Blog Post

Even for investors with cleantech home runs like Tesla, digital energy is more attractive these days

Science innovations are back in vogue for Silicon Valley investors, noted an article from the New York Times this weekend, and as I reported this summer. The trend can be seen via a series of investments by firms mostly associated with backing consumer web companies now putting small rounds into more hard core science tech startups, like those building new modular nuclear reactors, or new space ventures.

But we should keep this trend in perspective. The resurgence has more to do with the consumer web space becoming insanely crowded with a wave of startups, as well as a recent “correction” away from avoiding all things related to cleantech over the last couple of years. Basically, there’s been enough distance from the VC-backed huge disasters like Solyndra and Fisker (though there are still more out there) that investors are starting to dabble in this space again. It’s also just the natural way that trends ebb and flow (see Gartner’s hype cycle).

Enel VP Bill Price and colleague inspect one of the parabolic troughs installed at the Stillwater solar thermal plant. Image courtesy of Katie Fehrenbacher, Gigaom.
Enel VP Bill Price and colleague inspect one of the parabolic troughs installed at the Stillwater solar thermal plant. Image courtesy of Katie Fehrenbacher, Gigaom.

As the New York Times noted, venture capitalists put $1.24 billion into industrial and energy startups in the first half of 2014, which was more than twice as much as in the period a year earlier. However, in reality, this isn’t all that much funding. In 2008 — at the peak of a cleantech investing bubble — there was $4.64 billion invested in industrial and energy startups.

Most think that size of “bubble” will never be repeated again for energy startups. Most venture capitalists now realize the difficulty of investing in energy infrastructure, like solar and electric cars, and those new companies that are getting funded are actually often times getting very small (experimental really) amounts. Nuclear startup Transatomic raised just $2 million from Founder’s Fund, which is a drop in the bucket on the way to commercializing its technology. Likewise nuclear startup Helion Energy raised $1.5 million from Y-Combinator and Mithril Capital Management.

But for most investors that backed cleantech companies through the bubble, and are now figuring out their strategy post-bubble, if they want to keep investing in cleantech-like companies, they’re — more often than not — turning to digital energy companies. Those are companies that make energy software, water management software, and other web and mobile technologies and big data tools that can manage resources more efficiently. This trend has been happening for awhile, with some groups calling this “cleanweb,” and some calling it digital energy.

A metallic case called a hohlraum holds the fuel capsule for NIF experiments. Target handling systems precisely position the target and freeze it to cryogenic temperatures (18 kelvins, or -427 degrees Fahrenheit) so that a fusion reaction is more easily achieved.
A metallic case called a hohlraum holds the fuel capsule for NIF experiments. Target handling systems precisely position the target and freeze it to cryogenic temperatures (18 kelvins, or -427 degrees Fahrenheit) so that a fusion reaction is more easily achieved.

I had lunch earlier this month with Steve Westly, of the Westly Group, which has been investing in cleantech companies since the beginning, and which invested in Tesla Motors. If a firm has backed Tesla Motors, the clout is the equivalent of being an investor in Facebook, or Google or even Apple for the cleantech space (though probably the returns are different). It’s the hottest company, hands down, to come out of the cleantech bubble.

But even investors in the hottest cleantech company around are not really repeating that strategy. They realize how risky, how difficult, and how capital intensive these companies can be. Westly told me during lunch that the Westly Group is really excited about investing in cleanweb, and that it has mostly moved on from making those types of energy infrastructure deals that were done back in the bubble. The firm doesn’t really even use the term “cleantech” anymore when it is talking about its portfolio and future deals.

SolarCity panels, image courtesy of SolarCity.
SolarCity panels, image courtesy of SolarCity.

Draper Fisher Jurvetson — which also backed Tesla early on — is likewise also much more focused on a digital strategy around energy. DFJ didn’t just back Tesla, but also another huge win in cleantech, SolarCity.

So essentially even the VCs that had big wins in cleantech aren’t continuing that same strategy. And I think these new investors in nuclear startups and other science companies, outside of energy, know this and will continue to only make small investments in these types of firms.

The resurgence of science investing won’t be a repeat or return to the cleantech bubble, as I’ve seen some headlines claim. Long gone are the days where major firms will invest a third of their funds on big capital intensive infrastructure plays (like Kleiner and Khosla did years back). As we now know, it’s just not a smart investment strategy for venture capitalists.

2 Responses to “Even for investors with cleantech home runs like Tesla, digital energy is more attractive these days”

  1. brent marsh

    Katie: You ignore the classic Black Swan technologies in your conclusions – those that are cost efficient and close to market. Fisker and Tesla were in a race, but Tesla had Paypal’s Musk. Solar City’s success’ are also tied to Elon’s glow. How can you call an investor prescient because they invested in Elon Musk?

    There are a ton of companies prepared to return VC level expectations without the need for large amounts of cash, but VCs are as fickle and illogical as my last wife.

    Face it: VCs jumped on Obama’s ARPA-E mostly because it was subsidized and they could deploy large amounts of cash as IT and telecom stagnated, before the reality of making money off a bunch of stupid apps made more economic sense.

    They mostly made asinine investments for all the wrong reasons. Don’t blame the sector. Blame the investors.

    They persist as the single category of investor lacking enough sense and ‘your hormone of choice’ to serve as an asset class worthy of the money they attract.

    Do more research of what’s coming out of close to a score of emerging global incubators I’ve seen.

  2. Albert Hartman

    Digital energy is all about utilizing the energy we already have more efficiently. And to the extent our future energy needs will be solved with phone apps, we have nothing to worry about. Sort of like trying to advance human technology during the Stone Age by focusing on better rock delivery services.