[Editor’s note: We’ve run several posts in recent weeks touching on cleantech’s teflon qualities in the face of the downturn. Below, Munich-based venture capitalist Bart Markus explains why he thinks it will stay afloat, and two landmines it will need to navigate sooner than later. In doing so, he takes a more global perspective, highlighting European thinking on the problem that could go a long way in the U.S.]

Despite the post-dot-com-bubble depression and weak economy, 2001 was a watershed year for the cleantech sector. Overseas, it marked the start of production at solar leader Q-Cells, and the founding for wind energy firm REpower Systems. Seven years later, we find ourselves in roughly the same situation, if not worse off, yet these companies and others like them continue to see tremendous growth — hard evidence that fears of the green winter due to global recession are exaggerated, if not unfounded.

Four developments fuel my optimism:

1) The cleantech industry is more recession-proof than others. Even bearish Deutsche Bank has predicted a growth rate of 20 percent for the global solar industry in 2009. This is primarily due to the immediate global need to replace limited fossil fuel resources with sustainable alternatives. While this pressure has been temporarily eased by falling oil and coal prices, growing demand in emerging markets and developing regions will keep this topic high on the agenda. With the United Nations’ influential Copenhagen Climate Change Conference nearing in December 2009, cleantech is sure to grab headlines again — leading to a surge in consumer interest and capital financing.

2) Cleantech isn’t a mature industry yet. It’s still very young, and in need of many further technology breakthroughs in order to improve production and distribution of renewable energies. Just think about the need to transport power over long distances, like from the sun-rich Sahara to Europe, or the need to store solar energy for long-term consumption. This brand of innovation is not dependent on the general business cycle, and will allow innovators to gather considerable momentum in spite of the downturn.

3) Cleantech has broad and enthusiastic political backing.
And that doesn’t even include subsidies, especially in the solar arena. Generous support and incentives for homeowners to convert to this type of energy will help stabilize demand for green technologies through 2009. In Germany, for example, the Renewable Energy Sources Act guarantees remuneration for homeowners who not only install photovoltaics, but agree to feed their electricity into the general grid. And in the U.K., we see a similar combination of compensation and direct subsidies for renewable energy deployments.

4) Cleantech generates products that lower energy costs.
One obvious opportunity lies in office buildings, where huge amounts of power are wasted every year (just think of all those industrial parks where lights stay on all night). For example, Siemens spin-off EnOcean has developed powerless switches that operate wirelessly. As the economy becomes more cost-sensitive, ideas like these will rise in demand, recession or not.

Not to say that cleantech won’t face any hurdles during the economic slump. Life isn’t that easy. And as a venture capitalist, I see two major challenges looming in 2009:

1) A lack of equity debt funding for later-stage deals. Energy production is a capital-intensive business, and capital will become an increasingly scarce resource in coming quarters. While incumbents will be able to finance their cleantech activities out of their huge positive operating cash flows — or raise debt on this basis — newcomers are likely to have a tough road to hoe.

2) More pressure on early-stage companies to generate cash. Not only that, but they have to do so within an efficient timeframe too. Business models projecting years between now and breaking even will have a near impossible time finding financiers — and the industrialization of new technologies in this sector is generally pretty time consuming.

Still, considering the global demand for renewable energy, I remain highly optimistic that many attractive early-stage contenders will break onto the scene next year, and even after that. The one catch — many of these companies will emerge at lower valuations that usual. This isn’t great for company founders, but a pretty good deal for VCs.

Bart Markus is general partner in the Munich office of Wellington Partners Venture Capital, where he focuses on electronics and cleantech investments. Several of his portfolio companies have successfully spread from Europe to the U.S.

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