For VCs in green tech, it’s time for Plan B

December 8, 2010 No Comments

CAMBRIDGE, Mass.–Venture capitalists, who once thronged into clean technology, are finding that they need to rethink their strategies in order to succeed, with some of them apparently moving out of the field altogether.

There’s often a mismatch between the large amount of money required to commercialize new energy technology and the capital to which a venture fund has access. As a result, venture investors are increasingly seeking to invest in green-tech start-ups that are less capital-hungry, a trend which will accelerate next year, according to experts.

Instead of getting all their money from venture capitalists, budding green-technology companies when starting out will be looking for money from large corporate partners to test out new technology or from alternative sources such as angel investors, families, or government grants.
Overall, investors say that because green-tech investing is very different from other fields, people need a different game plan than what worked in the venture capital-friendly industry of IT.

“The model is not going to work the way it sits right now,” David Danielson, a former venture capitalist and program director for energy storage at the ARPA-E clean-energy research agency, said during a panel on venture capital and energy last week at MIT’s Sloan school.
Danielson said that venture capitalists have told him they are getting out of green tech because it’s taking longer to innovate around energy and materials than they originally expected. Venture capital investor Rob Day also sees more departures from green tech, saying that “generalist” venture capital companies which work in a number of industries are quietly moving on.

Recent data on venture capital investing points to a shift toward energy efficiency, an area which typically requires less money. In terms of number of deals, efficiency beat out solar and transportation in the third quarter. There was also a big drop in the average deal size from $35 million to $8 million. Overall, the third quarter saw a sharp drop in total dollars invested, although the year total for 2010 is expected to higher than in 2009.

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