Funding becoming harder to get for green startups

By Nichola Groom - Analysis

LOS ANGELES (Reuters) - Saving the planet is looking a lot less profitable than it was a few months ago, and investors once enamored with finding the next high-flying alternative energy startup are retrenching.

Venture capitalists poured a record number of dollars into alternative energy companies as oil prices peaked at $147 in the third quarter, but some say that investment has trailed off substantially as crude prices declined and the global economy has slipped toward recession.

Not only are venture firms demanding lower valuations for what they call "cleantech" companies, they are also shying away from those with riskier technologies and startups whose business plans will require large amounts of capital.

"Our standard of investment has always been high, but it's even higher now," said Bryant Tong, managing director with San Francisco-based Nth Power, a venture capital firm that invests in energy technology startups. "Investors are hesitant to make investments... so it is harder across the board to raise capital for these companies."

Alternative energy in the last few years has become a major focus for venture capitalists, who saw there was money to be made from investing in technology to create cheaper solar panels, clean transportation fuels and green building products at a time of increased concerns about global warming and soaring fossil fuel prices.

Venture investments in alternative energy companies reached a record $2.6 billion in North America, Europe, China and India in the third quarter, according to industry research firm The Cleantech Group, which expects a much different picture in the current economic climate.

"We expect fourth-quarter venture investment numbers to be down significantly from the third quarter," said Brian Fan, senior director of research with The Cleantech Group, who estimated that fourth-quarter venture investment in the sector would be somewhere between $1 billion and $1.5 billion.

"And we expect that to continue into next year as well," Fan added.

THE VAULT IS CLOSED

The most visible recent sign of venture capitalists' new found caution toward cleantech was Tesla Motors announcement last week that it would delay the launch of its battery-powered sedan and cut jobs because of a lack of funds.

The electric car startup had been on the cusp of securing another round of venture funding when that was scuttled by the financial market turmoil, Tesla Senior Director John Thomas said on Wednesday.

"The vault was closed to us," Thomas said.

Tesla is now waiting until it can secure low-cost taxpayer backed loans before re-starting work on the "Model S."

For many investors in early-stage companies, the 50 percent drop in oil prices in three months has been a big deterrent to making new investments in alternative energy.

"The biggest question on people's minds has to do with the price of crude oil, which is now hovering at $70 a barrel," said Glen Schwaber, general partner at Israeli venture capital firm Israel Cleantech Ventures. "From that perspective it can be a concerning time to be a clean tech investor."