"Green' VC Funding Sets New Record; Q2 Total Up 58%, To $2 Bil; Amid gloomy IPO climate, energy prices, environment spur interest in cleantech

Investors poured $2 billion into cleantech startups in the second quarter, according to a new report, setting a new record that defied growing concerns about the health of venture capital.

The Cleantech Group, a research firm, is set to report Tuesday that "green" companies saw investments rise 58% in the quarter from the year-ago period, nearly 50% over the previous quarter.

The investments, which involved 98 companies in North America, Europe, China and India, reversed a sequential slide that began after the third quarter of 2007's record total of $1.8 billion in cleantech funding.

Solar technology and biofuels drove much of the increase, says Brian Fan, senior director of research for the Cleantech Group.

"I think cleantech is the bright spot in venture investing," Fan said.

Venture capital backers have endured bad news in recent months. For the first time in 30 years, not a single company backed by venture capital went public in the second quarter. That followed a first quarter that saw just five initial public offerings from venture-backed companies -- vs. 43 in the year-ago quarter.

A strong IPO market is key to venture capital investors, who depend on the public markets to cash out of their investments.

In April, accounting firm KPMG issued a survey that said many venture capitalists are expecting less capital venture -- in both investments doled out and money raised -- than in 2007.

But Fan says cleantech is getting funding as VCs move money out of traditional technology investments and as new venture-backed funds try to cash in on the sector's growth.

Cleantech companies are benefiting from efforts around the world to provide cleaner energy sources for power and alternatives to oil for vehicles, he says.

"We're still very early," he said. "Despite the amount of capital that has flowed in so far, we're still at an early stage in replacing coal and replacing oil."

Solar technology plays into that trend. Much of the buzz around solar energy has focused on typically smaller-scale projects that use "photovoltaic" technology that converts sunlight directly into electricity.

But this year Fan says utility-scale projects are driving new VC growth in what's called "solar-thermal" power. The technology uses the sun's heat to create steam that turns turbines to create electricity.

"For the first half of the year, over $500 million went in solar-thermal companies," Fan said. "They didn't get (many) investments last year or the year before."

The massive power output of solar-thermal -- which can easily be 10 times the size of a photovoltaic system -- makes them a good alternative to utilities that need solar to meet environmental guidelines.

In April, solar-thermal company eSolar announced $130 million in funding from venture firms, including Google.org and Idealab.

"It's critically important," said Rob Rogan, eSolar's executive vice president of corporate development. "Solar thermal is an especially capital-intensive industry."

The company is targeting utilities, offering flexible plant sizes and lower costs, thanks to standardized parts, Rogan says.

Biofuels raked in $280 million in the second quarter, much of that for efforts to produce ethanol that avoids the use of food, such as corn, while still providing an alternative to oil, Fan says.

That can include plants or by-products of other industries. Fan also notes that startups focused on algae-based ethanol saw a big increase in funding this past quarter.

Range Fuels, an ethanol company, announced in April that it had landed more than $100 million in funding.

It also has more than $70 million in funding from the federal government, says Mitch Mandich, chief executive of the company.

Range Fuels uses waste materials from timber processing, including bark and other parts of a tree, to make ethanol. He hopes to have a plant open by the end of 2009.

Mandich says investors recognize the long-term potential of biofuels, despite short-term troubles in the equity markets.

"When it comes to cleantech, people aren't just looking at this on just a one-year time horizon," Mandich said. "They expect the technologies to change the world. You have to have a longer-term view."