Venture capital in clean technology today is moving away from capital-intensive deals and toward technologies like energy efficiency, which are capital-light and quickly adopted, Nancy Floyd, managing director for venture capital firm Nth Power said.
In the last two years, 300 energy efficiency companies have been funded by venture capital, showing a trend toward a more capital-efficient model, Floyd said at the Renewable Energy Finance Forum in New York City on June 25.
“The period we’re in now, which started in 2008, concurrent with the [economic] downturn, is really moving toward a more diversified portfolio,” she said.
That compares to the first phase of venture capital investment, driven by utility deregulation from 1998 to 2002, in which utilities looked for market-differentiating products and services. During the second phase, post-Enron, investors moved to new supply, meaning primarily renewable energy.
“You had a lot of generous funds moving to the sector in 2006 because they were looking at public solar companies that had multi-billion market caps,” Floyd said. “The deals that got done during this time on the supply side were at high valuations, north of $100m in a [venture capital] raise.”
Today, cleantech comprises about 19% of total venture capital. The market for cleantech has grown to over $150bn, she said.
Floyd said that despite current venture capital conditions, it was important to take stock of how far the cleantech sector has come.
“The number of new companies – these are distinct new companies, not just follow-on investments in companies – solar, wind, energy efficiency, have tripled and quadrupled over a decade,” she said. “But even as we’re seeing wind and solar march down the cost curve, my message today is that technology innovation and business model innovation is just as important in the decade ahead as it has been for the past decade.”
Venture capital investment has declined significantly in recent years – Floyd quoted a statistic that there were 800 venture capital firms five years ago, and only 75 today – and the cleantech sector has been hit hard as a result. The perception of capital intensity for cleantech and renewable energy deals has prompted many venture capital funds that entered the space to retreat, Floyd said.
The space is further challenged by natural gas prices putting pressure on renewable portfolio standards and by the ongoing politicization of energy, she said.
However, entrepreneurs are innovating new technologies and new business solutions, she said.
The evolution of solar technology, for example, went from the creation of the solar industry, prior to 2003, to scaling the technology up and creating operational excellence, and finally to an industry where markets are beginning to bifurcate, she said.
“First, it was distributed solar and utility-scale solar, but it’s continuing to segment,” she said. “You have the rise of solar financing models, you have companies focused on specific designs for specific applications. Now you’re coming full circle because if developers want to make money in renewables, we need to experience a new wave of technology innovation.”
This innovation will likely occur around specific solutions for specific opportunities, such as a solar trough technology company innovating a way to create steam for enhanced oil recovery in the Middle East, she said.
“The markets for cleantech solutions are going to grow and these are trillion-dollar market opportunities,” Floyd said. “Entrepreneurs are going to continue to innovate because they are seeing the market opportunities, and they’re going to take advantage of cross-enabling technologies.”