Cleantech is bleeding green: U.S. investment dollars slashed by half in last year

There’s more bad news for cleantech investing. A new report from Ernst & Young found that U.S. venture capital dollars going to cleantech have dropped 55 percent compared to the same time last year.

The report, released today, found that VC dollars in the third quarter of this year were $575.6 million in 53 financing rounds — about half what was invested in the third quarter of 2009, reflecting a 22 percent decrease in deals.

The new findings mirror the stark global picture painted in the preliminary third-quarter results last month from the Cleantech Group, which found that worldwide, cleantech venture investment in Q3 totaled $1.53 billion, a decrease of 30 percent compared to the previous quarter.

Also bad: Third quarters tend to be the strongest of the year, according to Dallas Kachan of research firm Kachan & Co. The decline in green has been mirrored by the spate of bad news in the U.S. wind industry lately, which this week posted its slowest quarter in three years.

CMEA Capital’s Maurice Gunderson told VentureBeat that the “bubble in cleantech” has been created by investors who jumped in without any background in cleantech. But he believes that investment opportunities are still there.

It’s a topic that’s ripe for debate. VentureBeat will be tackling cleantech investing at GreenBeat 2010 conference this week, Nov. 3-4 at Stanford University. “The Smart Grid Investing: Bubble or Goldmine?” panel will start at 10:55 a.m. Nov. 4, with panelists Paul Holland of Foundation Capital, Kevin Skillern of GE, Kenneth Davies of Google Ventures and Navin Chaddha of the Mayfield Fund. Other conference speakers include cleantech investing gurus John Doerr of Kleiner Perkins Caufield & Byers and Vinod Khosla of Khosla Ventures.

In an interview last month with VentureBeat, Peter Moran and Tom Blaisdell — general partners at venture capital firm DCM — weighed in on why there’s been a decline in cleantech dollars. “There have been very few successes in terms of IPOs to start returning some of those investments yet. This is time for a breather for people to say, ‘Okay, we put a lot of seeds into the ground, let’s wait for some of those to come [up] before we put more seeds in the ground,'” Moran said.

“It got very trendy to invest in cleantech,” Blaisdell added. “A lot of money went into projects, many on the value proposition that people want to be green, want to pay more for LEEDs-certified buildings. [There’s] rethinking on whether those are going to be the best-returning investments.”

Ernst & Young itself seems bullish on cleantech’s future. “This quarter reflects the ongoing volatility in cleantech investment that we have observed over the past two years, depending on the presence of the very large transactions we see in cleantech,” said Jay Spencer, Ernst & Young’s Americas cleantech director, in a company statement. “However, a number [of] factors point to the continuing strength in the U.S. cleantech sector, including growth in energy efficiency investments and corporate involvement throughout multiple industries — from utilities to technology to consumer products.”

Here are some key findings from the report:

• As has been widely reported, most cleantech funding is now going to later-stage investments, where the technology is proven and companies usually need funding to ramp up production. Nearly half of the deal activity for this quarter and 70 percent of the capital invested went to 25 later-stage deals.
• Energy efficiency was the hottest segment for financing, with 17 deals for $162 million, notching increases compared to least year. The biggest deal was by Smooth-Stone, a low-power data center chips developer, which raised $48 million. GE also announced plans to invest $432 million in the next four years for energy-efficient refrigerators.
• The largest deal of the entire quarter was the $65 million third-stage investing round by Solaria, a solar photovoltaic company.
• California saw a big decline in investment, with deals falling 44 percent and dollars falling 71 percent to $295 million. In comparison, California had five deals over $50 million one year ago, including the $286 million financing of Solyndra (which this year pulled a planned IPO).
• Massachusetts came behind California with eight deals and $87.6 million. New Hampshire and Texas followed with investments of approximately $50 million each.
• Solar companies lead with deal activity in the energy/electricity generation segment, raising $150 million in 10 deals. The energy/electricity generation segment overall grew 27 percent to 14 rounds, but capital invested fell 39 percent to $204 million as investors focused on smaller, earlier-stage deals.
• There is an increase in corporate investing — nearly one-fourth of Q3 deals were made by folks like Intel Capital and General Motors Venture Group. GE is also leading a $200 million smart grid fund under the auspices of its Ecoimagination competition, which is backed by Foundation Capital and Kleiner Perkins.
• Notable corporate investments for the quarter: NRG Energy will pay $350 million for alternative energy generation and distribution company Green Mountain energy. Sharp purchased solar project developer Recurrent Energy for $305 million.
• Notable M&A activity: Nine deals closed in total disclosed amounts of $1.9 billion. That figure includes a $166 million acquisition of Global Ethanol by Green Plains Renewable Energy.
• It was a tough quarter for companies in the industrial products and alternative fuels segments. Investment in the former fell 72 percent to $117 million, while alternative fuels raised just $50.5 million in three deals.
• Cleantech IPOs this quarter include energy efficiency and renewable energy company Ameresco, which raised $87 million, and biofuels company Amyris, which raised $85 million. The report didn’t mention German smart meter company Elster, which raised $211 million with an IPO the same week as Amyris.

[front page image via Flickr/Norfolkdistrict]

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