CMEA pulls plug on $500M late-stage cleantech fund

CMEA Capital has decided against raising a new $500 million fund to back late and growth-stage cleantech companies, Dow Jones VentureWire reported earlier today. The news is interesting for two reasons: 1) It suggests a shift in strategy for CMEA, one of the largest investors in the green space, according to yesterday’s Greentech Media report on the sector; and 2) It may be further proof of cleantech’s rebound from the downturn — venture firms like CMEA no longer need to keep late-stage companies on life support due to a frozen exit market (A123Systems’ IPO broke the ice in a big way).
CMEA, which has had several big victories with A123Systems’ recent blockbuster exit and the impressive growth of solar firm Solyndra and biofuel maker Codexis, reviewed late-stage opportunities in the cleantech scene over the last six months, managing general partner Jim Watson tells VentureBeat. (A123 was actually the only late-stage investment the firm made out of its last fund — demonstrating almost prescient judgment.)
“We just didn’t see that much that was quality or at the right price,” he said. “There’s a lot of money on the later-stage side, so there is more competition for deals — a lot of them didn’t make sense economically.” Still, the firm will continue to keep an eye on this segment of the market if any ripe options arise. Watson said the landscape may change in the next year as companies run out of money from their previous rounds and government grants and loans — pricing on deals will probably improve. And of course CMEA will continue to fund its existing portfolio companies in this category.
The role of state and federal governments is particularly interesting in this context. For the time being, stimulus-package subsidies, tax breaks and grants have somewhat negated the need for late-stage cleantech funding. After all, the Department of Energy and other agencies have emphasized that preference is given to companies already generating revenue or with capital-intensive construction projects underway (it just handed CMEA’s Solyndra $535 million in loans, for example). Even so, VCs will probably need to jump back in as soon as the government shuts off the tap.
In the meantime, Watson said the firm will divert much of its energy to the early-stage startup market. “We decided to stick with what we do best: the transformational science,” he said. “These companies can create some real intellectual property around their breakthroughs.”
CMEA appears to be well-positioned to take on the higher risk associated with these early, more disruptive investments. This is a good sign for the cleantech sector in general, implying that liquidity has returned, soothing skittish VCs that spent the first half of the year shying away from even mildly risky deals.
“Higher reward comes with higher risk,” Watson said.
VentureBeat is hosting GreenBeat, the seminal executive conference on the Smart Grid, on Nov. 18-19, featuring keynotes from Nobel Prize winner Al Gore and Kleiner Perkins’ John Doerr. Get your early-bird tickets for $495 before Sept. 30 at GreenBeat2009.com.