Green energy VC funds shift to advanced tech

Venture capital firms foster the growth of early, innovative, start-up companies—usually high-tech companies with high growth potential. The green energy sector had been a recipient of growing investments from the VC community until the economic downturn, following which VC investments shrank in 2009. Government policies and funding have played an important role in mitigating the intensity of such downward trends.

Frost & Sullivan's report on Venture Capital Funding in Green Energy—Current Scenario and Future Prospects, finds that VC investments in green energy are shifting toward advanced technologies as well as less capital-extensive technologies.

"Government policies and funding are two of the main driving forces for developments and investments in renewable and alternative energy technologies," notes Elaine Chan, technical insights research analyst at Frost & Sullivan. "Stronger government focus worldwide has been spurred by the need to address climate change as well as energy independence and security issues."

Support from major governments worldwide, including countries such as the United States and China, are already having a positive impact on investments in the clean energy sector. Significant amounts of the US stimulus funds allocated for smart grids and energy efficiency technologies are boosting developments and investments in these sectors.

However, the current economic situation is affecting some of the main clean energy investment trends, resulting in a fall in VC investments in this sector. Capital from limited partners for new venture funds has been difficult to come by, and the economic slump has negatively affected VC-backed liquidity through the initial public offering or mergers and acquisitions.

"Earlier investments show that VCs have moved into clean energy investments with amounts that are growing year after year, although there was a significant fall in investments in Q1 09," explains Chan. "Green energy start-ups will find it difficult to attract financing rounds of over $100 million. This is due to the smaller pool of investors and restricted access to capital, triggering a shift to less capital intensive energy technologies such as energy storage and energy efficiency."

Although investments in solar energy technologies continue to dominate, VC investments have moved toward smart grid and energy efficiency-enabling technologies such as green buildings applications and energy storage technologies for electric transportation and grid storage. Funding opportunities in these sectors have significant potential in the current economic climate.

"Technologies that are capital efficient and scalable present the best opportunity in the current economic scenario," concludes Chan. "Distributed energy generation, energy storage and energy efficiency on the supply and demand side including technologies along the supply chain of green energy industries will be increasingly sought after by VCs in the future."