Venture capitalists eye 'clean tech'
Posted on Fri, Jun. 24, 2005
By Gary Rivlin
NEW YORK TIMES
SAN FRANCISCO - Ira Ehrenpreis may be a kind of prophet advocating investments in alternative energy companies, but don't accuse him of being noble.
In recent months, Ehrenpreis, a venture capitalist at Technology Partners in Palo Alto, has been asked any number of times to speak to audiences about "clean tech," a term that encompasses such things as solar energy, water purification systems and alternative automotive fuels.
He begins and ends every speech the same way: with a slide that stresses that to the extent his motivations are tinged green, it has to do with the color of money.
In Silicon Valley these days, more venture capitalists are following Ehrenpreis' lead. They are driven in part by the high price of oil and the vast unmet demand for electricity in China and India.
"The reason we're allocating dollars to this sector is we think we can deliver attractive returns," said Ehrenpreis, who also serves as co-chairman of the advisory board of the Cleantech Venture Network. "It's not because we want to do great things for the environment or great things for the world," though he adds that that is a "great byproduct."
That message is resonating with venture capitalists and individual investors in the Valley, where growing rich through doing good is considered the ideal.
Top venture firms on Sand Hill Road in Menlo Park are beginning to show serious interest in the alternative energy sector, though that typically means venturing outside their core expertise. They hope to capitalize on the growing worldwide demand for energy at a time of rising energy costs, and they see potential for huge profits in technology that can address challenges like climate change and dwindling natural resources.
"This is an area where we've been seeing a lot of quiet investing going on," said Mark Heesen, president of the National Venture Capital Association. "People are saying so far it's more talk than action, but I think there's been a lot of sub rosa action."
This month, two of the area's top firms, Kleiner, Perkins, Caufield & Byers and Mohr Davidow Ventures, made large investments in solar energy companies. One, Miasole, based in San Jose, raised $16 million in a fund-raising round led by Kleiner Perkins. The other, Nanosolar of Palo Alto, raised $20 million from investors led by Mohr Davidow.
On Tuesday, Energy Innovations, a company building advanced solar panels that use mirrors to track the sun and capture energy on storage cells, announced it raised $16.5 million in venture capital in a round also led by Mohr Davidow.
Energy Innovations, based in Pasadena, was founded five years ago by Bill Gross, a pioneer of Internet advertising in the mid-1990s. Gross gained fame in the dot-com era when the company he founded, Idealab, a privately held "incubator" of Internet start-ups, burned through $800 million in eight months.
"I've had four years of conversations with VCs on both coasts," said Andrew Beebe, president of Energy Innovations, "and I think we've seen a real change in terms of interest level and an understanding of this area."
He said that in recent months he had spoken with roughly a dozen venture capitalists, and half of them proved willing to talk deal terms.
The field is "starting to get big and grow rapidly," said Sunil Paul, a founder of Brightmail, an anti-spam company that was acquired by Symantec last June for $370 million. Paul, an active investor in start-ups, has used his personal fortune to help finance three alternative energy companies. He was an early investor in Nanosolar, along with Sergey Brin and Larry Page, the founders of Google.
In February, more than 100 venture capitalists attended a conference on clean technologies in Palm Springs sponsored by Clean Edge Inc., a consulting group based in Oakland. And it is a poorly kept secret within venture circles that at least two venture firms are trying to raise money for new funds that will focus exclusively on energy investments.
This attention by some of the Valley's highest-profile investors heartens Nancy Floyd, a founding partner of Nth Power, a San Francisco-based venture firm that specializes in clean-tech investments. It took Floyd and her partner more than three years to raise their first fund, a relatively modest $63 million, which they started investing in 1997. Back then, Floyd said, it was very difficult to find a venture firm willing to invest with her firm on a deal, as venture capitalists tend to do on deals larger than a few million dollars.
"Energy had always had a very small core audience among venture capitalists," Floyd said. "It's only the last six months to a year we're seeing some of the generalist firms form teams around this and write checks in this area."
Interest from a broad array of companies, she believes, will help the entire sector. For one thing, big companies with expertise in, say, networking design or nanotechnology could provide invaluable expertise if they work with the right energy start-up.
Still, clean energy's share of the total venture pool remains tiny, according to data provided by Floyd's firm and Clean Edge, though it has doubled during the past four years. Paul, for one, noted that clean tech might need a success like a Yahoo or a Netscape "before every venture firm decides they need to be in this sector."
Clean tech represented a 1.2 percent share of the total dollar amount of venture capital invested in 2000. In 2004, the $520 million that venture capitalists invested accounted for a 2.6 percent share of the overall venture pie.
"We're in a situation where we still have more deals than capital," Floyd said.
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