There's a popular view that a perfect storm is brewing for alternative energy. With oil and natural gas prices skyrocketing, concerns about instability in oil-producing regions growing and warnings about global warming becoming more frightening, energy alternatives are seeing a spike in attention from both government and industry.
Venture capitalists have taken note of this trend, and they're rushing toward the new frontier of energy independence. A quarterly report by the National Venture Capital Association shows that second quarter 2006 alternative energy deals increased 69 percent in dollar terms over the previous quarter and nearly quadrupled in terms of number of deals. In the process, the sector surpassed semiconductors as the fifth-largest investment area for US venture capital.
With all this new money pouring in, concern has been voiced that too many inexperienced VCs are putting vast amounts of money into companies that may not have workable ideas. In other words, could the rush to alternative energy be premature? NVCA research and financial affairs executive John Taylor dismisses these concerns. He says the huge surge in alternative energy deals is coming from seasoned industry pros, not speculative newcomers.
“It's not as if people are waking up and saying, “I think I'm going to be an energy VC today,”” he says. “These are people who have been in the space all along, and with the cost of oil so high, alternative ways of powering America are much more investable right now.”
One such investor, who has been involved in the sector for 15 years, is Diana Propper de Calejon, a general partner with Expansion Capital Partners. The San Francisco-based firm recently held a close on its second clean technology fund at more than $55 million (€43 million). It has already made four investments from the fund, and is eyeing many future opportunities.
“We're reviewing 50 to 100 new deals a month, and we track over 2,000 deals in our database,” Propper de Calejon says. “I've never seen this many deals before.”
STAGGERING DEAL FLOW
When Expansion was founded in 2002, it was one of the first funds to focus specifically on clean energy. Propper de Calejon had been involved in clean tech for years previously, and says the amount of activity in the sector recently has been staggering.
“There's been a doubling of funds focused on clean technology, not only here but in Europe, Israel and Asia as well,” she says. “Now you have some of the more mainstream, traditional VC funds deciding to deploy capital in clean tech and make it a new category alongside their more traditional IT, biotech and semiconductor investing.”
Propper de Calejon disagrees with the characterization of clean tech as a fad or a short-term niche play. She cites Expansion's $4.5 million investment in Orion Energy Systems as an example of why the sector has good longterm prospects. Orion, a Plymouth, Wisconsin-based company that makes energy-efficient lighting systems, serves many Fortune 500 companies and addresses a global market worth as much as $10 billion.
She says Orion's business plan, i.e. providing tools for companies to save money on energy, shows that cleantech investment isn't inextricably linked to global warming or fuel prices. It's also being driven by a worldwide need to save costs.
“Natural resource-based industries have undergone a tremendous increase in competition because of globalization and resource constraint,” she says. “When you have these kinds of drivers, resource efficiency and productivity become a source of competitive advantage.”
As cleantech becomes more mainstream, VCs can be expected to adjust their strategies accordingly. Those who stand on the sidelines and assume the attention being lavished on the sector is a passing fad may end up missing out on a highly profitable area of investment for many years to come.