Why Cleantech Investing Has Morphed Into Energy and Sustainability
Advocates of cleantech investing often make the case that there are enormous opportunities to make the world cleaner and more sustainable. But what if labeling yourself a cleantech investor or entrepreneur is actually limiting?
That’s the question I walked away with after a panel of venture investors at the Energy Symposium at the Harvard Business School last week. The discussion reflected how investors have had to rejigger their strategies and reconsider the basic assumptions they held five or six years ago. For entrepreneurs, their thinking provides clues on how best to frame what your company does and how to approach VCs as potential investors.
First, a bit of history: in the early to mid-2000s, venture capitalists became enamored with cleantech and poured billions into startups, with a heavy emphasis on solar and biofuels, only to lose money after many of these companies failed. Because there have been few high-profile successes, cleantech, ironically, has become a dirty word for many of the limited partners who put money into venture funds. Most venture funds have shut down or deemphasized their cleantech activities.
Not Clamoring for Carbon Cap
One of the key flaws many investors made was operating on the expectation that government policy would favor clean technologies. There certainly are policies that do—there’s a 30 percent tax credit for renewable energy until 2017, for instance—but more sweeping measures, such as economy-wide carbon regulations or massive research and development programs, never materialized.
Nowadays, people don’t expect those types of programs to happen and act accordingly, said Michael Linse, who runs the Green Growth fund at Kleiner Perkins Caufield & Byers. Five years ago, VCs were hopping onto planes to lobby in Washington, D.C., in an attempt to influence federal regulations. Now, he worries about much more standard “growth capital” concerns, such as how much money startups will need to fuel their growth.
“(Specific regulations) will affect a lot of our portfolio companies but it’s not existential because the cost curves have spoken and will continue going down pretty dramatically,” Linse said.
Five years ago, people still debated whether solar, wind, and electric vehicles would have a significant penetration. Now, the question isn’t whether they’ll be adopted but how quickly, Linse said.
Before the word cleantech was even around, there were venture funds specialized in energy and perhaps materials as well. Now those stalwarts are finding it much harder to find co-investors, which becomes most acute when a venture firm has provided seed money and then needs growth capital in the form of Series C or Series D rounds, said Todd Wilson, a partner at RockPort Capital Partners.
“The number of investors in this sector is shrinking and has been shrinking,” he said. “As a firm, we need to make sure we have more capital reserved in this environment than we would have five or six years ago.”
And if a firm is reserving more of its money for later-stage investing in existing portfolio companies, then it’s probably putting less seed money into new ventures. That helps explain why early-stage venture capital in cleantech has shrunk dramatically.
On the other hand, large corporations, or so-called strategic investors, are becoming more active, even in Series B rounds, said Bill Lese from Braemar Energy Ventures. For a startup, strategic investors provide money and potentially access to their distribution or they can act as a first customer for a new product.
“Large strategics in energy have become very venture friendly in recent years where it used to not be,” he said. “It’s really changed the whole thing.”
Energy Writ Large
The growing importance of large corporations in cleantech exposes a less-publicized but significant change happening among investors and entrepreneurs in this area: a shift toward energy technology, in general.
Certainly, there are many cleantech startups with a mission of replacing fossil fuels. But a number of companies are developing technologies designed to make existing “dirty” industries, including energy, cleaner and more efficient.
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