Cleantech Startups are Expensive, but Worth It

The National Venture Capital Association (NVCA) recently released its Q2 data and invited me to participate in their quarterly press call. I was asked for my opinion on, among other things, the health of the cleantech sector.

NVCA’s data showed investment in cleantech companies declined 23 percent from Q1. But I don’t think the anomaly in this quarter reflects a changed commitment to the sector. For the first half of 2011, both the number of deals and investment dollars were about the same as the first half of 2010. The numbers simply reflect the ebb and flow of investing. Fundamentally, clean technology is still one of the largest opportunities of the 21st century; investment in this emerging sector is up 405 percent from the first half of 2000. Clean energy is not only a national priority supported with government regulation and U.S. Small Business Administration funding as the United States strives for energy independence, but it is a global imperative.

Even with a clear government mandate, there still aren’t a lot of VCs that focus solely on cleantech. That’s because it’s hard work. Most cleantech companies require a lot of money to get up and running; these solutions require significant capital, much more than is needed to create an iPhone app or build software-as-a-service. As stand-alone (capital intensive) deals, they might not be attractive to VCs but, when paired with non-dilutive federal funding, regulatory support, and maybe even a strategic partner, they look a lot better from a financial perspective.

The Departments of Energy, Defense, and Agriculture, as well as the National Science Foundation and others, provide lots of non-dilutive capital for cleantech projects. Investors get to see additional money put into a company in which they’ve invested to move the technology forward, without losing any of their stake. The Department of Energy is the nation’s largest funder of basic physical science research, and is encouraging America to take the lead in greater commercial penetration of technology and the creation of a new green industry with a global reach. One cleantech company JumpStart has invested in, Phycal, is utilizing a proprietary technology developed at Ohio State University to harvest commercially viable energy products from algae biomass. Of the $26 million Phycal has raised, nearly one-half has come in the form of Department of Energy and Small Business Innovation Research grants.

We’re seeing strategic investors move into the cleantech space because they see the potential to build sustainable and aligned businesses. And we’re seeing cleantech companies look to them as the venture capital industry overall constricts. “As fewer venture dollars are committed, we see energy companies raising funding from corporations, the government and other types of investors,” Jessica Canning, the global research director for Dow Jones VentureSource, stated in a recent press release. Another one of the the companies JumpStart has invested in is Echogen Power Systems. It recently received a $10 million strategic investment from Dresser-Rand to continue commercializing its thermal engine, and in this case, specifically making use of Dresser-Rand’s turbo-chargers.

Northeast Ohio cleantech companies captured about 20 percent of total capital invested last year. Cleantech companies make up one-third of JumpStart’s portfolio, and I believe the Midwest is going to spawn more of them in the coming years. In addition to the market potential for emerging sectors like biofuels, energy efficiency and storage, water remediation and advanced (or nano) materials, cleantech companies can leverage Midwestern assets like our supply chain infrastructure, our proximity to 60 percent of the U.S. industrial centers, and most importantly, our skilled manufacturing workforce.

A recent Brookings report, “Sizing the Clean Economy: A National and Regional Green Jobs Assessment,” cited that cleantech companies employed 2.7 million Americans in 2010. Of those jobs, 26 percent were tied to manufacturing, compared to just nine percent of the broader economy. A USA Today article dissecting the report made a list of the top 10 metro areas for cleantech jobs. Four of the ten were Midwest regions. These “green collar” jobs offer more opportunities and better pay for low- and middle-skilled workers than the national economy. And in Ohio, the State’s $6 million Energizing Career Program helps cleantech companies train the manufacturing workforce to apply their skills to advanced energy jobs.

Lynn-Ann Gries is the Chief Investment Officer of JumpStart. She previously worked in the investment banking departments at both McDonald Investments and Smith Barney (now part of Citigroup), and in the sales and trading area at Morgan Stanley. She received her MBA from New York University’s Stern School of Business and her BA in Economics from Smith College. She currently serves on the board of the Fund for the Future of Shaker Heights, the Great Lakes Science Center and Summer on the Cuyahoga (SOTC).