In 2011, the average venture investment deal size in cleantech sector has been nearly double the overall deal size across all sectors, based on data from US. At about $14 million per deal not only it’s the highest across sectors but it is also close to double the average investment deal sizes in web based ventures, the current hot potatoes in the market. Infact at a time when some experts are expressing concerns over the slowing of cleantech investments — which have grown to be the second largest VC investment segment from a scratch in less than a decade — the continued growth of the deal sizes deserves some discussion. Is it a mark of growing confidence that investors are placing larger bets on the table? Or is it a structural hitch?
Well a part of it has to do with the fact that less cleantech venture money is going into early stage companies and technologies and more is going into ventures with more established, tried and tested technologies. In 2010 VCs in US invested less than twenty percent of their capital in early stage cleantech companies and sticking to more tested technologies. The ventures with more established technologies which constitute the likes of solar energy, biofuels, electric vehicles among others require a lot of cash to upscale. This inevitably pushes up the investment deals. Infact the trend of increasing deal size also falls in line with the trends of decreasing investment in early stage cleantech companies. In 2007 at $886 million American investors invested 35 per cent of their money in early stage companies which has fallen to $424 million in 2010. This possibly points into a structural hitch atleast in part.
Figure 1: Average deal sizes in US based on data from NVCA
This attraction of investors towards the more established cleantech technologies has perhaps got to do with the fact that most government programmes tend to create market incentives for more established cleantech technologies like solar energy, wind energy or electric vehicles. Without active support many innovative ideas which could possible form the next wave of cleantech innovation die early.
But then a part of the trend also lies in the fact that the investors do see long term potential too in cleantech. Several global majors are also betting the future growth from this segment. This probably is keeping alive the momentum in the market. Last month Shell and Cosan announced their plans for a $12 billion joint venture for producing biofuels while Cargill Ventures has invested in a JV with Usina Sao Joao in biofuels segment too.
General Motors which has placed its bet on the electric vehicles with its Volt electric car is also investing into cleantech firms through its investment arm into a solar roofed garage maker, Sunlogics or google which is investing hundreds of millions in cleantech ventures.
Additionally the trend towards larger deal sizes means the less aggressive firms will move out and the more aggressive ones are staying put. Perhaps they see this as an opportunity to operate more profitably in this space with lesser competition and lower valuations. Even the funding sources are growing larger which may keep the momentum going. The funds of funds focused on cleantech are growing larger. The average size of cleantech sector funds has grown from $173 million in 2006 to about $300 million in 2011 as per the data from prequin.
Therefore what seems to be fuelling the growth of cleantech sector VC deal sizes is a mix of both structural reasons and an underlying confidence on the long term potential. However some focus on the high risk, early stage ventures will bring sustainability to the cleantech growth story. Something that Khosla Ventures with their recently $1 billion fund dedicated to cleantech intends to do. This is where Vinod Khosla, the founder of Sun Microsystems sees his next big opportunity, for him “Venture capital is always a long term story”.