Clean Technology "Boom?"

A comparison of Internet and clean tech venture capital trends

The word is out. People are excited. Even amid tempestuous financial markets, money is flowing into the clean technology industry. PricewaterhouseCoopers (PwC) and the National Venture Capital Association (NVCA) recently released their quarterly review of the United States venture capital industry. The MoneyTree Report, as it is called, revealed that the second quarter of this year brought record levels of venture capital investment to the clean tech sector. The $883.5 million spread across 65 deals makes for a slight increase from first quarter numbers, and a striking 62 percent increase over 2007’s record-breaking second quarter activity.

The media is well aware of the momentum brewing in the clean tech sector. In August of 2006, Business Week published a special report titled “Wall Street’s New Love Affair,” depicting investors’ bullish outlook on the industry. Since then, publications have been littered with headlines such as “Renewable Energy the Coming Boom?” (Salt Lake Tribune, 2007), “Venture Funds Flood Clean Tech” (San Jose Mercury News, 2008) and “Clean Tech: Green Energy is the Modern Gold Rush” (The Guardian, 2008). While excitement is clearly justified, one must always be wary of media hype. Past performance will never predict the future, but historical comparisons are valuable tools when attempting to gauge the scale of an event as it is occurring. In that vein, let us briefly evaluate the current clean tech “boom” by stacking it up against another illustrious investing episode: the Internet boom.

The U.S. venture capital industry was scorching hot in 2000. According to the MoneyTree Report, 7,907 deals were closed in the 12-month period (more than 2006 and 2007 combined). A bull market, IPO success and abundant capital created the perfect storm for entrepreneurs and investors who were looking to join forces. The Internet sector was largely responsible for this peak in investment with 3,210 Internet-specific deals being closed in 2000 at the height of the tech bubble. Since the state of financial markets was obviously much different in 2000 than it is now, it would be foolish to simply compare the number of deals and total investment amounts for the clean tech and Internet sectors. Instead, we will look at what percentage of overall venture capital funding went specifically to each area based on compiled data provided by PwC, NVCA and Thomson Financial.

Apparent at first glance is the enormity of the internet boom. In the first quarter of 2000, Internet-specific investments accounted for 50 percent of all venture capital funding in the United States. Although the burst of the tech bubble would bring Internet venture capital back to reality, only once since 1995 has Internet-specific funding held less than a 10 percent share (Q4 2003; 9.71 percent). As the Internet’s share of investment peaked in 2000, clean tech’s share was less than 1 percent, a level that the sector has seen as recently as 2004 (Q1 2004; 0.84 percent). Only in the last two years has clean tech really seen significant growth in its venture capital prominence, passing the 5 percent mark in the second quarter of 2006 and the 10 percent mark in the third quarter of 2007. According to PricewaterhouseCoopers, the clean tech sector raked in $2.2 billion in venture capital investment during 2007, a 45 percent jump from the 2006 number. A 45 percent increase is no small feat, and data shows that there is no sign of slowing. Over the last four quarters, clean tech venture capital investments have totaled $3.3 billion, a staggering 91 percent increase from the $1.7 billion raised during the previous four quarters (according to data from PwC, NVCA and Thomson Financial).

The clean tech investment trend is definitely real, enough to even grant the media credit for their coverage. But before we start calling it the Clean Tech Boom, let’s remember to refer to our history books. “Boom” may not be a technical term, though if we mean to compare the clean tech trend to that of the Internet bubble, perhaps it would be wise to use a different expression. In the 12 month period beginning the fourth quarter of 1999, Internet-specific venture capital investment totaled $47.3 billion. This amount was more than a 220 percent leap from the $14.6 billion in investment over the previous four quarters, an increase of more than $32.7 billion in one year. To put this amount into perspective, consider this: The entire sum of U.S. venture capital funding to the clean tech sector in the last 20 years equals something around $9 billion.

Where will clean tech investment go from here? While analysis on the topic could fill volumes, some of the bigger points are evident. High oil prices, climate change debate and an ailing economy will continue to keep the evolving energy industry on the minds of the American investment community, which has already begun to embrace hybrid cars as both eco-friendly and cost-effective. Clean tech has proven resilient to financial market turmoil, and many believe it is poised to lead the rebound of venture capital funding in coming years. Evidence of this can be seen in a recent survey conducted by KPMG, which involved polling of 297 venture capitalists, corporate buyers, bankers and entrepreneurs. When asked which industry is most likely to lead the next charge of IPOs, 44 percent responded favorably for Greentech, while Mobile came in a distant second at 16 percent. In response to the question, “What sector will see most investment dollars in 2009?” Greentech again led the pack with 27 percent of respondents, though Digital Entertainment and Mobile were close behind at 23 percent and 20 percent, respectively.

Confidence in the future of clean tech investment is inspiring, though policy decisions will ultimately make or break the ability of the clean tech sector to flirt with Internet-sized funding. With expiring production tax credits, nearly nonexistent feed-in tariffs and complicated incentive programs, the clean tech industry’s growth will hinge on our elected officials’ commitment to energy security and environmental protection.

For detailed amounts and comparisons of venture capital invested in these industries, see our Chart and Graph of Venture Capital for Internet and Clean Tech Business 1995-2008.

Written by: Trevor Winnie

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