to distributed generation approaches like solar, energy efficiency improvements around the home can often provide paybacks measured in months and not years. And even when the paybacks are longer, it can still make sense for a homeowner, with long-term plans to stay in their property, to make the investment. So it's no surprise that there have been a few business plans going around recently with the idea of launching new takes on the ESCO (energy services company, or energy savings consultants) model that has been a decent service market in commercial and industrial building markets. These companies plan to provide various building owners with an energy audit, and then be the contractor for installing the new systems and equipment. Great idea. The challenge for venture investors is scalability. As we VCs often tell prospective entrepreneurs, don't forget that only 2% of startups get funding from venture capital investors. That doesn't mean that 98% of startups are bad ideas, by any stretch. All it illustrates is that venture capital financing won't be the right fit for most good business ideas. This is particularly true in service-model startups, where the company can only grow as quickly as it can add highly-skilled consultants/ engineers. Some VCs will fund companies with this kind of business model, but certainly the typical VC is looking instead to back a company that is developing a proprietary technology that can be rolled out much more quickly and fetch a high valuation multiple at exit. That's dictated by investment strategies and investment returns expectations. But it does mean there's often a huge difference between a new service business being a lucrative idea for the entrepreneur, and it being a good fit for venture capital backing. And it's particularly a challenge for investors in clean technology markets, where so much of the value chains are in downstream services (think about the costs of solar installation vs. panel manufacturing, for example, esp. as nextgen PV technologies get introduced to the market). The portion of the value chain directly attributable to any proprietary technology, on the other hand, can often be very small. So in cleantech, investors have often looked to start with a proprietary technology, and attempt to use it to capture downstream value. Back a proprietary sensor company, but sell the data services as a recurring revenue contract. Back a company with one proprietary component involved in biofuels production, but use it as a platform for building a full-scale production company using mostly off-the-shelf processes with the proprietary component included. Back that same proprietary component developer, but plan on generating value via licensing relationships with downstream producers. Or, in some cases, venture investors have stretched their investment models and simply backed non-tech services, where they see some other kind of sustainable competitive advantage and a market opportunity that's big enough to accomodate multiple winners. Another model to explore, however, is in technology-enabled services. That is, looking for the ways to use proprietary technology to make the downstream service sectors more effective, then selling to those downstream service providers. To use the residential ESCO example from above, imagine a company that developed a) a rich database of easily-performed energy efficiency metrics and checklists for home inspections; b) a rich database of visually-simple instructions for installation of the most effective energy efficiency improvements, importantly include what NOT to do; c) fulfillment relationships with major energy efficient equipment/ home products manufacturers; and d) handheld/wireless/back-end capabilities integrating a), b), and c). Then you could sell "ESCO in a box" information and product distribution services to wannabe residential energy efficiency consultants all over the country. Instead of requiring highly-skilled auditors and contractors to do the work, it could be done with semi-skilled (and thus lower-cost) employees. After all, if you trust a moving company to pack up your valuables and breakables and move them across the country using pretty low-trained workers to do the planning, packing, etc., then you should be able to trust someone's full-time, semi-skilled employee to deploy batts of insulation and a staple gun in your attic. The game-changing angle would be that, over the long-run, you would enable an entirely new class of regional service entrepreneurs to get started as residential ESCOs with a much lower cost structure. And in the near-term, you could help those general contractors add another lucrative line of business to their service offerings... This particular fiberglass-inhalation-addled vision may not work (bonding and licensing may be an issue...), it's just intended to be a tangible example of what I'm talking about.  Smart entrepreneurs are already coming up with better versions of this in other cleantech markets.  But the idea is simple: If the biggest parts of cleantech value chains are in services, then providing technology to the service providers (if it means a significant shift in their economics, and can mean a dramatic expansion of the market) can be an interesting investment opportunity. (As always, send your executive summaries and personal insulation installation horror stories to cleantechvc@gmail.com...) Deals from the past week:

• GreenTech Media's Funding Roundup from last week already talked about GroSolar, PlascoEnergy, AgraQuest, Viryd, and OPX...  Also, SolarEdge and International Battery, later in the week...

• Multi-junction solar cell developer Cyrium has raised a follow-on insider round of financing. The amount wasn't clear from the press release, but the company reports they have raised $5.5mm to date (so, including their $2.6mm Series A, and seed financing, probably a $2 to $2.5mm round).

• VentureWire reported that small-nuke startup Hyperion has raised an undisclosed amount of financing from Altira Group.  For more info on Hyperion's approach, here's a good article.

• Woburn ("woo-burn"), MA based Wilson TurboPower has raised an additional $4mm on top of the $3mm they raised back in October.  Funders were not disclosed.

• Here's an amusing story mentioning gDiapers' recent round of financing...  "Diaper bubble", nice work, Dan.

• Cleantech investors in the news:  In-Q-Tel opens up a Boston-area office...  Vinod talks about why his biofuels startups may move to Colorado -- and perhaps to the Midwest...  Andrew Chung of Lightspeed has some cleantech predictions for 2008... and Chrysalix and Robeco have formed a joint venture that will do European cleantech venture investing.

Other news and notes:  It's not a venture deal, but it's worth noting Recurrent Energy's $200mm project financing from Morgan Stanley...  And last but not least, some good stuff out of NREL and the DOE:  An interesting interview with Paul Dickerson, and NREL attempting to walk the talk.

We've discussed before the important role that angels have to play in the cleantech investment sector. The biggest reason is because there can be longer gestation periods for cleantech startups (hard to release an early beta version into the market, as you sometimes can with other tech plays).  Thus, in this sector more than others, angels with more patient approaches than institutional investors can play an important role in bridging the gap between invention and commercialization. So it's very interesting to see mention of this analysis from the Kauffman Foundation which looked broadly at angel investment patterns across all sectors and estimated that overall, angels are earning comparable returns to those of institutional venture capital firms. Even more interesting was their conclusion that, when VCs follow onto angel investments, the results tend to be very binary -- either very good or very bad. Whereas angel-only startups tend to achieve a similar average, but more consistent, return. (Which highlights what I often tell entrepreneurs:  That they need to be very judicious when deciding whether or not to take in venture capital.  When it works, it works well for everyone.  But it certainly isn't the right fit for every good business idea.) So angels should take heart from this analysis and be encouraged to continue to play a more active role in the cleantech sector. Deals from the past few days:

• Expansion Capital Partners has done a follow-on $450k PIPE into portfolio company Biorem.

• Forestry biotech company CellFor has taken in a $24.5mm Series D from "late stage financial investors" and existing investors, bringing the total financing into the loblolly pine optimization company up to $100mm.

• It's project finance, not VC, but it's nevertheless well worth noting this $500mm effort to fund waste heat capture projects, by Denham Capital Management.

Cleantech investors in the news:  Russell Read of CalPERS is big on energy tech...  And Marty Lagod is big on water. Other news and notes:  An update on VCs and green chemistry...  An update on solar rooftop potential...  China's $3B carbon-related fund...  As we've discussed before, the amount of venture investment going into solar is eyebrow-raising...  Amen, Dan -- and for any skeptics out there, inform yourself...  For those tracking the 2008 presidential race with an eye toward potential impacts on environmental policy, here's a very handy chart (note: pdf)...  One wicked fast electric motorcyle (using A123 batteries)...  Finally, I'm still enjoying telling colleagues that the guy who probably could have been the next President has instead decided that he would prefer to have our job -- on that topic, someone needs to explain the concept of "carry" to the AP.

Seems like just a couple of weeks ago we were talking about how hot solar is again... News came out this morning (first saw it in CTI) that CIGS thin-film PV startup Heliovolt has raised an $101mm Series B round, which means they've added $24mm to their previous close on the round of $77mm. New investors apparently include Sequel Venture Partners of Colorado, Noventi Ventures, and hedge fund Passport Capital. The capital is intended to help them open "foreign" manufacturing facilities. It's a huge round (Matt Marshall says the biggest solar venture deal ever, but I haven't checked) at any stage, and especially for a Series B. A sign that many investors expect big things out of thin-film and other emergent solar technologies in the near future. Is this another one of the sort-of-VC, pre-revenue mezz rounds, quasi-project-finance, that we've talked about before? The inclusion of hedge fund financing would suggest that might be the case. It certainly turns up the heat in the CIGS sector, at very least...