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By contrast, venture capitalists in some biofuels enterprises have been thrust into the role of providing what amounts to project financing. That's normally the purview of companies like General Electric's financing division, but traditional sources may be reluctant to back a company with an unproven technology, say investors.
Biodiesel maker Imperium Renewables raised more than $200 million in venture capital and private equity, which helped the company to open a 100-million-gallon per year facility last year. Its expansion plans were scaled back, however, when it canceled an IPO earlier in January, citing market conditions.
As many of these biofuels facilities are just now getting off the ground, it's too early to say how well it will work out for venture capital investors who do finance plant construction.
Gorillas needed
The "funding gap" dynamic is also attracting a wider range of companies and financial instruments to clean tech and energy.
For example, US Renewables, which started its first fund in 2005, is in the business of financing and developing energy projects, rather than investing in technology development. It focuses on projects in biofuels, biomass, geothermal, landfill to methane, and solar power.
Private equity and other institutional investors like hedge funds are warming to clean tech as well. The Carlyle Group's energy buyout and investment structure has invested in a geothermal project. The Masdar Initiative, based in Abu Dhabi, spearheaded the creation of a $250 million fund in 2006 dedicated to clean tech.
To scale up, many smaller companies need to orchestrate financing that involves a few different sources, Jim Matheson, a clean-tech investor at Flagship Ventures, said at a recent panel on investing.
Government incentives, in particular, can play a significant role. States are keen to encourage development of the budding clean technology industry and attract construction of plants that can create so-called "green collar" jobs.
The state of New York is footing half the bill--or $14.8 million--to build ethanol start-up Mascoma's first demonstration plant. Tennessee is fronting $41 million for a switchgrass-to-ethanol facility. "Different regions are more aggressive than others," said Mascoma CEO Bruce Jamerson.
Although some hope that 2008 will be the year where green-tech start-ups go public to reward their investors, what's more likely is mergers and acquisitions, said Claudia Fan Munce, the managing director of IBM's Venture Capital Group and chairwoman of the National Venture Capital Association. She said there are no indications that the conditions for IPOs will improve this year.
"In clean tech, M&A's make the most sense because they require the scale of the 800-pound gorillas--GE, Siemens, IBM," she said. "When the dust settles, there will be some consolidation."
Public green-tech companies have felt the recent market volatility, even though the sector's long-term prospects are strong, given high demand and supportive government policies.
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