Caution is key for cleantech venture capital

Batya Feldman

Cleantech companies are dealing with real problems, and good products have a huge market - but not all cleantech can be financed by venture capital, neither in the US nor in Israel.

Israeli venture capitalists are very cautious people, despite working in a business that is risky by definition. They are not adventurers, and it's hard to get them to invest in ventures in an area of business unknown to them. This caution results in ridicule by bubbling entrepreneurs, but it saved them from the dot.com crash in 2001; by the time Israeli venture capitalists decided to invest in the Internet hype, it was all over.

Avoiding massive investment in Internet and e-commerce companies helped Israeli venture capital funds stay afloat while their US counterparts sank with their investments.

On the other hand, Israeli venture capital funds also missed great opportunities, such as Quigo, which was sold to AOL Inc. for $325 million, after it struggled to obtain financing from Israeli funds.

Investors in venture capital funds want amazing returns on their money, but they don’t want them to go crazy with their funds. Which is better - not to succeed or to fail? There is no good answer.

Venture capitalists do not want great failures, but they dream of great successes; the problem is that the latter require taking great risks.

Ten years after the dot.com bubble, the same thing is happening in cleantech, as it becomes the next great hope of the global venture capital industry. From negligible investment seven years ago, US cleantech firms raised $1 billion in 2009, and $733 million was invested in the industry in the first quarter of 2010, 68% more than in the corresponding quarter of 2009.

For the sake of comparison, the Israel Venture Capital Association says just $80 million was invested in Israeli cleantech companies - small change.

Other voices are now beginning to be heard, which argue that venture capital funds will not hurry to invest in cleantech companies next year. $500 million was invested in US cleantech companies in the third quarter, less than half the amount invested in the corresponding quarter, and VC fund Kleiner Perkins Caufield & Byers has announced that it will stop investing in the industry.

Although there have been some modest exits, the trend is downward. Ernst & Young says that 13 cleantech companies around the world raised $1.5 billion in initial offerings in the first quarter of 2010, down from $2.9 billion raised in 18 initial offerings in the fourth quarter of 2009. The reason for the drop is known: cleantech companies need time and money to mature, which does not always fit with the venture capital model.

Israeli venture capitalists have not rushed to jump in to the cleantech party, and are not scattering their money at every venture that promises to generate electricity from scrap paper, and this over-caution may once again save them from wholesale losses over the coming year.

Cleantech is a special case, it is not a new economy-type bubble that emerged in the late 1990s. Cleantech companies are dealing with real problems, and good products have a huge market. However, not everything called "cleantech" can be financed by venture capital, neither in the US nor in Israel.

Published by Globes [online], Israel business news - www.globes-online.com - on December 16, 2010

© Copyright of Globes Publisher Itonut (1983) Ltd. 2010

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