Clean-tech investing is a top priority for venture capitalists. But a big chunk of their money is avoiding the tiniest, early-stage start-ups with the most ambitious plans for innovation in favor of more established, later stage businesses.
The result could be a dearth of innovation several years from now, when a new generation of companies might be expected to fuel growth in the industry.
The trend toward later stage investing appears to have been gathering steam in the past year. In 2008, 197 follow-on investment deals were sealed in the United States compared with 93 first-round financings, a 2-to-1 ratio of later stage versus early stage.

In the first quarter of this year, the ratio was closer to 3-to-1, with 85 follow-on rounds completed compared with 31 first fundings.
“There are too few start-ups,” complains long-time industry insider Mark Jensen, managing partner for national venture capital services at Deloitte & Touche.
This shift comes amid a clear sign that clean tech is a growing venture capital priority – both domestically and abroad. A recent study from Deloitte & Touche and the National Venture Capital Association found that 80 percent of general partners plan to increase their clean-tech investing over the next five years. The commitment was far ahead of their number two priority, health care services, which 63 percent said they would fund more actively.
The survey contacted more than 500 venture capitalists in nine countries, including the United States, China, France, the United Kingdom, Brazil, Canada, Israel and India. And it found the intentions were pretty uniform country to country. Clean tech was the top focus for VCS in the United States, China, India, the United Kingdom, Germany, Canada and France.
And yet in countries such as the United States and Europe, money is flowing most readily to later stage businesses where partners hope for a big kill if a high profile Better Place or Amyris goes public.
The fallout is that early-stage entrepreneurs are forced to seek money from angel investors for seed and sometimes first rounds. In some cases, angels have begun playing the role of venture capitalists, but with less cash to deploy.
This was clearly the case in the second quarter. Venture capitalists in the United States set a quarterly record by investing $1.47 billion in clean-tech start-ups, a 107 percent increase from the first quarter.
But the number of companies receiving money remained almost unchanged at 71, compared with 70 in the first quarter.
Large deals dominated. Better Place raised $350 million, BrightSource collected $150 million and Boston Power added $62 million to its bank account.
Experts such as Jensen say they don’t expect the trend to reverse itself any time soon. At least not until VCs start making some money on clean-tech and become more comfortable taking on risk.
Until then, early stage businesses are likely to find money hard to get.
Posted by Mark Boslet 




