June 22, 2006 Birkenstocks not required by Andrea Orr Six years ago, the term "cleantech" did not exist as an investment category. VCs who put any money at all into so-called environmental companies were generally thought to be acting out of the goodness of their hearts, in the same way corporate lawyers devoted a few hours to pro bono work. Today the fledgling cleantech investment sector ranks fifth in terms of total venture capital raised - behind biotechnology, software, medical equipment and telecom - and is seeing increasing amounts come in from investors more interested in big returns than a clear conscience. Cleantech Venture Network LLC, a group formed in 2002 to help raise the profile of promising young businesses with an environmental focus, recently reported that 44 new investors entered the cleantech space during the first quarter of 2006 and that the average deal size rose to $8.25 million from $6.88 million in the fourth quarter of last year. VCs collectively invested $513 million in the cleantech sector during the first quarter of this year and have invested steadily increasing amounts over the past two years. The message within all these metrics: There is a new crop of environmental businesses concerned with both saving the world and turning a profit. "The prior perception of environmental technology was of a group of people who wore Birkenstocks and fleece and had long beards," says Lauren Bigelow, programming director of Cleantech Venture Network. "But we've come a long way. Clean water and clean air have become viable investment categories." Many believe this long-anticipated rise of the cleantech industry is due to the current surge in energy prices and consumers' increasingly loud demands for alternatives. Bigelow says it actually reflects the convergence of a number of factors, including a worldwide trend toward more incentives and favorable regulations covering alternative fuels. There has also been a growing number of significant liquidity events, like last year's initial public offering of the Chinese photovoltaic panel maker Suntech Power Holdings Co. Ltd., in which investors such as Goldman Sachs (Asia) Finance earned a 15-fold return in just a few months. Foundation Capital partner Warren Weiss says another key to this recent shift is the steady improvement in traditional technologies like software, hardware, telecom equipment and even nanotechnology, to the point they can be effectively applied to up-and-coming industries. Those who are active in the cleantech investment sector stress that contrary to popular perception, cleantech is not all about clean-burning fuels. The appellation applies to a range of areas, including food and water purification, and even some seemingly mundane businesses like updating the aging water delivery infrastructure of the U.S. What connects all of these disparate businesses, says Cleantech Venture Network's chairman Nick Parker is a desire to address resource scarcity, whether that be oil, copper for batteries in hybrid cars or even silicon for solar panels. The solar industry, he says, has grown to the point that it now consumes more silicon than semiconductors. Foundation Capital, which invests about 10% of its portfolio in cleantech, entered the sector gradually over the past few years as it explored ways to fund environmentally friendly businesses that would generate the 10-fold return it had come to expect from all its investments. "The premise here was that we would de-risk the investments by focusing on what we understood in IT," recalls Weiss. He quickly found that many technologies, from open-source software and commoditized servers to high bandwidand cellular networks, could be applied to cleantech. One of Foundation's investments is Silver Spring Networks Inc., a San Mateo, Calif., company that makes open-standards-based utility networking technology so that power companies can more easily share capacity and better manage peak demand periods when prices tend to spike. Foundation is also an investor in Novazone Inc., a Livermore, Calif., company that developed a technology to use ozone made from oxygen to purify food, bottled water and other beverages without harmful chemicals. The 32-employee company already has 200 customers worldwide, including PepsiCo Inc. A growing number of investor conferences are focusing on cleantech, and a group of business school graduates recently organized the first California Clean Tech Open, a nationwide business plan competition aimed at accelerating the move of clean technologies into the marketplace. While other contests in the past have focused on promising environmental companies, Laurent Pacalin, who serves as co-chair of the Clean Tech Open, stresses this event "is first and foremost a competition by entrepreneurs, for entrepreneurs," in which winners will be awarded a cash prize as well as a package of legal, accounting, public relations support and office space to help get their businesses off the ground.