PRINT THIS PAGE Cleantech venture investment in Israel: opportunities in deep, uncharted, waters
28/03/2007. Source:IVCJ. Jack Levy, Cleantech Ventures
Can Israel’s emerging cleantech industry become an investor favorite in the same way that high-tech industries have? In this article from the Israel Venture Capital Journal, Jack Levy, a founder of newly established Israel Cleantech Ventures, gives his view. With a remarkable track record in innovative technologies, Israel is widely regarded as one of the leading markets for venture capital investing, but the growing cleantech market is only now attracting attention. In North America, cleantech venture investing continues to grow at record levels – $502 million in the last quarter of 2005, up from $336 million in the first quarter of the same year, according to the Cleantech Venture Network. This growth should continue to be fueled by the recent closings of several funds dedicated to cleantech sectors as well as the commitments by leading non-sectorfocused funds to dedicate portions of their capital to investments in cleantech companies.
Investors and entrepreneurs alike are increasingly attracted to the cleantech markets by multiple drivers including: (1) the growing demand for energy and pure water in developing nations; (2) the need in developed countries to upgrade aging water and energy infrastructures; (3) the push for energy security given the instability in fossil fuel supplier regions; and (4) the growing awareness of the environmental effects of emissions and industrial processes. The significant spike in cleantech venture investing in 2005 also reflects the accelerating M&A and strong IPO markets in these sectors.
Israeli companies being formed to capitalize on these opportunities can take advantage of the strong reputation that established companies have created for Israeli technologies in water technology and renewable energy markets. Israel already has its share of cleantech standouts, including industry leaders in geothermal power (Ormat), solar thermal (Solel), drip irrigation (Netafim) and desalination (IDE Technologies), along with many young promising companies. Israel's leading academic institutions have significant activity in water technology, alternative energy and new materials technologies, and play an important role in global research in these areas.
Although the activity among Israeli energy start-ups (particularly in the solar power sector) is brisk, the pace of company formation in the water technology markets is even faster. Israel’s plans to leverage its leadership in water technology are evidenced in the recent establishment of Waterfronts – Israel Water Alliance, which brings together industry, academia, investors, start-ups and incubators to focus on the development of the country’s water technology exports and the launch of the "Agamim 10" national program to promote the water industry, championed by Mekorot (the national water company) Chairman Booky Oren. Recently, two of the government supported incubators, designed to assist early stage ventures, announced their focus on water technology ventures, and the incubator program held an exhibition in late May 2006 to showcase early stage companies that operate in all segments of the cleantech markets.
Even with the significant pace of company formation, many established Israeli venture capital firms have remained on the fence regarding the Israeli cleantech opportunity. Some are concerned about the challenges facing cleantech investing in general – particularly the capital intensiveness and longer sale cycles (hence longer time to exit) of many business models. Others are focused on the lack of venture funded Israeli cleantech exits and the absence of the military as the clear driver of innovation and source of management talent. Any prospective investment must be closely examined in light of these very real risks. Nevertheless, many early stage companies that we have met with have scalable business models that are no more capital intensive than many "traditional" IT or communications plays.
Israeli companies have historically excelled at rapid fielding of solutions and at taking existing products or processes and improving upon them – an approach which can help mitigate many risks and costs associated with new technology adoption. With this strategy, some companies, such as AqWise – whose AGAR technology improves the capacity and performance of wastewater treatment facilities – have succeeded, even in sectors with notoriously long sales cycles. However, other such product or process improvement approaches may limit the size of the opportunity and need to be diligenced carefully to ensure that any advantages developed are significant enough to build a sustainable business platform.
On the plus side, given the global nature of the cleantech markets, and the leadership of the EU and Japan in certain segments such as the solar energy market, the geographical location and immediate global focus of Israeli start-ups may prove to be an even stronger asset than in other areas such as software or medical technology. Perhaps most encouraging to the Israeli cleantech investor are the managers who have academic or early career backgrounds in relevant areas (i.e. water engineering, electrical engineering), but who as a result of the job opportunities of the past 10-15 years acquired significant management skills and experience in high growth and successful IT, software or telecom companies.
Like a returning diaspora, many of these individuals who take leading positions in Israeli cleantech companies are coming back to their true passions with strong conviction and a sense of mission. They are joined by other successful hightech entrepreneurs who have no previous background in cleantech markets, but are attracted to them by the growth opportunities. If these entrepreneurs remain mindful of the differences in their new markets, we believe they will be able to leverage their experience in high growth companies to help build a franchise in cleantech as strong as that which exists in more traditional Israeli venture-backed sectors.
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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