Despite some 'green shoots,' cleantech VCs see trouble ahead

There’s good news and bad news on the cleantech and environmental business front.

The good news first: more venture capitalists and private equity investors see an initial public offering (IPO) being likely for one of their green investments in the next year or two.

And now the bad news: While green businesses are perceived as a good investment, the ones most likely to make a dent in our energy consumption and carbon emissions — things like wave energy, tidal power, energy storage and biological sequestration of carbon — are the ones furthest down on VCs’ lists.

Those are some of the findings from Carbon International’s survey of 90 British and European investors who already have cleantech investments or are actively seeking them out. The survey found that 65 per cent of investors believed an IPO would be a “feasible exit” for at least one of their investments in 2010 or 2011. An overwhelming majority — 87 per cent — also reported that their current environmental investments are either outperforming the general market or doing at least as well.

Investors say the most attractive businesses for future funding fall in the realms of energy efficiency and resource recovery, which are less capital-intensive than other cleantech sectors like marine energy.

These little “green shoots,” though, still come with considerable risks. For example, some investors say they expect to see a “development hiatus” in environmental industries around 2012 and 2013, thanks to a lack of funding available for early-stage companies today. Other potential obstacles they identified in the survey: lack of political momentum, lack of capital, low oil prices and “muppets who don’t know what they’re doing.”

While oil prices today might still be enough to spur an all-out push for clean energy, investors say they expect more money will flow in that direction as energy costs keep rising. National legislation and international policy will also help drive such investment, they believe.

For now, though, circumstances are working against companies focused on more expensive next-generation energy technologies. Investors say biofuels and fuel cells are the least attractive sub-sectors at the moment — although Carbon International notes they still have their “hardcore fans.” And a reluctance to invest in some of the more costly energy technologies could haunt us down the road, the survey indicates.

“Our survey reveals some positives: the environmental sector is performing well and there is a strong expectation that the IPO markets will re-open,” said Tom Whitehouse, CEO of Carbon International. “But the survey also raises concerns. The majority of investors fear that early stage sectors, particularly capital-intensive ones such as wave and tidal power, energy storage and bio-sequestration, will fail to secure sufficient funding to grow from either private or public markets. If so, it’s difficult to see renewable energy targets being met.”

Carbon International plans to officially release the results of its survey during the Environmental Opportunities Forum at the London Stock Exchange, set for 25 – 26 March. The forum will provide advice to private companies on how they can raise money privately and/or through an IPO. It will also showcase private and quoted investment opportunities to an audience of institutional investors.