TechPulse 360

Venture capitalists may not fully understand how much money they need to nurture a generation of clean technology companies.

Power plants take years to site and billions in capital, says Bechtel's Ian Copeland

This was the message Wednesday from Ian Copeland, president of renewables and new technology at Bechtel.

Many VCs, such as Vinod Khosla, founder of Khosla Ventures and a leading green tech investor, believe capital requirements will be similar to the past, when VCs funded waves of information-technology and healthcare companies.

Twenty percent of startups need small amounts of money, 50 percent will demand between $30 million and $75 million and the remaining 40 percent will spend, well, more, says Khosla.

“Certain things take a lot of money, like biotech drug (startups) did.” But “you’ll see a distribution (of investments) that looks pretty typical of venture capital.”

Not so, Copeland said Wednesday at the AlwaysOn GoingGreen conference in Sausalito. Capital needs will be far greater than what venture capitalists experienced with high tech. That’s because “it’s on a risk profile, it’s on a scale, that’s different than software,” says Copeland.

The explanation is that energy plants take years and big bucks to site and build – a business Bechtel specializes in. And supplying the plants is a complex process with an intricate supply chain that VCs don’t have experience creating.

“Balance sheet requirements are quite large,” he said. “You are talking about billions of dollars.”

Copeland estimates $21 trillion will be invested over 20 years to remake the world’s energy infrastructure. Venture capitalists are likely to contribute only a small share of it. Either that, or the industry will need 40 times the money it has today, he said.

If he is right, venture capitalists may have few alternatives to providing the seed funds for a company and then getting out of the way – selling their portfolios early and moving on.

A lack of investment is stalling innovation in the high-tech and clean-tech industries far more severely than at any time in the past 14 years.

Venture capital investing in so-called Series A, or first-time, financings dropped to less than $100 million in the second quarter – a level not seen in the U.S. since 1995. While the overall decline in investment has been widely reported, the deep decline in money for these earliest of startups has not.

Venture capitalists have spent time with their existing companies and put off looking for new deals

The worrisome collapse in early-stage financing puts U.S. businesses at a disadvantage at the very moment the country is counting on technology for job growth and economic revival.

Venture capitalists say the pullback is the result of a retrenching that took place after the collapse of the financial markets last fall. Three quarters of venture partnerships still are not doing new deals and are spending their time nursing their existing portfolios back to health, estimates Robert Ackerman, managing director of Allegis Capital.

While this inward focus may be moderating a little, it does not appear ready to reverse completely, says Ackerman

The result is that many entrepreneurs with worthwhile business ideas may not get money to commercialize their products. Some of these business ideas represent substantial advances, particularly in clean tech.

There are in fact big breakthrough ideas in clean tech awaiting money, and eventually “we will see some breakthrough ideas” get funds, says a confident Steve Reale of Levensohn Venture Partners.

But in the meantime, innovation is on hold. And already both clean-tech and high-tech entrepreneurs have been hard hit by the investment pullback. In the second quarter, for instance, clean-tech venture investing fell 75 percent to just $221 million.

In the short run, the delay in funding might not worsen these companies’ ability to compete with rival startups in China, India, Israel, and across Europe. Funding elsewhere has also taken a hit during the downturn. But if the delay lengthens, the impact could be severe.

At Claremont Creek Ventures, Managing Director Nat Goldhaber said several factors have contributed to a slower than normal investment pace. The firm puts money into early stage companies and has completed just one deal this year. In a more typical year, it would have done four by now.

Big breakthrough ideas in clean tech are awaiting money, investors say

One investment Claremont was interested in became too expensive after another VC stepped in with a counter offer. Another deal meant putting together a syndicate of companion investors.

Goldhaber notes the firm’s “uncharacteristically low” pace could pick up before the end of the year. But the change appears far from certain.

Some VCs say a thaw might indeed be taking hold. Venture partners spent much of the year trying to figure out which of their existing portfolio companies would survive and which wouldn’t.

Now they are beginning to shift their attention to new deals. One such VC is Reale. “I’m just starting to think through where I want to be investing,” he says. “I’ve just started to come up from the nuclear winter.”

If other VCs follow suit, a small pick up in Series A deal making could occur during the remainder of the year. Reale thinks such a rebound is possible. But like everything else this year, it will be a matter of wait and see. And hanging in the balance is the country’s pace of innovation.