VCs evolve role in cleantech

The financial market has frozen IPOs, squeezed project financing, increased the cost to borrow money, and lowered company valuations. But venture capitalists speaking at the Cleantech Forum XXI in San Francisco today said they were beginning to find opportunities and ways around the new obstacles.

Companies are paying several points more for capital and debt than they were six months ago. With rates of 16 percent to 17 percent for debt and 20 percent to 25 percent for equity, many solar and other energy projects are not viable, said Partho Sanyal, director of Bank of America.

“The system is broken in the United States because of how the tax subsidies work,” he said. “We need capital costs and operating costs to come down.”

The costs are already dropping, said Global Environment Fund CEO Jeffery Leonard.

“Silicon prices are falling like a stone, and that will open up opportunities to deploy more and more cost-effective systems,” he said (see Top Chinese firms propose solar electricity for 14¢ per kWh).

Leonard said solar will never be the dominant energy source for the U.S. but is great to serve peak load and as a “bite-size” way for consumers to take part in the cleantech sector.

Meanwhile it’s important for investors not to take advantage of lower valuations by gouging companies that are desperate for funds, Leonard said. Even VCs are going to have to learn to do more with less (see More deals, fewer dollars for cleantech in '09?).

“We’re entering an era in which everything is subsidized, and that will bring rates of returns down,” Leonard said.

Leonard noted that investors are increasingly becoming fiduciaries of public money as stimulus bills begin to trickle cash into the private sector (see Germany, U.S., Australia inject stimulus spending into cleantech).

Government influence is only beginning, said RockPort Capital General Partner Chuck McDermott. He expects comprehensive energy legislation to pass in the United States soon, adding further support to the now-favorite fields of energy efficiency, smart grid and green building (see Smart grid could be early winner in U.S. stimulus package).

“Washington has made the pitch, now you have to figure out the catch,” he said, noting that overtaxed government agencies are likely to be saddled with dispersing stimulus dollars, further complicating the process. “It’s not going to be pretty.”

Michael Gougen, a general partner at Sequoia Capital, said cleantech has to be careful not to be deluded into thinking government subsidies are anything more than a temporary, artificial boost.

“An administration changes and that subsidy can go away, that tax incentive can go away,” he said.

Whitney Rockley, a principal at Nomura, said VCs are presented with a choice between needing an exit in three to four years, and investing in “amazing technologies out there,” such as German companies developing Fresnel lenses for solar thermal, or water technologies being developed in Israel.

“It’s the business model we struggle with,” she said about why VCs aren’t investing more in the water sector. 

But Leonard said cleantech doesn’t need the IPO market for a recovery. Innovative technology companies are still being acquired if they can provide value. He cited a portfolio company that made controls systems that recently sold for five times its revenue.

“Half the companies that went public in the past five to seven years didn’t deserve it,” he said. “They made one good widget and shot their valuations.”