Towards A Cleaner Future
Issues for investors
The global nature of cleantech innovation and demand throws a number of challenges at venture investors. The most successful investors will be those, like 3i, with an existing global network which will help them identify innovative businesses and partner them to success. Investors will also need broad technological and industrial expertise and experience.
Businesses in areas such as solar cell production will require heavy capital investment at an early stage. Investors must be well resourced, both in terms of capital and in the ability to deliver innovative financing solutions. 
The key to the right opportunity in cleantech is the end market or customer base. Markets break down into three categories, not all of which are as suitable for venture capital investment.
For many areas in energy, waste, water and air treatment, the customers are utilities and municipal authorities, often with immense purchasing power backed by regional or national government. These tend not to be ideal customers for venture-backed companies, as their purchasing cycles are very long and their appetite for innovation low. Companies addressing such markets can be good investmentsfor longer-term infrastructure investments, however.
The second category is the industrial market, for technologies suchas efficiency management and waste treatment. Industrial customers typically have shorter adoption cycles and a greatercompetitive need for performance gains, so are more likely to buy into new technologies.
The third and perhaps most interesting area isthe consumer market. In Europe and the US,the concerns surrounding cleantech are becominga mainstream issue in many purchasing decisions. Even early-stage cleantech companies with the right technology and the right brand will be very attractive to VC investors - but such companiesare proving elusive.
For the next few years, cleantech investment will dominated by late-stage deals - even in the US, where the angel and early-stage investment market is most developed. Attractive companies willtypically be generating revenues and on the verge of significant expansion, requiring only an injection of capital and some strategic support to achieve major growth.
As the cleantech market matures, early-stage investments will become more attractive. But, as ever in technology investment, the general rule is that the earlier the investment, the morerevolutionary the technology has to be. StrongIP and patent protection are, of course, vital.
Exit strategy is also a concern. While wise investors are prepared to partner cleantech companies for longer than in other sectors, they will still want a profitable exit at some point. Some companies will find a natural home of the public markets, where there is currently strong appetite for cleantech companies. Others, particularly those selling to utilities or industrials, will make good acquisition targets. Valuations are still flexible because of the relative youth of the market, but companies which can demonstrate scalability should be able to achieve high multiples.
Over the next decade, the diverse technologies and businesses under the cleantech banner will have as large an impact globally as the green revolution or ICT revolution of the 20th century. Smart venture investors will be along for the ride, to help these technologies reach their full potential and to reap the returns.