Q3 VC Funding in Cleantech Hardly Red-Hot, But Not Discouraging, Either

The Cleantech Group has released its third-quarter venture capital funding figures for the cleantech sector, and the news is just okay: global VC investment in clean technology has basically held steady, totaling $1.4 billing in the third quarter. That’s slightly lower than the $1.5 billion average of the first two quarters of 2013, and a bit short of the $1.7 billion invested in the third quarter of 2012.

In its presentation on the figures, the Cleantech Group suggests somewhat resignedly that the cleantech sector may be settling into its “new normal,” having corrected from the $2 billion to $3 billion quarterly funding totals that 2011 saw.

But in a recent speech at the Cleantech Open Northeast Startup Competition this week, Rob Day, a partner at cleantech-focused VC firm Black Coral Capital in Boston, offered an antidote to the soft disappointment trailing this quarter’s figures.

“Over the last few years, there’s been this regular drumbeat of, ‘This sector’s out of favor,’ or ‘It’s facing headwinds,’” he said. “But from what I can tell, this sector is actually quietly kicking butt.”

He says that between 2011 and 2012, “in our portfolio, we saw revenues just about double in aggregate,” and adds that it’s poised to do the same between 2012 and 2013. “When I talk to my peers who are active investors in the sector, they’re saying that they’re seeing a lot of the same progress in their portfolio companies.”

He adds that the entrance of more and more Fortune 500 companies into the space is another source of hope. Jenny Chase, a manager of Solar Insight at Bloomberg New Energy Finance, agrees that this is an important trend to note in considering the dampened VC figures—after all, the cleantech space may just be maturing.

“I think we can expect to see venture capital decrease, as it usually does in mature markets. To counterbalance that, we’ll see investment in infrastructure and corporate R&D rise,” she said in a recent live chat on cleantech trends hosted by The Guardian. “Someone has to build those plants and roll out that capacity, but it’s not high-risk, high-return money anymore.”  Bloomberg’s figures put Q3 cleantech venture capital investment at just $724 million, down from $1.3 billion in Q2 and $1.1 billion in Q3 last year, and overall global clean energy investment (including public market, project finance and private equity) at $45.9 billion in the latest quarter, dropping 14% from the prior quarter.

The Cleantech Group figures seemed to establish the fact, once again, that VC investors are increasingly only tempted by “capital-lite” plays in the cleantech space. Average deal size was $7.8 million in the third quarter, up slightly from the $6.9 million average in the first half of 2013, but down considerably from the $11.5 million average that began 2012.

But, again, a call for a bigger-picture view issued from the Guardian chat, this time by Richard Youngman, Europe and Asia managing director of the Cleantech Group.

“It’s all cycles, right? VCs have definitely shifted towards capital-lighter businesses (say in energy efficiency) and away from hardware and more capital intensive plays,” he allows. He continues: “In part that is more their natural terrain, but also it is only because they have funded the first wave of technology and infrastructure development that they can do that. And the PE and project financiers have more to feed off, to work with, more proof points. In short, cleantech is maturing.”

The release of these third-quarter figures coincides with the publication of the Cleantech Global 100, the Cleantech Group’s list of the 100 private cleantech companies to watch over the next 5 to 10 years. In a Guardian article about this year’s list, Youngman made another point about a larger development that seems to be taking shape in cleantech:

“There are 51 new companies to the list this year – the largest influx of new entrants we have ever seen,” he writes. “This seems to signify the ending of one wave of innovation and investment activity (which was at its height in 2006-09) and the beginnings of a new wave.”

It appears that, to a large extent solar is washing out with the old wave—only 6 solar companies make it onto this year’s list, down from 20 in 2009. “Solar technology is maturing, and solar manufacturing has over-capacity,” Youngman explains. A preview of the next wave might be found in this quarter’s cleantech figures: energy efficiency had a substantial lead by deal count, with transportation and solar a distant second and third.

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