Vinod Khosla has bet big on green energy before, investing millions of his own dollars in companies experimenting with everything from biofuels to electrical efficiency.

Now he’s raised $1.1 billion from others for Khosla Ventures Seed Fund LP and Khosla Ventures Expansion Fund to make bets in the same space, a sign that the green economy is more than a passing fad. Khosla’s investment, the biggest amount raised for venture capital in two years, may also mark the return of large-scale financing in a sector that was battered by the economic meltdown.

Khosla, a Sun Microsystems co-founder who went on to a career as a venture capitalist at Kleiner Perkins before launching his own VC firm, certainly isn’t alone in the green space. Other venture capitalists see potential in clean technology that covers everything from inventing a smarter grid to turning algae into fuel and sunlight into electricity.

“I believe that we’re at the dawn of a transformation of a number of industries in the world that have not gone through a radical transformation,” says Alan Salzman, managing director at Vantage Point Ventures, another venture capital fund. “We have a number of daunting problems…combined with the ability from technology to provide the solutions. To be in on the ground floor…is going to generate staggering returns as the Ciscos and Googles of the world emerge.”

Salzman sees a day, not too far off, when cars are powered by electric motors, batteries store the electricity generated by the sun, and homes and offices are illuminated by energy-efficient LED bulbs, and the companies—like Better Place, Bright Source, and Tesla—that make all of that happen will be the new giants. It will happen, he says, because the science is there to make the changes, the recognition of global warming as a danger is growing, and new technologies ultimately will be cheaper.

“This isn’t theoretical science. This is now. We’re doing these things today,” Salzman says. “These are inevitabilities. It’s just a case of how fast they roll out.”

That way of thinking is why a number of venture capital and private equity players remain bullish on cleantech.

Venture investment in cleantech fell off a cliff in the last quarter of 2008 and first quarter of 2009, a victim of the general crash of the economy. But in the second quarter of 2009, investment rebounded to $1.2 billion, up 12 percent from the previous quarter, but still down 44 percent from a year ago, according to a study by industry trade group Cleantech Group and Deloitte.

Not only has investment been down; so have exits—the mergers or initial public offerings where venture capitalists make their money. That doesn’t just apply to cleantech, but it’s as true of companies in that space as of those concentrating on information technology or biotech.

“That’s a long litany of woes,” Marianne Wu, managing partner at Mohr Davidow Ventures acknowledges.

But she counters with the reasons she thinks cleantech investing makes sense. And, like Salzman, her argument has everything to do with thinking big and thinking long term.

“We really see cleantech as 21st century industrial technology,” she says. It involves building, construction, transportation, and energy—fields that haven’t changed at their cores in a long time. “There’s fundamental change going on in the industrial backbone of our economy. The industrial backbone of our economy…hasn’t seen fundamental change. The potential…is enormous. It’s untrodden land in many ways, and there’s such mass and such depth.”

Plus, Wu says, traditional corporations are eager to act as strategic partners with cleantech startups. That’s something venture capitalists and the companies they’re shepherding are increasingly embracing.

Kevin Skillern, managing director at GE Financial Services in venture capital strategies, has seen more eagerness on the part of venture capitalists and their portfolio companies to partner with his giant of a company. “The market is very big in the energy world…and the value of having a large motivated partner is high,” he says. Of the 40 to 50 firms active in venture investing in energy, Skillern says GE has a good relationship with most if not all.

Khosla’s fund marks the return of thinking really big in cleantech venture investing, after a couple of down quarters. After all, it’s the biggest first-time venture capital fund of any kind raised since 1997.

And among its investors is the California Public Employees’ Retirement System, which is betting on Khosla’s reputation as one of the world’s most celebrated venture capitalists.

“An investment in the Seed Fund has the potential to be a ‘breakthrough’ opportunity for CalPERS to align itself with one of the most successful venture capitalists in Silicon Valley at a meaningful scale,” according to CalPERS documents quoted by the Wall Street Journal. “Mr. Khosla is viewed by industry participants as a visionary and a knowledgeable investor who is adept at spotting trends and capitalizing on them through his research and investments.”

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Kent Bernhard Jr. is News Editor of Portfolio.com