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Summary:

One of the more subtle problems with the first wave of cleantech investing I think has to do with passion, identity and save-the-world over exuberance. It’s hard to call that a fault, but when it comes to making money in the VC model, it’s a problem.

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Ask the very best investors and entrepreneurs about the secrets to their success and many of them will say it’s all about the passion. Falling in love with an idea, or a product, to the point of obsession can be a powerful catalyst that makes a venture work. But what happens when passion for an idea actually blinds us to deep problems with that idea? That’s one of the key things I think went wrong with the first wave of cleantech venture capital investing.

This week Reuters published a report, citing anonymous sources, saying that Kleiner Perkins held a meeting with its limited partners (the funds and endowments that put money into Kleiner’s fund) where Kleiner leader John Doerr apologized for a weak fund performance and promised to do better in the future. Kleiner closed on a new $525 million fund a little less than a year ago, and at the time made a bunch of changes.

Kleiner's Gore and Doerr Pitching Green Growth FundKleiner was one of the most aggressive and high-profile venture capital firms to put money into cleantech startups, and at one point had been hoping to invest a third of its funds into green companies. Part of Kleiner’s poor fund performance no doubt has to do with its greentech investments that haven’t made the firm money. And actually a bunch of its investments struggled mightily, like Miasole, Fisker Automotive, and Amonix.

I’ve written a lot on why cleantech and VC is a difficult match. Check out these pieces from over the years:

But one of the more nuanced reasons that I haven’t spent much time on is passion: what I think was investor passion for doing good, for helping fight global warming and for saving the planet. It’s hard to paint that type of enthusiasm as a bad thing. But I think the drive to be known as an investor that makes the world a better place was something that could have distorted the lens used to find investments that will make money.

A lot of the venture investors in Silicon Valley are cut from the same cloth. Many are environmentally-leaning Californians who have kids and who are in their mid-50s and 60s. Many made their fortunes — either through startups or investing — off of the IT sector. The general mindset several years ago was to look for what came next after IT, and greentech provided them with something they could feel good about doing and providing the right legacy for their kids.

That feeling of righteousness is a powerful drug that can cloud rational thinking sometimes. A startup with a potentially game changing innovation that can save the world should succeed — we all want it to succeed — but how much of these investments were hopeful money, blinded by do-gooder passion, as opposed to rational money?

That Doerr put his own personal money into some of these companies as they struggled highlights just how strong the do-gooder pull is and how personal these investments were sometimes. Reuters reported last month that Doerr dipped into his own pocket for the about $2.5 million that struggling solar company Miasole needed to make payroll before it was sold. I’ve heard rumors that Miasole isn’t the only company that Doerr, and Kleiner Partner Ray Lane, put personal funds into. When those companies fail, it’s a slap to the identity of the investor as the savior.

More money going into greentech innovations is the right thing to do from the perspective of the world. The planet needs this technology. But it will likely have to come from non-VC pockets of money, like government funds or project finance.

While Kleiner is the highest profile of the venture firms to make an aggressive bet on cleantech and then (seemingly) retrench, it by no means is the only one. VantagePoint Venture Partners admitted recently that it had to curb its cleantech fund due to lack of interest from investors. Private equity firm Hudson Clean Energy Partners also halted its clean energy fundraising process and the managing director resigned.

Other firms, like Draper Fisher Jurvetson and Mohr Davidow, have shifted strategies to focus on cleantech lite, or cleanweb startups. There’s a few VC firms left that are still trying to do investments in new energy tech and sustainability-focused startups like Khosla Ventures, Braemar Energy Ventures, and Lux Capital, but these are few and far between. The silver lining for those guys is that there’s a lot less competition out there now.

Clearly over-exuberant save-the-world optimism wasn’t the only problem with cleantech. The sector is vast, complex, science-heavy, partly regulated, partly government dependent, and many areas haven’t seen innovation in decades.

We’ll be watching closely to see if some of the cleantech 2.0 strategies are actually working and if those include that same do-gooder passion.

  1. Or could it be that double-bottom-line investing attracts charlatans and B-level money managers, plus investors with some combination of low standards and ulterior motives.

    http://www.barkfordaddy.com/2010/02/impact-on-target-signal-lost.html

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  2. “More money going into greentech innovations is the right thing to do from the perspective of the world. The planet needs this technology. But it will likely have to come from non-VC pockets of money, like government funds or project finance.”

    I hope this isn’t the case. Perhaps traditional investors such as KPCB haven’t achieved success with social impact investments, but this isn’t reflective of the entire sector. Next-generation organizations such as Endeavor, Omidyar Network and Vox Capital have made many successful investments with positive social impact (Carrot.mx, Cinepop, Enova, Imagen Dental, for example).

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  3. Here is the crux of the problem with most (though not all) cleantech ventures: They often do not create new value and are just focused on cost.

    Let’s take an example of a hypothetical company that has found a new technology to increase efficiency of solar cells. What is the ‘product’, i.e., the outcome of this company? It is that same boring electricity. And what is the USP? It is slightly cheaper — the end result of greater efficiency. Note that the company cannot charge a premium on its technology (or its solar cells) because if it did that, its costs won’t be lower. Its own income must come from that thin slice of cost arbitrage it has created.

    And then within six months to a year, somebody else comes up with another technology that reduces the costs still further, wiping out the business case in a flash. Even if that doesn’t happen, someone somewhere (in China?) agrees to work at a fraction of western wages and the cost of the conventional solar power itself crashes.

    The same paradigm will apply to wind power and electric cars (what is the product/outcome? A car!)

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  4. A lot of money goes into promoting the concern about climate change — $2Billion/yr from the government for “climate science” plus another $8B or so for subsidies, plus $400Million/year from foundations, plus corporate money (e.g. – Chesapeake’s $25 Million to the Sierra Club to kill coal (which Sierra has now turned against natural gas).

    The problem is that that the climate change hypothesis is shaky. Agreement is good that a doubling of CO2 would produce a 1C rise in temperature; all estimates above than assume that feedback effects are positive. ALL the models assume this (if your model does not show a problem, you aren’t going to get any of that gvt science money). In fact, empirical work indicates, increasingly, that the feedbacks are negative, dampening any effect of CO2.

    As Richard Lindzen, one of the best of the skeptics puts it:

    “Future generations will wonder in bemused amazement that the early 21st century’s developed world went into hysterical panic over a globally averaged temperature increase of a few tenths of a degree, and, on the basis of gross exaggerations of highly uncertain computer projections combined into implausible chains of inference, proceeded to contemplate a roll-back of the industrial age.”

    The answer is: follow the money.

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  5. solar technology is good and desirable one however, in one exhibit here in the Philippines, an attendant of the display of solar panel made in Germany secretly confided to me, the ROI in solar is slow, and difficult.

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  6. It takes about a 5 minute google search to show this article is fairly misinformed

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  7. Hmmm… Think you are giving investors and “entrepreneurs” in clean energy way to much credit.

    scientific incompetence (by both VC’s and inventors), deliberately misleading metrics (by both VC’s and inventors), and VC greed and laziness are far more likely culprits than “their passion to do good.” And the nice thing is through lobbying and influence they have managed to screw up the DOE as well.

    It would be nice if the disaster that is cleantech were just a simple… oops I was very passionate. the real problem is the same reason we should have had TV/PC convergence in 2000 and in 2013 we still have a largely page to page internet.

    VC’s have evolved into entities that are about apparent value, not real value (remember Doerr and “IT”. did the Segeway change the world? “cities will be built around it” Really? Doerr is the perfect modern day Barnum doppelganger).

    VC drivers are not dissimilar to the “celebrity culture” where a d-level celebrity gets enough headlines on TMZ or releases a sextape and suddenly they are a 30 million dollar revenue stream. VC’s same thing. If you can ramp a company and get enough buzz and get to the IPO then everything for you, the VC, is golden. Broader issue is there is a compound effect of this incompetence which is driving right into the wall, but the VC has his bonus so who cares. And you think these people are investing righteously? you cannot be that naive.

    And now they are moving on to second tier stuff that Gigaom can really dig into like ev’s and the smart grid and grid network management and software. of course none of this is worth anything without solving the core energy generation problem (ex. what good are EV’s like Tesla if they are supplied from a dirty generation system?), but they already screwed that pooch so they better move to stuff they can smoke and mirror for the next 5 years.

    this is as much about doing good as Stalin was. you really should pay attention to the man behind the curtain.

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