I quote Mark Twain not to exaggerate my absence from blogging for five months but to characterize the current negativity surrounding clean tech as an overreaction to several externalities, which will reverse course over time. Lately I have reviewed many cash-starved clean tech companies at various stages of maturity and have been listening to a lot of negative questions and comments about the future of clean tech. Why has clean tech investing dropped by 40% from this time last year?
First, the softening worldwide economy and declining fossil fuel prices have brought into question all new projects related to energy generation, industrial production, infrastructure development, and building construction. Most clean tech businesses are highly levered to these industries. Second, financing constraints across the capital structure (e.g., all forms of credit, private equity, and venture capital) have stalled many growth plans; however, these constraints are non-specific to clean tech. In other words, the uphill battle of financing clean tech technology and commercial projects is collateral damage of the rapid deleveraging across capital markets. Third, regulatory uncertainty over cap-and-trade is delaying many clean tech projects. Everyone expects a new regulatory regime to emerge; however, the timing and economic models of this market remain unclear. Fourth, how quickly and efficiently Federal and state government stimulus will translate into infrastructure funding and tax incentives for clean tech projects remains in question. Fifth, the failed hype over ethanol has become of an example of the risks and complexities of investing in over-hyped “green technology.”
The good news is that a clean tech bubble did not burst and the demand trends towards efficiency, conservation, and environmental stewardship have not fallen out of favor. Fossil fuel prices have not fallen so far as to invalidate worthwhile alternative fuel development or clean generation. Moreover, funding of new technology has already been deployed in such volume that we are sure to see amazing advances within the next several years. Regulatory change, infrastructure development, and an eventual end to this recessionary environment will drive clean technology initiatives to new heights. And, finally, as credit markets begin to function properly and venture capitalists return for the hunt, I suspect that clean tech will flourish.
Nevertheless, there are some important lessons to learn as entrepreneurs and investors wander through the wilderness in search of a promised land for clean tech:
- The term “clean tech” has stimulated discussion and generated interest from investors; however, it is too general for such a broad market space. Can you imagine if we still used the term “information technology,” instead of recognizing the diversity of businesses amongst enterprise software, personal computers, data centers, wireless platforms, e-commerce, smartphones, robotics, electronic storage, semiconductors, distributed computing, mobile advertising, new media, etc.? We must move beyond this term to distinguish amongst worthwhile market categories that fit generally under the clean tech umbrella.
- Technologies focused on conservation and efficiency can thrive in this economic environment. Investors have tended to ignore many promising technologies and ventures that are not focused on alternative fuels and alternative energy. Let us not forget that some “green” categories can boast a value proposition of direct ROI from cost savings.
- All bio fuels are not created equal. Maybe today’s ethanol and biodiesel technologies are not ready for mass commercialization with $55/bbl oil prices; however, the geopolitical and environmental issues of fossil fuels will not disappear.
- In the rush for alternative energy, we have missed many opportunities to seek innovation within markets that still involve fossil fuels. Better recovery technologies, more efficient refining, cleaner generation, smart grids, and other technologies have often been ignored by well-intentioned investors because they do not appear to be as “green” as developing new biofuels. The facts are that innovations in these ignored areas could have a greater impact on reducing greenhouse gases and building energy independence within the next 15 years than most alternative energy ventures.
- Clean tech investing requires more interdisciplinary domain knowledge than funding new media ventures or lending to commercial real estate. If you are looking at early stage businesses, and you do not understand the science or the industry dynamics at play, you should not be an investor. Too many early stage venture capitalists—who have never set foot in an electric utility or chemistry lab—were ready to pick winners in alternative energy. This is not a game of finding the next eBay or MySpace. Late stage VCs often did not understand how fragile their non-control equity position would be in a capital stack filled with senior and subordinated debt to build commercial scale facilities. Finally, banks and hedge funds were chasing yield by supplying cheap, covenant-light credit for technology and markets that were completely unproven.
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2 comments:
I want to accent your bullet number 4. I suspect that if we concentrated on using less, we could have 10 times the impact than any new form of energy. There is less call for VC size investments though, because some of these ideas are simple and cheap - which makes them great economically for individuals and bootstrapping businesses.
FIU has graduated a few businesses that provide a simple service - checking out your workplace or home and recommending cost effective modifications to behavior, control processes, or simple equipment that reduce energy use.
Thank you for your comments Marc. To expand, the reasons why investors have focused on alternative energy more than conservation or innovation within more traditional energy markets are to some extent historical. First, the early players in clean tech investing were VC shops where their capital came from electric utilities. Thus, they were more interested in investments that would be of strategic interest to their limited partners. Although there was an interest in Demand Side Management technologies, more emphasis was placed on alternative forms of generating electricity. Second, investors in more commercial-ready projects were drawn to wind, geothermal, solar and standard biofuels, where scale production was already possible. In addition, there has been growth in Performance Based Contracting and LEED certified construction, which could be argued involves new capital infused into conservation-focused clean tech projects that we do not typically account for as clean tech investments.
I agree that if you count near-term environmental impacts and cost savings more than investor capital returns, as a nation we should push more for conservation and efficiency than clean energy. Maybe this level of debate should be taking place in Washington, because investors will still drive innovation where the profit potential is strong, but government should be more focused on seeding innovation and supporting commercial projects where the profit potential is not great, but the benefit to the country is overwhelming.
It is hard for the press and politicians to understand that keeping your car tires filled, replacing your incandescent lights with CFLs and LEDs, installing high efficiency shower heads and toilets, and telecommuting one day a week could have more impact in the next 5 years than ethanol will in the next 15 years.
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