A recent Ernst & Young analysis revealed that cleantech Venture Capital (VC) investments fell 50% overall in 2009 from 2008. Seemingly alarming news for this important sector, but there’s optimism in their analysis.

What is cleantech and why should anyone care that VC funding dropped 50%?

Ernst & Young,  “a global leader in assurance, advisory services, tax, transactions, and strategic growth markets“,  defined cleantech in their analysis as, “a diverse range of innovative products and services that optimize the use of natural resources or reduce the negative environmental impact of their use while creating value by lowering cost, improving efficiency, or providing superior performance.” Cleantech will continue to play a vital role in our everyday lives and our future. The U.S. Government thinks it so vital that they are noted as one of the largest investors in the sector.

If cleantech is so crucial, why are VCs backing off?

Keeping in mind the global recession and that 2008 was a record year for cleantech investments, the analysis becomes less drastic. After all cleantech received $2.6 Billion in VC financing through 2009, and Q409 was even kinder. VC cleantech deals rose 21% overall in Q409 while  energy efficiency cleaned up. As a sub-sector of cleantech, energy efficiency VC investment rose 11% in Q409 making it the largest VC deal maker. In line with the boost in VC deals, energy efficiency also raised the most capital in Q409 than all the other cleantech subsectors.

The shift marks as an interesting cleantech market driver. Others noted in the analysis include the American Recovery and Reinvestment Act, which recently awarded $2.3 Billion to cleantech manufacturing; the U.S. Patent and Trademark office, who is expediting cleantech entries; U.S. corporations, who are rapidly “going green” in order to reduce overhead and operating costs; and U.S. public markets, which brought $2.8 Billion in cleantech investment.

John de Young, an Associate Director at Ernst & Young, captured the trend concisely, “These results reflect the easing of an investment cycle largely driven by significant capital demands of solar companies and a shift toward energy efficiency products with lower funding requirements and potentially faster commercialization.“