Venture Capital Rushes Into Alternative Energy By MATTHEW L. WALD
Money is flowing into alternative energy companies so fast that "the warning signs of a bubble are appearing," according to a report on investment in clean technology by a New York research firm, Lux Research.
The report also suggests that companies that make equipment to cleanse air or water, or that process waste, have been overlooked by investors.
Matthew M. Nordan, president of Lux, said that the amount of venture capital put into clean energy investments last year was $1.5 billion, up 141 percent from the $623 million of 2005, and that in the same period, initial public offerings by companies in this sector rose to $4.1 billion, from $1.6 billion in 2005.
The initial public offerings were primarily in companies involved in solar power or biofuels, according to the report, to be released today.
The investment is driven by fear that the peak of oil production is approaching, he said, and by the possibility of new taxes or other restraints in an effort to curb global warming gases, principally the carbon dioxide that is given off by burning fossil fuels.
Money is "sitting on the shelf" waiting to be invested, and investors are now chasing entrepreneurs, he said, rather than the other way around.
"When you see venture capital more than double from one year to the next, and I.P.O. values double from one year to the next, that's the sign of a bubble in the making," said Mr. Nordan.
As an example of a new participant in the booming market, he cited DFJ Element, a venture capital fund formed last year to invest in clean technology companies. It had a goal of $150 million, but was closed to new investors by the sponsoring companies, Element Venture Partners and Draper Fisher Jurvetson, last June when it reached $284 million.
Mr. Nordan said that his company counted about 1,500 clean technology start-ups globally, 930 of them in the energy field. "One hundred ninety-eight have received some venture capital funding," he said. "That's a pretty high share; generally, we see one out of 10 with some venture capital."
The investors, and the companies they finance, are chasing an enormous market. Mr. Nordan pointed out that China planned to derive 10 percent of its electricity from renewable sources, not counting large hydro projects, by 2010. Meeting that goal would require six gigawatts of electricity, which if produced by solar cells would represent more than two years' output of all of the solar cell factories in the world today.
While many — and probably most — of the start-ups are pursuing technologies that will not be commercially successful, even some alternative energy companies using established technologies may be on shaky financial ground, according to the report.
For example, the profit margin for ethanol made from corn was once a dollar a gallon, but now it is about 3 cents, according to the report. And environmentalists have objected to the approaches of some companies, like those making new bioengineered products.
Still, the promise seems enormous. "The secular trends are in place, and that's what's driving the investor," Mr. Nordan said.
But areas of clean technology other than energy have been overlooked, the report said.
"Air, water and waste segments present hidden opportunities that are relatively starved for investment," it said.
Waste accounted for 32 percent of merger and acquisition value in this sector in 2006, but just 1 percent of initial public offering volume and just 4 percent of venture capital, it said.