Cleantech eclipses IT and biotech as the investors’ favourite

Venture capitalists spent $1.59 billion across 134 companies in North America, Europe, China and India in the third quarter, according to recent figures from Cleantech Group and Deloitte. In addition, hundreds of millions of dollars in new venture funds came into the market in the quarter, including $1.1 billion in two new funds by Khosla Ventures.

Investment rose by 10 per cent compared to the second quarter, when investment first began to perk up following significant funding declines in the fourth quarter of 2008 and first quarter of 2009 that mimicked the turbulent global economy. Despite showing a continuing rebound, third quarter investment is down 42 per cent compared to the same period last year. But the signs are hopeful.

“The billions in government funding being allocated globally in clean technology have begun emboldening private capital, which has in turn helped propel clean technology to the leading venture investment sector, now eclipsing biotech and IT,” said Dallas Kachan, managing director of the Cleantech Group.

An over-reliance on stimulus funds?

In the United States, stimulus monies are boosting investor confidence. The two largest venture deals, Solyndra at $198 million and Tesla Motors at $82.5 million, and the largest IPO, of MIT spin-out A123Systems, all received US government stimulus funding in the third quarter.

“A123Systems is doing the kind of cutting edge work we need to get our manufacturing industry back on track and create jobs here at home,” Massachusetts Senator John Kerry said when the grant was announced this fall. “These grants are a wise investment that will pay many dividends.”

A123 Systems raised $437.5 million by floating 32.4 million shares at the end of September. The Massachusetts company uses technology from the Massachusetts Institute of Technology in its advanced lithium-ion battery for the transportation, electric grid services and portable power markets. It also will get up to $249.1 million in stimulus funding from the US Department of Energy’s Electric Drive Vehicle Battery and Component Manufacturing Initiative. A123 will be required to match the government funds over time as they are used.

“The extension of tax credits for renewable-based power generation along with government stimulus and regulatory requirements…are helping to drive continued investment on the part of VCs and utilities into the cleantech sector,” said Scott Smith, US leader of Deloitte’s Clean Tech practice.

Not everyone sees the reliance on stimulus funds as a good thing. Michael Liebreich, chairman of New Energy Finance of the UK, said he is heartened to see the investment collapse of the first quarter of 2009 firmly receding in the rear-view mirror. “However, the financing environment remains difficult, with undue reliance on stimulus funds, development banks and state-backed capital providers of various sorts,” he said. “Most significantly, the levels of investment required to bring global carbon emissions to a peak during the coming decade are as far out of reach as ever—particularly significant given the rapidly-approaching Copenhagen deadline.”

The European Commission has called for an additional €50 billion from the public and private sectors to boost Europe’s energy technology research over the next 10 years. That would almost triple the annual investment in the EU from €3 billion to €8 billion as part the European Strategic Energy Technology Plan implementation.

More public and private-sector funds need to be mobilised for the effort, Joaquin Almunia, the Commissioner for Economic and Monetary Affairs, said in a statement when the plan was released on October 7th. “We propose to reinforce the Risk Sharing Finance Facility, further support venture capital, and develop the Marguerite and other funds,” Almunia said.

Solar leads the sector

Solar rose from capturing 13 percent of total venture capital investment in the second quarter, to 28 percent of the total venture investment in the third quarter. In all, it drew $451 million in venture capital, down from a high of $1.2 billion in the third quarter of 2008. The second-largest investment area at $110 million was transportation, including biofuels, advanced batteries and vehicles.

Mergers and acquisitions dropped in the third quarter over the previous quarter to a total of 98 deals worth about $5.9 billion.

Venture capitalists were heartened by A123Systems’ robust IPO on the NASDAQ Global Market. In addition, wind farm developer Indian Energy raised $16.2 million and is trading on London’s AIM. And Euro Multivision raised $13.5 million on the Bombay Stock Exchange for its photovoltaic solar cell manufacturing unit.

North America continued to attract the largest portion of cleantech venture capital at 67 per cent of the total, with Europe and Israel together taking 29 per cent, according to Cleantech Group. North America raised $1.1 billion in 73 disclosed rounds, up 8 per cent from the second quarter of 2009 but down 42 per cent from the third quarter of 2008. California led with $655 million.

Europe and Israel raised $457 million in 53 disclosed rounds, up 61 per cent over the previous quarter but down 42 percent from the same quarter in 2008. The largest deal was Norway’s electric car maker Think Global, which exited bankruptcy and got a $47 million round of financing. Irish bioenergy company Imperative Energy raised $43 million, and UK-based fuel cell company Intelligent Energy raised $300 million. The UK led with $125 million in 17 deals, followed by France with $72 million and 10 deals.

China had 3 per cent of total venture investment, raising $41.8 million in three deals: Nabao Renewable Energy ($25 million), which is developing geothermal heating and cooling technology; Nanjing City Control Information Technology ($14.6 million), which is developing smart transportation control systems; and Wuham Rixin Technology ($2.2 million), a thin-film solar and building integrated photovoltaic company. There also were four private equity deals totaling $886 million and three M&A deals topping $146 million.

Indian cleantech companies raised $21.5 million, significantly lower than the $134 million in the second quarter of 2009 and $185 million in the third quarter of last year. There were five M&A deals topping $142 million (the value of two deals was not disclosed). VA Tech Wabag, an industrial water solution provider, said it plans to raise $100 million in an IPO next year.

Source: Cleantech Group (cleantech.com)