Why Are VCs Still Green When It Comes To Cleantech Investing?
May 2009Climate change and a shift in global policy favoring renewables has yielded widespread venture capital investment in the cleantech sector. Over the past 2-3 years, it seems that most VC firms have naturally evolved and now have a “cleantech portfolio” on their Websites. These firms have combed through the scientists and Ph.Ds at the world’s premier learning institutions, appointing the best and brightest to their cleantech advisory boards to round out intelligent investing with deep industry knowledge. Allotment of money, especially in the energy efficiency space, is now mainstream. It appears that all the tools are in place, yet VCs are still getting knocked when it comes to cleantech investing.
Two of the hottest areas now in VC investing are smart grid and energy efficiency, a clear advancement from ten years ago, before the term “cleantech” was even coined, when risk-taking individuals or large corporations gambled on unproven science projects. Could it be that the people doing the investing have not developed as quickly as the technology has? That might be part of it, but an explanation that I heard at a recent conference is much simpler: Cleantech investment “rules” are counter-intuitive to what VCs know.
Traditionally, a venture capitalist will search for or get pitched with a new idea or technology, thoroughly research the markets and become an expert on the innovation that they hope will spawn returns ten times that of what they put in. Investments in the Internet, enterprise technology or IT move very fast, as do advancements in those areas. Cleantech, especially energy efficiency, doesn’t have the same rule book. Energy is colossal—it’s bigger than any other area VCs have invested in before. Two-thirds of the planet uses it. It’s also slow, with R&D moving at an intense yet more measured pace than other technologies that VCs are accustomed to. Policy also plays a large part in cleantech investing, something that has not been a big issue in other types of tech.
Fortunately, investing in the cleantech space still has a lot of room to grow. I think that the success it promises to yield needs a more appropriate measuring stick as expectations are adjusted. Cleantech is still a fairly new game to VCs, and I think it will take time for the returns to roll in the same way they have in the traditional sectors that VCs are very experienced with.
