Clean technology venture capital spikes in Q2

Larger transactions and increased investor confidence pushed clean technology ("cleantech") venture capital investments higher in the second quarter of 2009. Investments in companies dealing with energy efficiency and solar power led the overall market, which surged 73 percent quarter-over-quarter. A study by Ernst & Young, with data from Dow Jones VentureSource, suggests a sharp up-tick in cleantech venture capital.

Venture capital investment in cleantech companies hit $572 million last quarter. Forty-eight financing rounds were completed, representing a 100 percent increase in quarter-over-quarter transaction count. Compared to the second quarter of 2008, which was the second best cleantech quarter for venture capital investment, capital put to work fell 59 percent, with the number of transactions down 16 percent.

"The quarterly up-tick reflects investor confidence in the ability of cleantech companies to capitalize on market opportunities," says Joseph A. Muscat, Ernst & Young LLP, Americas Director of Cleantech.

The Energy/Electricity Generation category accounted for 27 percent of cleantech venture capital investment last quarter, with $157 million. This is up 181 percent quarter-over-quarter. Solar energy-related transactions accounted for most of this, with these companies receiving $148 million in venture investments -- more than three times greater than the first quarter of 2009. The Energy Efficiency category followed, raising $152 million and posting 168 percent quarter-over-quarter growth. The Alternative Fuels category, at $53 million, consisted mostly of a $40 million round in biofuels company Gevo. The Transportation sector picked up $65 million, most of it from Daimler AG's $50 million in Tesla Motors.

Companies in later stages -- specifically those shipping product -- accounted for 65 percent of the financing rounds, up from 54 percent the previous quarter. Those in product development stages picked up 27 percent of the transactions, down from 46 percent in the first quarter, 8 percent went to companies in the start-up stage (from none in the first quarter of 2009).

The government continued to play a substantial role in the cleantech venture capital market. The U.S. Department of Energy put more than $47 million into this market to speed up the implementation of eight smart grid demonstration projects in seven states. This comes in addition to $74 million in tax incentives extended to General Electric by the State of Michigan, and a U.S. Department of Treasury plan to issue grants rather than investment tax credits.

"While enacted and anticipated government actions have helped bolster confidence and catalyze new capital," Muscat says, "we believe that leading cleantech companies will be defined by their ability to execute on business plans and advance their technologies through commercialization and distribution despite the challenging economy."

The sharp growth from the first quarter of 2009 to the second might suggest a quiet first quarter for the cleantech venture capital sector. While this is true, it nonetheless reinforces the perception of cleantech as a growing and resilient category in an extremely difficult alternative investment environment. The rapid growth from 2003 may have slowed with the financial crisis, but the strength demonstrated last quarter -- in addition to year-over-year cleantech private equity stability -- indicates the resilience of the sector and its potential for continued growth.

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