Where Will Cleantech Start-Ups Find Financing Now?

Cleantech financing dropped off a cliff in the first quarter of 2009 according to PricewaterhouseCoopers and the National Venture Capital Association.  Funding dropped an amazing 84% from the last quarter of 2008.  Some may say this is a good thing and it was inevitable as the exuberance was irrational in certain areas, such as solar.  I do recall having a conversation about how many VCs do not understand how capital intensive the cleantech space (especially renewable energy) is, as compared to software.  Lemming behavior or not, long-term this lower level of activity will be at a more sustainable level.  Nevertheless, existing start-ups now face a dilemma.  How do they survive and grow to the size to compete for the scarce VC, private equity, or hedge fund funding or utilize Stimulus programs?  The folks at Lightspeed Ventures have some suggestions.

Without VC and institutional funding, many cleantech start-ups will have to go down the food chain to friends and family and angel investors.  As long as they only need $3 Million, can promise returns of 3-5x in three to five years, offer reduced valuations, and have some sex appeal they can find an angel group willing to back them.

If you are a start-up, how do you navigate the maze of DOE regulations and programs?  In addition, how do you prove that your project is shovel-ready? Not so easy.  Of course there are exceptions.

The good news is angel groups will continue to see deals that formerly went to VCs and were priced accordingly.  The bad news is that the disruptive technology company without a robust management team with experience in the money-raising trenches will not have an easy time for the foreseeable future.  Maybe the answer is to change both the business strategy (to reach breakeven sooner and reduce scale-up risk) and the funding plan.

One interesting development is a report from the WSJ about VCs and cleantech angel investor groups forming a network to bridge the massive funding gap between family and friends and institutional capital.