Cleantech: bubble or bonanza?

As venture dollars pour into US alternative energy companies, some are starting to question whether there is too much money flowing toward too few sustainable ideas. Dave Keating reports.

Many are saying it  is the perfect storm 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 government and industry.

Venture capitalists have taken note of this trend, and they’re rushing toward the new frontier of energy independence. This month’s quarterly report by the National Venture Capital Association shows that second quarter 2006 alternative energy deals increased 69 percent in dollars over the  previous quarter and nearly quadrupled in terms of deals. The area has now surpassed semiconductors as the fifth-largest sector for venture capital in the US.

Diana Propper de Calejon, Expansion Capital Partners

With all this new money pouring in, many have voiced concern that too many inexperienced VCs are putting vast amounts of money into companies that may not have workable ideas. 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 are coming from 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 now with the cost of oil so high, these 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. That San Francisco-based firm has recently held a close on their second clean technology fund at more than $55 million. The firm 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 2000 deals in our database,” Propper de Calejon says. “I’ve never seen this many deals before.”

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 before then, and she 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.”

It’s not as if people are waking up and saying, ‘I think I’m going to be an energy VC today.’ These are people who have been in the space all along.

John Taylor, NVCA

Propper de Calejon disagrees with the characterization by some of clean tech as a fad or a short niche play. She cites Expansion’s $4.5 million investment earlier in Orion Energy Systems as an example of why the sector has long legs. Orion, a Plymoth, Wisconsin-based company that makes energy-efficient lighting systems, serves many Fortune 500 companies and addresses a global market as large as $10 billion.

She says that Orion’s business plan, providing tools for companies to save money on energy, shows that cleantech investment isn’t just being driven by the possibly temporary attention 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 increased competition from these kinds of drivers, resource efficiency and productivity becomes a source of competitive advantage.”

As the sector becomes more mainstream, VCs will certainly be adjusting their investment strategy as they go along. Those who stand on the sidelines and assume the attention is a fad may be missing out on a sector that will become a mainstay of business and industry in the future.