Venture capitalists see profit in greener future
'Cleantech' a fast-growing sector in the market

Gillian Shaw
Vancouver Sun

Published Saturday, May 05, 2007

Venture capitalists shovelled $3.6 billion US into green and clean ventures last year, almost doubling their investment over 2005 and helping drive "cleantech" to become one of the fastest-growing sectors in the North American venture capital market.

"The opportunities in 'cleantech' or 'greentech' stems from a growing need in the world for improvement," said Jim Charlton, senior vice-president of investments at Vancouver's GrowthWorks. "There is a huge investment opportunity in this.

"It is arguably one of the areas where a lot of fortunes will be made in the future."

"Cleantech" is this millennium's answer to the envirotech of the '70s and '80s, and while definitions vary in scope, "cleantech" covers a broad range of industries, from energy to water and waste and other innovative technologies meeting the environmental and ecological challenges facing the world today.

"We have been investing in these kinds of companies since the late 1980s," said David Berkowitz, a partner in Ventures West who leads the cleantech practice at the investment firm that was an early investor in Ballard Power Systems. "It wasn't called cleantech back then, and until recently there was only a handful of investors in North America. We all knew each other and did deals together. But lately there has been a rush, particularly on the venture side.

"It is probably the fastest-growing sector in North American venture capital."

The prospect of fortunes to be made saving the world is drawing huge investment dollars.

According to the Ann Arbor-based Cleantech Venture Network, North American and European venture investment in cleantech totalled $903 million US in the first quarter of this year. While that is down from a record $1.1 billion invested in the third quarter of 2006, it's still a hefty 42-per-cent hike over the $634 million invested during the first quarter last year.

British Columbia is home to some world-leading innovations that come under a broad range covered by the cleantech category, and venture capitalists here feel the opportunities are only going to grow.

"We see it as a great opportunity because we strongly believe in man's ability to overcome adversity; where there is a problem, it creates opportunity," said Berkowitz.

GrowthWorks, which was among the early backers of Xantrex Technology, a global innovator in advanced power electronics, sees potential in up-and-coming B.C. companies such as NxtGen Emission Controls and Angstrom Power.

"[There is] a definite investment opportunity," said Charlton. "The only reason we would look at these businesses is we think they will be money makers, these are areas that will continue to grow."

While Charlton said individual companies may not last, the sector will continue to represent a growing opportunity.

"There will be different technology and different applications, but it is not going away," he said.

Some experts are warning the investment bubble may burst, most notably in the energy sector where, according to Lux Research's Cleantech report, the value of global initial public offerings (IPOs) jumped to $4.1 billion US in 2006, up from $1.6 billion the year earlier.

"With 930 energy start-ups operating worldwide -- 198 of which are venture-funded -- energy technology looks primed for a classic private-equity boom and bust," the Lux report notes.

The report is more optimistic about the air, water and waste segments, which it identifies as presenting "hidden opportunities that are relatively starved for investment."

While Lux Research's figures focus on a more narrow definition for cleantech than the Cleantech Venture Network and so are considerably lower, they reflect a trend that is seeing venture capital investment in the sector on a meteoric rise. Lux defines cleantech as companies with innovative technologies, applying advanced science and engineering to energy and environmental problems in energy, air, water and sustainability.

According to its report, global venture capital investment totalled $2.04 billion US in the cleantech category last year, more than double the $985 million tallied for 2005.

Lux Research president Matthew Nordan said the warning signs in energy echo the Internet boom and bust.

"What you are seeing here is a pretty classic scenario," he said. "You have powerful long-term market drivers meeting excess capital."

The bubble is being inflated by solar and biofuel deals. Nordan said there are other areas in energy and the environmental world with market drivers equally powerful, yet they receive little attention and only a fraction of the money.

Solid waste is one area, which accounted for 32 per cent of last year's mergers and acquisitions, an indication that companies regard this as a potentially lucrative field. Yet it only accounted for one per cent of IPOs and four per cent of venture capital.

Nordan said the same applies to water.

"Water treatment is not terribly sexy, people don't get excited about filtration membranes, but there are definitely grounds for powerful startups and powerful exits in that field," he said.

Berkowitz said while cleantech is the flavour of the month, it does have staying power.

"I think the long-term opportunity is very strong," he said. "We have been investing in this for a long, long time and we have been somewhat conservative.

"Lately we are seeing the quality and the quantity of opportunities to be much better than they have in the past."

Berkowitz said with both governments and the public waking up to climate change, it is unlikely growth in the sector will slow.

"I believe over the next 10 years or so this will be a very strong and growing sector," he said.

Unlike technology, the opportunities for quick hits aren't there. Cleantech more closely resembles biotechnology with its long timelines and huge research and development costs.

"It takes a lot of money, and a lot of the time the big win potential is there," said Berkowitz. "It's not for the faint of heart."

gshaw@png.canwest.com

© The Vancouver Sun 2007


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