Uptick in Cleantech Investment Driven by Large Deals and Improved Investor Confidence  

By David A. Hill

Earlier this week we reported on the official launch of the Colorado Cleantech Industry Association amidst a general sense of optimism permeating the clean technology sector in our state. This, despite the current economic difficulties. Industry executives should feel even more upbeat after this week’s release of Q2 investment figures from Ernst & Young, LLP.

According to the analysis, Venture capital (VC) investment in cleantech companies in the United States for the second quarter of this year reached $572 million, an increase of 73% in terms of capital. The 48 financing rounds represented a 100% increase in number of transactions compared to the first quarter of 2009.

Colorado companies got in on the funding action, including Boulder-based Tendril, a manufacture of smart grid software, which received $30 million in funding; and alternative fuels producer, Gevo in Englewood, which was the recipient of $40 million, according to the EY analysis. The deals put both startups in the top five reported venture-capital deals nationwide for clean-energy in the quarter.

Compared to Q2 08, the second-highest quarter for cleantech investment on record, this year’s second quarter results were 59% and 16% below those record levels in terms of capital and number of transactions respectively.

The rise in VC cleantech nvestment was lead by the Energy/Electricity Generation category, which raised $157 million, a quarterly increase of 181% as compared to the first quarter of this year. Within this category, solar deals received the lion’s share of capital, more than tripling to $148 million compared to the prior quarter. Deal activity in the solar segment represented 26% of all quarterly cleantech investment by VC firms.

“We are seeing risk capital return,” Jeff Grabow, an Ernst & Young clean-tech leader. “First-quarter deals were cut back by the recession.”

In April, Gevo received $40 million in funding led by the French oil company Total SA, according to the Ernst & Young analysis. The company retrofits existing ethanol plants to make renewable butanol fuels.

“We are combining biotechnology, engineering and chemistry in a way our competitors haven’t done,” Brett Lund, Gevo vice president, told local media. The financing will get the company through development to the commercial stage, he added.

The Energy Efficiency category grew 168% from Q1 09 to $152 million due to power and efficiency management service deals that accounted for the majority of investment. This segment experienced 143% growth during Q2 09, attracting $93 million. A notable deal in this segment was the $30 million investment in the residential smart grid company Tendril. This investment was led by VantagePoint Venture Partners and has since followed with a partnership with GE to enable smart appliances to communicate over metering and broadband networks.

Commeented Tendril’s CFO, Mark Pougnet, “We are beneficiaries of being in the smart-grid space, which has been one of the few growing sectors.” He said that the funds will help the company’s R&D as well as get the sales and marketing capabilities built.

“The quarterly uptick reflects investor confidence in the ability of cleantech companies to capitalize on market opportunities,” says Joseph A. Muscat, Ernst & Young LLP, Americas Director of Cleantech. “While enacted and anticipated government actions have helped bolster confidence and catalyze new capital, we believe that leading cleantech companies will be defined by their ability to execute on business plans and advance their technologies through commercialization and distribution despite the challenging economy.”

The Investor Mix

The updated investment in cleantech exhibits a shift from companies in the product development stage toward companies in the start-up and shipping product stages. Start-up cleantech companies received 8% of financing rounds in Q2 09 compared to none in Q1 09. Companies at the shipping product stage accounted for 65% of financing rounds compared to 54% in the prior quarter. By contrast, product development stage companies received just 27% of financing rounds compared to 46% last quarter.

Ernst & Young says results also illustrate the continued mix of investors who are partnering to advance the U.S. cleantech market. Seven of the top 10 cleantech venture deals included participation by private equity, hedge fund or corporate investors. Indeed,the VC cleantech investment surge was accompanied by a rise in private equity and asset backed financings.

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