Cleantech Down and Dirty (Part One)

6/16/08

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setting up the next Facebook—more money, more time, and more headaches. Basically, a good branding plan will only go so far.

The other thing that is going to bite the VC community on their chino-clad behinds with cleantech is the regulatory environment. VCs just don’t get Washington at all. The culture in DC is so foreign to the tech community that it may never be bridged. That town isn’t built on best of breed, but on real relationships—and not just with a Senator or two, but on committees, at the agency level, in the White House, and with non-profits and other key stakeholders, the whole ecosystem.

Building off the regulatory/public policy space, the reason government is key is because a simple change in regulation or interpretation of a regulation can change the landscape drastically for what wins in cleantech. Forget a carbon tax—never going to happen. Instead, think of a tiny tweak in one biofuel formulation that is mandated and helps only a few companies while wiping out others.

It’s as easy as pie to make happen if you know how. Also consider that taking a cleantech technology from lab to pilot plant to full scale production costs BIG MONEY—and the government can be a key partner or sit back and watch an industry that doesn’t play ball drown.

I can say unequivocally that no VC has “it” on Capitol Hill. I spent six years as an appointee in DC, and I can also tell you that nothing makes a political fundraiser smile more than when someone with a Sand Hill Road address breezes into town—sans tie—writing checks and being too stupid to know what to ask for when it comes to a political favor. They let them shake hands and beg an officeholder for an oblique favor, and feel superior about themselves over a rubber chicken dinner. What they get is a photo for the office wall and a $2,300 (the maximum campaign contribution allowed) debit on their checking account.

And don’t go thinking Kleiner “has it” because they hired Al Gore. Anyone who knows the realities of Capitol Hill can tell you that—you are either “in” or you are “out.” Nobels and Oscars don’t make you “in” in Washington.

And lastly, lets cut to the chase on why the VCs are not going to really make a splash in the cleantech space—money. M-O-N-E-Y. A huge VC firm is sitting on maybe $1billion in funds. A tiny hedge fund is sitting on a $1.5 billion fund. And don’t think they and the greater private equity world don’t know it. And don’t think for a second they won’t slam down VCs so badly in the later stages of deals that they won’t erase them the way venture capitalists have erased angel investors. VCs aren’t even in the same ballgame as the boys in Greenwich. And the only way for them to get a semblance of a pimp hand to negotiate is via IPOs—and I dare you to find me all those cleantech IPOs.

So where does that leave VCs in the cleantech game? Likely nabbing a lot of headlines, drinking organic Merlot at sustainability conferences, and sitting in the middle of a very dangerous and expensive minefield that they have little chance of successfully negotiating.

Next time, folks, we’ll look at the areas in cleantech that are being over-invested or wrongly invested in.

Mark just helped found a Somerville-based stealth cleantech start-up which recently spun out of Harvard. He is a veteran technology entrepreneur and the former managing director and co-founder of Bang Ventures, an investment firm based in New York with offices which focused on early stage technology investments. Follow @

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  • http://www.ecogeek.org Hank

    I think there is a lot of validity here, particularly concerning a lack of understanding of the way DC works. I’ve been very frustrated at the solar industry’s complete failure on the SITC.

    But while there are certainly some cleantech startups that will probably never get to large scale manufacturing and IPO, that’s just the VC game. They expect to lose 9 times out of 10…though, they would certainly rather 8 out of 10.

    I think that there’s a ton of potential out there, and already a couple of success stories. Think Coskata, with their GM deal (GM certainly understands DC AND Manufacturing) or Nanosolar, as they approach both profitability and an IPO.

    In the end, you’re probably right about the god complexes…but let’s be serious…how else does anything get done in this world except by big egoed people trying to make their egos (and wallets) bigger. I, for one, am quite glad that conscience is now playing a part in large-scale investment, and hope that hedge funds see the benefits of the approach.

    Sometimes it’s just wrong to invest in the world that will make the most money. Maybe investing in the world that you want to see, and that would be best for the world, isn’t such a bad idea.

    Hank Green
    – Founder, EcoGeek.org

  • Neal Dikeman

    Mark,

    Dead on.

    I have hesitated to blog this area. I am on my 4th startup. Sandhill road is great at a lot of things, but taking investment bets in policy enabled, materials driven, commodity priced energy technology areas has not proved one of them.

    Energy and policy move differently than other areas, and Silicon Valley has been slow to respect the implications of those differences. That’s why the venture returns have not been there, even though the industries are growing hand over fist. The VC community by and large has been taking too much risk in their investments.

    Neal Dikeman
    Cleantechblog.com
    Founder Carbonflow

  • Barton Butterfield

    Finally, a voice of reason in this otherwise increasingly chaotic circus. Well done. I’ve been burned more than I care to share. Many of the financially painful lessons I’ve learned are summed up in your blog; i.e. money chasing hype, lack of understanding of scientific, industrial and manufacturing dynamics, and DC process.

    Barton B.
    Investor

  • http://www.greenstreetinvestor.com gsinvestor

    Mark, You bring up a bunch of interesting points. Yes VCs are throwing money at stuff in this sector – but then again its a pretty big potential sector.

    Yes VCs are making wild and crazy bets in Cleantech (e.g., letting a software programmer design electric cars for instance) but this is behavior we have come to expect from those that brought us te brilliant idea of shipping dog food to customers that buy it over the internet. That portion of the community isn’t going away anytime soon.

    And while I have no frame of reference regarding the DC portion of your critique – it doesn’t surprise me.

    What does surprise me (though I suppose it shouldn’t) is woeful lack of vision of the VC community with regard to how they approach cleantech. Their willingness to play within framework of the establishment with regard to most things cleantech is what is most puzzling to me. The energy business is about as rigged a game as it gets – its a truly crappy game to play as an investor because its not driven by market forces. Its a game they won’t win v. multi-national corporations and their cozy relationship with Washington.

    Where is the game-changing thought for this industry? Its as if the lessons learned from the PC/Internet revolution have been totally forgotten in the span of 24 months.

  • Andy B

    I am former military and today work Federal business by day and renewable tech at night. I always marvel at the mismatch between the gears which govern these very different worlds. Appreciate Mark’s comments that DC greatly under-values tech/business merit over relationships and trust. Sure there are exceptions, but this, in my experience, is the rule.