Friday, September 22, 2006

Too Late to Get Into Cleantech?

Reality Check: With more money chasing cleantech investments, it’s getting harder to make money by the minute.

There’s certainly never been a better time to be a cleantech startup.

Virgin’s flamboyant Richard Branson said Thursday he will invest $3 billion in renewable energy technologies over the next 10 years. The Silicon Valley insiders at venture firm Kleiner Perkins, Caufield & Byers said Wednesday that they were doubling their commitment to green technology to $200 million. Even the Bush Administration—not exactly a bastion of eco-warriors—on Wednesday unveiled a plan to spend $3 billion to research carbon-dioxide-reducing technologies. "It's been a very interesting few days." said Michael Liebreich, CEO of research firm New Energy Finance.

Could all the money be bad for investors? Robert Wilder, CEO of WilderShares, which manages two clean-energy indices, said he’s concerned that the growing funds could be bringing hype to the industry, along with the needed capital. Cleantech shares are already down more than 30 percent this year. “We need to be wary of hype because hype leads to real sharp pullbacks, such as the one we’re in now,” Mr. Wilder said. “As soon as people start thinking cleantech is a sure thing, you can be sure it’s a pretty bearish sign of a downturn ahead.”

The math is simple. Add too much money to too few investments and the valuations of cleantech companies are getting bid up quickly. But the higher those valuations rise, the tougher it can be to make money over the long haul.

And the money is certainly there. Other recently announced cleantech funds include US Renewables Group, which raised $80 million and plans to bring the total to $250 million, Expansion Capital Partners, which last year closed a $20-million fund and plans to raise an additional $30 million, and Tsinghua Venture Capital Management, which raised $30 million for a green fund in China. VantagePoint Venture Partners originally closed its fund at $225 million, but could expand it up to $300 million. By June close to $2 billion in Cleantech venture funds had recently been announced, according to research firm Clean Edge.

As a result of all the money, valuations are getting bid up. At a recent investor conference, for example, Mr. Wilder said he saw some technologies that he thought were not ready still getting heavy investor interest. “Clearly, right now, there are some areas that everybody wants to get into, like solar,” said Joel Makower, a principal at research firm Clean Edge. “VCs are throwing money at some solar companies almost without questioning, and in some cases unsolicited by the companies. That’s not a sustainable model.”

That’s been a turnoff for some. Matt Horton, a principal at @Ventures said his firm is coming across interesting companies that had valuations higher than the company was willing to pay. “Obviously, a lot more new capital coming in makes it tougher because there’s a lot more money chasing fewer deals, and valuations are being bid up to levels that may not allow for good returns, and that are pricing some deals out of a range that makes sense,” he said.

Mr. Makower said the cleantech valuations are mirroring the rise in valuations the VC community is seeing across the board of venture deals. “Everybody feels this way when their sector starts to get a lot more attention,” Mr. Horton said. “There’s a lot of new guys with a lot of new money that they have to put to work, and so they’re a lot more aggressive to get into the fewer deals, and are willing to pay a lot more money to get into the deals. It’s a very difficult problem for the venture community.”

In some cases, the competition could result in bad investments, he said. “For the most part, quality firms still do the due diligence, but I have seen firms do less research than they might have otherwise so they could get into these markets,” he said. “And that’s the danger with this market in particular—investors need to be sure they understand the dynamics of the market, because they are quite different than in software or other areas where people might have been investing historically.”

Still, once you dig past the tier of “hyped” companies that everyone else is chasing, there are plenty of good opportunities out there, Mr. Horton said. And as valuations rise, so has the quality of the management teams leading cleantech startups. “I think the standards have risen, such as in management quality and the pathway to execution, for instance,” Mr. Makower said.

Overall, Mr. Wilder agrees. “The growing capital for cleantech is 99 percent a good thing,” he said. “There are a few people who are famously smart, like Branson, Gates, and Buffett, and one thing they have in common is they are all putting money into clean energy.” The only question: when does all that smart money make the next dollar invested dumb money.
Credit: Red Herring

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