Cleantech VCs getting smarter

Cleantech investors still want to change the world.

But they’re taking less capital-intensive approaches toward that end, and aiming for faster payouts in return.

VCs at the AlwaysOn conference at Stanford University in Palo Alto, Calif., last week said that much of their focus these days is on lighting, smart meters, and waste energy instead of solar panels and biofuels. In other words, they’re after emerging fields where the focus is less on companies that produce new things, but rather on companies making smarter, more efficient use of what already exists.

“Folks only recently started talking about lighting,” said Jennifer Fonstad, a managing director at Draper Fisher Jurvetson. “But lighting can reduce operating expenses by anywhere from 40% to 80 percent. In short, the impact for relatively little investment is significant.”

DFJ has already backed several lighting companies, including 2-year-old D.light Design, which makes cheap, affordable lamps in Shenzhen, China, for third-world populations. The startup has raised $6.62 million to date from DFJ, Garage Technology Ventures and Nexus India Capital, among others.

DFJ has also backed Luminus Devices in Billerica, Mass., which makes oversize LED lights, several dozen of which can replace thousands of traditional LED lights. DFJ initially funded the company in 2003. Luminus has now raised $140.5 million from DFJ, Paladin Capital Management, Braemar Energy Ventures and other investors.

Partner Anup Jacob, of Richard Branson’s Virgin Green Fund, pointed to Metrolight, a 13-year-old startup that has in the last couple of years raised $12 million to manufacture energy-efficient High Intensity Discharge (HID) lighting, which consumes close to 6% of the total electricity produced nationwide.

“Lighting amounts to 30% of any [energy] footprint,” said Jacob, “and it’s not nearly as capital-intensive because you aren’t building a huge appliance.”

Investors at AlwaysOn said that they are also focusing more of their attention on smart grids these days. EnerNoc—an 8-year-old smart grid company that went public in 2007 and had previously raised roughly $30 million from DFJ, Braemar, Foundation Capital and individual investors—was “an obvious area of investment for us,” said Steve Vassallo, a venture partner at Foundation.

Smart metering company Silver Spring Networks, another Foundation portfolio company, has also been a cost-efficient cleantech investment, one likely to produce big returns in comparatively short order, particularly given that three years ago, California regulators gave Pacific Gas and Electric Co. the green light to purchase smart meters to moderate energy use.

“Longer term, all of us who live in Northern California will get [smart meters] from PG&E that will allow the utility to control certain things and allow [homeowners] to control certain things,” said Charles Ferguson, an attorney in the land, environment, and natural resources practice group at law firm Manatt Phelps & Phillips.

Investors say they’re more bullish than ever on waste recycling operations. For example, Jacob talked at length about taking oil out of waste streams, cleaning it up, then reselling it.

“We don’t think oil is going away in our investment time horizon,” he said. More, the ability to buy long-term contracts for waste streams allows investors in the space to “hedge your bet and lock up your margin, while looking at other innovative technologies.”

Among Virgin’s related investments was its buyout last year, with Masdar Clean Tech Fund, of Houston, Texas-based DuraTherm, a company that recycles waste from petroleum and petrochemical industries. The terms of the investment were undisclosed.

Fonstad, meanwhile, took the opportunity to promote San Jose, Calif.-based BioFuelBox, which gathers leftover waste streams from places like meatpacking plants and sewage plants, then turns it into sellable biodiesel.

Fonstad said that the company is taking advantage of fundamental inefficiencies of moving waste streams.

Eventually, she added, “You can put in place a distributed facility for processing that stream for a couple million dollars, then sell it to a high margin market and generate cash flows from that.” —Constance Loizos