Venture capital investors are still seeking high-risk, high-payoff investments, and many are looking at clean energy. That's according to Cleantech Group's investment report for the third quarter of this year (Q3'13). The quarter saw more than $1.4 billion of investment activity in the cleantech sector, and the top three categories of investment were transportation with $352 million, energy efficiency with $205 million and solar energy with $170 million.
Solar looks even better in terms of number of investment deals. The Cleantech Group reports that of the 195 total deals, energy efficiency companies had 33 completed deals – a decrease of 35% compared to the first quarter of 2013. Transportation had 22 deals, which was down 21%. Solar had 22 deals – an increase of 5%.
As positive as this sounds, the overall picture is less rosy, says Cleantech Group's CEO Sheeraz Haji. ‘While it's still in our top three, solar has come down a good bit.’
As recently as the first quarter of 2011, Cleantech tracked about $590 million of global venture capital for solar. That figure decreased to $171 in the second quarter of 2013 and was essentially flat at $170 million for Q3'13.
The industry still attracts investments, but some solar companies are more attractive than others. In particular, there seems to be a growing divide between manufacturing and project-oriented solar firms.
‘I think it's a tale of two cities,’ Haji says. ‘On the upstream side, there is a general fear in investing in a capital-intensive new company. The downstream side is growing really fast, and interesting new players are investing.’
Among the top deals, according to Cleantech, were Oakland, Calif.-based Sungevity Inc., which in July announced it had won $15 million in investment from GE Ventures. That announcement came a few months after the solar installer announced $125 million in combined venture capital and project financing. Another signature deal was Louisville, Colo.-based Real Goods Solar's acquisition of Port Chester, N.Y.-based installer Mercury Solar Systems.
Manufacturers were not shut out though. Solexel, a Milpitas, Calif.-based solar panel manufacturer, received $40 million of funding from an investor group that included Technology Partners, KPCB, DAG Ventures, SunPower and Gentry Ventures.
While most of the solar deals were U.S. based, Haji points out that investors are also seeing opportunities overseas. The Cleantech report includes several companies that are based in Israel, such as Pentalum Wind, which received an investment from GE Ventures, and Altair Semiconductors, which received funding from several corporate investors. Other companies in the Cleantech report are based in Norway, Sweden, Germany and the U.K.
As for solar, Haji says, global investment might soon come from countries that have abundant sun resources and an unstable grid, such as some countries in Africa and in the Middle East.
Haji says cleantech investors are looking for returns that are much higher than what an average stock picker might expect from the Standard & Poor's 500. At the same time, such investors are willing to take on more risk. They might take on 10 companies – some of them will go bankrupt or shut down; some will do okay but won't hit home runs. The goal is to have two or three that have blockbuster success.
‘Investors are not looking for 10 percent annual returns,’ Haji says. Instead, high-risk rollers want to see a tenfold payoff. ‘They put $5 million in, and they want $50 million when the company is sold.’
Nora Caley is a freelance writer based in Denver.