Major Shift in Cleantech Investment

Last week, I was in Geneva attending a cleantech summit that brought together Europe’s top venture capitalists and entrepreneurs looking for investment. One theme kept emerging: VCs are moving their money away from energy generation projects, such as wind-farm and solar-parks. The reason? Funding those types of businesses is just too expensive for investors already struggling from the global downturn.

That message was reinforced on June 23 when consultants New Energy Finance released preliminary results about cleantech investment. Not surprising, they also found VCs were steering clear of energy generation projects. In the first half of 2009, venture capital and private equity firms forked out $3 billion globally for clean energy companies — a 56% drop compared to the same period last year.

What are the reasons behind the decline?

According to New Energy Finance: "later stage low carbon investments are often considered too capital intensive for a venture capitalist (who finance development), but the technological or execution risk is too high for private equity and project finance investors (who finance diffusion)." Basically, green energy projects become too costly for VCs, while remaining too risky for more conservative financiers.

From talking to investors in Geneva last week, many reckon banks will have to fill the gap for multi-billion dollar green energy investments. Increased government support, often through stimulus packages, and the growing cost effectiveness of renewables, particularly wind, compared to conventional technology should help grease the wheels. Yet bankers remain cautious. There's anecdotal evidence green-friendly financing is returning to the market, but only for projects backed by mouth-watering government subsidies (either so-called feed-in tariffs or tax credits) and tested technology (aka wind-power).

Call me an optimist, but I see this financing trend as a good thing. Ten years ago, cleantech was an also-ran for the investment community. It's not surprising, then, that venture capitalists, who back early-stage industries, were the biggest funders. Now, the sector is becoming more mainstream (though it's still relatively small in overall dollar terms), so increasingly institutional investors are taking the lead. It's just a consequence of cleantech becoming a mature industry.

So what could be the next big drive for VC cleantech investment? Last week, a lot of incturvestors and entrepreneurs were playing up energy efficiency -- for everything from industrial manufacturing to household consumption. For savvy investors, that sector could now be worth a second look.

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