x Abu Dhabi, UAEMonday 22 January 2018

Venture capitalists no longer wearing green

Alternative energy investment trails off substantially as crude prices decline and the global economy worsens.

Tesla Motors has been forced to delay the launch of its battery-powered sedan and cut jobs because of a lack of investment.
Tesla Motors has been forced to delay the launch of its battery-powered sedan and cut jobs because of a lack of investment.

Saving the planet is looking a lot less profitable than it did a few months ago, and investors once enamoured with finding the next high-flying alternative energy start-up are now retrenching. Venture capitalists poured a record number of dollars into alternative energy companies as oil prices peaked at US$147 a barrel in July, but some say that investment has trailed off substantially as crude prices declined and the global economy has slipped towards recession.

Not only are venture firms demanding lower valuations for what they call "cleantech" companies, they are also shying away from those with riskier technologies, and start-ups whose business plans will require large amounts of capital. "Our standard of investment has always been high, but it's even higher now," said Bryant Tong, the managing director with San Francisco-based Nth Power, a venture capital (VC) firm that invests in energy technology start-ups.

"Investors are hesitant to make investments... so it is harder across the board to raise capital for these companies." Alternative energy in the past few years has become a major focus for venture capitalists who saw there was money to be made from investing in technology to create cheaper solar panels, clean transportation fuels and green building products at a time of increased concerns about global warming and soaring fossil-fuel prices.

Venture investments in alternative-energy companies reached a record $2.6 billion (Dh9.55bn) in North America, Europe, China and India in the third quarter, according to the industry research firm The Cleantech Group, which expects a much different picture in the current economic climate. "We expect fourth quarter venture investment numbers to be down significantly from the third quarter," said Brian Fan, the senior director of research with The Cleantech Group, who estimated that fourth quarter venture investment in the sector would be somewhere between $1bn and $1.5bn.

"And we expect that to continue into next year as well," Mr Fan added. The most-visible recent sign of venture capitalists' new-found caution towards cleantech was Tesla Motors's announcement last week that it would delay the launch of its battery-powered sedan and cut jobs because of a lack of funds. The electric car start-up had been on the cusp of securing another round of venture funding when that was scuttled by the financial market turmoil, said John Thomas, the company's senior director. "The vault was closed to us," Mr Thomas said.

Tesla is now waiting until it can secure low-cost, taxpayer-backed loans before restarting work on the "Model S". For many investors in early-stage companies, the 50 per cent drop in oil prices in three months has been a big deterrent to making new investments in alternative energy. "The biggest question on people's minds has to do with the price of crude oil, which is now hovering at $70 a barrel," said Glen Schwaber, a general partner at the Israeli venture-capital firm Israel Cleantech Ventures. "From that perspective it can be a concerning time to be a cleantech investor."

Cleantech investment in early-stage companies should fall off at the end of the current quarter, Mr Schwaber said. In the near term, companies seeking their first round of venture funding will have the toughest time, because a frozen market for initial public offerings has made it virtually impossible for venture capital firms to take public their later-stage companies, according to the National Venture Capital Association (NVCA), a US trade group.

"If you can't get companies out through the IPO market, you have less time and less money to devote to new investments," said Emily Mendell, the vice president of strategic affairs at the NVCA. She said she expected cleantech to keep rising as a percentage of overall venture capital investment. "I would be surprised if investment fell sharply in this area." The good news, according to many venture capitalists, is that with fewer dollars chasing the next big solar company or energy efficiency technology, there are good deals to be had.

"With the dollars that you put in now, you will own a greater percentage of the company," said Mr Tong. "It's really a buying opportunity right now." Once the downturn is over, many noted, the fundamental reasons for investing in clean energy will not have changed. "There is an increase in urbanisation, a population explosion and a reliance on fossil fuels, which are warming the planet," Mr Schwaber said. "None of these have changed because of the subprime meltdown."

Mr Fan said venture firms that committed to the sector before it was hot - such as Kleiner Perkins Caufield and Byers, Khosla Ventures and VantagePoint Venture Partners - were unlikely to pull back now, though they may focus on less capital-intensive businesses. "It's the second-tier VC firms, the fringe players, the newcomers that are getting scared off," he said. * Reuters