Seeing Green

Seeing Green

By Evan Carmichael

The Rising Trend of Clean-Tech Investing

As we speak, a breeze of fresh air is sweeping through the offices of investment firms across the country, literally. The search for new and innovative markets to invest in is a never-ending one, but in the industry of clean technology, venture capitalists have found a goldmine. Throughout North America, venture capitalists invested over $1.6 billion in clean-companies in 2005 alone. That represents a 35 percent increase from the year before, and experts are predicting similar rates of growth in the coming years.

Clean technology essentially boils down to environmentally friendly companies that are trying to improve their operations, productivity and efficiency while lowering their costs, energy consumption, inputs and waste. Why are more and more investors jumping on the clean-tech bandwagon? Is it because knowing that they are doing their share to save the planet is making them feel warm and fuzzy inside? Perhaps that's a nice by-product, but the actual reason is far more pragmatic in nature. Investors are beginning to recognize the real potential for profit in the industry; they are seeing the demand and are setting out to fill that void.

The International Energy Association predicts that by 2030, there will be a worldwide increase of over 50 percent in the demand for primary energy. And, as the pundits have been saying for years, traditional sources will not be able to meet this growing demand. While some people have been reacting to this with fear, and others with pessimism, a growing number of entrepreneurs and venture capitalists are responding to this with enthusiasm. Instead of a brick wall, they are seeing nothing but promising prospects.

A recent study by clean-technology consulting firm Clean Edge Inc. suggests that by 2010, the alternative energy industry will generate over $82 billion worth of electrical power, up from just under $10 billion today. The solar industry is predicted to grow to $51.1 billion in annual sales by 2015 while the wind industry is expected to grow from its current sales of just over $11 billion to $48.5 billion in 2015. A similar growth is expected with fuel sales, increasing its sales from today's $0.9 billion to $15.1 billion in 2015. The American private sector is already putting more of its money into possible alternatives to oil and natural gas. Entrepreneurs and investors alike are seeing flashing signs of opportunity; they know that the market is ripe for the picking.

The clean-tech sector is one of the few industries where supply will have much difficulty in outpacing demand. Especially as the prices of traditional energy sources continue to soar and urbanization becomes an evermore-present phenomenon, investors are recognizing the potential of the global market for clean energy. From hydrogen fuel cells to solar and wind energy to biofuels, investors are looking for profitable and creative ways to invest in the future. Though lined with numerous obstacles, including the traditional dominance of the oil, coal and gas industries, the road to a greener future is nonetheless a bright and promising one for investors.   

4.2 percent of the total investments made by American venture capitalists last year were directed towards alternative energy technologies. While that figure may sound small, it represents a dramatic jump from the under 1 percent it stood at no fewer than six years ago. With the increasing media attention focused on the catastrophic consequences of global warming, and the U.S. government's fear of dependence on foreign oil, the prospects for the alternative energy industry shift from not only short-term but also long-term profitability. President Bush has already called for a 22 percent increase in clean energy research by the U.S. Department of Energy.  

A number of key players within the clean technology industry are demonstrating the success that is possible for smart investors. Venture capital firm EnerTech Capital, based in Philadelphia, manages $290 million, providing financing and management support to startups in the energy and clean technology fields. 80 percent of its resources are directed towards clean energy projects, including Advent Solar, a company that makes cells with the aim of reducing the high cost of solar energy, and Clean Air Power, a company that makes alternative fuel systems for diesel engines. EnerTech specifically focuses on the commercialization of clean technology for markets. Currently, the company has 22 active portfolios, of which managing partner Tucker Twitmyer says, "a number have profitable commercial operations and several more are trending that way."

A similarly important investment firm in the clean technology industry is Draper Fisher Jurvetson. Only six of its 40 deals relate to clean technology, but it was involved in the creation of DFJ Element, which works out of California and Philadelphia with the aim of taking wind and solar generated power technologies to the mainstream commercial markets.

It has raised over $284 million to date and is beginning to look into investing in software companies that can manage wind and solar assets and companies involved in the filtration and monitoring of water.

Often, venture capital firms are looking to invest in companies whose products can improve those that are already out on the market, rather than companies whose products as of yet still have no market. Thus, the most popular clean technology ventures are proving to be those involved in the creation of various components of existing technologies, such as micro fuel cells, control systems and wind blades. Additionally, products that deal with monitoring and controlling technologies and those that improve efficiency are highly sought after. These products are less risky than investing in entirely new technologies, and often have more than one market opportunity. Investors are typically avoiding putting their resources into projects whose success is contingent upon changing government policy, such as electric cars. Instead, simplicity and reliability are key factors.

Based in Scottsdale, Arizona, AbTech Industries is an example of a successful clean-tech oriented company. Having participated in numerous CleanTech Venture Conferences, AbTech is beginning to make a name for itself as a leader in the field of water decontamination. The company pioneered a polymer sponge that can remove contaminants from storm waters before they wind up back in the environment. Multi-purpose, this SmartSponge technology can be used in other water-related sectors, including ocean oil spills, and so the company is continuing to expand its activities.   

A Seattle-based firm called Verdiem is also beginning to stand out in the industry. The company focuses on producing energy-efficient software for large corporate networks. Four venture capital firms have invested in Verdiem, which has raised over $6 million to date. Its software allows IT departments to save energy by remotely controlling their computers' energy management settings. As investors' interest in the company continues to increase, so too does the company's range of activities; while it is currently only targeting desktop computers, it plans to expand to look at servers and other portions of computing networks.

SunPower Corp. is also making a splash in the clean-tech market. Based in San Jose, California, the company uses silicon solar cell technology to produce high efficiency solar sells and solar panels, which can generate up to 50 percent more power per square foot than its competitors' traditional solar cells.

On its first day after going public in November 2005, the company's stock rose over 40 percent. It continues to trade significantly above its offering price and generated $78.7 million in revenues in 2005. Numerous other companies in the market have experienced similar success. President of the Solar Energy Industries Association, Rhone Resch, said SunPower's success was "consistent with the trend we've seen from investors that solar is a smart investment right now."

Clean-tech ventures are often risky bets, but the timing to invest in them could not be more perfect. They have finally moved from the research and development stage into becoming actual products that can be commercially marketed. Progress is shifting from within the labs onto the markets, and it is here where venture capitalists are making their mark.

In May, NASDAQ and Clean Edge Inc. announced that they were launching a new clean-energy index to track the performance of clean-tech companies that have gone public. While Clean Edge has been tracking the growth of these clean-tech markets for some time now, its co-founder, Ron Pernick, stated that this new partnership with NASDAQ represented "the further advancement, maturing, and mainstreaming of the clean-energy sector." This effort follows the launch of the Dow Jones Sustainability Indexes, which were launched in 1999 and were the first global indexes to track the financial performance of companies geared towards sustainability around the world.

Both at home and overseas, the movement to commit to energy-efficient policies is growing. Within the U.S., certain states are taking a leading role in setting the agenda. California has said it will try to produce 20 percent of its electricity from renewable energy sources by 2017. Similarly, Nevada is aiming for 15 percent renewable energy by 2013. Abroad, countries are demonstrating even more ambition and commitment. Denmark has said that by 2030, 35 percent of its electricity will be powered by renewable energy sources, and France and Germany are shooting for 21 and 10 percent, respectively, by 2010. Most dramatically, Iceland hopes that by 2030 the entire nation will be powered by renewable energy.

The market for clean-tech and sources of alternative energy is there and much opportunity exists in the quest to meet the demand. But, entrepreneurs and investors alike must be careful not get too excited and fall for the hype without properly assessing the situation first. Not every clean-tech company is guaranteed to succeed, and wise investment requires sufficient prior understanding of both the changing technologies and their markets.

In a classic case of over-excitement, the one-time thriving Newark-based AstroPower, which produced solar cells and panels and was enjoying significant success on the public market, was eventually de-listed from NASDAQ after poor management and a similarly weak business model got the better of it.

Interested investors should focus on finding the right market opportunity and a company with the right business model before making a move. Together, venture capitalists and entrepreneurs can harness the energy that is needed to leave their mark on the industry and achieve a greener future.