US: Green Tinge Is Attracting Seed Money to Ventures

Publisher Name: 
New York Times

SAN FRANCISCO -- Ira Ehrenpreis may be a kind of prophet
advocating investments in alternative energy companies, but don't
accuse him of being noble.

In recent months Mr. Ehrenpreis, a venture capitalist at Technology
Partners in Palo Alto, Calif., has been asked any number of times to
speak to audiences about "clean tech," a term that encompasses such
things as solar energy, water purification systems and alternative
automotive fuels.

He begins and ends every speech the same way: with a slide that
stresses that to the extent his motivations are tinged green, it has to
do with the color of money.

In Silicon Valley these days, more venture capitalists are following
Mr. Ehrenpreis's lead. They are driven in part by the high price of
oil, which hovered around $59 a barrel on Tuesday, and the vast unmet
demand for electricity in China and India.

"The reason we're allocating dollars to this sector is we think we
can deliver attractive returns," said Mr. Ehrenpreis, who also serves
as co-chairman of the advisory board of the Cleantech Venture Network.
"It's not because we want to do great things for the environment or
great things for the world," though he adds that that is a "great

That message is resonating with venture capitalists and individual
investors in the Valley, where growing rich through doing good is
considered the ideal.

Top venture firms on Sand Hill Road in Menlo Park, Calif., are
beginning to show serious interest in the alternative energy sector,
though that typically means venturing outside their core expertise.
They hope to capitalize on the growing worldwide demand for energy at a
time of rising energy costs, and they see potential for huge profits in
technology that can address challenges like climate change and
dwindling natural resources.

"This is an area where we've been seeing a lot of quiet investing
going on," said Mark G. Heesen, president of the National Venture
Capital Association. "People are saying so far it's more talk than
action, but I think there's been a lot of sub rosa action."

This month two of the area's top firms, Kleiner, Perkins, Caufield
& Byers and Mohr Davidow Ventures, made large investments in solar
energy companies. One, Miasolé, based in San Jose, raised $16 million
in a fund-raising round led by Kleiner Perkins. The other, Nanosolar of
Palo Alto, raised $20 million from investors led by Mohr Davidow.

On Tuesday, Energy Innovations, a company building advanced solar
panels that use mirrors to track the sun and capture energy on storage
cells, announced that it raised $16.5 million in venture capital in a
round also led by Mohr Davidow.

Energy Innovations, based in Pasadena, Calif., was founded five
years ago by Bill Gross, a pioneer of Internet advertising in the
mid-1990's. Mr. Gross gained fame in the dot-com era when the company
he founded, Idealab, a privately held "incubator" of Internet
start-ups, burned through $800 million in eight months.

"I've had four years of conversations with V.C.'s on both coasts,"
said Andrew Beebe, president of Energy Innovations, "and I think we've
seen a real change in terms of interest level and an understanding of
this area."

He said that in recent months he had spoken with roughly a dozen
venture capitalists, and half of them proved willing to talk deal

The field is "starting to get big and grow rapidly," said Sunil
Paul, a founder of Brightmail, an antispam company that was acquired by
Symantec last June for $370 million. Mr. Paul, an active investor in
start-ups, has used his personal fortune to help finance three
alternative energy companies. He was an early investor in Nanosolar,
along with Sergey Brin and Larry Page, the founders of Google.

In February, more than 100 venture capitalists attended a conference
on clean technologies in Palm Springs, sponsored by Clean Edge Inc., a
consulting group based in Oakland, Calif. And it is a poorly kept
secret within venture circles that at least two venture firms are
trying to raise money for new funds that will focus exclusively on
energy investments.

This attention by some of the Valley's highest-profile investors
heartens Nancy C. Floyd, a founder partner of Nth Power, a San
Francisco-based venture firm that specializes in clean-tech
investments. It took Ms. Floyd and her partner more than three years to
raise their first fund, a relatively modest $63 million, which they
started investing in 1997. Back then, Ms. Floyd said, it was very
difficult to find a venture firm willing to invest with her firm on a
deal, as venture capitalists tend to do on deals larger than a few
million dollars.

"Energy had always had a very small core audience among venture
capitalists," Ms. Floyd said. "It's only the last six months to a year
we're seeing some of the generalist firms form teams around this and
write checks in this area."

Interest from a broad array of companies, she believes, will help
the entire sector. For one thing, big companies with expertise in, say,
networking design or nanotechnology could provide invaluable expertise
if they work with the right energy start-up.

Still, clean energy's share of the total venture pool remains tiny,
according to data provided by Ms. Floyd's firm and Clean Edge, though
it has doubled over the last four years. Mr. Paul, for one, noted that
clean tech might need a success like a Yahoo or a Netscape "before every venture firm decides they need to be in this sector."

Clean tech represented a 1.2 percent share of the total dollar
amount of venture capital invested in 2000. In 2004, the $520 million
that venture capitalists invested accounted for a 2.6 percent share of
the overall venture pie.

"We're in a situation where we still have more deals than capital," Ms. Floyd said.

Mr. Ehrenpreis and Technology Partners, considered trailblazers in
clean tech, began to focus more closely on these start-ups starting
about five years ago. One reason was their reluctance to follow the
rest of the venture capital industry, which at the time was shoveling
tens of billions of dollars into dot-coms and telecommunications
companies. A second was what they saw as the underfinancing of
innovation in energy, given the potential markets.

"When you're talking about energy, when you're talking about water,
you're talking about the largest markets in the world," Mr. Ehrenpreis
said. His firm now devotes roughly half its resources to alternative
energy start-ups. The rest is being invested in life sciences

Similarly, Erik Straser, a partner at Mohr Davidow, spotted the
great size of those potential markets and over the last three years
decided to devote a large share of his time to exploring the clean-tech
field. In addition to investing in Nanosolar and Energy Innovations, he
and his partners have put money into a start-up that is using fuel-cell
technologies to develop a portable, self-sustaining power plant.

"You look at all the development that's going on in China and India
right now, and you realize that two-fifths of the world's population is
going through the kind of industrialization that one-fifth the world's
population experienced in the 20th century," Mr. Straser said. "The
size of the opportunity here is immeasurable."

He pointed to Energy Innovations as an example of a company with a
huge potential market. "If they can execute on their vision, they'll be
a cash register stuck on open," Mr. Straser said.

Not every venture capitalist, though, is convinced that the energy
sector is thick with companies with huge money-making potential.

Vinod Khosla, the prominent Kleiner Perkins partner, is bullish on
the clean-tech field - so much so that he stepped down as a full
partner at Kleiner last year in part to devote more time to investing
his own money in alternative energy companies. While he has already
made four such investments over the last four years, he also doubts
that very many clean-tech firms have huge payout potential.

"I have the sense that there are a lot more niche-sized start-ups
out there than big ones," Mr. Khosla said, "but some great
opportunities do exist."

While the federal government has scaled back investment in clean
technologies, states are playing an increasingly important role, said
Ron Pernick, co-founder of Clean Edge, the consulting group. Nearly 20
states have set goals for the percentage of energy supply that must
come from clean sources, Mr. Pernick said, and some states, including
California and Connecticut, are setting aside money to be invested in
promising alternative energy companies.

Not since the days of the Carter administration, when the federal
government was more involved, have venture capitalists been this
excited about alternative energy, said Mr. Heesen of the venture
capital association. And that time, he said, it "proved to be

Today's landscape is radically different from that of the late
1970's, of course. Years of experimentation in fuel cells and solar
energy as well as breakthroughs in other fields, from nanotechnology to
semiconductors, have been great boons to innovation in clean tech.

But on the other hand, many firms just venturing into this field have no more experience today than they did 30 years ago.

AMP Section Name:Technology & Telecommunications
  • 183 Environment