With oil prices exceeding $50 a barrel, CalPERS allocating more than $1.5 billion to “environmentally responsible” investments, and Russia in the process of ratifying the Kyoto Protocol, some venture capital investors are seeing more viability in a growing global space: clean technology.
The environmentally and socially responsible investment philosophy encompasses more than just alternative energy resources. Clean, or green, technology includes companies that focus on improved waste management, water purification, advanced materials – virtually any line of business that increases the productive use of resources while providing both economic and ecological benefits.
“I don't see this as tree-hugging investing”, says Adam de Sola Pool, the chief investment officer at Warsaw-based Environmental Investment Partners. His Central & East European Environmental Investment Fund is a venture fund that goes after companies that profit from selling environmental goods and services. “These are businesses of efficiency. Therefore, they're environmentally minded. We help companies get to the lowest cost of production without having to waste resources”.
For the first two quarters of 2004, North American venture investments in clean technology totalled almost $584 million, or slightly less than six percent of total venture dollars, according to the Cleantech Venture Network, a trade group formed more than two years ago that brings together entrepreneurs and VCs, holds annual forums and publishes statistics related to clean investing. The group also tracks developments in Europe, where it estimates nearly $80 million in new investments was completed in the second quarter.
Energy continues to be one of the largest sectors in the space, snagging more than $150 million in the second quarter in North America, more than half that period's total VC investments in clean technologies.
Neither are the venture rounds for these clean businesses insignificant. In July for instance, Mountain View, California-based Polyfuel secured $18.4 million in financing. The portable fuel cell technology company received capital from household name VCs including Mayfield, Ventures West and Intel Capital. Indeed, for the second quarter of 2004, the most active venture investors included, among others, Draper Fisher Jurvetson and Vantage Point Venture Partners, according to Cleantech.
Nick Parker, Cleantech's co-founder and chairman, says that though there are only between 30 and 40 venture firms who consider clean investing their focus, interest in the space has gone beyond the niche players.
“Typically what we see are syndicates between the specialist and the mainstream funds”, says Nick Parker, Cleantech's co-founder and chairman. “There are also a very large number of corporate investors in the space, such as a venture arm of a large chemical company or energy company”.
Nevertheless, clean technology development carries many downsides. Kai Hockerts, Adjunct Professor at INSEAD, points to the risk of delayed exit strategies when high costs of research cause smaller profit margins, especially in earlier stages when products have yet to match their cheaper, non-green counterparts.
Hockerts also says that there are still many eco-idealist investors who focus too much on being green rather than being profitable. He says the real winners in the space will be those that can create value by balancing cost, risk and innovation, and by paying attention to market trends and to potential customer demand.
This is no small challenge. However, the rewards could be significant as well.