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Private Funds Fuel Clean Energy

Ethanol, solar and other renewable sources are in venture capital firms' fastest-growing sector.

August 01, 2006|Elizabeth Douglass | Times Staff Writer

Los Angeles-based alternative-energy company Altra Inc. raised more than $120 million from private investors in its latest financing round -- a sign that major venture capital firms have not been scared off by growing talk that too much money may be chasing too few sustainable ideas in the search to replace gasoline.

The new funding, which Altra could announce as early as today, brings its total to more than $250 million from some of the nation's top venture capital firms. And it took less than six months to line up the cash.

Using investments from the likes of Kleiner Perkins Caufield & Byers, Sage Capital Partners and Khosla Ventures, Altra is building a nationwide network of ethanol and biodiesel plants that will ultimately produce 500 million gallons a year of the fuel.

At that level of production, the 2-year-old venture would capture a sizable portion of the U.S. ethanol market for vehicles and other uses, which today is about 5 billion gallons. Gasoline usage, by comparison, is 140 billion to 150 billion gallons a year.

The surge in such funding for biofuels, wind energy and solar development reflects an unusual combination of factors that could, for the first time, create a sustainable market for petroleum alternatives that have languished for decades, analysts and industry insiders say.

They point to concerns about reliable access to foreign crude, sustained high prices for oil and natural gas, worries about global warming from the burning of such fossil fuels and the growing movement toward government mandates for the use of renewable energy.

For Altra and competitors, it has been a heady time.

Fresno-based Pacific Ethanol Inc., whose publicly traded shares have soared along with other alternative-energy issues, plans to open its first plant this year in Madera County.

U.S. Renewables Group of Los Angeles raised $100 million from Rustic Canyon Partners, as well as "high-net-worth family trusts in Los Angeles," Chief Operating Officer Lee Bailey said. The company hopes to raise $250 million to $300 million in a current funding round.

Venture capital experts say clean technology, particularly in energy, has become the fastest-growing sector in the private funding business. Recently, it surpassed semiconductors as the nation's fifth-largest sector for venture capital, after biotech, software, medical and telecommunications, said Craig Cuddeback, senior vice president of Cleantech Capital Group in Ann Arbor, Mich., which tracks venture funding.

"You're seeing all the big players and the investment banks getting into it," Cuddeback said. "Everybody rushes in because they don't want to miss a good opportunity."

The rapid growth has triggered concern that the cash is coming too fast to an industry still getting its footing. Some experts have warned that the race to build biofuel plants will produce a glut and, ultimately, a shakeout not unlike what happened to telecommunications and high-tech firms in the 1990s.

"The energy technology and clean technology sector is offering a Wild West-type gold-rush investment opportunity," said Mark Donohue, founder and general partner of Expansion Capital Partners. These days his firm, which has more than $60 million under management, 40% in clean energy, is focusing less on biofuels because of concerns the sector is overpriced.

Cuddeback acknowledges that over-investment is inevitable in this environment. But overall, he said, "this is an industry that is growing responsibly."

Larry Gross, chief executive of Altra, rejects the notion of a tech-like bubble. Gross, the brother of high-tech entrepreneur and Idealab founder Bill Gross, was president of Knowledge Adventure and vice chairman of Idealab.

"A lot of the high-tech things -- and I was involved in them, so I can speak firsthand -- were the promise of revenue in three to five years," Gross said. "This is very different. This is 'make money now.' "

Altra's focus is ethanol, a liquid made from corn that is today used mostly as an additive to gasoline. Proponents note that it burns more cleanly than gas, though motorists sacrifice a bit in terms of mileage; it comes from a renewable source; and, unlike any fuel derived from oil, it does not have to be imported.

The company has broken ground on an ethanol production plant in Ohio and recently acquired California's largest ethanol plant in Goshen, south of Fresno, where it plans to expand production by nearly 30%, to 35 million gallons a year.

A growing number of cars and trucks have been engineered to run on a mixture of 85% ethanol, known as E85, and a federal biofuels mandate could nearly double total consumption by 2012.

Donohue, for his part, is focusing on less-visible technologies that boost energy efficiency.

"That is not to say that solar and biofuels are not going to be successful," he said. "The reason the valuations are high today for many of those companies is that the sector is going to be successful, and the drivers are very much in their favor."

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