Time to go green

The cleantech sector is still in its infancy yet it is the fastest growing recipient of venture capital investment in the world today. When the term cleantech was introduced to the world in 2002 with the launch of the Cleantech Group, the idea of investing in technologies that strove towards a more efficient use of natural resources was an alien concept to most venture capitalists, and as recently as 2005 the venture capital community – which styles itself as a forerunner of innovation – invested less than 5% of its capital in the cleantech sector.

By 2008 however, the market had peaked with 212 deals across Europe attracting US$1.8bn of capital, according to figures published by the Cleantech Group. This represents a 48% rise in the value, and a 25% rise in the number of deals the previous year. And in the midst of a recession the 2009 stats don’t look too shabby, with 214 deals receiving a total of US$1.6bn.

As a proportion of all venture capital investment the cleantech sector is growing apace. According to Dow Jones’s Venture Source, whereas European venture capital investment fell from US$7.6bn in 2007 to US$6.5bn in 2008, the amount committed to the cleantech sector rose from 19% to 24% over the same period. Furthermore, Deloitte’s Trends in Venture Capital 2009 report shows that 63% of VCs globally intend to increase their exposure to the cleantech sector between 2010 and 2012 – a far higher percentage than any other sector.

Cleantech is high on the agenda for many VCs, but what exactly is cleantech and why is it so popular? According to the Cleantech Group, cleantech is defined as “new technology and related business models that offer competitive returns for investors and customers while providing solutions to global challenges.” As one might expect this definition includes a wide array of projects, ranging from energy generation, storage and efficiency to recycling and waste management, from transportation and logistics to manufacturing and industrial processes.

Narrowing this down, the solar sector tops the list of VC investment. According to the Cleantech Group, in 2008 solar energy globally attracted US$3.3bn and accounted for 40% of all cleantech investments. The second most popular sector of that year was biofuel, which received just over US$900m, or 11% of all cleantech investment made. Other key recipients of VC funding included transportation (US$795m, 9.5%), wind (US$502m, 6%), smartgrid (US$345m, 4.1%) agriculture (US$166m, 2%) and water (US$148m, 1.8%).

Driving innovation

A number of factors are driving investment in the sector. First and foremost, following the 1997 Kyoto Summit, many European countries made a commitment to reduce carbon emissions and increase energy production from renewable sources, with each state setting their own targets. The UK, for example, currently derives just 2% of its energy is sourced from renewable means, but it has pledged to reach a 50% renewables target by 2020. In order to achieve this target the Government has introduced a plethora of regulations designed to assist clean energy companies, making it a particularly attractive sector for VC investors.

Barney Rhys Jones is the managing director of the 100% renewable electricity supplier, Good Energy, the leading supporter of small and medium-sized renewable generators. He explains how the Government’s new incentive scheme will work. “Here at Good Energy we’ve been offering a microgeneration incentive for five years. Feed-in-tariffs guarantee a price for electricity generated using small-scale (ie up to five megawatts capacity) low-carbon technologies. Small-scale low-carbon electricity technologies typically include wind, solar, hydro, anaerobic digestion and biomass. This incentive will encourage individual households, communities, businesses, schools, hospitals, universities and a host of other organisations to install small-scale low-carbon electricity generation technologies in order to reduce their emissions and dependence on fossil fuels.”

Neil Rimer, co-founder and partner at Index Ventures, identifies other factors: “Today, and increasingly going forward, companies that do not make use of sustainable technologies and clean energy will be frowned upon, and are likely to incur higher taxes than those that figure out how to take this approach. At present companies in the UK pay a small Climate Change Levy on their energy bills, but, following the December pre-budget report, those that demonstrate environmentally-friendly approaches will receive an 80% discount on this levy.”

Peter Linthwaite, managing partner of CT Investment Partners, the investment arm of The Carbon Trust, sees a less measurable dynamic. “The market for energy efficiency technology in the UK is largely led by demand,” says Linthwaite. “Companies feel the need to demonstrate that they are energy efficient, as this is what their customers demand of them, as well as making sound commercial sense.”

Dan Hatcher, partner at Gresham Private Equity, identifies another factor. “The rising price of oil has alerted consumers to the need to find alternate energy sources, and this has turned the spotlight on renewable energy, in turn promoting investment in cleantech.”

Whereas five years ago the cleantech sector was relatively uncharted waters for many investors, now some segments have become more attractive than traditional energy. Dr Stephen Mahon is chief investment officer for renewable energy investment firm Low Carbon Accelerator. Mahon says: “The technology employed to generate low-carbon energy is maturing rapidly and is becoming increasingly cost efficient, to such an extent that over the next five years it will, in many cases, be almost comparable with that of traditional energy, making investment in renewable energy technology now more attractive than ever.”

Good Energy is a company that has just negotiated a refinancing package, with the objective of upgrading one of its wind farms. Rhys Jones says: “Because wind farms are now a relatively mature form of energy production, many banks and institutions feel comfortable that they understand the commercial model, and are therefore more willing to lend or apply capital.”

Given the wave of government incentives and force of public opinion it would seem that investment in cleantech is a no-brainer. But, as in any type of investment, there are drawbacks.

CT Investment Partners’ Linthwaite says: “The primary objective of a business is to operate in such a way that is the most cost efficient, therefore companies will buy into the cleantech sector if they can see demonstrable cost savings over a defined period. Today, much of the technology in the sector is relatively new and unproven, and it will take time for large scale adoption to occur.”

And although governments are showing increasing favour towards the sector, there is some concern that they are not doing enough. Dr Mahon elaborates: “Multi-lateral government policy is somewhat vague at the minute, as it is largely driven by European Directive targets. What we really need to see are clear, specific and long-term objectives, which will reassure investors that their commitment to the sector will bear fruit in the long term.”

Then there is also the perennial risk associated with venture capital. Richard Youngman is a managing partner of the Cleantech Group. He says: “There is a high failure rate amongst venture-backed companies, with around one of every 1,000 companies making the grade.”

US vs Europe

Looking at the global picture, it is worth seeing how Europe compares with the largest economy in the world, the US.

Dr Mahon says: “The US utilities are regulated on a state-by-state basis, which means its approach to clean energy is more fragmented than in Europe but every bit as committed. As a result there is some inefficiency across the US nationally in terms of implementing change. Where there is inefficiency there is opportunity, and particularly for venture investments.”

And US venture funds are well placed to capitalise on this, as the Carbon Trust’s ‘Investment trends in European and North American clean energy 2003 to 2008’ report highlights. In the report, the average size of investment rounds in North America is shown to be significantly larger than those seen in Europe, to such an extent that the total financing for a cleantech company increased by 103% in North America between 2003 and 2008, to €65m, compared with a 4% decrease in Europe to just €27m per company.

But there are further differences. The same report points out that more capital is invested in follow-on rounds in the US than in Europe. Taking 2008 as an example, an average of €8m was invested in a Series B round per company as compared with and €15.4m in the US. When it comes to later rounds the difference is more striking. In the same year an average Series C round amounted to €10.7m, compared to €21.1m in the US, with the Series D comparison being €5.5m for Europe versus €27.8m in the US.

The conclusion of the report is that Europe places too much focus on early stage investments, to the detriment of later stages, concluding that European fund sizes lag considerably behind the US.


Leaving aside cultural differences and turning once more to the European market, one factor that has materially affected the venture capital industry is the economic downturn. Alex Hook is an investment manager at the National Endowment for Science Technology and the Arts (NESTA), with a responsibility for managing their cleantech interests. He says: “The recession has impacted the venture cleantech space to the extent that many businesses have had to significantly revise their commercial expectations and there are generally fewer deals in the market.”

There is, however, a silver lining. Hook says: “Given an increased reluctance for investors to make lone commitments to new companies, there is a clear trend towards co-investment. This is good both for the company and the VC alike, as the company benefits from the additional expertise on its board, whereas the risk is spread between all members of the consortium, although adds complexity to getting deals across the line.”

Hook continues: “Furthermore, a recession is always a great catalyst for new businesses, as entrepreneurs take the opportunity to start their own companies, often pursuing low burn, capital-efficient business models due to the current funding environment. With cleantech attracting so much attention at the moment, we are seeing some experienced second or third-time entrepreneurs looking to launch ventures in the cleantech space.”

Bart Markus, general partner in the Munich office of Wellington Partners, sees other factors: “The weight that individual governments have piled behind investment in the clean energy sector has made it an attractive proposition even in the midst of a recession when the venture capital industry at large is depleted.”

Richard Youngman agrees: “The government of every country affected by the recession is desperate to stimulate economic growth, and backing cleantech has the double advantage of creating jobs in a key sector whilst at the same time visibly working towards bringing about the necessary shift towards renewable energy sources.’

A wealth of opportunity

What seems clear is that investment is in cleantech, but just how big an opportunity does the industry offer for the savvy investor?

Markus says: “It has been estimated that clean energy is a US$6trn industry, and the success of some of the companies we have seen come to the market suggests this figure is accurate. For example, First Solar, a manufacturer of thin film solar modules, brought its first product to the market just eight years ago, and yet today the company boasts revenues in excess of US$1.2bn.”

Cleantech Group’s Youngman highlights an even bigger opportunity. “For too many years the European venture industry has been playing second fiddle to the US, both in terms of the scale of investment and the rates of return achieved by European VCs relative to their US counterparts. What we have with cleantech is an opportunity for Europe’s venture industry to reframe itself and establish itself as a hub of venture capital, innovation and deal flow.”

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Deals round-up

The most popular cleantech sector in Europe in 2009 was solar power generation, which attracted 40 private equity and venture capital investments. Of the 31 deals which disclosed a transaction value, the total invested was US$970bn. The largest deal in this sector was the US$212m investment in Qimondas Solar Cells, led by Portuguese group InovCapital. Another significant investment saw Norwegian firm Norsun receive US$163m in funding from a syndicate of investors led by private equity investor Good Energy, which injected US$71m into the transaction. Norsun AS is a producer of monocrystalline silicon wafers employed in solar technology.

Turning to the wind energy sector, private equity firms made commitments to 20 firms, and of the 12 deals that disclosed deal values the total amount invested was US$597m. The largest investment in this sector was Société Générale’s $135m acquisition of a 50% stake in UK-based GLID Wind Farms from Centrica Plc.

The recycling sector also proved popular amongst lower mid-market investors, with 10 deals receiving a total of US$60m. The largest deal in the sector was the investment in TMO Renewables made by a consortium led by Jupiter Asset management. TMO has identified and and exploited the properties of thermophilic micro-organisms for the production of chemicals and liquid fuels from biomass.

Other noteworthy deals include an investment by Venture Finance in UK-based Dams, a manufacturer of recycled and recyclable office furniture and a $2m investment in in Lysander Ltd, a company that has developed the Eco-Log system, which helps reduce vehicle fleet running costs by providing highly accurate data on fuel consumption and wastage.

The most active investors in 2009 were Foresight Venture Partners and the Sustainable Technology Fund, each completing five deals, with a combined value of US$44m. The largest single transaction was InovCapital’s investment in Qimondas.

Looking at the entire European cleantech market, the UK saw the most activity, with US$648m invested over 41 deals. The second largest recipient in terms of the number of deals was France, which saw 21 investments made with a total deal value of US$318m.germany clocked in third, with 15 deals attracting US$216m.

Data from Corpfin, part of Experian

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Activity was not merely restricted to the investment side in 2009, as several notable funds sets their sights on the sector. In Q1 Index Ventures closed its fifth fund, Index Ventures V, on Euro 350m, with then aim of investing in the technology, biotechnology and cleantech sectors in Europe and the US. This was followed swiftly by news that ATP, the Danish labour market pension scheme, had injected US$400m into US-based Hudson Clean Energy Fund, with further plans to increase its investments in the fund. Hudson’s remit is to invest up to $9bn in the solar, wind, hydro, biofuels and biomass sectors.

Later in the year, I2BF announced its intention to launch three news funds; a second US$100m global renewable energy fund, a cleantech-focused VC fund and a €30m water-focused fund, and WHEB Ventures, held a third closing of its second fund, WHEB Ventures Private Equity 2, on €105m. The London and Munich-based group is still aiming to achieve a final close on €175m.

Finally, at the close of the year, the UK Government appointed Hermes Private Equity and the European Investment Fund as co-managers for the UK Innovation Investment Fund, a fund-of-funds which has a £150m backing from the UK government in addition to £175m from investors, resulting in a pool of £325m. The fund is scheduled to begin making commitments in early 2010, with capital earmarked for innovative UK businesses in the life sciences, clean technology, digital and advanced manufacturing sectors.

Data from Corpfin, part of Experian