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For months, the cleantech sector — everything from renewables to energy efficiency projects — has been awash with tales of investors pulling the plug on start-ups and entrepreneurs struggling to find capital. On Apr. 1, the CleanTech Group, a market research firm, released figures that provide hard data to back up these anecdotes. According to the research, the combined venture capital investment in the North American, European, Chinese, and Indian cleantech markets in the first quarter of 2009 totaled $1 billion. That’s a 41% drop since the last quarter of 2008, and a 48% decline compared to the same period last year.
Indeed, the CleanTech Group reckons VC investment in the sector now stands at its lowest level since 2007. That comes despite G20 countries expected to put aside $400 billion of their combined $2.6 trillion stimulus packages for cleantech projects.
“Cleantech financing is moving into a new phase, characterized by diversified sources,” Brian Fan, CleanTech Group’s senior director of research, said in a statement. “Venture funds continue to invest in significant sums, albeit at a slower pace and smaller scale than in the past two years.”
So where is the money being spent? As in previous years, North America took the lion's share of investment, gobbling up 68% of the capital. Europe finished second -- at 21% -- while India and China finished third and fourth, respectively.
What's particularly interesting, though, is where VCs are targeting their cash. For the first quarter of 2009, solar energy snagged roughly one third of all investment. That includes $72 million for Norweigan polysilicon producer Norsun and $67 million for Californian concentrated solar start-up SolFocus. The second-largest sector was biofuels ($96 million raised), followed by advanced batteries ($94 million), and electric vehicles ($78 million).
That shows VCs are turning away from more mainstream cleantech projects -- such as wind energy -- in search of second-generation technology, like concentrated solar and biofuels. In part, this trend represents cleantech's maturing: venture capitalists moving from one, well-developed, technology to another, more immature, one in search of a larger rate-of-return.
But it also shows the way VCs are investing has changed. A couple of years ago, funds would have been willing to spend millions -- on their own -- in untested sectors, betting the farm that their investment would pay off. Now, venture capitalists are more cautious, often investing with other funds in industries, such as solar, that are supported by lucrative, government-backed incentives.
Inevitably, VC cleantech investment will pick up as the global economy gets back on its feet. But in the meantime, investors are being circumspect where they put their money. To win backing, says one cleantech entrepreneur who declined to be named, it's all about making your business work. "Money is out there, but only for projects that make financial sense," he says.
BusinessWeek correspondents John Carey and Mark Scott, cover the green scene, keeping on top of the business aspects of energy, the environment and climate change, as well as the technologies, policies, markets and people that are shaping how the earth's resources will be used in the century ahead.