While all venture capital sectors suffered during the Great Recession, one notable sector was almost completely left out of the corresponding recovery: Cleantech.
It certainly didn’t help the sector that many of the major institutional investors who had very publicly backed the Green Wave of allocations to venture firms (circa 2004-2007) had been very disappointed with the financial results. Perhaps the most visible such disappointed investor was CalPERS, whose Chief Investment Officer Joe Dears declared in 2013 that their allocations to cleantech venture capital funds had been a “noble way to lose money”. But quietly, while most of the institutional investor universe was ignoring the sector, cleantech venture capital returns appear to have rebounded to quite attractive levels.
This is according to the latest data from Cambridge Associates, who have been tracking cleantech venture investments at both the company and the fund level for a number of years now. It’s well worth digging into the details of the report, where they’ve tracked over 1,500 investments by 578 investment funds, with data reaching back into the early 2000s up through 2018.
One key insight that comes through from the data is that returns have really picked up just over the past few years. While in fact they do confirm the poor results generated by those investments during the “cleantech bubble” years of 2005-2009 (with overall negative returns), investments made from 2010-2013 did a bit better, and then those investments made even more recently have thus far produced 23.9% gross IRRs. That’s a remarkable turnaround.
It’s a contrarian story as old as venture capital as an investment category: A sector gets a lot of hype, and attracts a lot of investment dollars, much of which ends up being invested in questionable ways. The resultant poor returns scare almost everyone away. Meanwhile, however, the sector continues to enjoy strong market tailwinds and growth, while a few committed investors continue their efforts and start figuring out how to actually generate strong returns off of the clear market opportunity and megatrend.
Are these early results in this highly useful Cambridge Associates report indicative of cleantech venture capital now coming through to the next phase of this classic story arc of redemption? As with all useful data sets, this report provides a lot of compelling answers, and yet even more questions. But these results at least make one thing very clear: It’s time for the institutional investor universe to start paying attention to this sector again.
Author: Rob Day
Curious to learn more? You can read the full article here!