Young green-technology companies lure venture capital

Nov 12, 2007 @ 12:01 am

By Liz Skinner

Young companies with green technologies are cleaning up when it comes to venture capital dollars.

Venture capitalists invested $844 million in so-called clean-technology companies in the quarter ended Sept. 30, an 80% increase from the amount during the previous three months, according to a new report from PricewaterhouseCoopers LLP of New York and the National Venture Capital Association of Arlington, Va.

The total invested in alternative-energy firms, pollution technologies, clean power supplies and conservation companies represented only 12% of the total $7.1 billion venture capitalists invested for the quarter. However, clean tech was the fastest-growing sector and is expected to keep outpacing other types of companies, according to the association.

"The business potential from these firms could be quite significant for venture capitalists," said Tracy Lefteroff, managing partner of PricewaterhouseCoopers' venture capital practice. They typically generate revenue more quickly than traditional technology companies, said Mr. Lefteroff, who is based in San Jose, Calif.

Venture capitalists have been studying this sector for the past few years, many bringing on new employees with an energy or environmental background and others testing the waters with an investment or two, said Emily Mendell, vice president of strategic affairs for the association. After much consideration, they are deploying money, she said.

"There's been a national recognition for the country to be less energy dependent and more environmentally friendly," Ms. Mendell said. "Venture capitalists follow trends, and they are capitalizing on the need."

These enterprises usually are more capital intensive than firms in sectors such as software that have long attracted venture capital funds, Ms. Mendell said. Venture capital deals in the clean-technology sector averaged about $13.6 million this quarter, with companies in the sector receiving an average of $9.8 million each, according to the report.

In fact, three of the top five largest venture capital deals of the recent quarter involved clean-technology firms. The largest of these transactions included Cambridge, Mass.-based GreatPoint Energy Inc., which raised $100 million during the quarter for its technology that converts coal and biomass into cleaner-burning natural gas.

The largest of all deals for the third quarter was $110 million invested in Audubon, Pa.-based Globus Medical Inc., which is expanding its manufacture of medical devices for spinal surgery.

Total venture capital investment dropped 1.4% in the recent quarter, compared with the amount during the second quarter, the report said. That decline isn't significant, and the credit issue that hurt public markets during the quarter did not affect the venture capital landscape, Ms. Mendell said.

"Venture capitalists invest for the long term," she said.

A separate report on venture capital during the third quarter showed $8 billion going out to companies, which represents the highest quarterly investment since the second quarter of 2001, according to a report by San Francisco-based VentureOne and Ernst & Young LLP of New York.

Venture capital investment has shown gradual growth every year since 2003, said Joseph Muscat, the Americas director of Ernst & Young's Venture Capital Advisory Group.

Investments in "idea and people businesses," such as picture-sharing companies that use the Internet, also have taken off as innovators have created new ways to communicate and interact online, he said.

Because these businesses are not capital intensive and require little time to go from development to attracting users, they have "a lot of characteristics that venture capitalists like," Mr. Muscat said.

Financial advisers have differing opinions on whether individual investors should include venture capital investments in their portfolios.

"We like venture capital a lot," said Anthony J. Guinta, an adviser with Atlanta-based Homrich & Berg Inc., which has about $1.6 billion in assets under management. "We push it on our clients a little bit."

Sometimes clients will want to invest in a friend's restaurant or new company. Instead, Mr. Guinta said, he'll suggest that they place money in a venture capital fund that invests in many companies instead of just one.

To pool clients' money, Homrich & Berg creates an in-house vehicle that amasses a few hundred thousand dollars from each investor until the firm has about $10 million to invest.

To help insulate against the day-to-day volatility that is found in the public markets, Mr. Guinta recommends that clients allocate 3% to 10% of their portfolios to venture capital, which tends to be illiquid.

Other financial advisers steer clients clear of this asset class.

"We don't recommend clients invest in venture capital on a proactive basis," said Dougal Williams, an adviser with Portland, Ore.-based Vista Capital Partners Inc., which manages about $400 million in assets. The firm will help clients evaluate opportunities to invest in a young company or fund, he said.

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