Dirty side to clean energy investing

Renewable investments have tripled since 2002, but is quick cash really what the sector needs?

By Steve Hargreaves, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Venture capital is sexy: The glamour of bringing a new business to market, the promise of big returns, the risk of losing it all.

There's no doubt this fast money plays a big role in building the businesses of tomorrow - especially those in the burgeoning alternative energy sector, which has seen funding triple over the past four years.

But venture capital investors often bank on a relatively quick payback, and have high expectations for the firms they back. Those expectations have sparked debate among renewable energy financiers: Is too much venture capital money a bad thing?

Venture capital flowing to renewable energy firms has surged to almost $3 billion last year from just over $1 billion in 2002, according to the data tracking firm Cleantech Venture Network.

"There's just a ton of money trying to invest in companies," said Matt Cheney, head of MMA Renewable Ventures, a San Francisco-based renewable energy finance company.

That's good for startups looking for cash, so long as they can become profitable relatively quickly.

The typical time frame for venture capital firms - which provide cash and provide management expertise usually in exchange for part ownership - is three to five years, according to one venture capitalist.

"Money doesn't have a lot of patience in general," said Cheney. "I'd say eight out of 10 of these operations don't go anywhere. And for those eight, it gets pretty ugly."

Second guessing the company's founders, firing people, bringing in hired guns - these are all things a venture capital firm will try to do if they find themselves writing checks for a floundering firm. And if that doesn't work, the salvage sale begins.

"When they (venture capitalists) lose patience, they start destroying value," said Cheney.

The fact that many renewable energy technologies are still years from being commercially successful, combined with what some say is a lack of places to turn for money, leaves many of these companies especially vulnerable.

"Private equity is stepping into a space that commercial banks won't fill and the government hasn't put enough money behind," said Peter Gray, a managing director for energy and natural resources at KPMG Corporate Finance LLC, an independent investment bank. "They're filling a gap that shouldn't exist."

One chief executive at a Canadian renewable energy company, who wouldn't speak on the record because his firm is under a government-mandated quiet period, said Canadian financial rules allowed his company to go public sooner, avoiding the need to raise money through venture capital.

He said the Canadian arrangement was similar to a U.S. company going public with an over-the-counter offering, which avoids the extra scrutiny placed on a firm from an exchange such as the Nasdaq or the New York Stock Exchange, but doesn't carry the negative stigma associated with so-called "pink sheet" stocks.

He said raising money in looser public capital markets was better than turning to venture capital.

"I spent 6 years in venture capital, and I know their tricks," he said, referring to the ownership deals the VCs extract from firms they fund.

While some said the government should play a bigger role in funding start-ups, others cautioned that getting the government too involved is a bad idea.

"The government is horrible at picking technologies that merge science and markets," said Cheney. "It's a special beast that can do all that."

"Venture capital is important because it drives a profit motive," said Rodrigo Prudencio, a partner at Nth power, a San Francisco-based clean energy venture capital firm. He said owners of a startup firm "need to have a company that is profitable and not reliant on government grants."

Prudencio took issue with venture capital being characterized as quick to pull the trigger on a struggling company.

"It's not like we're pounding our fists on the table saying 'we want out money back,'" he said. "We're trying to create value for everybody."

But he did say the sudden interest in the sector had the potential to cause problems.

He cited the ethanol boom as one example, as production of the corn-based fuel has exceeded the actual ability of farmers to grow corn, driving up prices not just for corn but for a variety of food products everywhere.

"If too much money flows in, then you create companies that there isn't the market to support," he said.

A hot investment sector also attracts players who haven't done their research, leaving the door open to spectacular losses that could frighten away other potential backers.

Investor interest in hot sectors, such as renewable energy, "is a great thing," said Cheney, the project financier from MMA Renewables. "We just hope everyone is responsible. We can't afford for [investors] to get beaten up and not be happy. Then they sour [on the sector] and don't want to be in it."

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.