VCs bail from IT to raise cleantech funds

NEW YORK CITY — Venture capitalists pitched limited partner investors on new funds at the Cleantech Venture Forum here last week, playing down their backgrounds as information technology investors and playing up their newfound love of the emerging industrial investment field.

“You have a rising tide issue,” says Tom Cain, founder and managing partner of Sail Venture Partners, of why he launched the firm to focus exclusively on cleantech. “Why swim against the current? It’s a multi-decade rising tide.” Sail, which is based in Costa Mesa, Calif., has raised $20 million on a $60 million targeted fund, according to Cain.

Cain, who previously founded a supply chain software company, wasn’t the only investor with an IT background at the Cleantech Venture Forum to repurpose himself to take advantage of the boom in industrial investment. James Horn, a managing director of Noventi, told PE Week that his VC firm dropped IT to focus on cleantech because of limited partner interest in the space. The firm has raised $30 million for Noventi Fieldstone Ventures, a $100 million targeted fund, entirely from Sorgenia, an energy division of the CIR Group, an Italian industrial conglomerate. CIR had a particular interest in cleantech, Horn says, and was an attractive anchor tenet in the fund. This will be the second fund for Noventi, which is based in Menlo Park, Calif., following a $40 million IT only fund raised in 2002.

The move to cleantech is particularly surprising given Noventi’s successes with early stage tech deals. The previous fund paid off with an over 30% IRR, according to Horn. One of the firm’s biggest hits was Sygate, a network security startup which sold to Symantec for an undisclosed amount in 2005. Noventi held a 10% stake prior to the sale. The firm also sold mobile content startup M7 Networks to Motricity; mobile infrastructure startup Teltier Technologies to DynamicSoft; and computer reservation system maker Travel Discount to German tourism company TUI.

Noventi continues to manage its IT portfolio, which includes mobile phone technology startup Bitfone. But CIR had been the firm’s major backer and the LP wanted exposure to cutting edge industrial technologies.

Meanwhile, Glen Schwaber’s decision to leave Jerusalem Venture Partners and launch Israel Cleantech Ventures, which is raising a $60 million fund, was more about the opportunities he saw than any particular interest from institutional investors. Schwaber sat on the boards of optical broadband companies CyOptics, Inplane and Kodeos Communications while at JVP. But he opted to leave the firm, which expects to raise a fifth IT fund next year, because he says the venture market in Israel has matured. “The larger all-purpose funds are going to have trouble generating good returns,” he says.

I can’t say we’re proactively recommending cleantech to clients. It’s a growing market though, and we want to have the resources available if LPs start to ask for it.

Craig MetrickMercer Investment Consulting

Plus, cleantech looked like an untapped opportunity to Schwaber, especially in Israel. He points out that there are 250 startups that fall into the cleantech category while the country has worked to create desalinization and geothermal power projects. Up to now, most of the innovation has come from large corporations. “There’s an opportunity to be a first mover here,” says Schwaber, who expects Israel Cleantech Ventures to have its first close by the end of the year.

It hasn’t been easy for the emerging managers in this field to raise money, Cain says. They have to compete with well-known firms as well as large companies, such as BASF, which has launched a venture fund focused on cleantech. And the incumbents aren’t making it any easier. It seems they’re constantly upping their funds to include more limited partners. DFJ Element, for example, closed a $284 million cleantech and energy fund in July—nearly double the $150 million it set out to raise last October—and Kleiner Perkins Caufield & Byers doubled its greentech push, allocating $200 million to the industry, up from the $100 million it had announced in February.

But Cain expects institutions will start looking to new funds, such as his. “They’ve topped out investing with the big name managers and will start looking for emerging managers soon,” he says.

There may still be plenty of money to be raised in cleantech though. The Cleantech Venture Network, which organized the forum last week, estimates that pre-IPO cleantech investors are receiving a 5.5x return on their original investment and the return on acquisitions in the industry is about 4.3x the original investment.

The one theme at the cleantech conference that was repeated more than any other was that everybody—LPs, VCs and entrepreneurs—want to be involved in the industry. And that the move to capitalize on cleantech-related innovation was a long-term trend and not a bubble. “I could imagine working in this industry for the next 10 to 15 years,” says a recent Wharton business school graduate who was volunteering at the event.

“I can’t say we’re proactively recommending cleantech to clients,” says Craig Metrick of Mercer Investment Consulting. “It’s a growing market though, and we want to have the resources available if LPs start to ask for it.”