A greener path to success

Many dedicated cleantech funds have been set up in Europe and the US to focus on finding good companies that offer solutions to the future's energy consumption challenge. One such fund is Environmental Technologies, which closed its maiden vehicle in March on £110m (see page 07). "We started discussing the idea in 2004 of forming a dedicated fund as we saw the start of a large economic change in the market," explains Henrik Olsen, founding partner of the fund. The international directives of business conduct where firms face increased prices and fees on carbon emissions, combined with increased energy prices, also acted as a reason to set up the firm. "We regarded these changes as an opportunity to invest in companies that are developing technological solutions to solve these problems," says Olsen.

Many venture firms have also changed investment scope to include more environmentally-friendly investments on the basis that these companies are also technology businesses. But is it really that straightforward? With the scope of cleantech investments broad, the process can be complicated, leading some to argue that specialised funds or teams could be more successful. "An attractive company will be an attractive company, regardless of sector," says Jorgen Bladh of Northzone Ventures. Creandum views cleantech as a sub-segment of technology investing. "Since it is such a broad concept, we believe it is better to have a general perspective for our funds, and would rather focus on attracting investment professionals who possess specialised knowledge in different segments, where cleantech could be one," explains Staffan Helgesson of Creandum. He illustrates this point by using an energy saving semiconductor business as an example. "To nurture this company, semiconductor experience and knowledge will be more important than having previous cleantech experience," he explains.

The process for cleantech is different to conventional IT companies, yet continues to prove attractive. "We have invested in nearly 10 cleantech companies in the past three years, and we expect to see this number significantly increase going forward," Bladh says. In the past two months alone Northzone has invested in two such companies; Climatewell (page 29) and, together with Creandum and Eqvitec, Norstel (page 30). Helgesson feels funds dedicated to cleantech are more likely to succeed if their investments have a pan-European, rather than country-specific, focus. "The pipeline is simply not there," he notes.

Marketing tactics

Regardless of strategy, more targets have emerged than ever before. Various companies that previously have not been considered green have slightly tweaked their technology to move them into the sector, which should, in turn, give them more social acceptance. "As long as the change in technology leads to less energy consumption, the net effect is purely a positive one," Olsen says. "It will also lead to more interest and awareness of these companies, creating greater economic value which should produce a solid eco-system for cleantech investments," he explains.

Also increasing the pipeline are educational campaigns on global warming and pollution. Such efforts have exceeded initial expectations as people are much more concerned about these questions and would like to conform to the greener way of conducting business. Films like "An Inconvenient Truth" by Nobel Prize winner Al Gore add to this sentiment. Increasingly, people recognise that change is needed to innovate and succeed.

No compromise

Returns must always be a primary driver of deals, even in cleantech. "There are no compromises in returns when investing in cleantech compared with other types of companies," Olsen says. "In order for a company to triumph, the key success factors have to be present, just like other venture investments. It is not enough for a company to survive on goodwill," he says. Succeeding is a case of the basic mechanism of supply and demand. There is a demand in the market for technology that can respond to these environmental changes and it is the objective of the venture capitalists to find strong companies that can supply technology to meet this demand. "The increased focus on energy saving companies is no doubt purely a positive development for the venture community, but we have to be aware of the hype that some companies bring along with them," says Helgesson.

One example is Norwegian REC, a solar energy specialist, listed on Oslo Bors. The initial excitement surrounding the business subsequently led to a plummeting of its share price, although many feel underlying factors of the business remain promising.

So even with great optimism, energy saving investments still bear some degree of uncertainty. But it seems clear that the change in consumer attitudes and technological advances will continue to drive cleantech investment momentum going forward.

Cleantech vs. greentech

An increasing population, rising oil prices and growing concern over carbon emissions are heightening growing interest in investment opportunities in cleantech companies all over the world. Cleantech is knowledge-based products or services that improve operational performance, productivity or efficiency, while reducing costs, inputs, energy consumption, waste or pollution; in other words quite a loose concept.

Venture capitalists also distinguish between cleantech and greentech investment, popular terms used in the 1970s and '80s. Cleantech is identified as being new technology and related business models which will offer investors attractive returns while providing solutions to global environmental challenges. Greentech is more regulatory driven, and hence less attractive for venture capitalists since alluring returns are more limited. The EU countries have committed to increase renewable energy usage and have announced the 20/20/20 target (reduce emissions by 20%, increase renewable energy by 20% by 2020) in March 2007, which will also boost green investments.

NORDIC CLEANTECH INVESTMENTS

According to a study by the Swedish Venture Vapital Association (SVCA), seven out of 10 Swedish venture capitalists seek to invest in cleantech as investors and regard this sector as having the greatest potential. Cleantech attracted 6% of committed capital in Q1 2007, reaching SEK 25.7m. Clearly, willingness to invest in the asset class is abundant.

The Nordics have also seen the largest cleantech investment in Europe with the $60m investment in Th!nk Global, a Norwegian producer of environmentally-friendly cars, by DFJ Element and RockPort and Capital Partners (September 2007, page 33). The business is managed by the three founders of Norwegian solar company Renewable Energy Corporation.

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