Green energy investors entering China market
In the vanguard of venture capital, the buzzwords of late have been "alternative energy" and "China." Are the two worlds about to collide?
Seed investors are financing, or considering financing, start-ups in China that are developing equipment for wind and solar power; clean water and food alternatives; and technology to promote energy efficiency.
While this may seem an arbitrary combination of two of the hottest trends in venture capital — sort of like the first time someone mixed peanut butter and chocolate — there is a growing number of investors who say the potential reward in China is worth the tremendous risk.
China has voracious energy needs and "the most serious environmental problem in the world," said Jerry Li, a consultant in Beijing who matches venture capitalists with entrepreneurs. "There is a huge demand for investment" in alternative solutions, he said.
Li is the first director of Cleantech China, a joint venture beginning this month between Tsinghua University in Beijing and the Cleantech Venture Network, a blossoming North American trade and research group for venture capitalists investing in alternative energy technology.
While independent hard data on alternative energy investments in China are hard to come by, Li's joint venture, aimed at marrying overseas investors and Chinese entrepreneurs, testifies to the emerging trend. From June 2005 to June 2006, American venture capitalists put $100 million into China-based start-ups focused on alternative energy, double the investment in the period a year earlier, Cleantech China said.
But the challenges are immense. For one, China has a hard-driving, fossil-fuel- centered economy that has so far done little to diminish its reliance on those fuels. And venture capitalists have still not entirely figured out how to manage investments from such a distance, and across cultures, and, pointedly, how to get their money out once they have built the start-ups into viable companies.
John Rockwell, a managing director at DFJ Element, a Silicon Valley venture firm, was not deterred. In March 2006, DFJ invested $2 million in Miartech, a 34-person Shanghai start-up that makes technology to send data over power lines, automate meter reading and make the distribution system more efficient.
Rockwell liked both the technology and the cost of doing business: the company, thanks to lower payroll and other costs, uses less than $100,000 a month, a fifth of what Rockwell said it might in the United States.
He has been to China twice since August and plans three trips this year, partly in hope of finding new ventures that address the country's voracious need for energy. "They're going to require a greater increase in electricity than anywhere else," Rockwell said.
He said China was already beginning to look more intensely at renewable sources like wind, hydroelectric and solar power. "It's going to create a lot of opportunities," Rockwell said.
John Denniston, a partner at the venture capital firm Kleiner, Perkins, Caufield Byers, said he heard a similar message when he met with a high- ranking official in the Ministry of Science and Technology.
The deputy minister said that "one of their highest goals is to find alternative energy sources that decrease their dependence on oil," Denniston said. And he said that in conversations with other officials, entrepreneurs and scientists, "everyone was on the same playbook."
Denniston said he had not made any investments yet but was interested in exploring opportunities. He said he was curious to see whether China, because of its high demand for energy, could leapfrog some other countries and become a leader in alternative solutions, like being the first to mandate all-electric vehicles.
Rockwell agreed that China had a chance to define itself early as promoting alternatives to oil. "When you don't have an established grid," he said, "a lot of renewables look more attractive."
A perhaps more basic issue that investors say is challenging China is the simple demand for potable water and clean food — industries that fall under the loose and broad definition of "cleantech." Li said that within six months, he expected to have a database of about 300 Chinese start-up companies seeking investment partners.
Li said the big challenge facing American venture capitalists was not so much finding viable technology as finding capable managers.
Chinese entrepreneurs can "have a different speed and rhythm — everything is different because of the cultural background," Li said.
He insisted, though, that
things are changing, and "not just because the government is hungry
for this." When it comes to alternative energy, he said, "The whole
country is hungry for this.