Outlook '04: Energy

Venture Capital Journal
by Matthew Sheahan

February 1, 2004

The renewable energy market should clean house this year.

While investments in cleantech - or renewable energy technology, such as solar power - slowed in the first half of 2003, cleantech investments overall rose last year and were expected to total more than $1.3 billion by year's end, according to Cleantech Venture Network, an organization backed by private equity investors in clean energy technology.

In 2004, investments in the sector will reach about $2 billion, predicts Nicholas Parker, Cleantech's co-founder and chairman, who says the sector got charged up at the end of last year thanks to heightened media interest in alternative energy and the rise of a number of new investors.

In fact, the long-term outlook is especially bright. The worldwide clean energy market is forecast to grow to $89 billion by 2012, a nine-fold increase from $9.5 billion in 2002, according to Clean Edge Inc., an energy research and consulting firm based in Oakland, Calif.

In addition to predicting that investment in cleantech could reach $2 billion in 2004, Parker is also confident that there will be more venture investors calling cleantech a sector of choice.

“We'll continue to see new entrants in the cleantech space, with a number of these new entrants putting cleantech more explicitly into their list of core areas,” he says. “They dabbled in 2002 and 2003, and in 2004 they'll have the capacity to project a solid interest in the area.”

Some of the mainstream venture capital firms that have been more heavily involved in cleantech recently have been Advent International, Benchmark Capital, Thomas Weisel Partners. U.S. Venture Partners, VantagePoint Venture Partners and Warburg Pincus.

Canada's Hydro-Quebec CapiTech and OPG Ventures have been a couple of active cleantech investors. They each funded three companies during the third quarter last year (for a select list of 2003 deals, see chart below).

New funds devoted to energy are starting to spring up. Vancouver's Yaletown Venture Partners, which focuses on IT and energy technology investment, closed its inaugural fund last year.

Plus, Braemar Energy Ventures expects to close its premier fund between $50 million and $70 million before the start of the third quarter. New York-based Braemar held a first close on $35 million in December 2002. The firm expects to fund between four and six deals this year. It typically partners with traditional venture capital firms that do not share its sector-specific focus. The firm expects more of these partnerships to flourish throughout the industry this year.

Neil Suslak, a managing director with Braemar Energy, says that 2003 made some important advancements in the energy sector.

“There were a number of events that focused attention on long-term drivers and an interest in technology,” Suslak says. “The most prominent was the East Coast blackout. That event focused the need on investment in the electricity grid and the importance of energy security.”

Likewise, the Iraq war has renewed concerns about the United States' dependence on foreign oil, and there have been increased calls domestically for greater energy independence.

The energy and cleantech markets have not normally been a focus of venture capital. Investors typically shy away from the heavily regulated markets. But advances in technology and the need for better service are changing that, according to Suslak.

“Over the next several years, consumers will demand better service, prompting investors to increase their interest in cleantech,” Suslak says. Particularly attractive areas of investment continue to be individual backup generators and other technologies that help cope with or avoid blackouts. Electrical grid maintenance and communication software also looks promising for heavy investment this year.

“We're seeing a fair amount of activity in some of the areas of energy efficiency management and communications, which tie together,” says William Lese, a managing director with Braemar.

Of course, not every sector within the energy and cleantech industries is set to have a happy 2004. Parker reports that funding for fuel cell companies has “all but dried up.”

Overall, 52 North American companies in the cleantech sector received venture funding in the third quarter of 2003, compared to 42 in the previous quarter. The average deal size decreased slightly, but the number of deals increased by 20%.

Recently Funded Cleantech Companies:

Solicore, based in Lakeland, Fla., develops high-energy rechargeable batteries for industrial and consumer markets. Hydro-Quebec and OPG led a $15 million Series B round in the company. The other investors were Air Products and Chemicals, Braemar, Draper Fisher Jurvetson (DFJ), and Firelake Strategic Technology Fund.

Powerspan, which provides clean energy products and services, raised $20 million in debt financing from investors that included the Aquilex Services, Beacon Group, Calvert World Values International Equity Fund, FirstEnergy, NGEN Partners and Zero Stage Capital.

Amperex Technology Ltd., a Hong Kong-based battery manufacturer, raised $30 million in a Series B funding led by Carlyle Group with a $22.5 million investment. The 3i Group also invested in the round.

Power Paper, a Tel Aviv, Israel-based provider of micro-power source technology and devices, raised $12 million in a Series D round of funding.

Publicly-traded Evergreen Solar (NASDAQ: ESLR) raised $29.5 million in a Series A PIPE deal. The Marlborough, Mass.-based solar power product maker received funding from the Beacon Power, CDP Capital-Technology Ventures, Perseus, RockPort Capital Partners and Nth Power.

Metallic Power, which develops zinc fuel cells, closed on $13.5 million from Arete, the Beacon Group, Cinergy Ventures, Hydro-Quebec CapiTech, Perseus and Nth Power.