Cleantech 2.0

by David Berkowitz, General Partner

Cleantech seems to be the new venture capital buzz word these days, but the sector has actually been around as an investing theme since the mid-1980s. Ventures West actually made its first investments in the cleantech sector almost 20 years ago, investing in such companies as Ballard, Statpower and Astropower. It has been called various names over the years, like Envirotech, Powertech and Nanotech, with each of them having their moment in the sun. During the 80s and 90s the sector remained a niche within the North American venture market with only a handful of investors participating in a meaningful way. Over the last decade, however, Cleantech has become a major investing theme for VCs, and the sector has grown up in a serious way. Some of the big differences today, relative to years gone by include:

• Opportunities are not driven solely by high priced oil. We anticipate that broader awareness of Climate Change will remain a significant driver for the adoption of new technologies over the next decade.
• Urbanization and Economic Growth of the BRICs (a term used to refer to the rapidly developing economies of Brazil, Russia, India, and China) has created an unprecedented strain on natural resources. The developing world, China in particular, truly understands the need to adopt clean and renewable technologies to be a viable economic force long term.
• Investors are funding near term commercialization of technology versus science projects
• IT, Biology, and Material Science advancements have led to better, cheaper value propositions for end-consumers.
• We are seeing more seasoned & focussed entrepreneurs and management teams than in the past.

Many of the largest venture-backed tech IPOs over the past few years have come from the Cleantech sector including REC, Suntech, and Q-Cells.  This has attracted many new investors to join the fray, resulting in a short term oversupply of capital and rising valuations, particularly in the U.S. However, we expect this indigestion problem will be short-lived as the supply of interesting new deals seems to be growing. Ventures West has already made two new Cleantech investments in 2007 and we expect there will be more to come before the year is out. The exit environment also remains strong, both from an M&A and IPO perspective. In fact two companies in our portfolio, Cellex Power and TIR Systems, were sold this year.

Within the sector, we see tremendous opportunity in areas such as solar, biofuels, solid state lighting, building efficiency, clean power generation and the electrification of vehicles. Even though solar and biofuels have dominated the investing landscape the past few years, we believe the solar industry in particular still provides ample opportunity for venture investors. Back in the mid-90s when we were involved with Astropower, a developer of thin-crystalline silicon solar cells, the industry was focussed on manufacturing yields. In the end, the costs remained so high and the market so small, it really didn’t matter – solar panels were not even close to being economic. Today it’s a different ball game. The solar market has grown 30-40% annually this decade and is forecasted to continue this torrid pace. Investors have emphasized new architectures – thin film for example - that will capture niche markets (e.g. small commercial buildings). However, traditional silicon-based Photovoltaic (PV) cells still dominate over 90% of the market. Cost, efficiency, and the supply of silicon remain as key challenges, all of which are being addressed by emerging venture-backed startups. As an example, a silicon shortage evolved as the PV market blossomed, causing silicon prices to skyrocket. Traditionally the market was supplied with scraps of electronics grade silicon which is expensive to purify. Ventures West recently funded 6N Silicon, a startup with an economic and modular process for purifying solar grade silicon from cheap, metallurgical-grade silicon. We believe there are many innovative small companies like 6N that can significantly improve the ultimate value proposition for solar customers. It is a market that remains ripe for innovation.

So, is the sector in a bubble? In a nutshell, no. Perhaps the market is somewhat overheated, but we believe the fundamental drivers are stronger than ever. We continue to seek opportunities with strong value propositions in the Cleantech sector as we believe the medium and long term opportunities for companies in the sector are substantial.

The Ventures West Cleantech Team

David Berkowitz – General Partner
http://www.ventureswest.com/Team/Profiles/David_Berkowitz.asp

Sam Znaimer – General Partner
http://www.ventureswest.com/Team/Profiles/Sam_Znaimer.asp 
 
Steven Turner – Associate
http://www.ventureswest.com/Team/Profiles/Steve_Turner.asp