Venture capitalists want in on the next wave.

cleantechwind.jpg Credit: Pekka Nikonen

Last spring, Lisa Bergson received an unexpected call from an investor interested in her company, Tiger Optics. Bergson hadn’t considered her company to be “cleantech,” but Rob Day, a venture capitalist who specializes in clean technology, made a persuasive case: Tiger Optics’ products—sensitive, laser-based devices that measure traces of moisture and gases in the air—could be used for industrial applications, including environmental monitoring. Plus, the company uses non-polluting manufacturing methods.

“I think that we epitomize, in many ways, ‘cleantech,’” Bergson says now.

Cleantech is a venture capital buzzword, making eyes sparkle the way “biotech” and “infotech” once did. Over the last several years—for reasons financial, technological, environmental and political—cleantech is showing commercial potential. Startups are sprouting like weeds, bolstering investors’ hopes for big, fast returns. Surely venture capitalists, as well as state and local governments angling to be the “Silicon Valley” of cleantech, noticed that last year’s three largest technology IPOs were all solar energy companies.

“There will continue to be cycles within this, but around the trajectory of growth—strong growth,” says Day, who is a principal investor at Expansion Capital Partners

Solar energy is indisputably a clean technology, but the venture capital community defines cleantech a little more broadly as anything in energy, water, transportation and materials science. By this definition, a company that specializes in squeezing 90% of the oil out of a well could call itself cleantech.

“That could [encompass] everything,” says Warren Weiss, a venture capitalist with Foundation Capital, another company hot for cleantech. 

Other observers of the market are a little more discriminating. Joel Makower, co-founder of the research and publishing firm Clean Edge, defines cleantech as “a diverse range of products, services and processes that harness renewable materials and energy sources and substantially reduce the use of all resources and dramatically cut or eliminate emissions and waste.”

While Makower’s version is more in line with the intuitive definition of cleantech, it still encompasses a baffling array of technologies, including Tiger Optics’ devices, solar cells, water filtration systems, software that manages a building’s air conditioning, biofuels and ozone-water systems for disinfecting fruit.

“I worry about everything getting lumped into one category and people saying ‘Here’s the average outcome of these kinds of companies,’” says Weiss.

Taken as its heterogeneous whole, cleantech is scaling the venture capital pyramid. Investment in the sector jumped almost 35% to $1.6 billion between 2004 and 2005, making it the fifth largest sector, just ahead of semiconductors. Continued growth seems inevitable: Venture capitalists are attending cleantech conventions in droves, kicking the tires of new companies and asking questions in panel discussions.

“Almost everybody is poking around,” says Steve Chadima of Energy Innovations, a solar company that received funding last year.

However, it’s possible this flurry of newfound interest in earth-friendly cleantech isn’t as noble as one may think. There’s green and then there’s green, and some in the field don’t believe the venture capitalists are showing up because they had pangs of environmental conscience.

“I don’t think the social and environmental aspects have anything to do with it,” says Makower. 

There are likely several reasons that cleantech is now seen as a potential moneymaker— the most commonly cited is the rising price of oil. As the price of a barrel dances around $70, efficiency-boosting technologies start to look attractive and renewables become more cost-effective. The prospects of cleantech may follow each hiccup in oil prices, each protest in Ecuador, each incident in Nigeria, each pipeline rupture in the Middle East. 

“All these issues are colliding on a global basis and venture capitalists love to hear that stuff,” says Weiss. 

Investors are also interested because of the maturation of these industries. Larger cleantech companies, especially solar ones, can now benefit from economies of scale. Rapid economic growth in China and India provides opportunities for whole economies to leapfrog past wasteful solutions and build infrastructures around the latest clean technologies. There is also a general perception that government regulation and increased subsidies, nascent at the federal level but active in several states, are on their way. Jonathan Koomey, a staff scientist at Lawrence Berkeley National Lab who works on smart power systems, calls it an “inflection point”—the turn of the tide. 

“The federal response has been totally inadequate and, some would say, given our security and environmental challenges, borderline criminal,” says Makower. “At the state and local level that’s a very different story.”

As the current administration stumbles onto a train already leaving the station, several states are pushing to become hotspots for cleantech startups. New York, Massachusetts and Minnesota have made overtures, according to Clean Edge’s Makower, but for now California is it.

In addition to its solar and efficiency initiatives, California—and the San Francisco area in particular—is hosting the Clean Tech Open, a competition for new cleantech companies that is one part X-Prize Cup, one part “American Inventor”. Contestants submit proposals in one of five categories—smart power, energy efficiency, renewables, transportation and water management. The winner gets a “startup-in-a-box”: cash and a year of free PR, accounting, legal services, consulting and office space. Conceived by the MIT Club of Northern California, the contest looks to make Silicon Valley, well, the next Silicon Valley. 

“The environment is very conducive to new ideas,” says Laurent Pacalin, one of the Open’s co-chairs. “There is both money as well as intellectual capital.”

But not everyone is convinced that the exploding cleantech industry will put down its roots in one place. 

“There will not be one Silicon Valley of cleantech,” says Ron Pernick, the other founder of Clean Edge, along with Makower. “Just like we’re talking about distributed generation technologies, the revolution will be distributed.” 

At least at this early stage, with venture capitalists circling and words like “revolution” getting tossed around, it is hard not to think of the boom-bubble-bust cycles of the recent past.

“There’s the risk of too much capital chasing too few good deals,” says Makower, who adds that there is caution in the wind.  “[Investors aren’t] simply throwing money at two guys and a golden retriever and a business plan.” 

cleantechenginno.jpg Energy Innovations is testing its Sunflower™ solar energy generation system on its roof in Pasadena, CA.  Courtesy of Energy Innovations

But just like recent booms, startups are likely to play a big role because of their nimbleness and idea-driven single-mindedness—and because venture capitalists are ready and waiting for explosive ideas. 

Cleantech is entering some markets, such as energy and water, where there are already entrenched, connected business interests, in addition to public utility commissions more interested in keeping the lights on than innovating. The hope here, for everyone from environmentalists to venture capitalists, is to find a clean idea that rewrites the rules, a “disruptive technology” that will hop over the energy giants and start fresh in the biggest industries in the most populous countries in the world.

“Something dramatic has to happen,” says Mark Heesen, president of the National Venture Capital Association. “And you could see a very quick adoption from other regions of the world.” 

Despite a preference for profit over environmental responsibility, venture capitalists might end up making the world a better place.

“Is some solar company we don’t know of yet going to end up buying Shell?” said Makower. “It’s totally possible in 15 or 20 years.”

“It’s pretty clear that clean technology will become the dominant technology,” he added. “Physics and survival demand it.”

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Originally published May 3, 2006

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