Venture Capitalists See Potential in Green Businesses
Venture capital is cleaning up its act. Long berated for investing only in high-tech industries such as software and biotech, VC firms across the country are quietly lining up behind companies with environmentally friendly products and technologies.
So-called "green" or "clean" technologies like water purification, solar energy, biodiesel and waste reclamation are garnering billions in growth capital from a new breed of VC firms, and from many of the old guard in the VC industry, too. Early entrants into this field, like the Global Environment Fund and SJF Ventures, are being joined by new boutique funds like Rockport Capital Partners and SAIL Venture Partners. Even the largest and oldest funds have caught green fever: Global venture funds like 3i and Draper Fisher Jurvetson have dipped their toes into the water by adding investments in green technology to their portfolios. Earlier this year, Kleiner Perkins Caufield & Byers, one of the largest VCs in the U.S., launched a $100 million "Greentech Initiative" as part of its $600 million 12th fund.
What Is Green?
Whether it's called "green," "clean," "sustainable" or simply "environmental," most people agree that the current trend started in 1999. Only within the past few years, however, have investor dollars really started to flood into the category.
"We look at all kinds of energy and environmental technologies," says venture capitalist David Kirkpatrick, managing director at SJF Ventures in Durham, North Carolina. "But it's different than the '70s and '80s boom in environmental cleanup technologies: Today, these are proactive technologies, not reactive."
Kirkpatrick lists a wide variety of technologies that fall into the general category he calls "sustainable," including efficient crop irrigation technologies, organic pesticides and online auctions of junked cars. What makes junked-car auctions green? "The auction process leads to more reuse and recovery," Kirkpatrick says. At the same time, of course, the seller receives a higher value for the vehicle and the auction company pockets a nice profit.
Lest we forget, green investing is still about profit. The rush to cash in on green technologies is sometimes cloaked in what insiders call the "social mission" of doing the right thing for the planet. But the underlying nature of venture investing has not changed, and neither has the underlying nature of business. Being green does not mean balancing profits with environmental concerns, but rather finding fresh solutions that are both more environmentally beneficial and profitable.
Green Is Golden
Ice Stone of New York City is a perfect example of a company riding the green investment wave. The Brooklyn business makes countertops and other solid surfaces from recycled glass and cement. It operates in an energy-efficient building lit primarily by sunlight. Miranda Maganini, CEO of Ice Stone, calls it a "mission-driven company," and she plays up that distinction when she talks to investors.
"Sophisticated investors are interested in our mission and like the fact that we're carving out a cool product-grabbing a leadership position in this industry as it comes into the mainstream," says Maganini. "I think it speaks to more progressive investors who'd like to see their money not just returned in dividends, but also to pay an environmental dividend."
The message seems to be working. Over the past two years, Ice Stone has raised close to $5 million from angel investors and is now targeting wealthier, more influential "arch-angels" and institutions that can help take the company to the next level. Maganini says she's had very few investors turn down her request for growth capital, and many more have approached her to get in on the venture because of its unique value proposition.
Maganini adds that the business is still profit-driven, but the economies of green tech companies simply demand a longer-term return horizon. "Is it really sustainable to run a business based on this quarter's results?" she asks. "That's the Wall Street model. We think that more patient capital is a better strategy." That long-term view is a natural fit for venture investors and allows Ice Stone to make decisions that are "the right thing to do and the right economic decision."
With today's rocketing gas prices and daily reports on global warming, entrepreneurs and investors alike are seeing new opportunities to do well by doing good. The Cleantech Venture Network says that investing in green technologies has doubled in the past two years and is now the fifth largest sector of venture capital spending. The company's report on venture financing during the first quarter of 2006 (the latest data available at press time) found $513 million invested in clean technology companies, a 52.9 percent increase over the previous year. Only the biotech, software, medical and telecommunications sectors currently receive larger pieces of the VC pie. The rapid pace of investment growth is likely to hold steady. Cleantech Capital Group estimates that between 1999 and the first quarter of 2006, a total of $8.8 billion was invested in clean technology ventures, and between 2006 and 2009, another $8.7 billion will be poured into the sector.
Worth the Effort
For entrepreneurs who truly want to change the world, there has never been a better time to try. Investor and corporate interests, which have so long seemed at odds with social and environmental forces, are finally lining up to help solve the tough problems that face our planet. Creative entrepreneurs will benefit not only from the rising tide of capital available to them, but also from the shared visions and interests of investors who want to make a positive difference in the world.
Maganini is justifiably proud of her company, her investors and the money she has raised. "Fundraising in general is hard," she admits. But she beams when she talks about how the company's life-affirming mission has brought the company and the investors together into a single cohesive team. "Our investors are the greatest people on earth. They don't open just their checkbooks, but also their hearts and souls."
David Worrell is author of the e-book Finding Funding.