Cleantech hasn’t deflated, financing has, say VCs

After soaring in 2008, cleantech venture investment has plummeted in 2009.

In the first half of this year, cleantech companies raised $512 million—about one-fourth of the $2 billion invested in the sector in the same period a year ago, according to the MoneyTree Survey from the National Venture Capital Association and PricewaterhouseCoopers, based on data from Thomson Reuters (publisher of PE Week).

And while funding improved some in the second quarter, with VCs investing $274 million, up 15% from the $238 million invested in Q1, VCs say they don’t expect any near-term return to last year’s levels.

“The cleantech financing bubble has burst,” said Mamoon Hamid, a principal at U.S. Venture Partners, an investor in Fremont, Calif.-based solar cell manufacturer Solyndra.

Although Solyndra to date has raised $226 million in venture funding from USVP, CMEA Capital, Redpoint Ventures and Rockport Capital Partners from 2006 to 2008 (and an additional $535 million in federal loan guarantees), Hamid said that he believes the company would not be able to raise that much capital if it were fund-raising in today’s environment.

Hamid was one of five venture investors who participated in a panel discussion last week in Palo Alto, Calif., called “The Current State of the CleanTech Bubble,” which was hosted by SDForum at the law offices of Pillsbury.

Though not all the panelists agreed that last year’s funding levels represented a bubble, most predicted that, going forward, other funding sources, such as from the federal government, strategic investors and project finance lenders, would take on a larger share of cleantech financing.

“Venture capital represents less than one-third of the dollars that are fueling innovation in cleantech,” said panelist Don Wood, managing director at Draper Fisher Jurvetson, who added that he believes, with more federal and corporate dollars going to cleantech, “the money is going to keep flowing from various sources.”

But while they welcome increased federal funding under the American Recovery & Reinvestment Act of 2009, several VCs said they’re skeptical that the money will go to companies with superior technologies.

Rather, they said, recipients are likely to be judged on who can claim to create the most jobs. Additionally, VCs said that there could be a bias to business plans that are highly capital-intensive, and therefore less attractive to VCs.

“We don’t want to make our investment decisions based on what some government bureaucrat thinks about increasing headcount,” said Robert Walker, a principal at Sierra Ventures, which he said prefers to invest in startups that will take tens of millions of dollars to grow to maturity rather than “hundreds of millions in project finance.”

Matt Garratt, senior associate at Battery Ventures, said that while stimulus money is “overall positive, the concern is if a lot of these companies get huge amounts of government money and ultimately fail, there could be a backlash.”

The stimulus includes generous sums for all things green, including solar farms, wind turbines, electrical grid updates, and weatherizing buildings. Some industry watchers expect to see upwards of $200 billion going into the space over the next two to three years.