October 28, 2011 4:40 pm

Venture capital: Patience is a virtue in hunt for game-changing ‘green Google’

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The bankruptcy of Solyndra, a California-based solar panel producer, has been the most spectacular collapse so far in the clean technology sector.

Sir Richard Branson’s Virgin Green Fund is one of the private investors who between them are set to lose up to $1.1bn, while US taxpayers are underwriting a $535m federal loan.

But other venture capitalists (VCs) are counting large profits amid inevitable losses, as they “swing for the fences” in search of the Google of renewable energy.

Silicon Valley firm VantagePoint began investing in clean tech in 2002. Some $1.5bn of its $4.5bn under management is devoted to renewable generation, advanced biofuels, electric vehicles, smart grids, energy efficiency, battery technology and grid storage.

Alan Salzman, co-founder and general partner, says: “Clean tech is the industrial revolution of the 21st century. Edison invented lightbulbs in the 19th century much like the ones we use today. And we still boil water using coal, gas or nuclear power to generate electricity.

“We need to change, so we don’t have resource pressures and poison the planet. It’s not a false trade-off – we’re making profitable, successful companies that exploit the silliness of our antiquated energy system.”

VantagePoint made a reported $4m when Tesla made its initial public offering on Nasdaq in June last year. The upmarket electric car manufacturer is now valued at $2.9bn and its shares are regularly rated higher than those of traditional US automakers.

Don Wood, partner at Draper Fisher Jurvetson (DFJ), which also backed Tesla, says the company’s disruptive technology shocked rivals into action.

“Tesla gave a real kick in the pants to the global auto industry. GM, Ford, Toyota – they all saw this little company producing these [electric] cars and thought: ‘Wow, we should be able to do it too.’”

Volatility in the public markets has since driven bearish valuations on other clean-tech stocks. UBS recently valued publicly traded clean-tech companies at $142bn, down sharply from $475bn in 2007.

Advanced biofuels have largely been the only clean-tech category for which the IPO window has stayed open. Solazyme, which creates renewable fuels, cooking oil, and beauty products from algae, is one of only 40 clean-tech companies worldwide to go public so far this year, compared with 97 for all of 2010, according to figures from US analysts Cleantech Group.

Vinod Khosla, the Indian-born Silicon Valley VC who has declared a hunt for game-changing “black swans” in clean energy, estimates profits for Khosla Ventures of $1bn after this year’s public offering of KiOR, which had been preceded by successful IPOs of its other advanced biofuels companies Gevo and Amyris.

Solyndra’s collapse and Germany’s struggling Q-Cells may have clouded brighter outlooks for solar, but consolidation is inevitable, says Mr Salzman: “You have to go through a Darwinian narrowing down, because the industry will ultimately support only a fraction of the aspirants.”

But VCs both sides of the Atlantic still have confidence in solar. VantagePoint, DFJ and Google have invested in BrightSource, which is developing the $2.2bn Ivanpah solar thermal plant in the Mojave desert.

Wellington Partners in London has emulated the symbiosis between VCs on Sand Hill Road and scientists next door at Stanford University by investing in Cambridge university spin-out Enecsys, which makes microinverters for photovoltaic systems.

Frog Capital in London lists UK-based Solar Century in its portfolio, as does VantagePoint. Its clean-tech exits so far include Agri.capital, a biogas power producer, and SiC Processing, a silicon waste recovery company.

But most investors admit that the clean-tech journey has not been easy. Rapid successes such as Facebook, LinkedIn and Twitter created unrealistic expectations of quick exits, says DFJ’s Mr Wood. “Some firms are tiptoeing out of clean tech now, because they realise it’s not like social networking, where a company that didn’t exist 18 months ago all of a sudden becomes a household name. Companies in clean tech don’t grow so fast.”

Bart Markus is a general partner at Wellington, which has $1.1bn under management. He says future start-ups may find it difficult to follow Enecsys and Heliatek, a solar spin-out from Dresden University, as VCs take flight from early stage funding in the face of market volatility and the European debt crisis.

“Clean tech is not a mature industry – there aren’t 200 growth companies to choose from,” he says.

Long before Solyndra’s collapse, New Enterprise Associates, Kleiner Perkins Caulfield & Byers, Khosla Ventures, DFJ and VantagePoint had been turning to less capital-intensive investments in energy efficiency.

These leading US funds now list in their portfolios energy-efficient lighting start-ups such as BridgeLux and Switch LED, both in California, and smart grid companies such as Tendril in Colorado and Silver Spring Networks in California.

In the last quarter, investments in energy storage exceeded solar for the first time, says Cleantech. Nexeon, a UK-based advanced battery start-up, was one of the top five deals alongside BloomEnergy, a US fuel cell company.

Sheeraz Haji, chief executive of Cleantech, says energy storage has huge growth potential as demand for electric vehicles increases and mature technologies such as wind stall over intermittency. “Energy efficiency is a no-brainer for return on investment and energy storage addresses the integration of intermittent renewables into the grid,” he says.

Although VC investing has slowed since 2008, Cleantech figures show that the $2.23bn invested globally in the last quarter represents a fivefold increase since the start of 2005.

Ira Ehrenpreis, general partner at Technology Partners, says that despite a slowdown in VC funding, government support – estimated at $194.3bn globally since 2008 – and corporate and academic interest are at unprecedented levels since he began investing in clean tech in the 1990s.

“Energy is one of the most under-innovated sectors for VC funding. There’s ripe opportunity in clean tech to do what has been done in computing and semiconductors. But it’s not like Moore’s law – innovation cycles in energy are measured in decades, if not centuries.”

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