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Greentech Investing: Not Working for Most

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There’s been a trend of well known web investors over the past year noting “boy are they glad they haven’t been investing in cleantech.” The latest came from Peter Thiel, co-founder of PayPal and partner with The Founder’s Fund and Clarium Capital, at the Tech Crunch Disrupt conference this week. Thiel said “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.”

Last year, when Netscape founder and investor Marc Andreessen launched his $300 million fund, he went out of his way to note that the fund would keep a wide berth from anything related to cleantech, energy and transportation. He told Fortune Magazine, flat out: “No cleantech, no rocket ships, no electric cars.”

The two Internet entrepreneurs-turned-investors have been smart to steer clear from the often capital intensive and science-dependent sector. The returns, if they happen, seem to have been stretched out over close to a decade, many times have required a lot more capital than VCs anticipated, and haven’t appeared to have delivered close to a VC-type return. Kleiner Perkin’s first cleantech investment — fuel cell company Bloom Energy — has raised over $400 million, is eight years old, and only launched out of stealth this year with a handful of customers. Thin-film solar maker Solyndra has raised close to $1 billion over its 5-year-lifespan and pulled back on its IPO plans earlier this year.

The economics have gotten so difficult that according to a report in Reuters this week, there’s been a sharp decline in investing in early-stage cleantech companies because of the lack of returns for investors. VC investment overall fell in 2009 because of the recession, but investments in new, early-stage cleantech startups dropped even more compared to all investing: 35 percent of VC dollars went to early-stage and seed cleantech companies in 2007, but just 20 percent went to that group in the first half of 2010, reports Reuters.

Cleantech investing has instead shifted to follow-on rounds to companies that have already received hundreds of millions of dollars and passed important milestones like achieving commercialization, passing regulatory hurdles, selling to companies’ first customers, and the often necessary U.S. government loan, loan guarantee or grant. Examples of these firms that have continued to raise a lot of capital over the years are BrightSource Energy, Bloom Energy, Solyndra, Fisker, and Tesla (s TSLA) (which had one of the few positive exits in cleantech). Investors seem to think it’s a less risky bet to keep putting money into more mature companies.

Khosla Venture’s Vinod Khosla seems to have the opposite approach. He continues to put small amounts of money into early-stage startups; I see his firm’s name associated with startups emerging from stealth mode on a monthly basis. This week, Khosla and Kleiner had one of their first exits, when next-gen biofuel maker Amyris (s AMRS) debuted on the NASDAQ. At $16 per share, each firm’s shares were worth less than $70 million, and we’ll see how much that’s worth after the lock-up period is over.

Investor Fred Wilson recently pointed out that there are two VC industries. The first is focused on the web and software and has fundamentally been changed by how inexpensive it is to build and launch a software or web company. The second is looking at cleantech and biotech and other capital-intensive industry, and which hasn’t fundamentally changed at all, says Wilson.

Well, there’s a good deal of “cleantech” innovation that can be software-based, like energy efficiency, but overall, I agree with Wilson. Cleantech investing hasn’t seemed to benefit at all from the new wave of super angels and scrappy Y-combinator entrepreneurs. I don’t think any of my peers in cleantech paid attention to the Bin-38 super angels story this week. Chris Sacca, one of the so-called super angels, told me a couple months ago, that he, too, like Andreessen and Thiel, plans to stay far, far away from the cleantech sector.

I think there’s a learning curve happening for cleantech investors; it’s just taking awhile to happen. And yes, a bunch of the cleantech investors are getting weeded out, and some of the early funds have been misspent. There’s only so much LP money you can spend over so many years without getting some back.

Here are a few things I think have been learned over the past few years, and which the slimmed-down number of cleantech investors will work off of in the future:

  • Don’t lead investments in emerging areas that depend on science that you don’t fundamentally know much about.
  • Bring in someone with power industry, oil industry, car industry, or engineering or chemistry degrees to find leads.
  • Batteries and power electronics aren’t as accessible as, say, Zynga.
  • Another one is have someone in Washington. You and your cleantech firm need the government and the government needs you.
  • The innovation in cleantech won’t be coming from the Y-combinator crew.

The last item is key; innovation will be coming first from the crossover between IT and greentech, like the smart grid sector. There’s enough in common in some of these areas that smart startups can be built and lead industries, like Silver Spring Networks.

The second place where innovation will occur, and which investors need to do a better job at tapping, is university labs. Greentech and energy research is becoming amazingly popular with students, which means you’ll have to access the students that stay in schools — not the brilliant ones that drop out to build the next Facebook.

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5 Responses to “Greentech Investing: Not Working for Most”

  1. Excellent article!

    Your lessons are very well taken.

    In fact, as an EIR at Yaletown VP, an early entrant Cleantech VC firm, this is an area that stimulates lively dialog and debate. So much so, that an article posted today at is dedicated to a new Cleantech framework to better separate potential winners from more marginal prospects:

    The four criteria that have been developed are consistent with four of your five lessons.

    Regards, David

  2. Katie-
    Good insights, and thanks for mentioning the important exceptions to the capital-intensive rule. While many early-stage investors have good reason to stay away from cleantech, there are some cleantech opportunities (like Efficiency, Smart Grid, and what I call Smart Transportation) that do lend themselves to profitable early investments. Not coincidentally, these are the best stock market investments as well.

  3. Great post, Katie, and I’d that if government and university labs are indeed among the Holy Grail for cleantech/greentech/smartGrid start-ups, they’d be wise to look in my neck of the woods: Maryland. Montgomery County, Maryland is close to DC, we’ve got Univ of MD here, and our county government is investing in a GreenTech corridor similar to the I-270 Tech Corridor that spawned a ton of tech start-ups back in the day. (I used to handle marketing for one of them – Telogy Networks – which was later sold to MOT & TXN). Oh, and my vested interest? Now I run a marketing firm and would LOVE more cleantech/greentech clients but there aren’t enough of them around here!

  4. Steve Geiger


    you can’t Facebook your way to a power station.

    Cleantech never promised to be like the Web, where you pitch $2-5mn at guys in a garage writing code and hope for a Google.

    Most of cleantech investing centers on power generation, energy storage, water treatment, etc., which inevitably revolves around hard physical assets that can’t be scaled or reproduced cheaply like PayPal or other software apps.

    And there rarely is a sugardaddy like Cisco waiting in the wings to buy your umpteenth start-up from you at a tasty profit and save you from the valley of death.

    No one should doubt the potential of cleantech, but this potential may not be captured best by a VC model used to Moore’s Law and Web investments.

    (no, Virginia, your electric bill will not get cheaper every 18 months)