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Cleantech finds investors in Israel29/11/2006. Source: Israel Venture Capital Journal (IVCJ).
 Israeli venture capital has at last discovered cleantech. In this IVCJ article, Ira Moskowitz surveys the local venture capital scene for the latest in cleantech activity.
"If I was 25 again and I was setting up a career in the private sector, not as a public servant, I would go into clean energy," Bill Clinton told an audience in Scotland last month. "I would be a billionaire before you could turn around."
Indeed, with spiraling fuel prices and dire environmental phenomena, investing in clean energy and other clean technologies (cleantech) would appear to be a "no-brainer." It might not be so simple to become a billionaire overnight, even if you are Bill Clinton, but the annual market for cleantech is now valued at over $200 billion and is growing fast. According to the Cleantech Venture Network, over $7.3 billion of venture capital was invested in North American cleantech companies between 1999 and mid-2005, and cleantech could account for up to 10 percent of all venture capital investment activity by 2009.
In Israel, venture capital is just beginning to target cleantech start-ups. Two dedicated cleantech funds have begun to raise money in recent months, and at least two established funds are focusing more attention on cleantech investment opportunities. In addition, a non-profit organization – Waterfronts-Israel Water Alliance – aimed at promoting Israel’s water technology companies was formed last summer:.
Terra Venture targets $50 million fund
Astorre Modena is an Italian-born physicist with a McKinsey background who began tracking cleantech opportunities while working at Israel Seed Partners in the early 2000s. "There wasn’t much interest then," he confirms. "I think the VCs were very skeptical of this sector a couple of years ago, partly because they didn’t understand it and partly because they saw it as a long-term investment."
Modena is convinced that cleantech can yield returns over a shorter term because "the market is much more driven than it was a few years ago." In fact, he adds, "all the plans we’ve seen in the past two years have put this industry in the forefront." Six months ago Modena partnered with Eli Even to form a dedicated cleantech firm – Terra Venture Partners. Terra is "earth" in Italian, indicating the fund’s environmental focus. Even, a chemist, worked at Millennium Materials for a number of years and directed Dow Chemical’s activity at the Ashkelon Technological Industries (ATI) incubator. Terra will soon announce the name of a third partner, whom Modena describes as "one of the most veteran and successful people in the VC business, with 20 years of industry experience as well."
Terra began raising funds about four months ago, with a target of $50 million. It expects to execute an initial closing of $15-20 million by the summer. Modena: "Most of our investors are very smart financial and strategic investors from Europe and the States, and some from Israel," he says. "I wouldn’t raise a $400 million fund – I don’t think there are enough opportunities for that. But for a small $50 million fund, I think there are plenty of opportunities and you can obtain very good returns for your investors."
Terra is mainly focusing on renewable energy, and solar energy in particular, as well as water management and water treatment technologies. "We’ve already found some very interesting opportunities and we’re in the process of making an investment," Modena says.
Israel Cleantech finds dealflow Jack Levy and Meir Ukeles are American- Israelis who teamed with four local partners last November to form Israel Cleantech Ventures. The fund will exclusively focus on cleantech investments. Levy and Ukeles, both in their thirties, bring Wall Street experience to the investment company, while their Israeli partners have "deep experience in building and leading companies in relevant sectors," Levy says.
During the first half of 2005, Levy and Ukeles began looking at cleantech as an area "where deals might be somewhat more available, with less capital chasing them, and at the same time where there were good opportunities in the global market." They became convinced that "there was a significant opportunity that wasn’t covered and had terrific market dynamics," Levy says. "Then the question became whether there is enough dealflow in Israel."
Levy answers this question in the affirmative: "I’m basically moving into this area because I feel that this is where some of the best investments for the next 30 years are going to be made. Some of the changes that are going to happen in these areas of water and energy are going to be fundamental. The markets are so big and growing so fast. Cleantech will definitely attract venture investments. It wasn’t that way five years ago."
The target for the fund is $60 million; Levy expects the first close to take place in the fall. So far, all of the commitments are from North American investors, but the fund is also conducting talks with Israeli investors.
"We’re actively looking now for investment deals, which may happen even before the first close. The deals we’ve looked at involve initial investment of $200,000 to $2 million," Levy explains. The fund has a database of about 200 companies, most of them early-stage. Some 40 percent are water-related and another 35 percent are energy-related.
Because of the scope of the global water and energy markets, including the antiquated condition of water and energy infrastructure in developed countries, the opportunities can be very significant even if the technology is not revolutionary, Levy contends. Having just returned from a capital raising trip to US, he says: "You can’t walk anywhere without people thinking about these matters – especially on the energy side."
Millennium Materials makes room for cleantech
Nir Belzer, a senior partner at Millennium Materials Technologies (MMT), says his firm has invested in cleantech since 1998, before it became a buzzword. Most of MMT’s portfolio companies are engaged in material science, with a small subset involved in what can be considered cleantech, he explains. Among these investments are a green battery (for cosmetics, pharmaceuticals and other applications) and a renewable lithium ion battery. MMT has not invested in water technology, "but we’ve had some dealflow in this domain," he notes.
MMT is currently raising its third fund – targeted at $100 million. The two initial funds, which totaled about $50 million, allocated about 10 percent to cleantech companies. The new fund will increase this to 25 percent, while maintaining the same general focus – a partial vote of confidence in Israeli cleantech opportunities.
Belzer explains: "We believe that there are not so many clean technology companies in Israel that would satisfy just a cleantech fund. There are technologies in water, fuel cell batteries, recycling, etc., but the deals you can reach are not as big as in material science and other sectors, so we choose to look at cleantech as part of our activity, but not as our sole activity." According to Belzer, there are about 100 cleantech start-ups in Israel that should be considered for VC investment. "I believe $25 million can serve this area," he says.
Giza VC proceeds cautiously
Giza Venture Capital recently closed its fourth fund at "north of $150 million" and is actively looking to invest some of this money in cleantech, according to co-founder and managing director Zvi Schechter. But he cannot say how much of the new fund will be devoted to cleantech, "because at this point we just don’t know."
Schechter is examining opportunities in water technology, while a colleague at Giza is looking into the energy field. "We did not invent the [cleantech] trend, but are following what is happening in the US, where there is a lot of activity," he explains. "Still, with every new hype you should try to be realistic and determine how money can be made from it," Schechter cautions. "At the end of the day, we are in the business of making investments and making money from them. We are not in the business of cleaning the environment."
Cleantech investment in the US tends to target companies that have "traction" and expand them, Schechter notes. In Israel, he has only identified two such water technology companies. This does not include smart irrigation, which is already a mature industry and is not relevant for venture capital investment, he explains. "The majority of companies are just ideas, one-man or two-man operations. In a nutshell, there are lots of opportunities, but they are very early. But we are looking all the time."
More investment activity
When it comes to cleantech, Israel’s strongest advantage is in the area of water, explains Ori Yogev, founder of Yogev Consultants and chairman of Waterfronts-Israel Water Alliance. "We have been dealing with the water problem for five decades. There is a lot of experience here and many uses of advanced water technology and knowledge," he notes.
Yogev says that advanced technologies and solutions account for 25-30 percent of the $400 billion global water market and that this technology sector is growing at upwards of 10 percent a year. Israel’s share of this sector is less than $1 billion today, but "we think within a decade we can be at $10 billion and have a very strong global presence."
Yogev Consultants represents the Gandel Group in Israel, which has invested in Plastro and is looking at other water technology investments. H2Tech is new water technology fund currently raising capital. Formed by asset management firm Priority Investments, H2Tech hopes to close on a $50 million fund in the near future.
This article appeared in the Israel Venture Capital & Private Equity Journal (IVCJ). IVC Research Center publishes the Israel Venture Capital & Private Equity Journal, a quarterly review of trends and developments in the Israeli-related venture capital industry. IVCJ, distributed worldwide, is dedicated to provide wide-range coverage of Israel's venture capital industry. For more information please visit www.ivc-online.com
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