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Early Stage Venture Capital To Return to Cleantech Sector in 2011


Early stage venture capital investing will return to the cleantech sector in 2011, according to year-ahead forecasts made by analyst firm Kachan & Co.

Already, in the last few months of 2010, data shows an increase in early stage deals with green investing piggybacking less on U.S. government grants and loan guarantees, which had skewed investment into more mature cleantech companies.

"In 2011, venture investment in cleantech will return to what it does best: seeking out emerging early stage technologies and teams that promise good multiples, and will be less influenced by governments putting large amounts of capital to work themselves," said Dallas Kachan, Managing Partner of Kachan & Co. "Funds are still being raised. And those funds will need to be invested."

The industry is not on the downside of a bubble, Kachan adds, citing near record venture investment worldwide in 2010 and expectation that 2011 will bring an even more tangible appreciation of the drivers of cleantech: resource scarcity and the need for greater efficiencies, energy independence and climate change.

"We predict these drivers--particularly the real or perceived scarcity around oil, rare earth elements and other commodities--will be felt even more acutely in 2011, especially as the Chinese middle class expands, further cementing the demand for and the market validity of clean technologies," Kachan said.

Other predictions

Venture capital will continue to cede importance to corporate and non-institutional capital
Look for large companies to invest billions in cleantech in 2011. In recent weeks, GDF Suez (GSZ.PA) created a fund to invest primarily in waste management, while GE (NYSE: GE) invested $200 million in a handful of cleantech companies. In 2011, corporations will continue to form or expand corporate venturing arms, driven not just by returns, but by associated corporate social responsibility (NYSE:CSR) benefits.

Energy efficiency emerges as the clear rock star of cleantech
Efficiency, including smart grid--where Kachan expects continued massive investment and corporate activity--really only got serious traction in 2010. GE made huge announcements, investments and acquisitions in 3Q10. Just over a month ago, Russia unveiled massive energy efficiency plans.

"In 2011, look for efficiency to become the clear dominant investment theme as investors continue to seek less capital intensive efficiency plays," said Kachan, who also expects a winnowing of efficiency companies in 2011, "partly because of concerns about differentiation, and partly because of the long sales cycles of utilities that are only starting to become understood by startups in the space."

Biofuel investment could reach former highs
After several years of relatively inexpensive oil, Kachan predicts an upswing in biofuels investment in 2011, specifically, in drop-in biofuels. Cellulosic ethanol, which disappeared from headlines in 2010, may even disappear from investors' portfolios in 2011, the firm predicts, citing expectation of the U.S. Environmental Protection Agency lowering its cellulosic ethanol volume requirements.

Nuclear surprises, but not in U.S.
Expect to hear about more nuclear innovation in 2011, according to Kachan, as the industry begins cautiously testing new science after decades of relative inactivity, citing thorium fuel initiatives, waste disposal and new micro-reactor designs. However, R&D, trials and ultimate adoption are expected to be in Asia, Europe and Canada. The firm expects nuclear development will remain stalled in the U.S. in 2011.

Recycling and mining will attract more investment
Rising commodity prices have been making the economics of recycling and recovery of trace materials more commercially viable. Silver almost tripled in price in 2010. Gold doubled. Companies that recover and reprocess materials, such as scrap metal, used lithium batteries or mining tailings, will be companies to watch in 2011.

Natural gas emerges to threaten solar and wind for utility renewable power generation
Renewable natural gas from inexpensive feedstock, indistinguishable from petro-based natural gas, could capture the cleantech industry's imagination in 2011. Such gas, transported in existing pipelines, could be sold at a premium to industrial customers like power utilities anxious for a cheaper renewable source than solar and wind. If burned in existing natural gas plants, such power could represent baseload renewable energy, unlike solar and wind, the firm notes.

"Look for scientific innovation in renewable natural gas in 2011, increased political support for natural gas in general as a transitional 'cleaner' fuel, a folding-in of natural gas into renewable energy standards and cleantech industry buzz over it being an important new wagon to hitch to."

China becomes the most important market for cleantech; companies not selling in China won't matter
"In 2011, the leadership of cleantech vendors and service providers will be determined by the extent of their traction in China," Kachan said. "It's the largest and the fastest growing market for clean technologies, and to ignore it out of concern about intellectual property or other costs of doing business will be to watch most of one's addressable worldwide market disappear to competitors."

Disclosure: no positions