Greening venture capital: are clean technologies the next new thing?

In the wake of the dot-com bust, forward-thinking investors have been in search of the next big thing to revolutionize the economy while lining their own pockets. Many venture capitalists seem to be banking on the so-called "clean tech" sector--startups committed to sustainable practices and products, embracing such industries as alternative energy generation and water purification. Clean-tech companies are also emerging in the sustainable agriculture, manufacturing and transportation sectors. Today, the deals are flowing as both individual "angel" investors and well-established venture capital (VC) funds are wing for their piece of "clean tech."

With surging demand for renewable energy across Europe, Japan and many developing countries, not to mention new consumer incentives in the U.S., clean tech has emerged as one of the hottest new investment sectors. Start-ups such as Miasole, Solaicx, Konarka and Evergreen Solar have become established operators poised to usher in an economy powered by renewable sources. Along the way, these companies have garnered millions of dollars in funding from topflight VC firms.

Booming Sector

According to Nicholas Parker, chairperson of an association of investors called the Cleantech Venture Network, more than 200 start-ups in the sector drew in 6.4 percent of all North American venture investments in 2003, up from four percent the previous year. "Clean tech is now a larger investment category than semiconductors, IT services, financial services and media," says Parker, who adds that some of the big-name venture firms such as Draper Fisher Jurvetson, Technology Partners and Kleiner Perkins have gotten into the game.

Joel Makower, who runs the research and strategic marketing firm Clean Edge, concurs: "There is no question that this is one of the next big areas of growth in the venture industry." Makower warns, though, that the venture community should be careful to avoid creating another unsustainable bubble around the clean-tech sector. "VC firms rushing into the space looking for investments could increase the casualty rate and set the scene for a bust," he says.

Saved by Angels

Well-heeled venture capitalists aren't the only ones getting in early on the cleantech revolution. Individual investors are also finding ways to get equity in some of these early stage companies via "angel" investing. Angel investors serve a critical role in the start-up process by providing working capital to companies too embryonic to seek venture capital and too risky to attract standard bank or Small Business Administration loans. They often have relevant industry experience, and can play an important role as mentors to young entrepreneurs running start-ups.

But not just anyone can become an angel. The Securities and Exchange Commission (SEC) requires that investors who put money directly into start-ups have a net worth of more than $1 million (or income in excess of $200,000 in each of the two most recent years). Since start-ups require lots of capital and carry a high risk of failure, the regulations are in place to protect middle- and lower-income people from bankrupting themselves through speculative investments gone awry.

But even those who meet the SEC requirements often have trouble finding worthy start-ups to fund. Scouting deals locally is a good place to start. Networking with engineers and innovative employees of established companies--often the first to peel away with their own start-ups--helps in finding early-stage investment opportunities.

Even if you don't have your own connections, a handful of socially responsible angel networking organizations have sprung up to make the deals flow. Perhaps the best known is San Francisco-based Investors' Circle, which charges angels $1,200 per year for access to investment opportunities in hundreds of emerging start-ups devoted to sustainable practices and products. Since its inception in 1992, Investor's Circle has channeled more than $85 million into about 130 start-ups.

Seattle-based Angels with Attitude provides similar services, but pools its members' resources into a fund and manages a small portfolio of socially responsible start-ups. Meanwhile, Nicholas Parker's Cleantech Venture Network operates more like Investors' Circle--requiring angels to pay an annual fee to access hundreds of relevant early-stage investment opportunities--but is focused specifically on the clean-tech sector.

Indeed, recent technological innovations coupled with surges of investor interest make clean tech one of the most promising new sectors since the dot-com era. While analysts are quick to warn that flooding start-ups with capital could lead to a bust, they may be putting their own money in behind the scenes. After all, they know that dot-commers who got in and out early made the most money. CONTACT: Angels with Attitude, www.soundpointventures.com/angelsfund.html; Clean Edge, www.cleanedge.com; Cleantech Venture Network, [phone], www.cleantechventure.com; Investors' Circle, [phone], www.investorscircle.net.

RODDY SCHEER is bullish on cleantech stocks.