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Friday, January 2, 2009
Green Growth
VCs need to move beyond solar, biofuels and cars
MHT's Efrain Viscarolasaga: Solar installation booms in New England
MHT managing editor Rodney Brown on NECN: 22 tech companies give back to community
MHT reporter Efrain Viscarolasaga on NECN: Green tech brings jobs back to Mass.
According to the most recent numbers from the venture networking organization Cleantech Group LLC, solar, biofuels and transportation accounted for 60 percent of the global venture dollars put into the clean tech category during the third quarter of 2008. Solar by itself was more than 40 percent.
There’s much more to clean tech than just solar, biofuels and electric vehicles. At my firm, @Ventures, we think of the category more as “natural resource optimization.” That means we look not only at the three “headliner” technologies mentioned above, but also energy efficiency, water technologies, efficient materials use and cleaner use of incumbent technologies. But right now in the clean tech venture industry, clearly most dollars are going into a very small portion of the overall clean tech landscape.
If the goal of venture capital investors is to maximize returns, there’s a big problem with such a concentration of investments in general and into these subsectors in particular. The team at @Ventures recently posted a presentation (a link to which can be found at www.ventures.com), drawing upon the senior team’s deep experience in venture capital and the entire team’s experiences in clean tech, to draw out and discuss this and other challenging trends. The team members have invested in all three headliner categories in the past — and have learned a lot of lessons along the way. Limited partners, the investors who provide the funds that VCs put to work, should take particular note of some of these trends.
The first problem for LPs arising from such a concentration of effort is that it artificially limits the pool of investment opportunities. While the overall clean tech sector remains underinvested relative to the magnitude of the challenges facing our economy and society, by focusing on just a couple of technologies the broader VC community ends up over-crowding these subsectors. The world needs cost-effective solar, but does the venture capital community need to back 150 different solar startups, as some have identified?
While so many efforts in technologies like solar may seem like a good thing in concept, in reality it means VCs urging their entrepreneurs to take riskier approaches in an attempt be the “one winner.” That could mean more failures and fewer sustainable companies for the long run. So such over-crowding may not just be bad for VCs and LPs, it might be bad for the overall solar industry. Competition is good for customers, but over-crowding such a nascent market may not really help.
The second problem is that the three headliner subsectors are capital-intensive. In other words, you need tens of millions of dollars of investment in order to get the first dollar of revenue, since you need to build large manufacturing facilities. The bigger checks going into these startups mean that investors could see higher losses with each entrepreneurial failure. It also means that IPOs or the acquisition of the company might not provide good returns relative to the amount of capital that went into the company. According to Ernst & Young, the average venture-backed solar company has already taken in $40 million in venture dollars (and counting), compared to VC-backed energy efficiency companies at an average capital raised to date at $14 million.
The third problem is that the economics of these three subsectors are some of the most challenging of any across the clean tech landscape. Without regulatory support, the cost per kilowatt-hour of solar and per mile for biofuels and EVs remains unattractive for many potential buyers. While I am a strong proponent of these innovations over the long run, for now at least the customer economic value propositions pale in comparison to those of companies in subsectors like energy efficiency and smart grid, where the paybacks for customers are much shorter.
Fortunately, New England clean tech entrepreneurs and venture capital investors appear to be actively pursuing efforts across the broader energy, water and materials spectrum. In that the third quarter, for example, New England-based clean tech startups like Advanced Electron Beams Inc. of Wilmington (energy efficiency), FloDesign Wind Turbine Corp. of Wilbraham (wind), and Environmental Operating Solutions Inc. in Bourne (water) raised venture financings, to name just a few.
This is encouraging, but New England clean tech needs to continue to move beyond the headliner subsectors of solar, biofuels and transportation. Broadening our clean tech industry into more sectors will bolster the jobs creation potential for the New England region, and will also provide more diversification for the inevitable sectoral downturns. From an investor’s perspective, it means finding good investment opportunities where others may not be looking.
Rob Day is a Boston-based principal with @Ventures, focused on investments in the clean tech sector, and co-leader of the Renewable Energy Business Network. You can reach him at cleantechvc@gmail.com.
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