U.S. VCs invest in clean energy, but cautiously

The U.S. venture capital sector suffered as a result of the dot.com bubble burst of six years ago, allowing private equity to become more assertive. Analysts pointed out that investment in clean energy would likely be the path for VC firms to reassert themselves in the market and dominate the investment landscape. A new report from Newton, Massachusetts-based technology consulting firm Topline Strategy Group says that, indeed, venture capitalists are proceeding to back companies in the clean energy sector, even if more cautiously than commonly believed. The study, to be released today, says that venture firms are taking an “active, but measured, interest” in biofuel, solar, and other renewable energy technologies.

Topline reports that from the second quarter of 2006 to the first quarter of 2007, $1.3 billion was invested in 93 cleantech firms. The total dollars invested and the number of venture transactions have remained relatively flat quarter-over-quarter. As a whole, the sector represents only 4.9 percent of all capital deployed and 3.7 percent of all transactions.

Jonathan Klein, founder and general partner at Newton, Massachussets-based Topline and author of the report, told the Deal that most VC firms are still getting up to speed on the investment requirements for cleantech companies and what order of returns they can expect. “I’ve heard people comparing cleantech to the dot-com bubble, and that’s clearly not going on,” he said. “People are not just throwing money at these companies. They’re making smart, rational investment choices.”

During the Internet boom of the late 1990s investors in information technology easily shifted gears to put capital into dot.coms, but the cleantech sector is more complex in its technologies and market opportunities, and capital outlays can be truly substantial, especially if an energy company needs to build a plant. “People recognize this is not the kind of market where you can put a little money into things and be successful,” Klein said. “There aren’t a lot of YouTubes in this market where you invest a few million dollars and the next thing you know there’s a multibillion-dollar outcome.”

Ted Bernhard, a corporate and securities attorney with Stoel Rives in Portland, Oregon, agrees, saying the “Investing in the cleantech space is very different than software or Web. 2.0 companies in the sense that the market dynamics are very different. The clean energy market is driven by government regulations and tax incentives, whereas things like semiconductors and software are less regulated.”

The Topline study reports that only three of the top twenty-five U.S. VC firms — Draper Fisher Jurvetson and Kleiner Perkins Caufield & Byers, both of Menlo Park, California, and Atlas Venture of Waltham, Massachusetts — have made three or more investments in cleantech. Eight other firms made one or two investments, suggesting they are exploring the market.