Brightspots in Gloomy MoneyTree Cleantech VC Report

Cleantech firms attracted $369 million in U.S. venture capital investment during the first quarter of 2013, a 61-percent drop from the same period last year, according to the latest industry report by PwC MoneyTree. Total deal volume also declined, though not as violently, reaching 61 deals, a 25-percent drop from Q1 2012.

Average deal size for first-time funding amounts dropped 66 percent in Q1 year-to-year, to $2 million. Things didn’t improve with follow-on funding, where average deal size declined 45 percent versus last year to $7 million.

The totals confirm what many analysts have been predicting for months, that as interest wanes in traditional cleantech companies, what strength remains lies primarily in new capital-light deals. The average size of early- and late-stage deals dropped close to 50 percent in Q1 year-to-year, to $6 million.

“Cleantech funding in the first quarter was lower than anytime in the past four years”, said Tom Solazzo, leader of PwC’s cleantech practice. “The decline was driven by a significant drop in average deal size as well as volume.”

Though the decline in cleantech investment was quite steep, it mirrored a larger quarterly trend in venture capital activity this year, which saw a 15-percent drop in deal count since Q4 2012, and a 12-percent decline in dollars invested, to $6.7 billion, PwC found.

There was some good news in all the cleantech doom and gloom. While averages were way down in the first quarter versus the same period last year, the sequential quarterly results show a dramatic improvement for early stage deals. The average early stage cleantech deal grew in size by 195 percent from Q4 2012 to Q1 2013 with total early stage investment rising by 134%, even as deal volume dropped 21 percent. Investment in the subsector Pollution & Recycling rose 245% and Alternative Fuels rose 233% in Q1 2013 versus Q4 2012, accounting for some of that pick up. In addition, the increase in early stage investment may reflect the growing interest in new innovative cleantech business models that have sprouted up, including those in energy efficiency, the cleanweb, collaborative consumption and agriculture.

And though investment in most cleantech subsectors were down in Q1 2013 versus Q1 2012, Smart Grid and Energy Storage  was the clear winner when using this time comparison, rising 21 percent to $43 million. That change came amid other major year-on-year losses, including an 87-percent drop in Solar and 99-percent decline in Transportation, to $1 million, versus Q1 2012.

All of which leads analysts to wonder why.

Tracy T. Lefteroff, global managing partner of the venture capital practice at PwC US, speculates that for cleantech, “This capital-intensive sector is showing signs of reaching its limit in how much VCs can continue to support these companies without additional equity coming from outside sources.”

While increased participation by strategics has been widely noted, others believe this drop-off in investor interest for cleantech opportunities may be just a short-term blip.

“This is why investment is stalling, LPs are hesitating, and cleantech VCs are thinning: Capital invested in other domains is showing a greater near-term return,” Matthew Nordan, a vice president at Venrock, wrote in a recent column. That hesitation is fueled by the closing of IPO’s as a viable exit strategy for many companies, and by disappointing returns after IPO’s take place, Nordan says. Although, the Cleantech Group’s Cleantech Index outperformed the S&P 500 by 8 percent from October, 2012 through March, 2013.

Hard times now pose immense opportunities for cleantech companies and their financial backers, Nordan predicts. “Some of those companies – and some of the investment managers that have backed them – will break off into the wilderness to find a new route,” he says.  Nordan predicts the most cleantech activity happening in the following areas: late stage recapitalizations by large funds, companies setting up joint ventures to deploy products overseas, mainly in China, an increase in strategic and philanthropic cleantech investments, and a wave of foreign firms buying U.S. cleantech companies.

Indeed, there may be support for the idea that 2012 and early 2013 may be bottoming-out for cleantech investment, and not the inception of a new normal. SJF Ventures raised $90 million for its third cleantech fund on May 1, the Westley Group  announced on March 19 that it closed on a $160-million fund with investors including E.On, SK Group and Citi, and Lux Capital successfully raised $245 million for its third cleantech fund on February 13.

The Cleantech Group’s report for Q1 2013 shows that while global venture capital investments in cleantech dropped $43 million to just over $1 billion, deal count actually rose modestly over Q4 2012, suggesting that investors are “no longer irrationally exuberant.” Energy Efficiency took home the most deals at 31, followed by Transporation at 24 deals, they reported.

And Bloomberg New Energy Finance reported a sequential uptick in their first quarter report, stating that global cleantech venture and private equity investment rose $200 million to $1.3 billion versus Q4 2012. Smart energy technologies led all other sectors, posting 39 deals worth a total $700 million. Solar had 20 deals worth $300 million, and Wind came in third, raising $200 million in eight deals.

To read the full PwC MoneyTree report, click here

 

 

 

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