By Valerie Tompson Courtesy of EE Times Europe (03/17/2008 10:21 AM EST)

ZURICH, Switzerland — Venture capital is flowing to firms whose technologies are targeting renewable energy, power generation, storage, and distribution markets.

The trend looks set to continue with several corporate venture funds and specialized funds being raised to address the so-called Energy-tech, along with increased interest of Europe's early-stage venture firms " see Table 1.

A number of technology, business and legislative factors are coming together to drive the change. They are interlinked but include high oil prices, consumer awareness of the need to reduce CO2 emissions and to make more use of renewable energy sources, and more productive use of energy in general, combined with legislation both on energy efficiency and on things like the use of chemicals in manufacturing and automobile emissions.

This together with lackluster returns from investments in semiconductors and software for information technology and communications has resulted in increased interest in investing in emerging technology areas, albeit the venture capitalists still show a preference for firms with strong intellectual property and large addressable markets.

The money movement is heightened by brisk IPO and M&A activity, which are key to exits " seeing other investors making money is the booster to investor confidence. Before they get in, they want to make sure they can get out before it is time to raise the next fund " see Table 2.

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But some segments in renewable energy are heating up. "The recent entry of some very large Silicon Valley venture firms has served to increase valuations and expectations, particularly in solar," said Evan Bakke, a venture partner with Bankinvest's New Energy Solutions (NES) venture capital fund.

Indeed, the solar sector in 2007 attracted $3.0 billion in private equity and venture capital finance, much of it flowing to fledgling U.S. solar companies, according to New Energy Finance, a U.K. research firm.

In 2007 the U.S. solar power startup sector raised some $702 million, up from $181 million in 2006, and much higher than the $59 million raised in 2007 by early-stage solar companies in Europe.

Early-stage investors report that valuations for energy-technology companies are still not too high. "The valuations are reasonable, and certainly not as high as Web 2.0 ventures," commented Alessio Beverina, a principal at Sofinnova Partners in Paris.

Early-stage venture funds are interested, but cautious. Clearly there is crossover between the traditional areas that venture capitalists invest in, semiconductors and solar cells is the most obvious, but there are some differences.

"One major variance between ICT and cleantech investing is that with ICT you can always relate to Moore's law," commented Gregers Kronborg of Northzone Ventures, pointing out that in semiconductors, speeds, density and prices are often the enablers of new technologies or applications, and so Moore's law can provide useful information about future trends.

But for solar technologies there are, as yet, no roadmaps and the distance from lab to fab can be underestimated. "You have to be very selective. Some of these solar cell startups may have to spend as much as €100 million (about $150 million) before they know it will work in volume. Not all will be successful " not all will be able to scale," said George Powlick of Doughty Hanson Technology Ventures (DHTV), which has been backing Odersun a thin-film solar cell manufacturer since 2004. Odersun recently raised $90 million for a second factory in Germany, after achieving success with its first one, according to Powlick. The investment by DHTV occurred after ten years of R&D.

DHTV sees value in power-generation as it relates to electronics and new materials; energy efficiency as it relates to electronics and systems innovation, and transmission or energy distribution, in particular batteries and storage technologies.

Sofinnova indicated it is looking to invest "opportunistically" particularly where there are "pain points" that breakthrough technology can alleviate.

In addition to an interest in "smart grid", "smart metering", and lighting, Sofinnova's Beverina described some broad opportunities. "Wind power generation, for example, has issues with the cost of maintaining infrastructure, and that intensifies with offshore wind farms. There is also the issue of managing variable wind rates. In solar, silicon still costs too much. So a startup with a clear cost advantage would have an edge," said Beverina.

Scottish Equity Partners (SEP) is also eyeing energy ventures; in renewable energy, particularly solar and wind, which are proven markets, and startups with environmentally-friendlier solutions than incumbent technologies.

For example, SEP invested in Atraverda, which claims to have an environmentally compatible material that can be used in batteries. Its early customers are lead-acid battery manufacturers.

Dave Sneddon, a partner at SEP, also mentioned applied sensors and "smart metering". This is in addition to startups targeting the oil and gas field sector, an area that it has invested in for over a decade.

The sale of startup geological measurement company MTEM for $275 million to Norway's Petroleum Geo-Services is a recent example of its success in that category.

But don't go to SEP with a wave power generation or fuel cell startup. "We prefer substitution innovation over creating a brand new market with a brand new product," said Sneddon.

Henrik Olsen, a partner at Environmental Technology Fund (ETF), said his firm has a broad scope but when it comes to electronics and new materials, it looks for technology-based businesses that have industrial applications, even if that means having to win over larger OEMs or strategic partners.

"GE, Honeywell and Siemens are typically hard to penetrate. But with the cost of energy going up, technology solutions that use less energy or resources, gets them interested," said Olsen.

Indeed, one of ETF's first investments, four year old Perpetuum Ltd. (Southampton, England), has recruited GE Energy to sell its battery-less monitoring systems to oil and gas field companies.