Cleantech venture capital heads east

I have argued in this column that the scandal surrounding Solyndra’s bankruptcy distracted U.S. lawmakers from a fundamental market dynamic: Though the U.S. is investing in cleantech, it’s getting crushed by China. Xinyu City–based LDK Solar received a credit line worth $8.9 billion in 2010 from the government-controlled China Development Bank. Suddenly the $535 million loan guarantee that Solyndra got doesn’t seem like that much government support (imagine if Solyndra had another $8 billion to play with). More importantly, China’s strategy is working: It has now locked up 70 percent of the growing solar panel market.

So the news last week that leading cleantech venture capital firm Kleiner Perkins Caufield & Byers (KPCB) was raising $250 million in funding to invest in Chinese companies represents the logical next step in a migration of cleantech investment toward China. While the Chinese government has always been the most aggressive global investor in renewable energy and technology, there are early signs that make the country a promising place for overall cleantech VC, from solar to electric vehicle technology. Here are a few reasons why.

It’s the exit, Stupid. While 2011 has been the worst year on record for IPOs, with the most-ever IPOs shelved due to market volatility and tepid demand, the Chinese cleantech sector has offered some hope. Eleven of the 14 cleantech IPOs in the third quarter were Chinese companies, with four Chinese solar panel manufacturers raising $812 million. While the venture capital investment in China is small right now, with the whole Asia-Pacific region raising just $303 million of the $2.23 billion global raise in the third quarter, VC firms ultimately care about exiting and watching their invested companies raise additional cash in public markets. Seeing Chinese companies exit to the tune of almost a billion dollars in one quarter sends a very promising signal.

A government can venture invest. In September, China’s Ministry of Finance issued a policy statement, codifying its policy of venture investing and outlining a strategy where it will invest in venture funds with a minimum of 2.5 billion yuan ($394 million). It wants to contribute no more than 20 percent of the fund, presumably to allow venture firms to maintain some autonomy from the government. I have noted before that, politics and ideologies aside, the U.S. government should take small equity stakes as a way to make subsidies and loan programs sustainable, because U.S. companies are up against a very aggressive financing agenda from the Chinese government. And giving the government some return on its cleantech investment could deflect critics of cleantech subsidies.

The yuan is powerful. The newest trend emerging, in line with China’s role as a growth area for venture capital, is the spread of yuan-denominated funds. China Cleantech Partners, Hudson Clean Energy Partners and KPCB have all raised small yuan funds in the past four months. Dow Jones VentureWire reporter Jonathan Shieber points out that yuan-denominated funds have fewer restrictions than foreign funds, which can’t invest in certain areas like defense and some energy firms. Yuan funds often don’t need investment approvals from China’s economic ministries, either. From wind power to electric vehicles, it’s clear that the Chinese market itself will be the biggest cleantech market over the next decade. American VC firms that raise yuan funds can get further access to investing in the companies that will serve that market.

Many may lament the impact that China’s aggressive stance on cleantech finance is having on U.S. companies that must compete against some Chinese companies that appear to have bottomless capital. But others, like Dallas Kachan, the former managing director of industry analyst firm The Cleantech Group, see a potential opportunity in the Chinese environment. In September Kachan brought seven Canadian cleantech companies to Beijing and Shanghai to look for venture capital. There’s no word on whether any received financing, but looking forward, I believe 2012 and 2013 will be years with increased cleantech venture capital coming out of China. Given that the DOE’s loan guarantee program has expired as well as the weakening political support in Europe and the U.S. for cleantech subsidies, companies in search of capital should not ignore China.

Question of the week

How possible will it be for U.S. cleantech startups to raise capital in China?
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Adam Lesser

Cleantech Curator Gigaom Research

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