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Summary:

Despite the hand-wringing over the cleantech investing cliff, it actually could be the best of times for investing in energy tech, resource management and sustainability, for investors that stick with it.

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The “death of cleantech” has been the topic of much discussion over the past few months. Whether you think the sector will emerge from “the trough of disillusionment” with an evolved strategy and moniker, or if you think the sector is gone for good, it’s hard to ignore metrics like the fact that venture capitalists invested a third less in cleantech startups in 2012, compared to 2011.

But for investors that still believe in the underlying trends of cleantech — the fairly obvious notion that the world will one day need better management tactics for resources like energy, food and water — the so-called “cleantech cliff” actually has some noteworthy silver linings. The most important one of those is that there’s just not that much competition out there anymore for investors to find and fund new startups in clean power, smart grid, energy storage or tech for more sustainable transportation.

Back in the years between 2006 and 2008, investors had to compete with their peers for the chance to fund promising young cleantech companies. These were frothy times and the startups’ valuations were often higher than the investor wanted. This was the age that produced crazy-high valuations for companies like Solyndra, Nanosolar, Fisker Automotive, and others.

In contrast 2013 is basically an open field for investors that are sticking with cleantech investing. Valuations haven’t just dropped back to earth, they’re running below market value. If you believe in this sector, there’s undoubtedly some really great deals out there.

Lux Capital’s Peter Hebert, whose firm just closed on its third fund, which will partly be dedicated to investing in energy technology, described another positive affect of the weeding-out process as “people in it today are there for the right reasons: passionate, want to build real companies, not just flippers, hucksters and passers-by.” The entrepreneurs and company builders are also a lot more rational, said Hebert.

For Khosla Ventures Andrew Chung, investors that have built a substantial portfolio in energy, resource management and sustainability could use the “network effect” for their benefit during this time. The relationships we built with corporate partners, star executives, private and public funding sources can all serve to benefit multiple companies, said Chung.

Khosla Ventures is also betting that the move away from backing cleantech companies — and companies that innovate around the underlying trends — is cyclical. “Venture is highly cyclical business, and we expect sustainability investments to experience a renaissance as today’s breakthrough companies successfully commercialize and have massive impact on society’s infrastructure,” Chung wrote.

Still, it can be lonely out there for investors that stick with it. And that means there’s fewer investors willing to partner with firms like Khosla Ventures and Lux Capital for follow-on rounds. VCs commonly need partner with other investors for larger rounds.

Chung said that just means they have to be more creative and patient in finding sources of funding, often tapping global investors who continue to have enthusiasm and corporate investors who can provide strategic benefit alongside capital. Khosla also has set up multiple funds so that the firm can do early stage seed investments, and then follow-on with larger rounds for companies that hit milestones and show promise.

While it could be the best of times, there are a couple of other hurdles that loyal investors will face. Hebert said that alongside fewer investors, there are fewer entrepreneurs, as some entrepreneurs have moved onto greener (easier) pastures. In addition, there’s more pressure on the investor — from both limited partners and general partners (not focused on energy and cleantech) — to produce returns for the companies that they’ve been nurturing for years.

Then there’s the situation that word “cleantech” itself has become rather toxic, as 2013 gets underway. Investors like Lux Capital and Khosla Ventures are not using this term; they call their portfolio companies in this space “energy tech” and “sustainability investing.”

So if cleantech does come back, it’ll have to have a new and improved brand.

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  1. Felix Hoenikker Monday, February 18, 2013

    Of course its cyclical, people will continue to innovate and the money will come eventually. I was in cleantech VC from 2008 to 2012 and try not be a cynic but sitting from the analyst desk doing all the analysis and research….I learned there were actually very few people with the technical understanding and business acumen to responsibly make investments. For example had anyone done their research on the solar industry in 2008 they would have realized one glaring fact….China was subsidizing to push down panel cost and there was no indication they would stop. Same goes for many of the CIGS and CdTe starups funded after 2008. Similarly in LEDs, Why would you build a fab in the US if China/Taiwan are subsidizing CVDs, did we not learn anything from the fabless revolution led by TI? Same goes for batteries, at the time A123 was going bankrupt you could literally buy the same LFP chemistry batteries in China for 1/4 the cost A123 manufactured at. This is one aspect of due diligence, but a simple concept to research and understand and inexcusably overlooked by many “experts.” We need VCs less interested in playing the role of a VC and more interested in helping to creating value. Is Calera bigger than GE yet?

  2. The stocks are down for a reason.

  3. Kirk Brand Coburn Wednesday, February 20, 2013

    In regards to Peter Herbert’s comments, I agree with the fact that there is a silver lining to the situation. It’s survival of the fittest and a weeding out process. In reference to Burton Malkiel’s modern classic on investing, A Random Walk down Wallstreet, cleantech companies and investors that were along for the ride to be investing based on “castle in the air” theories are now gone, and cleantech companies here are rational, committed and have viable ideas and products based on research. Investors are fewer and far between, but they are investing based on firm foundations. With every speculative period marked by mob mentality and inflated IPOs, the market’s efficiency proves itself and inevitably, it did.

    The surviving companies continuing to innovate and persist are hopefully here for the long haul.

    This is also a time for larger corporations to invest in cleantech, which they have continued doing so. Companies such as Dow, Johnson Controls, Schneider Electric, Eaton, Honeywell, Hitachi, GE Energy and many more are investing.

    As we know, solar deals have gone down significantly, but faith remains especially for investors in sectors of transportation and green chemistry companies. And in agreement with Peter Herbert, venture is a cyclical business and I’m sure cleantech will once again gain respect from the masses and media and will be far from a toxic name in due time.

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