Clean Tech Investing Shifts, With Lower-Cost Ventures Gaining Favor

Standard cement manufacturingtechnology, using super-heated kilns, hasn’t changed much since the Romans mixed cement to pave roads 2,000 years ago.

Srinivas Kilambi, a self-described clean energy serial inventor, aims to change that. He says his new process, a potential “paradigm shift,” would need far less energy, a much smaller plant, and a shorter production time.

A "before and after" image that shows the Digital Lumens lighting system in use at the headquarters facility of Maines Paper and Food Service, Inc. located in Conklin, NY.
Source: Digital Lumens
A "before and after" image that shows the Digital Lumens lighting system in use at the headquarters facility of Maines Paper and Food Service, Inc. located in Conklin, NY.

Kilambi's startup,Sriya Green Materials of Marietta, Ga., backed by a global cement company and a major chemical concern, is trying to raise $10 million to build a pilot plant this year. Confident in his prospects given past fundraising successes, Kilambi needs the cash infusion at a time of notable change in the so-called clean tech arena.

For many investors, that change means shifting funds from capital-intensive alternative-energy technologies, such as solar panels, to lower-cost ventures focused on energy efficiency and “smart grid” technologies that automate electric utility operations.

“We continue to be very optimistic about things like the smart grid and the infusion of information technologies and software services” into old lines like electricity, agriculture and the built environment," says Steve Vassallo, general partner in Foundation Capital. “We’re very bullish on what I would consider the nexus of information technology and clean tech.”

Foundation, based in Menlo Park, Calif., reflects this in investments such as Sentient Energy Inc., a smart-grid monitoring company that allows utilities to remotely find power outages, and Silver Spring Networks, which provides utilities a wireless network for advanced metering and remote service connection.

Another holding, EnerNOC , a demand-response business with technology to turn off noncritical power loads during peak periods, went public in 2007.

EMeter, a one-time Foundation investment, was recently acquired by Siemens Industry.

To be sure, investors have not abandoned costlier technologies with longer-term horizons, but many — put off, in part, by last year’s bankruptcy and shutdown of solar power firm Solyndra— now favor smaller infusions in businesses with a quicker potential payoff.

Rob Day, partner in Boston-based Black Coral Capital, says his cleantech investment firm maintains some solar holdings, but he sees a shift from an emphasis on those types of plays to more “intelligence-driven, software-driven, web-driven businesses.” These technologies can be used to improve existing businesses, he says.

One Black Coral smart-technology investment is Digital Lumensof Boston, which makes high-efficiency, low-cost LED lighting for warehouses and factories. Software and controls are embedded in the fixtures, which can cut lighting bills by 90 percent, providing customers a two-year payback, says Day.

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U.S. venture capital investment in cleantech companies hit $4.9 billion last year, down 4.5 percent in dollar terms but flat in the number of transactions, according to Ernst & Young LLP, which analyzed data from Dow Jones VentureSource. Cleantech companies raised 29 percent more capital last year than in 2009, E&Y said recently.

Most of that decline, however, came from less investment in sectors that were once hot.

Serial entrepreneur and founder of Sriya Green Materials of Marietta, Ga.
Photo by: Srinivas Kilambi
Serial entrepreneur and founder of Sriya Green Materials of Marietta, Ga.

Investment in energy and electric generation, including solar businesses, fell 5 percent to $1.5 billion, while that of industry products and services companies plunged 34 percent to $1 billion, according to E&Y's analysis of equity investments from venture capital firms, corporations and individuals.

The energy efficiency category leads the diverse industry in deals with 78 transactions worth $646.9 million. Energy-storage companies raised $932.6 million, a 250 percent increase and 47 percent deal increase.

“Cleantech is … a maturing industry. I think people are beginning to have worked through the early stages, figured out where the more attractive opportunities are and those less so, and meanwhile lots and lots of changes have occurred in the broader world,” says Dan Reicher, executive director of Stanford University’s Center for Energy Policy and Finance, and a faculty member of the university’s business and law schools.

Cleantech investment in 2011 brought a number of other important changes: Most of the money went to companies already generating revenue, the emergence of innovative contributions from the IT industry and extraordinary interest by the Chinese in large-scale, capital-intensive technology, such as energy hardware.

Many U.S. companies can’t get domestic backing for what they call the “valley of death” phase: between the VC-backed pilot plant and the fully commercialized facility. As a result, they are increasingly turning to China, says Reicher.

“There are clearly economic implications," he adds. "The wonderful fruits of our innovation in this country are increasingly being consumed in China, and that has implications for job creation here, for a whole host of things that are important to our economy and our security."

Stanford is developing a financing vehicle to address that valley, but Reicher says he couldn’t provide details yet.

“You really want to see big impacts; you’ve got to put big money in,” says Kilambi, the serial entrepreneur, who has experience raising large sums of investment capital.

Federal funding for cleantech is facing more political resistence in the wake of the Solyndra collapse.

President Obama has requested $2.27 billion in his 2013 budget, versus $3.2 billion the previous year. Congress, however, has approved less than the president's requests for the last three fiscal years, notes Reicher.

Black Rock’s Day, who laments the politicization of the cleantech sector, suggests that investors look beyond Solyndra or the next election to what will happen over the next 20- or 50-year cycle.

“Man, there’s a huge opportunity there,” says Day.