The cries declaring that cleantech is headed for an apocalypse keep on getting louder. The latest is an article this month in Foreign Affairs on The Crisis in Clean Energy, which is getting attention from the blogosphere like this post on The Coming Cleantech Crash. A couple of months ago, I addressed some of my own concerns over a growing depression around cleantech investing and sectors.
I don’t think cleantech is headed for a sharp crash, given it’s been going through consolidation and a downward coasting for some time now. The cleantech sector is inherently cyclical — tied to international, domestic and local politics, oil prices, the economy and public sentiment — and is clearly facing a down cycle right now. Ask any cleantech-focused investor and they’ll tell you how they’ve ridden the cleantech seesaw up and down, and then up and now down again.
A few things are contributing to this slow downward trend. The traditional venture capital model of investing hasn’t been working as well as many investors had expected and a variety of firms have pulled back on investments or cut cleantech investing completely. Not many firms will admit it, but it’s still happening. And yes, there has been a series of cleantech IPOs this year, but as Rob Day points out, many of these IPOs are being done out of necessity for fund-raising, and are also piggybacking on summer of social media IPOs.
The potential drop in government support from both the U.S. and European countries, will contribute to the downward trend. The Department of Energy’s budget is facing the knife, and the markets that carried the solar industry — Germany, Spain, Italy — are pulling back. As we’ll see at Intersolar this week, solar firms are desperately seeking new markets to enter. The few-year term cycles for politicians also contribute to the up and down nature of government support.
The big problem, which the Foreign Affairs article points out, is how to invest in innovation for energy technologies — which takes a long time and a lot of money to produce — in the face of a drop in overall spending on it. Innovation breakthroughs come from basic science research, which takes money, but as Bill Gates has pointed out, his call for boosting energy R&D funding won’t likely be even remotely possible for several more years.
Trending back up
So, you proactive folks are probably wondering: If this is a down cycle, when will it start cycling back up? The good news (at least for cleantech companies), is there isn’t any avoiding moving to a low-carbon future, as fossil fuel dependence is creating immediate problems for national security and climate change.
Will public opinion turn the tide? I think the more digital documentation of extreme weather, the more people will be demand from their legislators that this change happen.
For more investors to get back in (or newly enter) the space, investors need more proof that certain kinds of greentech investments will make them money. Those are both the low-risk small returns of solar, or the high-risk large returns for new greentech innovation. The latter hasn’t happened yet, and everyone’s still waiting for a Google of cleantech. There could be some blockbuster greentech firms on the horizon — there’s been enough investment that likely something will appear — whether that’s via some of the new funds like Silver Lake’s Kraftwerk fund, or the next generation of funds from VantagePoint Venture Partners or Vinod Khosla.
Ultimately if the economy recovers more, government support could potentially rise again. And then there’s China, which is the world’s largest investor in clean energy, and which will be creating its own massive market for green technologies, regardless of what the U.S. does. In the same way that developing countries skipped over installing land line phones and went straight to cell phones, the developing world and China will install the next-generation of energy technology (including clean power and the smart grid) to meet its growing demand for power.
Clearly parts of the cleantech sector are moving into a consolidated, and depressed state, but I’m confident the cycle will trend back up at some point. The harder question is: When?
Image courtesy of Petroleum Jelliffe.