Solyndra and the future of cleantech investing

When all was said and done, solar panel maker Solyndra raised over a billion dollars, making it No. 2 on the list of companies that have raised the most equity, according to a 2010 list from Dow Jones VentureWire. But unlike Facebook or MetroPCS, two other names on the list, it’s the only one that’s bankrupt. So with cleantech responsible for possibly the biggest venture disaster on record, it’s a good time to ask what the future of startup investing will look like in the green economy.

Overall venture capital investments grew 19 percent to $7.5 billion in the second quarter, but cleantech saw a 23 percent decrease, from $1.2 billion in the first quarter to $942 billion in the second quarter. Adding to that, the third quarter has seen a number of tech IPOs shelved due to the volatility of public markets, and you can see why firms like CMEA Capital, which raised $400 million in 2008 and backed Solyndra, reportedly has no plans to raise another fund.

GigaOM Pro’s Flash Analysis, which surveys both investors and those from the industry, showed that while there is some general negativity in the air, with 30 percent of investors viewing the environment for VC as being “in bad shape,” 43 percent of all respondents still thought there were attractive opportunities in greentech.

In the end, the troubles of the solar power industry are part of a maturation process that has gone on in cleantech investing over the past couple of years. Capital is harder to come by than it was between 2006 and 2008, and “science projects” — which are really basic scientific research and should be funded by the National Science Foundation, not venture capital  — are no longer fundable.

Solar power has always represented a bit of a quandary for venture investors. In order for solar panels to come down in price, some degree of commoditization needed to occur. This meant there could only be so much value in an exciting technology, because for the industry as a whole to succeed, much of the value would have to come from a company’s manufacturing process.

Venture firms are looking for clean technologies with clear products. A partner in the technology arm of a venture firm recently told me that his firm won’t go near anything that requires a lot of debt capital or building a new plant. Rather, he’s looking for cleantech companies with a product or a service that can be marketed through identifiable channel partners with clear end customers.

This shift in thinking is a reason that startups with software-based efficiency technologies will get traction, whether it’s a company like PowerAssure, which has an efficiency software package for data centers, or a home energy management software and service provider like EnergyHub, which raised $14.5 million last week. These companies are putting the IT in green IT by relying on software products to wring out energy efficiency. The development cycle is quicker, and there’s a clear product at the end.

Sources of funding for cleantech startups are shifting, too. As Kleiner Perkins partner Ray Lane recently indicated in an interview with Earth2Tech editor Katie Fehrenbacher, there’s a macro trend of LPs passing on new VC funds, and we’re likely looking at a reduction in the overall number of VCs. Fortunately, companies like GM and GE have decided to fund startups rather than do all of their R&D in-house. If the contraction in cleantech investing continues, startups will increasingly look to big companies for seed funding. Many of the Fortune 100 companies are sitting on the sidelines with record amounts of cash.

So while it can feel like pretty dark days out there, my sense is that the industry is growing up, not imploding. Because cleantech has had the strange coupling of subsidies with a moral imperative to help the environment, the thinking can stray from basic good business. Make a product that brings value to a clearly identifiable customer. Sounds easy, right?

Question of the week

What sectors will reap cleantech venture capital in the future?
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Adam Lesser

Cleantech Curator Gigaom Research

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