Investors take on green energy's 'Valley of Death'
by Nichola Groom

Reuters    Translate This Article
15 April 2008

LOS ANGELES (Reuters) - Some big investors are set to finance alternative energy projects that have long been taboo.

Unproven technologies, combined with the hundreds of millions of dollars in costs to build project such as solar plants, biodiesel facilities or wind farms, have always made investors skittish.

'There is a need in the market for financing vehicles that will take that first project risk,' said Dan Goldman, chief financial officer of Chicago-based GreatPoint Energy, which has a technology to convert coal into cleaner-burning gas. 'There is a real gap in the market now.'

But investors ranging from venture capitalists and private equity firms to Credit Suisse, Google Inc and the U.S. government are gearing up to fill this funding gap—known in the industry as the 'Valley of Death.'

Up to now this gap has posed a challenge for venture capital firms and other early-stage investors used to the speedy and relatively low-cost paths to commercialization for traditional technology companies, such as software developers.

'Two guys in a garage doing a software deal don't need a lot of capital,' said Todd Glass, who co-chairs the energy and clean technology practice at law firm Heller Ehrman LLP. 'If you compare that to somebody building a new wind project, to deploy that at a scale that really makes sense you are talking about $50 million to $100 million.'

GOOGLE STEPS UP

The 'Valley of Death' received high-profile attention in November when Web search giant Google announced a plan to invest hundreds of millions of dollars in renewable energy, including 'breakthrough' technologies.

Dan Reicher, the executive in charge of Google's green energy push, said in an interview that since that announcement, 'there are even more technologies hitting the Valley of Death and in need of capital... we have a long way to go before we have really cracked the code on this.'

Google has yet to announce an investment in that part of the market, but Reicher said the company was 'in the middle of this process on a couple of fronts.'

The U.S. government has also made small moves to address the issue. The Department of Energy in February announced a plan to give a handful of renewable energy start-ups access to state-of-the-art government labs, a move that aims to speed commercialization of technologies that will help reduce greenhouse gas emissions.

Venture capital firms, also, are committing ever bigger sums of money in individual financing rounds for alternative energy firms. The average amount VCs committed per round of financing increased to $15.8 million in the first quarter of this year, up 53 percent from $10.3 million a year go, according to research firm the Cleantech Group.

The biggest VC deals have also skyrocketed in size. In 2006 and 2007, the biggest early-stage funding rounds for alternative energy were both about $200 million, according to the Cleantech Group. In the four previous years, the biggest deals were much lower—between $25 million and $50 million.

Still, VCs can't fill the funding gap on their own, and many see private equity as well-placed to swoop in given that deals such as large leveraged buyouts are essentially dead in the water these days.

'For private equity, it's the right product in many circumstances because the public markets aren't forgiving with development stage companies. And yet you need a fund size that allows you to get through probably some delays and some timing issues and some heavier capital spending than some VC funds are comfortable with,' said a private equity source who declined to be named publicly. 'In this financing environment, where traditional LBOs are really tough to do, these deals have a very attractive profile.'

In 2007, private equity invested $6.3 billion in clean energy technology, a 21 percent increase from the year before, according to New Energy Finance.

CREDIT SUISSE TAKES NEW APPROACH

Private equity funds also have bigger appetites for risk than traditional project finance investors. Though investment banks such as Morgan Stanley and Goldman Sachs have emerged as big players in green project finance, they are still unlikely to lend vast sums of money to risky ventures.

Last week, Credit Suisse took a new approach to its clean energy banking practice when it announced that it would invest $300 million in renewable energy companies through private equity firm Hudson Clean Energy Partners. The move was aimed at moving the bank from investment banking to principal investing in the sector, it said.

In addition to Google, other U.S. corporations are becoming more active in helping start-ups reach scale. GreatPoint Energy in September raised $100 million from a consortium that included Dow Chemical Co, AES Corp, and Suncor Energy Inc, in addition to financial players.

'We took a different approach than typical clean technology companies,' Goldman said. 'There hasn't been a very large seeking out of strategic investors among solar, fuel cell, wind and other types of new technologies. It's something that is probably going to be employed more and more often.'

(Reporting by Nichola Groom; Editing by Tim Dobbyn)

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