In 2007, investment in Green technologies broke through the $5 billion dollar mark, according to The CleanTech Group.  Are we sitting on the verge of a Green Explosion? or are we just a bubble driven society that needs a fix?

If you look at the investment trends, the news and the fact that it seems like every Venture Capital Company in the valley is starting up fund dedicated to Green investment, it certainly does look like the next boom. There are many important questions to be answered:

1. Will it be the same as the .com boom, or different?
2. Will the invetor community learn lessons from the .com bust or not?
3. Will there be a wave of optomism followed by a strong reality check?

North America (NA) and Europe produced stronger than expected growth in Q407, with total cleantech investment across the regions more than doubling year-over-year, from $676 million in Q406 to $1.38 billion in Q407. This brings the level of venture investment in NA and Europe for 2007 to $5.18 billion and historical results for the cleantech category as:

2007: $5.18 billion 2006: $3.6 billion 2005: $2.5 billion 2004: $1.8 billion 2003: $1.7 billion 2002: $899 million 2001: $714 million Source: Cleantech Group, LLC (TM)

NA cleantech investing in 2007 grew by 38 percent, from $2.87 billion invested in 2006 to $3.95 billion invested in 2007. The number of deals increased by 15 percent, from 233 in 2006 to 268 in 2007. The average deal size increased by 20 percent, from an average of $12.3 million in 2006 to $14.7 million in 2007.

European cleantech investing grew by 34 percent, from $915 million in 2006 to $1.23 billion in 2007. The number of deals increased by 56 percent, from 67 in 2006 to 105 deals in 2007. Average deal size in Europe increased by 26 percent from $7.8 million in 2006 to $9.8 million in 2007 (excluding the outliers of the $395 million Airtricity financing in 2006 and the $205 million Isofoton financing in 2007).

North American companies continue to receive the lion's share of cleantech venture investing, with North American-based companies receiving over 3x the investment of European-based companies.

"Despite strong headwinds building in the global economy and tightening credit markets, the medium and long-term value propositions for cleantech opportunities sustained the sixth consecutive year with unexpectedly robust growth," said Nicholas Parker, co-founder and Chairman, Cleantech Group. "High carbon-based energy prices, global resource competition and increasingly favorable policy frameworks provide stronger than ever fundamental drivers for cleantech investors, and we foresee continued growth over 2008 as the cleantech market cycle moves from early adoption to mainstream driver of wealth and job creation."

2007 Top 5 Cleantech Investment Sectors

The cleantech investment category is composed of 11 industry segments. (full details and definitions on the cleantech category can be found at http://www.cleantech.com/.) Over 2007, the top five categories by total financings were:

Energy Generation: $2.75 billion; 172 deals
Energy Storage: $471 million; 20 deals
Transportation: $445 million; 20 deals
Energy Efficiency: $356 million; 41 deals
Recycling & Waste: $291 million; 17 deals

Source: Cleantech Group, LLC (TM)

How is the GreenTech boom going to be different than the Internet Boom?
One of the biggest mistakes is to assume that the Green Boom is exactly the same as the Internet boom.  So how is it different. 

1. The average deal size, posted at $14 million in 2007, is much larger (at least for the early companies) and that means that some VCs may not be able to participate as a lead and may have become follow-on investors;

2. The follow-on investment (that is past Series A) is significantly larger than that of .com companies creating a space for non-vc investment firms to get involved.  Companies such as Isofoton SA Spain ($205 million), Brazilian Renewable Energy Co., Ltd. Brazil ($200 million), Project Better Place US ($200 million), Yingli Green Energy Holding Co. Ltd. China ($118 million) and NanoSolar ($112 million); For comparison Google, the Internet's biggest winner, worth billions today raised a meager $30 million in comparison;

3. Many CleanTech energy companies skip angel investment which will force angels to band together, group their funds and try to create fund of funds to invest VCs in order to get in the action;

4. The skills needed to be a successfull investor in startup GreenTech companies are somewhat different that the skills needed to invest in .com companies. Many VCs are starting up their teams with generalist venture capitalists instead of specialists.  Many say this is a dangerous strategy;

5. The make up of the team needed to create a successfull GreenTech company is very different. The average age of an Energy entrepreneur is also probably a little bit older and if they have a PhD it may be much more likely it is in materials engineering than software engineering.3. The time horizon for a GreenTech company to take off are significantly longer that .com companies;

5. Most GreenTech companies today are energy companies in one way or another.  How many people have heard of an energy entreprenuer?  Where are these people comming from?  Teams are not always right around the corner from Stanford University like they often are in the .com space;

6. Many GreenTech companies are at serious risk of being science experiments rather than businesses that could ever really make a product that makes money; 

7. A GreenTech explosion will involve nearly every government and every existing corporation with a large consumer footprint, every utility company and every energy company.  .Com companies never needed to worry about these factors like CleanTech companies.  A CleanTech company can live or die by legislation, by the reaction of a powerful energy company or lobby and who would have thought that Wal Mart would be in such a power position to save the earth and create the CleanTech explosion;

 

How is it the same? Did we learn anything from the .com boom?
Over the history of venture capital there have been several booms, so it would seem to make sense that there were some patterns, but when you look at the patterns that are the same, it really makes you wonder if we have learned anything at all.

1. There is no real track record for setting and legitimizing valuations in the GreenTech space.  However, just as it was in the .com space, valuations are through the roof yet there has been no real exits to point to;

2. Nobody is profitable, many companies aren't even shipping products; 

3. Lots of hype followed by lots of nothing, then the CEOs start getting fired; 

4. Everybody wants in, and there seems to be a real crowd mentality when it comes to investing;

5. Every VC in the valley seems to be putting together a GreenFund with a Green team, but does anyone know what they are doing yet?  Ask a VC to give you a sector by sector analysis of the GreenTech space and tell you what is interesting or dangerous about each sector and they look at you funny.  I seem to remember that being the case back in 1996;

6. Everyone thinks that Green is going to change the world but almost nobody has been changed by it yet; Interesting experiment: Get a group of people together and ask everyone if they think Green is a big deal.  Then ask them if any of them has changed their lives because of the Green movement.  When you filter for the prius owners, you get zero.

7. The consumer population doesn't even know what going green actually means.  Ask that same group of people to tell you the priorty climate impact between changing out light bulbs, changing their heater or changing their driving habits and you watch everyone get into an argument.  If you want to see a fight, ask them to discuss the pros and cons of ethanol and for bonus points cellulosic ethanol.

 

1. Green will be a much bigger deal than the .Com boom because consumers, businesses and governments believe that we must build sustainable solutions or the human race will be at risk.  One of the first things you learn in business school is to find a motivated consumer.  Well, GreenTech's consumer is all dwellers of Earth who are trying not to die;

2. It doesn't actually matter if the scientists who say its too late to save Earth are right when it comes to a GreenTech boom or not because everyone has decided that we going to try and they are about to spend a lot of moeny; 

3. Green will be more important than the .Com boom because it will change the way we interact with Government, it will change what corporations value, because consumers will be demanding different products;

4. The GreenTech boom will suffer early loosers that die just like in the .Com boom.  Just as much investment money may be lost, but on a lot fewer deals. 

5. VCs will not let hype dominate for as long as it did in the .com era.  I would say right now, VCs don't know what they are doing as a whole.  However, the VC industry is among the most agile in the world and they have a way of getting smart very fast when there is a lot of money involved;

6. Early VC Green teams will be dominated by generalists who will help create and analysis the sectors.  Once that is done, the specialists will arrive to round out the team.  As in most markets and most industries, expect the tier 1 VCs from the .Com era to participate heavily in the GreenTech era, but also, look for a few new entrants;

7. Any billionairre with a heart is going to create a GreenVC fund.  They will be in for the short term, but will generally move on;

8. Most serious VC funds are $100 million on the low end to $800 million  or maybe even a billion on the high end.  Look for new multi-billion dollar funds in the $10-20 billion dollar range being created that will compete with the World Bank in funding country level infrastructures.  These funds will likely be private equity and will not share the identity of their LPs;

9. Look for governments to play an active role in infrastructure decisions and try to fight these new billion dollar funds;

10. 3rd world countries will be spotilighted because at peak oil capacity, they get none and therefore must build infrastructures that are not oil based.  Look for these type of countries to try to leapfrog in their infrastructures and look for them to try to get funding from non-traditional sources;

11. Smaller first world countries like Japan, UK, France, Germany will not want to get in a natural resource fight between China, India and the US.  These countries will either adopt a seriously strong sustainability initiative or tensions will increase between the powers that be.

 

My overall feeling about Green is that I believe it was a big enough deal to get out of what I was doing (founder of Powerset a .com search engine company) to work full time on Green initiatives.  I truly think that it will be the defining era of this century and will set the tone for government, corporate a social structures for a long time to come.

That's all I got for now.

Steve Newcomb
"I don't know when, I don't know where and I don't know how, but I'm going green"

"Hi, my name is Steve Newcomb and I've been addicted to carbon for 38 years"

"Why do we believe we can save Earth by convincing every single government, corporation and person on earth to change every habit they have ever had, when we can't even convert to the metric system?"

"Of coarse I'm green, I own an iPhone and a MAC"

Posted by Steve Newcomb on January 28, 2008 11:03 AM | Permalink