Back on track? Cleantech VC deals continue global growth

The global cleantech sector continued its steady climb back from the financial winter of the first quarter, according to data released today on third-quarter investment by the Cleantech Group in conjunction with accounting firm Deloitte.

The sector accumulated $1.59 billion across 134 companies—up 10 percent from the second quarter's $1.2 billion. The cleantech sector began its recovery last quarter, as the sector saw its total dealflow improve 12 percent from the low of $1 billion in the first quarter of 2009 (see Cleantech investment drops but stimulus funds soar in 1Q09).

The growth was even more significant because cleantech is now the largest category for venture capital investment, said Dallas Kachan, managing director of the Cleantech Group. The sector accounted for 27 percent of venture capital in the second quarter of this year, up from 3 percent at the start of 2004, according to new data from the Cleantech Group.

"In a world where venture capital investment has retreated back to 1997 levels, the fact cleantech has recovered as dramatically as it has and now represents the largest sector for venture investment is a long way for the category to have come from niche status only eight years ago," Kachan said.

See a graphic depicting the growth of cleantech venture capital over time »

The Cleantech Group has been tracking the sector since 1999 and provides research, advisory services and networking events around the world. The group also publishes this Web site.

While up from the previous two quarters, the third quarter total is down 42 percent from the same period a year ago, according to the Cleantech Group. The third quarter’s average round size was $12 million, down slightly from $12.9 million in the previous quarter. The average size of follow-on rounds increased slightly during the two periods, from $15 million to $16 million.

Trevor Loy, managing partner of New Mexico-based private equity firm Flywheel Ventures, was cautiously optimistic about the third quarter numbers.

"It is certainly refreshing to see signs of momentum in the cleantech sector as well as the broader economy.  I do not think, however, that the recent momentum represents a broad enough show of strength to truly represent recovery," said Loy, also a board member of the National Venture Capital Association. 

He noted that the cleantech sector's most mature, strongest and largest cleantech companies accounted for much of the quarter's good news.

"We will need to see a broader set of companies, including evidence of momentum among smaller and more early-stage cleantech companies, before I would be willing to characterize the environment as being in true recovery mode," he said.

Many of the cleantech sector's biggest deals went to companies that received government funding, Kachan said. In fact, government-backed companies received one-third of all capital raised this quarter.

San Carlos, Calif.-based electric car maker Tesla Motors raised $82.5 million in September, three months after the U.S. Department of Energy granted Tesla a $465 million loan guarantee to build factories (see Tesla calls new investment 'endorsement' and Who is next for $17B in DOE auto loans?). 

Similarly, Fremont, Calif.-based solar cylinder developer Solyndra raised $198 million after the DOE granted $535 million in a loan guarantee for its new manufacturing facility (see Solyndra raises $198M, breaks ground on 500 MW plant and  Solyndra nabs $535M DOE loan guarantee for 500 MW factory). 

"Government investments are giving investors the assurance they need to put capital to work in cleantech," Kachan said. "And this is just the beginning. Of all the billions available in government stimulus around the world, only a very small amount has been allocated to date, let alone actually put in companies’ hands. For instance, South Korea has only allocated 20 percent of its cleantech stimulus capital—and they’re the ones that have given the most away." 

However, Stephan Dolezalek, managing director and cleantech group leader at VantagePoint Venture Partners, said the speed at which most government are distributing their money has actually slowed private investment. In addition, companies not receiving government funds are having a harder time raising private capital, he said.

"The net reaction is to follow the DOE where it acts and otherwise play a cautious hold game—not ideal at all for the cleantech industry," Dolezalek said.

Initial public offerings were under the microscope in the third quarter as Watertown, Mass.-based A123Systems raised $380 million in its highly anticipated IPO on the Nasdaq in late September, establishing a company valuation of $1.3 billion (see Will A123Systems revive the IPO market? and A123Systems up and climbing after Nasdaq debut). The Cleantech Group called the deal the leading IPO of the quarter and one of the most significant cleantech exits to date.

Dolezalek said the success of A123's IPO might trigger additional IPO filings in the fourth quarter, but he cautioned that the market will likely have the appetite for no more than a half dozen IPOs by similarly qualified companies during the next six to nine months. He noted that A123 has DOE support, several years of sales, and contracts with companies including Chrysler.

"The A123 IPO is a very important but easily misunderstood milestone for cleantech investors," Dolezalek told the Cleantech Group. "This is not a concept IPO, a momentum IPO or the beginning of a cleantech bubble. There are only a few other cleantech companies today that have the qualifications to go public under these standards."

Other cleantech IPOs in the third quarter included wind farm developer Indian Energy, which raised $16.2 million in an initial public offering on London’s Alternative Investment Market (see Cleantech investors return from summer hiatus) and India's Euro Multivision, which raised $13.5 million on the Bombay Stock Exchange (see Chevron, P&G pony up for LS9's $25M round).

Also this quarter, the solar sector recovered from its three-year low of $114 million in the second quarter (see Cleantech may have seen the worst, rebounding to $1.2B in 2Q09). Solar companies secured $451 million in the third quarter in 24 deals, accounting for 28 percent of venture investment. Still the sector lagged its all-time high of $1.2 billion invested in the third quarter of 2008, mostly driven by CIGS and amorphous silicon technologies (see Cleantech investment breaks all-time record).

"Solar has become more of a concentrated photovoltaics and a services story this quarter," Kachan said.

In addition to Solyndra's $198 million, the other major solar deals included a $77.6 million round for SolFocus and $18 million for San Francisco-based SunRun (see SolFocus closes $77.6M round, readies for manufacturing ramp and SunRun secures $18M Series B for residential solar). Atlanta, Ga.-based solar cell manufacturer Suniva said in July that it raised a $75 million Series C round, but it was not included in the third-quarter tally because the deal closed in the second quarter (see Inside the year’s 2nd largest solar round).

Transportation was the second-largest investment category with $383 million for 27 companies in vehicles, biofuels and advanced batteries. The top deals included Tesla Motors' $82.5 million, as well as $46 million for Oslo, Norway-based Think Global, $25 million for South San Francisco, Calif.-based LS9, and $24.8 million for Emeryville, Calif.-based Amyris Biotechnologies (see Does Think's revival signal cleantech's recovery? and Friendly competitor LS9 congratulates Amyris on $25M raise).

"Transportation is alive and well, especially if you factor in non-VC deals, such as government loan guarantees and grants, and investments like ExxonMobil's $300 million into Synthetic Genomics, Craig Venter's algae-biofuel startup," Kachan said (see ExxonMobil devotes $600M to algal biofuel project with Synthetic Genomics).

Green building was also a top sector with $110 million, led by a $60 million Series C round for Sunnyvale, Calif.-based green building materials company Serious Materials (see Biggest energy efficiency deal of '09 goes to Serious Materials). Another standout was iControl Networks with $23 million.

The Cleantech Group's findings include North America, Europe and Israel, India, and China. North America's share held steady at 67 percent of the investment total, with $1.1 billion in 73 disclosed rounds. Europe and Israel made up 29 percent with 53 rounds pulling $457 million. China received 3 percent of the total with $41.8 million in three VC deals, while India took $21.5 million in four disclosed deals, in addition to one undisclosed round.  

Intel Capital was the busiest cleantech investor, participating in six rounds: Ozmo Devices, Powervation, CPower, Grid Net, iControl Networks and Convey Computer. Five of those deals were announced in one week (see Intel and Braemar: A match made in cleantech heaven? and Textiles a surprise winner in $229M week for cleantech).

Kleiner Perkins Caufield & Byers made five cleantech investments in the third quarter, while New Enterprise Associates and Braemar Energy Ventures each made four investments. 

The Cleantech Group data also showed that merger and acquisition activity slowed to 98 deals, down from 138 transactions in the previous quarter. Third quarter M&As amounted to $5.9 billion in disclosed deals.

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