The Greening of Venture Capital
It seems that everyone is going green these days, and venture capital is no exception. VCs are directing lots of money to start-ups developing more efficient solar panels, synthetic ethanols, and other clean technologies. Some see this sector as the next Internet. There is huge market potential and a favorable political climate on both sides of the aisle.
There also appears to be widespread agreement that measures aimed at existing energy sources (like carbon cap-and-trade systems) might be useful in the short term, but that innovations in clean tech are our best long-term solution. President Bush repeatedly mentioned the need for clean technologies in a recent speech on climate change, and Al Gore made headlines when he joined the leading venture capital firm of Kleiner Perkins last November. According to the Financial Times, KP just tripled its set aside for future clean tech investments.
Yet for all the VC dollars being funneled to clean tech, there is a healthy dose of skepticism about its market potential. Some think that the real story here is liberal, rich-enough VCs like KP’s John Doerr using their market power to direct investors’ money to serve an environmental cause regardless of whether the investments will turn a profit.
Am I a clean tech believer or skeptic? Answer below the fold…
When I started paying attention to this issue, I was a skeptic. The model that worked for the Internet doesn’t seem to fit here. First, VCs must exit their investments and return profits to investors after 10-12 years, a pretty quick timeframe. Yet cost-competitiveness in clean tech may be 20-30 years away. Second, while the typical Internet investment may be $5-$10M, for clean tech it can be closer to $100M. This requires more money from investors and a higher price at exit to produce the same returns those investors have come to expect from the Internet. Finally, there may not be enough experienced entrepreneurs entering the clean tech sector. While engineers at IT companies left their jobs to form Internet start-ups, engineers at big energy companies may not be likely candidates to form clean tech start-ups.
On the other hand, some recent developments in the solar field are encouraging. Solar is the front line of clean tech. Until recently, its high costs and low efficiency have been significant impediments to competitiveness. However, Bloo Solar’s Larry Bawden recently told a group of Stanford entrepreneurship students that solar technology has rapidly progressed from silicon panels to thin film panels to super thin films that use 90% less material. Bawden also noted that in the US alone, five times more capital has been poured into solar in the past two years than in the past fifty. Due to great demand for solar panels, mostly from Germany, some solar stocks are performing very well. For instance, Phoenix-based First Solar sold shares for $20 in its 2006 IPO and is now trading at over $250. Also, if US regulations direct or encourage changes in current energy practice (a seemingly inevitable trend), we can expect to see more market opportunities and therefore more clean tech innovation.
Bottom line: While outcomes are uncertain, one thing is clear – VC investments in clean tech will only increase for the foreseeable future. It will be something to watch, with potentially major ramifications for us all.