Washington ranks among the top five states for venture capital funding of startups. But when it comes to VC investments specifically in clean technology, Washington ranks near the bottom.
That finding from the National Venture Capital Association in 2010 (the most recent stat available) is counterintuitive, considering the state’s outdoorsy reputation and environmental focus.
But Washington’s clean tech startups have been undergoing a shift. Cheap prices for energy sources such as natural gas have prompted many tech startups to scale back on attempts to make renewable energy competitive — and instead focus on boosting the energy efficiency of existing industries.
“You could argue that low prices of natural gas is one of the worst things to happen to many clean tech startups,” said Lars Johansson, co-chairman of Northwest Energy Angels, a group of 55 investors supporting the clean tech industry.
Clean technology tends to be a more expensive initial investment than traditional energy because of the new technology and infrastructure required, and with inexpensive natural gas flooding the market, clean energy startups may struggle for market share.
That’s why some entrepreneurs in clean tech have looked outside energy production.
An example of the efficiency focus is Sumner-based FluxDrive, which makes an adjustable-speed coupling that fits between an engine and something that spins, such as a fan or turbine. The technology uses magnets made from rare earth metals that never lose their magnetism, so the coupling spins without any moving parts, preventing wear and tear and reducing the energy needed to run the systems.
The Flux Drive system works well in harsh environments, which is why the company is working closely with the Navy on contracts for the saltwater cooling systems used in ship engines.
Meanwhile, many Northwest clean tech companies are adjusting to the demise of dollars from the American Recovery and Reinvestment Act of 2009, better known as the stimulus.
“There was a big peak, everyone was trying to invest ahead of 2010,” said Kim Zentz, executive director of clean-tech-focused nonprofit Innovate Washington. “(Investment) started falling precipitously after that, and fell by more than half in the last quarter of 2010.”
In what could be considered a response to the twin challenges of dwindling stimulus money and low demand for alternative energy, many Northwest clean tech startups — and the investors who support them — are focusing instead on products they can sell to bigger companies and utilities that have more experience in the market.
Northwest Energy Angels has invested $5.5 million in companies throughout the Northwest since it started in 2006. But the group does more than invest. Johansson said many members have experience in clean tech and, even if they don’t want to invest in a company, they frequently provide young companies with connections and assistance in fleshing out their business plans.
“It’s a shared level of understanding,” said Johansson. “The whole idea is, entrepreneurs in clean tech look to us.”
For some companies, the cheap American energy market, combined with a complex regulatory environment, is even sending them to other countries to develop their products.
“A lot of the adoption of clean tech is happening in countries with more aggressive policies,” said Northwest Energy Angels co-chairman Byron McCann.
China is the largest wind and solar manufacturer, McCann said, even though many of the technologies were first developed in the United States.
And local companies can try out new technology in places where manufacturing can be cheaper and the products can get to market faster. For example, Seattle canal power turbine company Hydrovolts is looking to expand its technology in Pakistan, where farmers rely heavily on canals for irrigation.
Seattle’s Principle Power Inc., which developed a floating platform for offshore wind turbines, rolled out its first product in Portugal late last year.
“That has a lot of people slapping their foreheads, saying it shouldn’t be that way,” said Zentz.
But there are plenty of people working to grow the clean tech environment here, despite the challenges.
The Zino Society, a group of Washington investors, created a fund specifically to support clean technology. Every year the Zino Green Investment Forum showcases a group of clean tech finalists, and investors pick one winner. Zino’s fund allocations are typically around $50,000.
“We’ve found in the last two or three years, we’re looking at companies that are more likely to exit (the investment) more quickly,” said Zino Society founder and CEO Cathi Hatch.
In fact, a Zino Green winner that builds energy-savings software to manage lighting for large parking lots and municipal areas recently successfully exited the investment group — and Zino investors got double their money back.
Hatch said companies that understand their market and are capable of bringing the product out quickly are the most attractive to investors.
“From the investment side, we want to find good things for our investors to put their money in,” she said, “but the idea of being able to do something that potentially helps the environment is great, as long as it makes sense.”
Early on, Hatch said, Zino received proposals from companies that were “greenwashing” their ideas, trying to make something that wasn’t a clean tech company sound like one. Now, she said, people seem to understand the industry a little better and are paying attention to what’s called the triple bottom line: people, planet, profit.
“We’re seeing more socially innovative companies that are looking at the triple bottom line. They have lower profit margins,” she said.
The national Cleantech Open competition aims to help young companies connect with organizations that have already found success in the market, and to reward good ideas. Since it started in 2006, Cleantech alumni have raised $660 million for clean tech investment, and a disproportionate number of the competition’s winners have come from the Pacific Northwest.
“It never ceases to amaze me the things people come up with,” said McCann, who, in addition to co-chairing the NWEA is also regional director of the Cleantech Open.
Puralytics, a Beaverton, Ore., company that developed a way to purify water using sunlight, was a Cleantech Open national winner. The company has since gone into production with its product, and it’s in use purifying water across the globe.
Emily Parkhurst covers the technology industry for the Puget Sound Business Journal/TechFlash.