VCs navigate cash vs. carnage scenario with green tech

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Over the past four years, venture capitalists have tossed huge amounts of cash at "green-tech" startups. The green, er, field has become saturated with speculative funding, rivaling even the two mainstays of Valley vulture capitalists: IT and life sciences.

What was once the domain of well meaning, but ultimately dirt poor entrepreneurs is oh so hot right now. Some predict green tech funding will even out pace internet startup funding in 2008.

Or to give another example of the frothy funding madness, folks this week were given the honor of paying $85 a pop to attend a Churchill Club green investment panel at the SRI headquarters in Menlo Park.

But where a journalist can get in free, The Register is there! Tally ho!

Let's start with a stupid question. What's the big change?

It was clear at the panel that the faces of green tech CEOs in operation more than five years are tattooed with the worry lines of yesteryear. They speak gravely of "dark days" when nobody gave a snot about eco-friendly startups.

Cut to 2007 and green funding totaled more than $5bn, according to the Ira Ehrenpries, host of the panel and investor at the private venture firm Technology Partners. It's the fallout of a perfect storm of high energy prices and ceaseless public eco-beration.

"We now have people knocking on our door trying to work with us," said Mike Biddle, President of MBA Polymers, a plastic recycling firm with operations in the US, Austria, and China. "That's a luxury we never had before."

After years of his company roughing it, Biddle has been lifted by the eco windfall. His business is now padded by the pockets of big names such as General Electric.

"The challenge has been keeping investors at bay," said Dirk Michels, a green tech venture adviser from the law firm Kirkpatrick & Lockhard Preston Gates Ellis.

But the coiling snakes of a shaky global economy could easily make-or-break the burgeoning green market in the upcoming year. Unlike the IT sector, most green tech propositions require massive amounts of capital to get off the ground. In addition, they can take much longer to mature than your billions-in-a-flash gigs like YouTube.

"It's really quite similar to the biotech startups we've seen," said Jennifer Fonstad, Managing Director at the investment firm Draper Fisher Jurvetson. "They need hundreds of millions to get through the start. We put down lots of money without even knowing the technology really works."

Yet green tech companies lack the money-making track record that pill procurers possess. The answer for many green tech businesses has been government subsidies. And, while aid is still tight in the US, Asia and Europe have readily opened their wallets to risky technology. But a business model heavily dependent on government stipends losses a lot of appeal to an investor.

"You can't build a company while expecting the government to take it away," said Fonstad.

"One of the reasons we have more investors in the space is there are more companies that don't rely on subsidies," said Biddle. "We have always been about being a low cost producer. We are not about saving the planet, but a better economic equation."

Just where green tech is headed in 2008 is understandably mixed.

"If you're looking at short term quarter to quarter, there's no question about a lot of volatility in the public markets," said John Woolard, CEO of the solar firm BrightSource Energy. "It could easily be considered over-hyped and overvalued. But if you measure this in years or decades, we have a long way to go and a lot of work to be done. There's tons of investment opportunities."

Yet perhaps some venture capital companies aren't shaken by the doom and gloom economic forecasts. This week the US tax and audit advisory firm KPMG released a bullish survey on green tech.

In polling more than 350 venture capitalists, investment bankers and research analysts, KPMG found that about 51 per cent of respondents said they expect venture capital spending to continue to rise in 2008. When asked to identify which sectors would receive the most cash over the next two years, 24 per cent indicated green tech companies. Biotech and pharmaceuticals received 15 per cent and internet services were at 13 per cent.

The hope is that this year green tech companies will start to go public. But a stumbling economy means this isn't very likely. Nearly half polled said they expect the domestic IPO market to maintain its 2007 rate. Just over 26 per cent said they expect it will increase, with 15 per cent anticipating a drop.

The likely outlook seems to be mergers and acquisitions for the next year. And with rigorous capital requirements, there are going to be a lot of failures.

"The Darwinian effect has always been strong here," said Ehrenpreis. "If we looked at the disk drive industry a few years ago — just because there was a lot of disk drive companies doesn't mean it wasn't a strong industry. We're optimistic, but that's not to say there won't be a whole lot of carnage along the way." ®

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