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CleanTech Investing: The Green Gold Rush


GreenBiz.com
January 6, 2008


According to U.N.EP, investors poured $2.9 billion into clean
technologies in 2006, an 80 percent increase over 2005. Investments are expected
to rise even higher by the end of 2007. Already in the first three quarters of
2007 U.S. companies alone have invested $2.6 billion in clean technology. Most
of this funding went toward wind, solar and other low-carbon energy
technologies.

Growing public concern over climate change and other emerging environmental and
energy-related issues have spurred green investing. And as the number of
socially motivated companies rises, so too will the ranks of investors funding
them, as many investors believe it is the smaller innovative ideas that will
make the greatest difference tomorrow, not the big named technological
breakthroughs that may or may not ever come.

According to Vinod Khosla, founder of Sun Microsystems and one of the driving
forces behind the once dominant information technology market, the growing
climate crisis not only calls for immediate action, but is also starting to
generate real financial opportunities. Khosla notes that the risks associated
with investment in "dirty" technologies, i.e. petroleum products, are rising and
clean technologies may provide a lower risk alternatives.

In a recent interview he posed the question "How do you make a 50 year
investment in an asset saying it's economics, not knowing what the economics are
going to be?" He notes that if carbon ends up costing $60 to $80 a ton, and each
ton of coal produces three tons of carbon dioxide, coal effectively is costing
hundred of dollars a ton. "That's a big problem. So what do you do as an
investor? You decide not to make the investment, because there's too much risk."

Most investment firms now anticipate legislation will occur in developed
countries that will impose binding carbon emission reduction targets for
commercial and industrial sectors. While this will support the development of
clean technologies through incentives and renewable energy targets, it will also
impose higher operating costs for carbon-intensive enterprises.

During the Global Business Day at the recently concluded U.N. Conference on
Climate Change in Bali, business representatives clearly stated that firm,
legislated targets were required to encourage sound investments designed to
reduce greenhouse gas emissions. Business does not like uncertainty.

"Everyone expects a global slowdown, so there is quite a lot of risk aversion,
and there is evidence that money is being taken out of equities into less risky
assets," says Ian Simm, chief executive of Impax Group, which operates an
environmental fund specializing in alternative energies, water and waste assets.
"But we are seeing investors willing to leave their money or increase their
exposure to environmental markets."

"These are savvy investors looking for a growth area," Edward Guinness of
Guinness Atkinson Alternative Energy Fund, which has achieved an annualized
return of 27 per cent since 1998 by investing in wind turbine manufacturers,
hydroelectricity and geothermal energy, said. "We also have investors who want
to spice up their portfolio and have some assets in a volatile, but
high-potential industry."

Bob Welsh, chief executive of VicSuper, one of Australia's fastest growing
superannuation funds, believes that venture capitalists must look beyond just
technology ideas and climate change for these clean investments to be truly
successful.

Welsh believes that unless the environmental externalities are taken into
account from all human activities, the ability to keep generating the same
revenue year after year will be undermined.

For example, a VicSuper venture called "Future Farming Landscapes" aims to put a
value on eco-system services. Farmers will be rewarded, for instance, for
efforts that contribute to preserving wildlife corridors. The $40-million
project is aimed at generating economic returns while preserving the
environment.

"It's showing the way where super funds can eventually lead," said Welsh of the
program.

Venture Capitalists in Developing Countries

Although the growing investment in clean enterprises is beneficial for the
production and rollout of clean technology in developed countries, it falls
short of addressing the environmental situation in developing countries.

Developing nations have called on the U.N. and wealthier nations to fund
programs for technology transfer; to set up incentives for companies to share
their know-how with the developing world; and to set international targets for
such transfers.

These demands are being matched by those of private companies seeking greater
protection of their intellectual property rights; assurances they will have the
opportunity to profit from their investments; and better enforcement of
regulations and corporate laws by host nations in the developing world.

"If you want funds, venture capital funds, going to such inventions, the
entrepreneurs, the businesses that invest, need to know they're going to get a
return on their investment," U.S. Trade Representative Susan Schwab said in Bali
last week.

"What is needed in the short- to medium-term is for developed countries to speed
up the process of transferring climate-sound technologies to developing
countries," said Maxwell Kofi Jumah, Ghana's environment minister. "Time is
running out and more action is needed."

Finding an acceptable balance for technology transfers that satisfies both the
demands of the developing world and clean investors was an important aspect of
the Bali conference. In its last days a draft technology transfer arrangement
was debated which recognizes the following needs:
The implementation of technology needs assessment and demonstration
activities;
Joint research and development program and activities in the development of
new technologies;
Enabling environments for the transfer of technology; and
Licenses to support access to and the transfer of low-carbon technologies and
know-how to the developing world.
Currently the Clean Development Mechanism (CDM) is the only U.N. sanctioned
mechanism in place for the transfer of technology to the developing world. It
allows developed countries to undertake greenhouse gas emission projects in
developing countries to earn credits to offset targets they agreed to under the
Kyoto Protocol, But until more appropriate regulation is developed that protects
the business interests of companies involved in such projects, there will be
little incentive for investors to participate in the CDM.

Wealthy countries, meanwhile, are pushing free-market answers to speed the
diffusion of green technologies. The United States and the European Union, for
instance, have proposed removing barriers to 43 green goods and services such as
wind turbines.

India is demonstrating that with a little help from the developed world,
developing nations can provide clean technology investment opportunities for
venture capitalists. Thanks in large part to New Ventures India (NVI), created
in December 2005 with funding from the United States Agency for International
Development (USAID), venture capitalists have begun scouring India for
entrepreneurial opportunities that look promising.

New Ventures India specializes in identifying such companies, helping them to
develop attractive business models and marketing them to interested venture
capitalists. NVI has over 40 venture capitalists in its Clean Investment Network
and estimates that 40 per cent of all venture funds will eventually come to
India.

''These investments make economic sense. They aim at maximum yield by using the
minimum resources, hence minimising waste and increasing profitability -- and it
is this profitability that will drive this business up,'' says Suneel Parasnis,
country head of New Ventures India.

In India, the "clean energy" market is beginning to grow quickly and will reach
$1 billion over the next 15 years. This month at a large Investors Forum
organized in Mumbai, 157 companies sent in their business proposals compared to
only 50 from the previous year. This progress is seen a promising sign for the
developing world, but according to Parasnis ''there have been delays and second
thoughts. After all, the VCs are putting large sums of money in a sector that is
still seen as nascent."

The Future of CleanTech Investing

"Investing in new technologies can be fraught with pitfalls and is not for the
inexperienced or the faint of heart," Said Mark Heesen, President of the
National Venture Capital Association. "Prudent, long-term, knowledgeable
investment in cutting-edge technologies has been the hallmark of venture capital
in the past and should be the mantra in the cleantech space as well. Short-term
'tourists' should steer clear."

A recent study by New Energy Finance also found that venture capitalists were
able to invest only 73 percent of the funds that had been raised and had not
been able to spend $2 billion of available money. With so much funding unable to
be invested, some industry insiders are wondering if there are enough good
investments available to justify the amount of capital being raised and if the
green venture capital bubble will burst in the near future. Earlier in 2007
several clean technology venture capital funds closed their doors including
Climate Change Capital, a 200-million fund, and Technology Partners, a
$300-million fund.

Regardless, the trend toward green investments is strong, and growth in the
market may be an indication that the competition for good projects is getting
more intense and investment deals are getting bigger. Clean technology investors
see the future as opportunity and a little more experience and wisdom will
smooth out the bumps.

"We are seeing the quality and quantity of deal flow has increased markedly,"
said Diana Propper de Callejon co-founder of the venture capital company
Expansion Capital Partners. "We're looking at 50 to 75 new ventures each month
and there has been no slowdown."

With much of the venture capital investment in solar, wind and biofuels, market
insiders believe there are several untapped investment areas to be discovered.

A report released in January of 2006 by Cleantech Venture Network, LLC, suggests
that by 2009, cleantech will grow to 8-10 percent of all capital investments, up
from 5 percent in 2005. The report also notes that for the cleantech venture
community to remain successful in the next decade, above average investment
returns must be achieved.

The 2008 U.S. federal election results may provide a challenge to such high
investment returns. The United States accounts for over two thirds of venture
capitalists investing in clean technology worldwide; however, leading Democratic
candidates for the 2008 election have vowed to offer between $10 billion and $50
billion of funding per year towards the development of clean technology.

The addition of such large funds from governments may make high investment
returns impossible, and may remove the need for cleantech venture capital
investments. Some investors believe the funding process could become too
political, with too many strings attached. "Markets support the industry," said
Jeff Siegel, a renewable-energy analyst at Green Chip Stocks. "The government
putting money in is not going to fix the problem."

Many venture capitalists don't believe there is a problem to begin with and that
a government infusion of funds is not necessary. Venture capitalists feel that
there is adequate money being invested in environmental technologies and there
is all ready evidence that demand is outpacing supply.

"There's a lot of private investment capital already focused on investing in
tech startups in this arena," said @Ventures principal Matt Horton.
"Governmental support may be more useful in creating markets and demands for
technology provided by our companies."

Instead of developing clean technology venture capitalists believe government's
role should be creating incentives for clean technology such as reducing
subsidies for oil and coal, making alternative fuel tax credits permanent,
creating cap-and-trade systems for carbon emissions, and pushing up demand for
alternative energy sources that would diversify the electrical grid.

Many investors also feel that governments could also support projects and
technologies that are risky or large-scale enough to deter other investors such
as tidal energy which has not yet proven that it can become a commercially
viable technology.

Concern over statements made by Democratic candidates may be premature. The 2008
U.S. election is still a year away and the Bali Climate Change talks indicated
that world leaders are looking to investors and business to play a significant
role in mitigating climate change and averting an environmental catastrophe. As
the technology becomes more familiar and legislation is developed, particularly
in the United States, it is likely that the clean technology market will
continue to grow from venture capital investments.

As Mark Heesen, president of the National Venture Capital Association, said in a
statement: "There are major opportunities for venture capitalists to totally
reshape the energy market throughout the world, as governments, consumers and
companies are demanding innovation in this space."

 

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