When VCs Run Out of Energy: The New Era of Cleantech Investing
The hasty promotion of cleantech to the high expectations of high-tech and biotech led to well-documented investment disasters. Capital intensity, time to exit—as we all know by now, energy simply isn’t IT (with all due respect to the plucky, if likely short-lived, promotion of “clean Web”).
The apparent decline of the word cleantech may be a good thing. In fact, its composition from “clean” and “tech” suggest the cause of its demise. The moral inflection of “clean” in cleantech suggests a subtle flaw in its origin. For many, cleantech was (and is) a cause. A non-financial motivation like environmentalism is admirable and even necessary, but it can muddle investor judgment. One frequently hears indignation in response to political opposition to comprehensive energy and environmental legislation and sanctimony in the wake of prominent investment failures. Neither has proven to be effective in overcoming the current malaise. We need some big wins, but how do we get there?
First, we should recognize that the fundamental macro trends that favor cleantech remain in place: GDP per capita in emerging economies continues to grow, with unsustainable middle-class material aspirations; energy security and energy independence continues to be a key driver of geopolitics; our electricity grid is aging, inefficient, and susceptible to cyberattack; and the effects of climate change, vividly demonstrated by Hurricane Sandy, already have the attention of our national security establishment and may yet overwhelm anti-scientific political intransigence.
Taking an Efficient Investment Approach
In response to these challenges, multi-trillion dollar global energy markets are undergoing a technology-driven transformation. Innovation and entrepreneurship related to energy and resource efficiency is producing a wide range of emerging companies seeking to address these markets. The contraction of the venture capital industry in general, and the retrenchment from cleantech in particular, should yield better returns for those investors who stay with it, assuming they can find a way forward that doesn’t repeat the mistakes of the past.
But the big change, of course, is cheap, abundant, domestic natural gas. The merits of natural gas compared to its fossil fuel siblings as a way to mitigate climate change are debatable—as are the environmental effects of fracking. But until there is a price on carbon, natural gas will loom over renewable energy like clouds over a solar farm or the desultory calm of a windless day.
So is it time to give up cleantech and energy investments and join the digital media party? It’s tempting, but I believe that resource efficiency and energy innovation are the wealth creation opportunity of this generation. Here are three ways to think about exploiting this opportunity:
1. Disentangle environmental considerations from your investment analysis. Many of us in cleantech are motivated by environmental concerns, but factors that enhance personal satisfaction may cloud professional judgment. Cleantech investment opportunities should be able to stand on their own business merits. Vinod Khosla recently declared that Khosla Ventures would not invest in any green tech startup that could not achieve cost competitiveness in an unsubsidized marketplace within five years of it launching. Good idea.
2. A dominant energy infrastructure, unforgiving commodity markets, and a natural gas supply spike enabled by fracking won’t be overthrown by a cleantech revolution. In fact, these factors comprise the context for cleantech investment decisions. Solazyme, a public biofuels company, has diversified into skin and personal care, nutrition, and chemicals in addition to fuel. In our own backyard, Oasys Water, which was initially conceptualized as a water desalination technology solution for agricultural and drinking water purposes in 2009, has re-focused to go after the domestic multi-billion dollar fracking market. Energy technology innovation and entrepreneurship must find a way to thrive in existing market conditions.
3. Although it is frequently pointed out that cleantech stumbled in part because it blindly followed habits developed in other sectors, the fundamentals of venture capital investing still apply: team, technology, markets. There are good arguments for the primacy of any of these, but for me it is ultimately the team—through perseverance, creativity and execution—that determines success. Where would Tesla be without Elon Musk? Matthew Nordan’s secret formula for identifying a great cleantech team is to look for bands of brothers and sisters—including the core inventor—that come together on their own, form a complete team, and have a leader fit for the long haul. I could not agree more. Terawatt’s first investment, MC10, was just such a band of brothers with a phenomenal platform technology. Since then, we have seen this band work beautifully through every early-stage startup challenge, from building a world class team to signing its first customer deal.
Is it time to jettison the word “cleantech”? There are no clear successors, but I prefer “resource efficiency”, which encompasses energy, water, food, land, and other critical resources. In any case, there are probably as many different ways to describe the investment category as there are investment strategies to address it.
All that said, I think we should keep the word “cleantech” (and not just to preserve Rob Day’s Twitter handle): neither the irrational exuberance that inflated it nor the knowing hindsight that disparages it are the true arbiters of its value. It is still early, and given the size of the opportunity, cleantech is an investment category that may well redeem itself.