The State of Cleantech Venture Capital

Last week, Matthew Nordan of the venture capital firm Venrock wrote an excellent four-part series entitled “The State of Cleantech Venture Capital”.

Part One focuses on the amount of venture capital into cleantech. Looking at capital flows over the past several years and projecting forward, Nordan concludes that a record amount of cleantech venture capital will be required over the next few years to bring deals from recent years across the goal line to exit — but expresses the concern that “there may be insufficient Seed/Series A capital available to fund new cleantech enterprises.” This is a worry to me, as well.

Part Two aims to analyze the returns that cleantech venture investors have been able to generate. Nordon notes that the conventional wisdom — that cleantech venture capital must have much worse returns than venture capital overall — is patently incorrect. “Relative to its level of funding, cleantech has actually overdelivered on exits…[venture-backed cleantech start-ups] take less time [to exit than companies in other sectors]…[and] cleantech-only VC funds have about the same valuation metrics as VC funds overall.” Of course, Nordson does not emphasize that the venture capital sector as a whole has performed poorly over the past decade, but at least cleantech VC doesn’t trail a field that is sucking wind.

Part Three profiles 24 cleantech firms that have undertaken or filed for an initial public offering (IPO) since 2000. Nordon’s analysis indicates that half of the seemingly-successful companies — these are only the ones that IPO’ed, after all — “stumbled” somewhere along the way towards their exit. By Nordon’s definition, “stumbled” means receiving investment at a too-high valuation at some point, and then suffering when the valuation falls in a subsequent round of investment. Such “down-rounds” are inevitably very painful. As Nordon advises entrepreneurs at the end of his piece, “the share price that really matters is the one at the end.”

Part Four offers some brief concluding remarks, among which are “It’s still really early [in cleantech venture capital}", and "The optimal investment vehicle [to finance cleantech start-ups] remains to be figured out.”

Nordon and his firm Venrock are eager to play in this cleantech venture capital game, rough-and-tumble though it may be.