VCs Bet On Cleantech Innovation, Happy Workforces

Feb 16 2007 | 1:19pm ET

From the president’s State of the Union address to the chatter on Wall Street, cleantech is on everybody’s lips. But while cleantech may be the hippest investing sector since the internet boom, experts worry that all the hype is causing inventors to jump in, and out, of the sector too quickly.

“I’ve seen a lot of things come and go and come again in this space,” says Dianna Expansion Capital's Dianna Propper de CallejonPropper de Callejon, general partner of VC firm Expansion Capital Partners. “In the late ‘90s, there was a lot of enthusiasm for distributed generation like microturbines and fuel cells, and then there was the energy tech bubble that burst in 2000. Whether we’re going to have the same level of interest from VCs, I don’t know because some VCs come in and out of areas depending on what’s in favor and right now, and cleantech is a hot area.”

North American venture capital investment in cleantech totaled a record $2.9 billion in 2006—a 78% increase over 2005’s $1.6 billion and a 140% increase over 2004’s $1.2 billion, according figures from the Cleantech Venture Network.

David Kirkpatrick, co-founder of SJF Ventures, echoes De Callejon’s sentiments: “There’s a lot of focus on cleantech right now and we’re seeing some IT funds turn into cleantech funds, so we’re a little bit skeptical about some of the new players.”

A Play On Cleantech Technology

De Callejon’s firm, for one, prefers companies that are already moving. As its name suggests, Expansion Capital invests in growth stage or expansion stage companies with trailing 12-month revenues of between $2 million and $20 million. To date, the firm’s Clean Technology Fund II has north of $75 million in committed capital and has made six investments in companies with existing customers and fully-developed technologies.

“They sell commercial units to customers and our capital is used to accelerate the commercialization process to help scale the companies to new customers and new markets,” says De Callejon. “Our money is not about getting the beta unit to commercial unit.”

Expansion’s portfolio includes an investment in Tiger Optics, which reduces energy consumption and waste at semiconductor fabrication plants, and Orion Energy Systems, which manufactures energy-efficient lighting for schools, gymnasiums other commercial properties. “These are our bread and butter cleantech investments, but are not necessarily the companies you read about in the papers,” says De Callejon.

The firm invests in three or four companies each year, and has signed a term sheet with a company in the water technology and industrial processing space, according to De Callejon, who avoids companies dependent on regulation to boost their bottom line, such as biofuel concerns. “They have regulatory issues and [biofuel] is very capital intensive and it has commodities risk,” says De Callejon.

Banking On the Workforce

Kirkpatrick, who’s SJF Ventures invests in companies with annual sales of $1 million to $20 million, says that an increasing awareness of environmental problems is opening up new opportunities in heretofore underappreciated areas, including agriculture.

The latest trend in agricultural efficiency is efficient drip irrigation and fertilizer systems that deliver nutrients and water directly to the plants, according to Kirkpatrick, who has an investment in South Carolina-based B.B. Hobbs, which designs and installs irrigation, fertigation and on-site waste water systems.

“They don’t think of themselves as a cleantech company but a very efficient ag-design and system company,” he says.

Another area in which Kirkpatrick sees opportunities in is in electronic recycling: “Big corporations that have a lot of electronics that they’re retiring and face issues such as data security and environmental issues with toxic chemicals and metals in these components.” SJF in November 2006 acquired Intechra, an IT recycling company, and since then has made four add-on acquisitions in this space.

What is more, SJF looks not only at the technologies companies create, but at how those companies take care of their employees.

“The themes we talk about are cleantech innovations and workforce innovations,” says Kirkpatrick. “A couple of deals we’re going to be closing this quarter are with high-growth companies with great employee cultures. These companies are growing rapidly partly due to how they engage their workforce, and how that workforce engages the customers.”

SJF is currently investing through its second fund, SJF Ventures II, which will close with some $30 million next month.

All the trends are positive for the cleantech sector, which has a lot of governmental, public pension and consumer interest, says Kirkpatrick, who sees a proliferation of opportunities for his firm. “Unfortunately, we’re going to have more and more environmental challenges, which is going to drive public policy and investment opportunities.”

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