Venture Capital Today: Recycle Your Sock Puppet

If your friendly sock puppet is made of recyclable materials, use it now to write a check! The Internet boom is back, but in an interesting new-millennium twist, it is followed closely by the clean technology sector.

Earlier this year, the National Venture Capital Association reported that Internet storage company Dropbox received the largest single private investment of the fourth quarter of 2011 with a US$250 million funding round, followed by electric vehicle infrastructure provider Better Place with $200 million.

Is venture capital actually chasing companies that make things? Evidently so: In “Shaking the Money Tree,” PricewaterhouseCoopers reports that in 2011, investment in clean technology rose 12 percent over the previous year, accounting for $4.3 billion in 323 deals.

Spreading It Thin

As a result, clean technology represented about one-seventh of all venture capital deals; the two other industrial companies that cracked the list of top 10 venture deals in Q4 2011 — Fisker Automotive and Stion Corporation — are also cleantech companies.

In comparison, Internet-specific companies (those with a business model fundamentally Internet-related) raised $6.9 billion in 997 deals. These numbers highlight one of the ongoing challenges with manufacturing companies: With two-thirds as much capital, you can only do one-third as many deals.

In other words, because funding must go to capital and highly trained people in manufacturing companies (unlike Internet plays, which just require talent), it is not possible to fund as many companies, thus limiting the funding opportunity.

Young Big Companies on the Move

We don’t know if these cleantech deals raised funding in the federal stimulus program of the early Obama years; while there may have been some, it is likely that the federal grants were not as high as hoped (in the absence of Solyndreals). Certainly many funded startups of the last couple of years folded after waiting too long for anticipated stimulus money that never came.

All these companies represent the trend of the last few months, where young companies founded at the dawn of the downturn are now claiming the spoils. PricewaterhouseCoopers further reports that later-stage funding rounds experienced increased activity, though at the expense of seed-stage companies.

Fortunately, one rich man’s trash is another rich man’s treasure: The angel investment community, jumping on the bandwagon, has seen a renewed emphasis on seed-stage funding to fill in the gaps left by risk-shy VCs.

In fact, while software represented nearly one-quarter of 2011 funded angel deals, industrial segments jumped to 13 percent, according the Center for Venture Research at the University of New Hampshire.

It helps that seed-stage valuations and deal sizes have collapsed to levels last seen several years ago, making angel investment a buyers’ market once again. New cleantech innovators prepared to compete on a global scale can likely attract funding for their enterprises.

It is also interesting that all three of the recently VC-funded cleantech companies are based in California, showing that no matter how difficult the state environment may be for truly small mom-and-pop businesses, these “young big companies” are still successful in attracting capital and talent.

Furthermore, the websites of all three show how cleantech is both global and local — in infrastructure and in capital. Like politics, all cleantech is ultimately local.

The Takeaway

What does all this mean for you and me?

First, we can all hope that companies funded in these 2011 rounds position themselves for IPOs around 2014. It would be nice to see new public companies with industrial products, as the cleantech industry reaches early critical mass so it can exist as an industry without government subsidies.

Hopefully this is also the leading edge of cleantech becoming just another industrial sector, serving as the “picks and shovels” of the next gold rush, with expansion of the developed world into new marketplaces where natural resources are more expensive than in the U.S. and Europe.

However, unlike previous booms — as we transform the American Dream into the Indian-African-Asian Dream — successful companies will exploit fundamental technology advantages while simultaneously competing globally for labor and capital.

Finally, the deal economics of this sector, compared with the software industry, suggest that for these deals to attract investment dollars, the competitive advantage has to be strong and sustained, with a technical risk that is mostly retired. The software company spending and risk profiles still make them extremely compelling funding opportunities.