Over the past several years, many investors, pundits and entrepreneurs have pointed out the infamous gap between the time lines of venture capitalists and the time lines of successful greentech companies to me. Basically, VCs start to want an exit (IPO or acquisition) from a startup it has invested in after about 4 to 5 years. Given the capital requirements for some greentech startups, the economies of scale needed to cut prices of technology like solar, and the sometimes hardcore science breakthroughs required, often, 4 to 5 years just isn’t enough time for a greentech startup to find success.
The result isn’t pretty: a gap in expectations, and frustration by both investor and entrepreneur. While this has been a much-discussed topic, over the past few weeks, the reference to this gap seems to have hit a fever pitch. Here are several voices I’ve heard recently on how the VC model is broken for cleantech:
Bob Metcalfe, partner with Polaris, interviewed in the Wall Street Journal this week:
I learned that the innovation environment in the energy space is not there yet. The problems we see are a mismatch between the asset class called venture capital and the innovation opportunities in energy – it takes too much capital and it takes too much time. But I claim that’s only because the innovation environment in energy hasn’t developed, say, the way it has in pharma.
Drugs take a lot of money and a long time, but there’s a lot of venture capital activity in drug discovery. That’s because the drug-discovery business has grown into being able to exploit the venture capital model. The partnerships that big pharma has with drug companies in stage one, stage two, stage three [clinical trials] allow venture capitalists to do what they do and get the returns that they need. The energy space has not quite developed, but it will.
We’ve always been very interested, but we also remember what happens when small entities get involved in highly capital-intensive companies. If you’re a company in the energy field that employs capital wisely, the future should be fairly bright. If it requires hundreds of millions of dollars, there could be clouds on the horizon.
Dan Reicher, head of the new Stanford Steyer-Taylor Center for Energy Policy and Finance, former Director of Climate Change Initiatives for Google:
The VC community is seeing that success in energy tech takes a lot longer than success in IT. That’s why the policy world is so important. In IT, we look at months and years, and [with] energy tech, it’s years and decades.”
John Doerr, Kleiner Perkins, speaking 2009 at GreenBeat:
If we’d been able to foresee the crash of the market, we wouldn’t probably have launched a green initiative, because these ventures really need capital. The only way in which we were lucky, I think, is that the government stepped in, particularly the Department of Energy. Led by this great administration that put in place these loan guarantees.
Peter Thiel, co-founder of PayPal and partner with The Founder’s Fund and Clarium Capital, speaking at TechCrunch Disrupt earlier this year:
Cleantech companies for a variety of reasons don’t work . . . the one thing we haven’t done is an alternative energy investment. . . I think a lot [of alternative energy funding] has been misdirected.
For more research on cleantech financing check out GigaOM Pro (subscription required):