Green Venture Capital

How to Use Green Venture Capital for Personal Profit

Written by Brian Hicks
Posted June 10, 2008

Many of the cleantech companies we've come to know and love started their exciting journeys with green venture capital.

Indeed, the common path for several successful green initial public offerings (IPOs) has been via venture-backed activity. Some recent examples of companies in that category include, in order of IPO date:

  • Hoku Scientific (NASDAQ: HOKU)

  • Q-Cells (Xetra: QCE)

  • SunPower (NASDAQ: SPWR)

  • First Solar (NASDAQ: FSLR)

  • Comverge (NASDAQ: COMV)

  • EnerNoc (NASDAQ: ENOC)

  • Orion Energy Systems (NASDAQ: OESX)

  • Ocean Power Technologies (NASDAQ: OPTT)

This onslaught of venture-backed IPOs is undoubtedly connected to a rise in interest from venture capitalists about green technologies.

In 2005, for example, only 74 green venture capital deals were executed with about $600 million changing hands.

By 2006, the number of deals grew to 124 and the value of those deals climbed to almost $2.5 billion.

Experts really started paying attention to green venture capital in 2007, when the number of deals grew to 222 at a value of approximately $3 billions.

But the most impressive year for green venture capital (GVC) is shaping up to be 2008. In the first quarter alone, 73 GVC deals were pushed through with a price tag of $962 million.

At that pace, GVC is on target to close 292 deals costing $3.85 billion by the end of the year. Of course, it remains to be seen whether that will happen or not.

It is important, however, not to get lost meddling in the numbers from individual years and quarters. Instead, I've provided those numbers to illustrate the emerging macro trend.

That trend, if you haven't guessed, is that venture capitalists are tripping over themselves to fund startups and companies with promising technologies operating in the clean space.

And while we're not green venture capitalists, following these early rounds of funding can give us an edge as these companies make the trek toward listing on a major exchange.

Following the Green Venture Capital

Back in 2001, GVC made up only 1% of total venture capital spending. That number grew to 10% (or more depending on the source) by 2007, leading some insiders to call cleantech the "third leg" of venture capital behind only biotechnology and software.

But just knowing how many deals are being executed and at what value doesn't really tell us where to put our money as retail investors. For that, we have to know exactly where the green venture capital dollars are going.

We have that information as well.

In 2005, only six green sectors received venture funding. Here are those sectors with the approximate amount received:

  • Biofuels, $210 million

  • Solar, $120 million

  • Water, $110 million

  • Fuel Cells, $100 million

  • Batteries, $50 million

  • Smart Grid, $50 million

2006 brought venture capital to many of those same sectors, though the dollar amounts began to significantly expand. We also began to see money going toward electric vehicles, wind, and geothermal.

2007, it seems, is when GVC began taking notice of other cleantech sectors. In addition to the previously mentioned green divisions, millions started being funneled to ocean energy, lighting and efficiency, and the still elusive "clean coal".

So far in 2008, green venture spending has continued in the original sectors, but to a much more limited extent, while increased dollars have flowed to "newer" sectors, like smart grid technologies, demand response, energy efficiency, batteries and fuel cells.

Reacting to Green Venture Capital

The green sectors of the market that have been hot in over the past year or so are industries that received venture funding years before that.

SunPower (NASDAQ: SPWR) is one of the most prominent examples. When that company was in its early days, it employed only six people and was desperately seeking funding.

Luckily, SunPower's story came across the desk of Amy Smith, now Co-Head of Alternative Energy Banking at Lehman Brothers. Funding came SunPower's way, Lehman underwrote the IPO, and the rest is history.

The early days of cheap solar stocks climbing to legendary status may be behind us. When good companies come to market these days, they're generally valued higher than in years past, if only because of the success of their peers.

To profit in the solar sector these days takes more skill and analysis. It's more about output numbers, the reduction of costs and the creation of economies of scale than it is about just having a novel concept and a name that includes solar.

There are, however, sectors in which it is still possible to get ahead of the retail investment curve. Those, of course, are the sectors being invested in by green venture capital right now and as recently as a few years ago.

The goal is to find those sectors, which we did earlier in this article, and place your bets early. The sectors to watch, in my opinion, are batteries/electric vehicles, water, emissions control, and any technologies that help store renewably-produced power or aid in its introduction to the grid.

At the Alternative Energy Speculator, I look for such early stage companies to get my readers in as early as possible. One of those opportunities, in the emissions control space, is chronicled in this report.

As always, keep with Green Chip to get all the latest on investment trends and analysis of green markets.

Call it like you see it,

nick hodge


P.S. My colleague and editor of Wealth Daily, Steve Christ, has devised a novel way for 'lazy' investors to profit. It centers around creating a portfolio that works for you by investing in unconventional stocks, bonds and trusts that pay dividends or have other benefits. This report will show you everything you need to know about starting a journey toward wealth building.