Cleantech Down and Dirty (Part One)

6/16/08

I feel the need to start off with a disclaimer, because when you start pouring A-1 sauce on sacred cows people tend to get a wee bit irrational. Let me state for the record that I do indeed believe that global warming is a real threat. I also think that our over dependence on foreign oil is a bad thing that imperils our nation’s economy. I also believe that cleantech is an investment area of great promise with new technologies that will profoundly change our world for the better.

That said, the cleantech field—as it currently stands—is a disaster in the making, with dumb money chasing dumb investments and with shoddy science experiments being grossly over-hyped as panaceas for all that ails our environment, gas tanks, and wallets.

We all know the score—basically, we have is a planet warming from CO2 emissions, record fuel prices, near or at peak oil, exploding demand from China and India for natural resources, not to mention suburban sprawl, polluted rivers and soil, etc, etc. The hope is we may be able to fix it with behavioral changes and technology.

Cleantech is the umbrella term for the technology part of this hope. It’s generally thought of as products or services that “…improve operational performance, productivity, or efficiency while reducing costs, inputs, energy consumption, waste, or pollution.” (Thanks Wikipedia.)

The issue I have with cleantech lies in the solutions that are being focused on, and who is doing the focusing. Let’s start with the latter and look in this column at cleantech and the VC community. You know, the guys quoted in all those BusinessWeek and Fortune articles portraying themselves as the saviors of the Earth—much like Capt. Planet and the Planeteers.

According to the most recent PricewaterhouseCoopers MoneyTree survey, venture capitalists invested $2.2 billion in cleantech companies over the last year. That’s a mind boggling 45 percent jump over 2006. I have seen business plans that were laughed at a couple years ago now become the object of bidding wars by top VC firms.

Beyond the hype and money, why are the VCs flooding into cleantech? I reckon some of it is driven by a combination guilt complex/God complex for the “sins” they committed in acquiring their wealth. I won’t mention any names (mainly because it’s such a huge list), but it appears these personal pathologies factor into their drive to save the Earth with their bigger brains and purer hearts ***cough***.

Now, there are great venture capitalists patrolling the cleantech space—Rob Day of @ventures comes to mind—but they belong to a very short list. The biggest problem is that most VCs are not equipped to handle industrial plays like energy. They don’t understand the engineering, the science, the value chain, or how the public policy world works. And, even worse, they don’t seem to be taking the time to access the right people to do the due diligence for these questions either.

These days, I am watching some HBS drop-out, who sold an online dog food company back during the bubble days, in a mad scramble to blindly pull the trigger on deals that need expertise in materials science and mechanical engineering to even read through the business plan. Seriously, some of the bizarre claims being made by some entrepreneurs in their projections would make any power industry engineer simply laugh out loud. Yet the checks are flying out of investment firm after investment firm to these start-ups.

Getting beyond the scientific and technical feasibility issue, try to find a VC that understands manufacturing. Good luck. I hypothesize that the reason so many photovoltaic companies have gotten funded is because if a VC by some miracle does understand manufacturing, he almost always understands it in terms of the semiconductor field. The reality is that building a physical object is extraordinarily different from 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.