Which Israeli venture capital firm made the most new investments in 2009?  The answer may surprise you.

Israel's most active investor wasn't Pitango Venture Capital, Carmel Ventures or Jerusalem Venture Partners.  According to the Israel Venture Capital Research Center, Terra Venture Partners, a cleantech fund focused on seed and early-stage start-ups, was Israel's most prolific deal maker.

PhDs Astorre Modena (physics) and Harold Weiner (chemistry) are Terra's founding and general partners.

Q: In which sectors is Terra most interested?

A: "We are quite diversified in terms of our interests and portfolio.  We are focused on energy, but are relatively flexible on the definition of cleantech and have in our portfolio two companies that are not classical cleantech.  Our big focus is on good entrepreneurs.  We don't have to have a five-time serial entrepreneur because there are almost none in the field, but we are very focused on people who listen and who we can work with.  In terms of fields, we like energy efficiency, energy generation (but we are very, very selective in terms of solar, for example, because the level of crowdedness is outstanding and the target dollar per watt is continuously going down), and energystorage 

For example, we invested in a company, Lithium Force, that provides battery solutions to electric fleets.  We are less focused on water, even if in Israel there is a lot of very good expertise in the field and a lot of innovation.  In water, the cycles are usually very long and the level of intellectual property protection and differentiation is relatively low.  I think water is a difficult field for venture capital."

Q: Tell me a little bit about the companies in which Terra has invested.

A: "We invested initially in two companies, IQWind and Phoebus Energy.  IQWind is developing an innovative gearbox for wind turbines, allowing for increased efficiency and reduced costs because the gearbox replaces several electronic components. The company is progressing very nicely. They have been selected as a Guardian Global Cleantech 100 company and recently signed a production and distribution deal with Guascor, a Spanish vendor. They have a very strong and entrepreneurial team that is working with all the top players in the industry. 

"Phoebus is developing a very efficient water heating system with a very short return on investment.  Phoebus does retrofits for hotels, hospitals, etc. -- big installations where Phoebus puts its system in parallel to the current system.  Phoebus' system is much more efficient and can get up to a 60-70 percent reduction in the cost of energy because the system decides at any time, what is the cheapest source of energy.  Phoebus already has 15 installations in Israel.  The first one has already been operating for almost two years.  Phoebus has a very good track record and is now expanding into Europe."

Q:  You studied in London and worked in France.  Why invest in Israel?

A: "I lived in Europe and there is no comparison between the level of entrepreneurship and innovation that you find in Israel and Europe.  The closest you can get to Israel is Silicon Valley.  Israelis are probably not as good managers and marketers as are most Silicon Valley entrepreneurs, but in terms of entrepreneurial spirit and innovation, Israel might even be superior to Silicon Valley."

"We get almost two new deals a day.  The level of deal flow is exciting.  The quality of the opportunities is rising because a lot of smart entrepreneurs from the high-tech field are getting into cleantech and bringing their expertise and innovation and applying it to the energy field.  There are a lot of fields where Israel has been a pioneer for many, many years."

"Water is a matter of survival, but Israel is very advanced in energy as well.  In solar thermal, Luz and BrightSource were the pioneers.  In general, Israel has a lot of interesting progress in material science, electrochemistry, smart IT, and sensors.  There is a bit less of the military effect in cleantech than there is in high-tech, because there is less spillover, but there is a bit more spillover from Russian immigrants."

Q: In the last few years, American venture capitalists have begun to understand the difference between IT and cleantech.  What do you think the differences are?  Why has Israel been successful in IT?  Why do you think Israel can succeed in cleantech as well?

A: "I don't think all the cleantech fields will be successful in Israel.  In general, there are some sectors that are not ventureable and in Israel, even more so. What Israeli companies have been good at in the past 20 years has been being very capital-efficient compared to most U.S. companies.  I don't believe that Israeli companies can get the same level of funding that U.S. companies can get and so they have to be more capital-efficient.  That is why we pick sectors where cleantech -- and specifically Israeli cleantech -- can be capital-efficient and can lead to exits on a venture timeline."

"On the other hand, there are advantages to Israeli cleantech. When you bring these people into a relatively conservative and not-so-innovative field like energy, loads of ideas come up.  Israelis are out-of-the-box thinkers.  They are also very multidisciplinary compared to other countries and cleantech projects are often multidisciplinary.  Israelis can start in a sector and then change sectors a few times in their careers and this is something which I think is unique to Israelis.  If you look at the amount of the time that most Israelis work at a particular company, it is much, much shorter than in Europe and probably more similar to Silicon Valley.  On top of that, in a small country with all the expertise that you need, there are tight networks and companies can find the expertise they need quickly, which is very important in the process of building complex, multi-disciplinary cleantech projects."

Q: In which sectors do you think Israeli will be most successful? 

A: "If we take out the venture level, water will definitely be a sector where Israel will succeed. I don't think it will succeed on the venture side, but the sector is definitely growing and is going to continue growing.  Israel has so much expertise and innovation in the field, but really needs to monetize it.  It is not monetizing it enough."

"In terms of the energy space, solar thermal is going to have some interesting outcomes.  We invested, for example, in Linum Systems, which is developing a solar cooling system based on solar thermal applications.   In terms of other fields, I see successes from the combination of energy and fields that are close to what Israel has historically been strong in, such as smart energy -- smart grid, power conditioning, sensors, IT, chip -- and then potentially in other fields were Israel has a lot of expertise such as semiconductors, materials, including batteries, and, if venture-suitable, in biotechnology and agricultural efficiency. 

Q: What are the most significant challenges Israeli cleantech faces?

A: "First, the financial challenge is always the biggest.  At this stage in Israel, there is relatively very little money that is invested (or is investable) in cleantech.  Many good companies are not being funded and those that are getting funded are spending lots of time fundraising, which distracts them from their actual business activities."

"Second, of course Israel is a very small market and start-ups always need to always work with global companies, but in cleantech this is more complicated.  In cleantech, it is a global market, but it is also a local market.  Most products involve significant and lengthy hardware-based pilots. It is not like selling software on the Internet and there is a challenge when the internal Israeli market is tiny.  Also, in many cases, companies really need to be physically present or have a strong local partner in the market to sell their product."

"Third, a general issue compared to the high-tech market, cleantech is involved in many different sectors and ecosystems.  Most of the high-tech players are not relevant, and for each sub-sector you need to have a full ecosystem of different players.  We're used to selling companies to CISCO, IBM, Intel, etc."

Q: Do you think the Israeli government is doing enough to promote cleantech?

A: "Israeli government intervention in high-tech has been very strong.  For a government effort, the Yozma project and the Office of the Chief Scientist work very efficiently.  The government could do more help to start-ups rather than big companies and could make the terms of the Chief Scientist more investor-friendly and exit-friendly, but in general, they are doing a good job.  On the cleantech side, the government is starting to take action but it is not yet doing enough compared to the high level of priority they claim to give the sector."

"There is a lot of work still to do on energy efficiency.  A few months ago, the government reduced the price of electricity because Israel is moving to natural gas, which is cheaper.  It should have used at least part of the savings to encourage energy efficiency and green energy.  Reducing the price will lead Israelis to use more 'dirty' electricity."

Q: You mentioned being selective about solar.  Why?

A: "Solar has been overhyped.  We had extremely high valuations in 2007 and 2008.  A lot of companies came into the market, not bringing a lot of innovation.  A lot of 'me too' companies.  A lot of CPV companies were funded.  In the United States, a lot of thin film companies were funded.  Now, due to the reduction of feed-in tariffs and the financial crisis, the demand has lowered while capacity has increased significantly, leading to a huge drop in PV prices so that many startups' PV price targets have become irrelevant."

"We have also invested in Linum and solar cooling, which is not a crowded sector.  Solar cooling is a key way to reduce peak demand for utilities in California and many other states, as air-conditioning is one of the key components of peak use. In California, electricity is expensive, and there is a lot of sun and a great need for air conditioning.  It is almost a no-brainer to use a good solar cooling system with a good ROI."

Q: Looking at Terra's portfolio, one of the companies that caught my interest is SmarTap. Can you talk a little bit about the company?

A: "SmarTap is an unusual company for a venture investment.  It is a working on electronic cartridges for smart electronic taps, which is not a typical industry that venture deals go to.  But it is interesting because there is a very strong trend among faucet manufacturers and designers to go electronic. However, the key challenges they face are the cost and that they don't have any real understanding of electronics."

"Specifically, what SmarTap produces is a very inexpensive electronic cartridge that is also very energy-efficient and saves water.  It is basically a very precise measure of temperature and flow.  For example, when a person fills a bathtub, this system allows them to indicate 150 liters, 100 degrees, press the button, and they get the specified quantity of water at the specified temperature.   Different users can set their own temperature, their own flow.  Another innovation that will increase water efficiency is the information.  Many people, when the SmarTap indicator tells them they are consuming 10 liters per minute, they will tend to use less water."

Q: Another company that caught my interest is Wi-Charge.  How far along is the company?

A: "Wi-Charge is still in an early stage.  The idea is to have wireless power charging at distances of up to 30 feet.  The company is working on a system that will be able to charge mobile phones, laptops, LCDs, and speakers at the same time.  But Wi-Charge is at least one-and-a-half years to market."

Yoni Cohen is a JD-MBA student at the Yale Law School and the Wharton School of the University of Pennsylvania.  He previously worked as a reporter for Fox Sports, among other jobs.