Over the past three years, cleantech has been a favorite sector for the global venture capital industry. Venture capitalists hoped that cleantech would be the industry from which new companies will come to change the world, and possibly also make billions of dollars for investors.
Israeli venture capitalists also pinned hopes on cleantech, believing that technologies developed at academic research centers can be commercialized and turn Israeli into a green technology powerhouse. While these hopes have not died completely, they have been tempered.
It seems now that cleantech will not realize the venture capitalists' dreams, neither in Israel, nor in the US.
The Ernst & Young 2008-09 Venture Capital Survey says that 2008 was the peak year for venture capital investment in cleantech in the US, with $4.7 billion in investment, 68% more than in 2007. However, investment dropped in the fourth quarter.
The PricewaterhouseCooper MoneyTree Report for the Third Quarter of 2009 shows an 89% increase in venture capital investment in cleantech, compared with the preceding quarter, to $898 million. The number of deals rose by 16% to 57.
US cleantech companies have been raising capital since 2002 from venture capital funds. However, while the amount of investment has been rising slowly, there have been no exciting exits, sweeping IPOs, or fat acquisitions.
It is not that cleantech is losing money - it is expected to generate big exits - but venture capital funds won't be around to reap them, because the funding needed to establish an energy giant is beyond the means of even the largest Silicon Valley firms.
Even if promising cleantech companies emerge in Israel, too, Israeli venture capital funds will not be present at the coming-out parties. The lack of infrastructures, government incentives, and money, will keep the venture capitalists out of the game. There is no one to blame for all these factors; after all, Israel is a small place.
Part of the poor fit is due to the venture capital model of taking risk for the sake of a possible large return in the future. Cleantech, however, needs large investments. While 3-4 years ago, there were venture capital funds that invested $100 million in biofuel companies, that no longer happens. It is not only because of the economic crisis.
Accel Partners partner Richard Wong said, "Venture capitalists are not sure how much will have to be invested in cleantech. The concept is there, but it's not clear."
Hezy Ram, the CEO of Reno-based Ram Power Corporation (TSX: RPG), and a former VP at Ormat Industries Ltd. (TASE: ORMT), is developing geothermal and solar energy technologies.
"Globes": What is the difference between cleantech and high tech?
Ram: "The final product of cleantech companies isn't a cellular cell, but electricity, which is a regulated product. It's impossible to increase the profits tension too much. The exits we saw in high tech, such as Mirabilis and Chromatis, won't happen in cleantech. The problem is because the main customers are power utilities, which want a reliable long-term product. The good news is that there are also guaranteed sales over the long term.
"Companies founded two years ago cannot provide these proofs, and they need a lot of capital. There isn't enough capital in Israel, and there's a lack of implementation capability."
Biomed also requires large investments and a long time.
"True, but in biomed, when a company gets its drug approved, it gets 15 years patent protection, and can be very profitable. Electricity isn't a medication, but a daily need, and there's competition on the price."
Ram demonstrates his assertion with the cellular industry. "A lot of capital is flowing to these companies, but the crisis caused the price of silicon to plummet. The theoretical business models collapsed."
Herzog Fox Neeman Law Offices partner Ruth Dagan, head of the firm's environmental law practice, believes that hopes that cleantech will save Israeli high tech are groundless. She says that Israel does not have enough practical applications. "Where there is no implementation and production, it signals hesitation. In addition, projects need government backing, which doesn’t exist," she says.
Is money again being requested from the public's coffers?
Dagan: "There's no need to expect the government to budget incentives like in Europe and the US, but at least act to remove the regulatory obstacles of the Israel Land Administration and the planning and building commissions, which prevent ventures from developing.
"The government can create a package of incentives, which will improve investors' confidence, and will boost stability and investment in the sector. This doesn't have to be done with piles of money on the table."
Ernst & Young Israel Kost Forer Gabbay & Kaiserer Partner Itay Zetelny, responsible for cleantech at the firm, believes that Israeli venture capital funds can participate in the green wave. "Most cleantech industries need technology innovations to compete with less environmentally friendly solutions that are much cheaper. This is where Israel has something to offer," he says.
Published by Globes [online], Israel business news - www.globes-online.com - on October 22, 2009
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