The Greening of Venture Capital
posted by Darian Ibrahim
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.
July 2, 2008 at 11:05 am
Posted in: Corporate Law, Environmental Law, Technology
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Responses (3)
A.J. Sutter - July 3, 2008 at 12:05 pm
“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.”
I’ve worked as a corporate VC in the clean energy field, and I’m wondering, why would this be something reasonable to think? If KP *knows* it will lose more money than it makes, how will the money sunk into clean-tech start-ups have served an environmental cause? Moreover, how will KP raise money for another fund? I don’t think anyone who understands the business of venture capital could find the assertion about KP credible.
Also, VCs do not make money based on the success of technology. VCs make money by selling sizzle, not steak (sc., to the extent VCs make money from investments rather than from management fees). One example is the fuel cell field, especially hydrogen, direct methanol, and other types for non-stationary applications. Many fuel cell companies went public years ago. The folks who invested in those companies through VC funds made money in the exit. The fact that the fuel cell industry is floundering doesn’t matter. Venture-round investors can make money post-IPO as long as the romance of the technology’s promise survives for a few months until the end of the lock-up period (when they can sell their shares that were registered in the IPO). If the company goes to heck after that, they don’t care. The locus classicus of this (at least within the timeline of my own career) is of course the biotech wave of the early 1990s, but the same is true of many dot-coms that now are bust, “nanotech” companies, etc.
The irony here is that turning a profit from an investment in clean tech doesn’t have any necessary connection to serving an environmental cause. The technology may be useless, but the investment profitable.
Other points: “First, VCs must exit their investments and return profits to investors after 10-12 years, a pretty quick timeframe.” The actual timeframe is much shorter; 5-10 years is more typical. “[S]olar technology has rapidly progressed from silicon panels to thin film panels to super thin films that use 90% less material:” (i) actually, the progress has been going on for a long time, and (ii) the reduction in material, and changes in choice of material, usually come at a cost in efficiency. Consequently, you need to deploy more square meters of the stuff to get the same power output. So many of those low-cost thin-film photovoltaic technologies aren’t suitable for certain markets, e.g. downtown Tokyo, where I live. All the less so for, say, Puxi in Shanghai. BTW, there is much more to “solar” than photovoltaics.
Darian Ibrahim - July 3, 2008 at 12:31 pm
A.J. – thanks for your comment.
I agree with you on the sizzle/steak point, although to avoid a repeat of the Internet bubble rational investors might look for a little more steak this time around (or we could hope). That said, you’re right that some clean tech companies already boast successful IPOs, such as the company I mentioned, First Solar.
On your question “If KP *knows* it will lose more money than it makes, how will the money sunk into clean-tech start-ups have served an environmental cause?”, my answer would be that investments which lose money in the short term could still end up incrementally advancing technologies and lead to clean tech’s cost competitiveness in the long term.
A.J. Sutter - July 3, 2008 at 1:51 pm
Thanks for your reply. I don’t know what “rational” investors are doing. But I saw Sand Hill Road VCs making quite ignorant clean-tech investments — e.g., investing in companies making fuel cells for use in laptops and cell phones without knowing about fatal regulatory impediments to bringing such devices on board aircraft.
As for “investments which lose money in the short term could still end up incrementally advancing technologies and lead to clean tech’s cost competitiveness in the long term,” that could, in theory, be true. However, I haven’t seen this happen too often; it’s more often that companies go out of business because their technologies couldn’t become cost-competitive. I don’t think KP would bet on the rare case of something that’s way ahead of its time because they intend for it to rise, phoenix-like and owned by somebody else, 20 years later. If they want to give money away, KP guys would be more likely to give the dough directly to Stanford, MIT, etc. Your explanation also doesn’t address why KP would be motivated to go out of their way to lose the trust of their LPs. (And what does “liberal” politics have to do with this, BTW? The stereotype that liberals throw away money, notwithstanding KP being in the vanguard of the capitalist class?)
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