The rush to invest in “CleanTech” will continue in 2008, leading to an overvaluation of those environmentally friendly firms, according to a survey of venture capitalists.
In its second survey of VCs, the National Venture Capital Association said Monday that 79.5 percent expect CleanTech deals to increase. That prediction comes on top of a record $2.6 billion invested through the first three quarters of 2007. CleanTech deals totaled $1.8 billion in 2006.
However, the rush to go green will have consequences, the VCs predicted. Asked what sector would be most overvalued in 2008, 61 percent of the respondents said it would be CleanTech.
“CleanTech will continue its pace as the fastest-growing venture category of the past several years,” predicted Ira Ehrenpreis, a general partner with the VC firm Technology Partners. “In its quest to solve some of the most important energy and water issues of the 21st century, the sector will also attract the interest of some of the best and brightest entrepreneurs, executive teams and technologists.
“Finally, the diversity and breadth of the CleanTech sector will evolve such that areas beyond solar and biofuels will capture more venture dollars over the coming year than ever before,” added Ehrenpreis, who is also chairman of the 2008 CleanTech Investor Summit.)
More than 170 investors participated in the NVCA survey.
Only 12 percent of the VCs said CleanTech investments would decline, while 8.4 percent expect the investments to remain the same.
Other sectors projected to receive increases in funding include media (64.6 percent), biotech (55.4 percent) and Internet (54.5 percent).
The VCs were most divided about the prospects for Internet-related deals, with 36.4 percent expecting investments to be flat. Also, 31.9 percent of the respondents projected a flat year in biotech.
The biggest declines were predicted in semiconductors (49.7 percent) and software (48.8 percent), with 22.3 percent predicting wireless telecom.
Overall, 71.3 percent of the VCs forecast total investments ranging between $20 billion and $29 billion, which would be in line with recent years. The average prediction was $27.6 billion.
Year of Transition for Industry?
VCs do expect change to take place within the industry, especially if the number of initial public offerings for stock remains a difficult “exit” ramp for investors.
With “dot com” and tech deals that went bad continuing to filter through the industry, 57 percent of VCs predict that the number of venture firms will decrease in 2008. Only 17 percent see an increase, and 26 percent expect the number to stay the same.
Despite the gloom about the number of firms, 77 percent of those surveyed forecast improvements in short-term (1-5 years) and 81 percent forecast improvements in long-term (5-10 years) returns.
That optimism carried over to IPO expectations, with 59 percent predicting it will improve. If not, investors are likely to seek more mergers and acquisitions, said Mark Heesen, the NVCA’s president. If so, Heesen said 2008 could trigger major changes in the VC business.
“[I]f the venture-backed IPO market in the U.S. doesn’t begin to open in 2007, the VC industry will begin to leverage alternative markets and buyers for their portfolio companies,” Heesen said. “An industry-wide shift toward these new exits has the potential to fundamentally transform the venture capital business model.”