Venture Investing in Cleantech Awaits Economic Signal-Us

Yesterday VentureBeat and TechCrunch reported on the release of two reports showing that venture capital investment dropped significantly in Q1 2009 compared to Q4 2008 and over the last year.  

A summary of the MoneyTree™ Report from PricewaterhouseCoopers (PwC) and the National Venture Capital Association (NVCA), using data provided by Thomson Reuters, said that venture capitalists invested $3.0 billion in 549 deals in the first quarter of 2009,  down 47% in dollars and 37%  in deals from the fourth quarter of 2008, when $5.7 billion was invested in 866 deals.  Every major industry sector saw double digit declines in investment in Q1, the lowest level of venture capital investment since 1997.  Similarly, another database,  Dow Jones VentureSource  reported investments of $3.9 billion in 477 deals, a 50% decline from a year ago.

While both posts reported the same data and highlighted a serious decline in Cleantech investments, they diverged on their reaction to this development.

Interestingly, the MoneyTree 2008 year end report (PDF) states that the Clean Technology sector – defined as a cross industry category comprised of alternative energy, pollution and recycling, power supplies and conservation - experienced significant growth in 2008.   $4.1 billion invested in 277 deals represented a 54% growth in dollar amount invested and a 16% growth in deals compared to the $2.7 billion invested in 238 deals in 2007.  Clean Technology investments accounted for 15% of all venture capital investing in 2008, up from 9% in 2007.  Seven of the ten largest deals in 2008 were in clean tech.

Yet in Q1 2009, venture capital investment in Cleantech fell significantly. $154 million went into 33 deals, an 84% drop in the $971 million invested in 67 deals in Q4 2008.  It represented the lowest level of investments in the sector since 2005 and only one of the top ten largest deals in the first quarter.  

In his post Good luck with that funding: Q1 sees lowest VC investment in more than a decade VentureBeat reporter Anthony Ha comments,  ”those numbers are particularly mind-boggling since it was previously seen as the silver lining in the dark clouds hovering over venture”.   In a recent VentureBeat interview, Mark Heesen, president of the National Venture Capital Association, indicated Cleantech could be the largest area for venture capital investment within five years.

In  Venture Capital Down 50%. It’s Not Just the Recession, Folks, Tech Crunch reporter Sarah Lacy has a worthwhile take on the overall state of venture  capital, making the case that the steep drop in funding is not the result of a recession but “more of an industry correcting for more than a decade of scale and liquidity issues.”  

Saying she has more to write on the topic, Lacy offers 3 key takeaways, one of them being “Bye-bye Clean Tech Hyperbole.” She explains:

“It’s not that clean tech isn’t a huge opportunity. It’s not that it isn’t an important opportunity. But I’ve never believed it was the next wave equivalent to the personal computer, as several VCs and even President Barack Obama said during the campaign.”

I later discovered a post on a new site, TrueSlant, by Anne Field.  In Good News for Cleantech Startups?, she reports that the advanced-battery and fuel-cell segment of cleantech received $126 million of the $154 million invested in Q1.  Quoting a New York Times article,  Field indicates that this segment of the sector has started to receive solicitations from the government looking to deploy the $2 billion in stimulus money set aside strictly for batteries.  She suggests that more VC money will come back into the space as they see more stimulus money flow from the government and in what direction it goes.

While each reporter has a different perspective on the story, they each add an insight that leads to my key takeaway.  

Chances are Cleantech will revert to being a major recipient of venture capital investment in the near future, even if the category is overhyped.  Right now the oversupply of poorly performing and not fully-invested venture capital funds, combined with the impending economic stimulus, has actually stalled the process.  

The economic stimulus package for cleantech effectively serves as an Economic Signal-Us for venture capitalists.  By waiting for the government to act, they gain the advantage of knowing what cleantech will have a better chance of succeeding as investments.  

In other words, by waiting to find out what the government stimulus thinks is the right cleantech, they reduce their risk of being wrong.  This sounds like the closest to a sure thing that a venture capitalist could ever get, so pulling back and holding off, whether by instinct or design, is the smartest cleantech investment a venture capitalist could ever make right now.