Challenges Ahead For Cleantech Investing
As the California Clean Energy Angel Fund that she launched five years ago winds down, Susan Preston’s analysis of the opportunity to create a second “cleantech” fund has guided her to conclude “the bloom is off the rose of clean-energy investing.”
“We have done a great deal of analysis into raising a second fund, and unfortunately, market timing is quite bad,” said Preston, the former Seattle attorney who formed the first-of-its-kind angel fund for seed and start-up stage clean energy companies in August of 2007 and became its general partner. “The public and private markets are down on clean energy and the venture model itself is
Byron McCann, co-chairman of the Northwest Energy Angels, agrees with Preston’s assessment to the extent that “there isn’t the excitement in the market that there was. All the fervor and bluster have faded to the point where we do deals that make sense on their own.”
But McCann, whose angel group focuses on young “cleantech” companies in the Pacific Northwest, disagrees to the extent that he says he has seen “a robust deal flow, increased membership and angels interested in the clean-tech space.”
In fact, his angel group, formed in 2006, had its best first half this year, by July investing more than $1 million in six companies, with the investments focused on energy efficiency, green-building technology and biomass power
Preston and McCann will be together on a panel Friday in Seattle at the Northwest Energy Angels Leadership Breakfast, where the topic of discussion will be Portland author Ron Pernick’s new book, “Clean Tech Nation.”
Pernick indicated his sense that “without a concerted energy policy, pieces of the energy puzzle may be in trouble,” but added “states and cities are pushing for” clean-energy initiatives.
Pernick, Preston and McCann all agreed, in separate telephone conversations, that the erosion of venture-capital interest in clean-tech investments this year has brought challenges to the angel side of investing in the sector. Statistics indicate that venture funding in the clean-tech sector is off about 30 percent this year.
“Venture’s turn off means venture funding no longer represents second-round financing for young companies, and IPOs are not likely, so that limits the exits and that limits the interest,” Pernick said.
“Venture interest is down, but hasn’t disappeared,” said McCann. “A venture investment usually takes more money than investors anticipated and that’s even more of a challenge in clean tech, which takes more money and more time, making it more complicated than what a lot of us are used to.”
“So it’s a challenge for angels, who have to decide what kind of a deal is this? Am I bridging to a venture round or is this an angel deal where we’re going to grow the company,” McCann said.
Preston, in her typically direct fashion, said “a lot of the cleantech companies were walking dead and VC’s kept putting money into the walking dead. We all have these walking dead or zombies that we keep piling money into looking for some turnaround and instead the outcome is a turnoff.”
Early this year, I had Preston keynote a gathering at the Coachella Valley Economic Partnership in Palm Desert and she was bullish about the sector and about the prospects for a new fund.
But what she found in the months that followed was the erosion of venture-capital interest and waning interest on the part of major institutional investors.
“All the individual investors wanted to do another fund and we had positive feedback from all the limited partners,” Preston explained. “But the institutional investors were going to funds focused on later-stage investing and fewer were looking at cleantech.”
I asked her if there was any cleantech area for which she was still bullish and she said “I see a lot of opportunity in energy efficiency,” noting that one company in which her fund invested is Berkeley-based Alphabet Energy, which captures waste heat and turns it into energy.
Preston helped form the Seattle women’s angel network, Seraph, in the late ’90s and was a Kauffman Foundation entrepreneur in residence in Seattle. She was retained by the non-profit California Clean Energy Fund (CalCEF) six years ago to develop the model for a seed-stage clean energy fund.
She moved to the Bay Area to manage the $11 million boutique fund, in which the non-profit CalCEF was the key funding source, supported by a group of individual investors.
Preston, McCann and Pernick all agreed that the predictability that attracts investors requires a national energy policy.
“This country has a choice to make relating to energy and right now clean-energy has been villanized by partisan politics,” said Pernick. “All energy industries from oil, coal and nuclear to renewable and clean require government support, both regulatory and financial.”
McCann scored “the vaguery of energy policies” and Preston suggested that “what would really help is a clean-energy act,” noting that “regulation is essential in our industry.” But she added, “My hope of federal legislation is very low.”