The next technology revolution
Investments in clean technologies are growing at a phenomenal rate, leading experts to predict that cleantech will soon become the next technology revolution.
In the past four years, 3i has invested in companies that provide energy-saving integrated circuits for electronic products, intelligent sensors for remote networks and energy-harvesting technologies for wireless devices. Its portfolio companies have launched water treatment systems, energyconverting wave machines and portable fuel cells. 3i is placed second only to The Carbon Trust for the number of cleantech deals done in Europe between 2003 and Q3 2006, according to the recently released European Cleantech Investment Report. But, while 3i stands out as a leader in cleantech investments, it is not alone.
Venture capitalists invested $8.8 billion in cleantech companies in Europe, Israel and North America between 2003 and Q3 2006, according to a recent analysis by the Cleantech Venture Network. Investments increased annually in each region between 2003 and 2005 and in North America cleantech investments surpassed the 2005 total within the first three quarters of 2006.
3i’s cleantech investments reflect the breadth of technologies that come into play and that can be considered “clean technology” – those that optimise the use of natural resources while reducing ecological impacts – such as software, chips, advanced materials, fuel cells, water treatment systems, wave energy converters and more. Technologies in the sector tend to fall under one of the 11 segments that the Cleantech Venture Network uses for its analyses, including: agriculture; air and environment; energy efficiency; energy generation; energy infrastructure; energy storage; manufacturing/industrial; materials; recycling and waste; transportation; and water and wastewater.
Despite the overall increases in cleantech investment, the development of cleantech entrepreneurship and expertise has differed from region to region. Europe, for instance, has been at the forefront of many cleantech innovations, from solar power components and systems to waste recycling and management programmes. Entrepreneurs have responded to European Union mandates such as Kyoto standards and limits on toxic chemicals in electronic devices as well as to national programmes such as an updated Renewable Energy Law in Germany, which provides incentives for utilities to integrate solar power into the grid. Consumers in Europe also have been quick to embrace the concepts of cleaner, more efficient technologies.
Diverse investments
Overall, cleantech investment has risen in response to global demands. In Europe, a total of 431 venture deals were recorded between 2003 and Q3 2006 for about $2.4 billion. European cleantech investment increased from $511 million in 2003 to $782 million in 2005. Israel closed 13 cleantech deals in the period for a total of $113 million. Its investments have grown from $11 million in 2003 to $72 million in 2005.
North America, however, represents a steadily growing investment market, with 817 venture deals for a total of $6.3 billion. North American cleantech investments rose from just over $1 billion in 2003 to $1.6 billion in 2005 and reached almost $2.3 billion by Q3 2006.
Each region’s technological strengths, consumer markets and public policies have helped to shape venture investments. The energy generation segment, which includes technologies such as solar, wind and biofuels, captured 62% of the total cleantech investment in Europe. Energy-related technologies (generation, efficiency, infrastructure and storage) accounted for 76% of the investment total. The manufacturing/industrial category received 7%, while materials and water/wastewater each had 6%. Five segments received venture funds in Israel: 45% went into energy storage, 38% into water/wastewater; 13% into agriculture, and the rest into energy generation and manufacturing/industrial.
Investors in North American companies were the most diversified. The energy generation segment received the largest proportion of funds, with 26%. Energy storage placed second at 16%, and energy infrastructure received 11%. Materials followed at 10%; air/ environment at 8%; recycling/waste at 6%; agriculture, energy efficiency and manufacturing/industrial each at 5%; and transportation and water/wastewater each at 4%.
Divestments and IPOs in the sector painted an interesting picture. In Q3 2006, for instance, 14 cleantech companies went public, raising an aggregate total of more than $1 billion. That same quarter, 31 cleantech companies were acquired, two merged with other companies and one engaged in a reverse takeover. In the public markets, cleantech fared well over the long term. The Cleantech Index™ (CTIUS), which lists more than 50 U.S. cleantech companies, rose 34.5% between 2004 and 2006. CTIUS outperformed the S&P 500 Index (up 27.6%) and the Nasdaq Composite (up 20.6%) for the three-year period, but its 2.6% increase for 2006 lagged behind the major indices.
Focused fundraising
As global warming and the need to protect natural resources for future generations becomes embedded in the public consciousness, fundraising in the sector appears to be on the rise as well. At least four cleantech-specific venture funds totaling more than $250 million were announced in Europe in 2006 with anticipated final closings in 2007 expected to add another $400 million or more. In North America, venture firms closed four cleantech funds for a total of almost $600 million in 2006. Israeli venture investors launched a dedicated cleantech fund in late 2005.
In far less than a decade cleantech has grown from a business opportunity recognised by a few pioneering entrepreneurs and specialist investors into what is sometimes called the next technology revolution. Leading global financial institutions now include cleantech in their strategies for business growth. The combination of specialist investors who offer domain expertise and generalist investors who provide pedigree and prestige could be a catalyst as cleantech shifts into the mainstream.
The blending of investor expertise extends across borders as well. Europe, Israel, North America and other regions have shown they have great technological capabilities, but solutions to massive challenges such as climate change or accessible clean water will likely take the integration of several technologies from several regions. Investors who navigate between countries and cultures will be positioned to identify deals that meet global needs and convert their portfolio companies into global business opportunities.