Dealwatch: Cleantech

As Cascadia Capital LLC's CEO Michael Butler noted, solar is still hot, while companies focused on advanced materials for energy efficiency and technological improvements for biofuels. And a recession may actually help drive cleantech M&A, according to Cascadia managing director Ted Bernhard. "A lot of the M&A activity is actually, in part, driven by negative economics in these projects," he noted. "I think a recession would probably actually increase the amount of activity and consolidation that we see in the sector." Further, he says, in green building and energy efficiency sectors, there are economic benefits for companies, so startups in this arena look positioned to do well.

Interesting bets of late include:

• Marquiss Wind Power, which is developing windmills to generate wind power in crowded urban areas, an untapped corner of the wind power market. The company took $1.3 million from Velocity Venture Capital of Folsom, Calif., and Strategis Early Ventures of El Dorado Hills, Calif.
• Food and water purification technology developer Purfresh Inc., which landed a $25 million round led by hedge fund Chilton Investment Co. in January.
• L-Cell battery-maker Deeya Energy Inc., which tapped New Enterprise Associates to lead a $15 million round.
• Meanwhile, Intel Capital is pushing hard into the sector.

LOOKING AHEAD

Going into 2008, VCs expected cleantech to remain a super-hot sector, according to a survey released Dec. 17 from the National Venture Capital Association, which also compiles data on venture investing, though investors did express concern over continued high valuations. On investment growth in venture capital overall, The Deal's George White noted:

The highest growth is expected to come from cleantech, which 80% of the respondents predict will attract higher levels of venture financing in 2008. However, 61% of respondents also believe that cleantech sector will be overvalued next year.

And as investment has grown, cleantech's definition has also broadened beyond just alternative energy bets. As Cliff Carlsen noted Dec. 17: "Investors believe the development of new materials with raw ingredients and distribution models that all address environmental issues may be the next big movement."

Recent bets, he noted, included: Foundation Capital leading a $50 million Series B for Serious Materials LLC, a company building plants to produce more eco-friendly drywall; and NGEN Partners LLC's $180 million fund raised in 2006 dedicated for environmentally friendly products, one of which is Hycrete Inc., which makes a concrete mix additive to improve structural fortitude and durability.

Meanwhile, cleantech venture investing had already hit a record high in 2007, according to data out Nov. 28 from Thomson Financial and the NVCA, as U.S. venture firms poured $2.6 billion into 168 cleantech deals in the first nine months of the year. The year-to-date total is already 46% more by dollar volume than all of 2006 and the highest dollar volume ever, the report said.

While the three largest cleantech deals by U.S. firms in the first three quarters of 2007 according to NVCA data were in overseas companies, California, Massachusetts and Texas unsurprisingly roped in the most dollars and deals stateside, while solar energy saw the most activity by subsector. The largest funding for a U.S. company, the report said, came in two rounds totaling $115 million for GreatPoint Energy Inc. of Cambridge, Mass., which converts coals, petroleum coke and biomass into clean natural gas, from Citigroup Inc.'s Sustainable Development Investments unit, AES Corp., Suncor Energy Inc., Kleiner Perkins Caufield & Byers, Draper Fisher Jurvetson, Dow Chemical Co., Advanced Technology Ventures, Khosla Ventures and others. The most active U.S. investors this year have been Khosla, DFJ and Kleiner Perkins, the report said.

But will the reward merit the risk down the road? All bets are on.

SEARCHING FOR POWER

The NVCA report came a day after Google Inc. unveiled plans for an initiative run through its Google.org philanthropy arm to generate a gigawatt of renewable energy cheaper than electricity from a coal-fired plant. The company said it would commit up to "hundreds of millions" of dollars to bring new technologies to market and is working with eSolar Inc. on its solar thermal power initiative and has invested in wind power company Makini Power. (See more on Google's green building initiatives below.)

While cleantech is still just a few watts of the venture capital power supply, the sector is growing, and more significantly, it continues to channel significant financing rounds.

Other recent deals include:

• Nov. 1 news of a $50 million Series B for eco-friendly construction materials company Serious Materials LLC co-led by New Enterprise Associates and Foundation Capital
• Wind power startup Everpower Renewables Corp. closing in on $55 million from Good Energies Inc., announced Oct. 2
• The first tranche of a $70 million round Series B round for Amyris Biotechnologies Inc. led by DAG Ventures to bring its renewable transportation fuels closer to market announced in mid-September, shortly after a $40 million round was announced for solar thermal power startup Ausra Inc. from Khosla Ventures and Kleiner Perkins.

For the second quarter of 2007, the largest venture funding across sectors was a $73 million round for Advent Solar Inc., according to the MoneyTree report from PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson Financial. The funding bolstered total investment in cleantech to $451 million in 44 fundings for the second three months of 2007. In late July, Palo Alto, Calif., venture firm Technology Partners announced raising a $300 million new fund -- to be split evenly between cleantech and life sciences. Also in July, solar panel developer Solaria Corp. raised $50 million in a Series C round of funding led by German strategic partner Q-Cells AG to finance construction of a manufacturing plant with a Philippine partner.

All the hype and investor interest has led to the term "greenwashing," The Deal's Andrea Orr wrote in October, where things sound eco-friendly, but in reality aren't as green as they purport to be:

In the best-case scenario, these are businesses such as clean-burning corn-based ethanol that in theory reduce carbon emissions, until you factor in all the land and all the fuel required to grow the corn in the first place.

And as the fervor continues, The Deal's David Shabelman pointed out in July, despite a common perception to the contrary, VCs are proceeding with caution in cleantech investing.

A study scheduled for release [July 16] by technology consulting firm Topline Strategy Group indicates that venture firms are taking an "active, but measured, interest" in biofuel, solar and other renewable energy technologies.

WHAT TO WATCH

So what's hot? Everything, Heller Ehrman LLP's co-chair of energy and cleantech, Alison Freeman-Gleason, told The Deal's Claire Poole in June. More specifically, biofuels made from biowaste, solar projects and renewable portfolio standards, or the requirement on energy companies to generate a certain percentage of power with renewable sources, while those that have tanked or are on their way, she says, include hydrogen and overly hyped ethanol, which won't necessarily solve all the problems it portends to. And what's ahead, she says, is the emergence of more clean coal technologies. In April, The Deal's Stacey Higginbotham gives a rundown of the well-funded startups and their lofty expectations:

• Wind farm operator Airtricity Holdings Ltd. has raised $678 million and plans to generate 6,000 megawatts of electricity using wind in the U.S. and Canada. Cilion Inc. plans to produce 440 million gallons of corn-based ethanol by 2008 and has powered up with $200 million. Altra Inc. is another ethanol project. It's collected $170 million. Seven others make her list including on-site power generation systems developer Bloom Energy and thin-film solar panel maker Nanosolar Inc.
• Another recent round of note is electric car maker Tesla, which took $45 million in fourth round venture funding to fuel production of its high-performance roadster expected to ship by the end of 2007.

Indeed, venture investing alone won't do the trick in fast-changing renewable and cleantech markets. But VC with private equity, or even project finance, with just a little help from the government, may suffice, The Deal's Cliff Carlsen pointed out.

THE CRAPSHOOT

Investors are taking chances across the board and focusing now on what one referred to as "the deep-science plays." Higginbotham in April ranked five technologies expected to take hold according to their near-term commercialization potential and the startups to watch.

• Fuel cells -- which are like batteries but require a constant source of chemicals to function -- generate too much heat or require super-cool temperatures. The fix may be in nanomaterials.
• Biofuels.
• And upstarts harnessing the power of soundwaves, the sun and the wind.

EXECUTIVE ORDERS

President George W. Bush gave cleantech a considerable nod during his State of the Union address in January:

America is on the verge of technological breakthroughs that will enable us to live our lives less dependent on oil. These technologies will help us become better stewards of the environment -- and they will help us to confront the serious challenge of global climate change.

While he has tackled topics like reducing U.S. dependence on oil, foreign and otherwise, and alternative energy in all six of his previous State of the Union addresses, he has also laid out an aggressive goal -- to reduce gasoline use by 20% over the next 10 years -- a task only achievable through the use of alternative fuels. But some large oil and utility companies are falling short in adopting cleantech, Poole points out.

WISHING ON A STAR

VCs, however, are unfazed. Investors like Vinod Khosla, who has built an entire portfolio of renewable energy startups, are often cited for their commitment to the sector, but The Deal's Mary Flynn examines some other notables:

• Old hands in the cleantech game like EnerTech Capital, which has been investing in the space for 11 years, and San Francisco's Nth Power. Mohr Davidow Ventures's new recruit Josh Green who is charged with the task of amping up the firm's energy reach. The real power behind Richard Branson's Virgin Fuels, Shai Weiss.
• And Bill Gross, whose incubator Idealab Inc. is cooking up cleantech startups.

SUNNY OPTIMISM

VCs have warmed to startups focused on solar power and seen reinforcement through projects like Google Inc.'s to build the largest solar-powered office complex in the U.S. The search giant enlisted Energy Innovations Inc.'s Pasadena, Calif.-based systems integration arm, EI Solutions Inc., to build its new headquarters.

• The news came nearly one year after California launched a $2.9 billion solar power initiative to promote the use of solar power, which at the time seemed a possible incentive for VCs to look at companies focused on alternative energy.

But with such aggressive investment, some advocate caution. "The VCs are still early on in their education curve, and there are a lot of new entrants to the marketplace that are making investments based on generalized knowledge of the sectors, rather than experience with the individual technologies themselves," Ted Bernhard, a Portland, Ore.-based VC-turned-attorney said in January. "You don't have a lot of VCs that came from one of these companies themselves that have, all of a sudden, jumped over to the VC world like you did in the software and hardware arena." He said some VCs might not be focusing on investments that can yield venture-level returns and that, instead, the focus really needs to be on early-stage technologies that will be ready for large-scale deployment a few years down the road.--Carolyn Murphy