President Obama has pointed to the peak the nation has to summit for a brighter cleaner energy future, but will venture capitalists join the trek?

That is a big question in the current climate where VCs seem, well, deflated about investing in cleantech. Bets on producing solar panels and biofuels are taking so much longer to get any returns. Smart meters are finding foes in some energy regulators and consumers. Electric cars are gaining public attention, but they won’t reach critical mass for a while – maybe 10 percent in the United States by 2020.

“We haven’t seen many new comers in the venture capital space in the last few years. This will have to change if we want things to move forward,” said Gil Forer, global director of cleantech at Ernst & Young, during a panel discussion at an energy conference in Abu Dhabi a few weeks ago. “If you look at exits for VCs, they took three to five years in the 90s; seven years in 2004-05. Now we are talking about nine years plus. Not a lot of VCs can sustain this time frame from investment to exits."

VCs’ willingness to bet on technologies, particularly those in early-stage development, is crucial for achieving goals pinpointed by President Obama in his State of the Union address last week. Obama spoke at length about the importance of nurturing innovation, and he challenged the country to work on getting 80 percent of its supply from cleaner sources by 2035. He also wants to see 1 million electric cars on the road by 2015.

The government has long funded research that found its way into everyday lives. In hard times, the government is also known to offer cash, loans and tax credits to startups and corporate giants to sustain their technology development efforts and keep people on the payrolls. This largess comes with an expectation that the private sector will match in money and effort. In fact, billions of grants and other incentives that have flowed from the American Recovery and Reinvestment Act of 2009 went to companies that had to provide matching funds and specify how many jobs their projects will create.

But investors’ patience for seeing any return on their investments may be thinning. Cleantech companies, VCs have come to discover, require a much longer gestation period than they had anticipated. Many of the cleantech sectors, from solar to electric vehicles, involve manufacturing and building factories is an expensive and time-consuming undertaking. Plus, Congress’s failure to pass a climate change bill has dampened demand for cleantech, even if energy policies have taken shape, in a hodgepodge fashion, in many states.

“A lack of clear regulatory framework has created a lot of problems and made it hard to bring companies into the conventional VC cycle,” said Ben Cotton, a partner at London-based Earth Capital Partners, during the panel discussion at the conference. “The innovation cycle is getting extended because they can’t find the customers for their technologies.”

In solar, VCs are seeing their portfolio companies – many of thin-film panel makers – struggling to improve their products’ efficiencies and build their first factories while these companies’ already much larger competitors keep expanding their factories quickly.

Vinod Khosla, founder of Khosla Ventures, has become fond of pointing out how two solar companies in his portfolio, Stion and Cogenra, have been able to hit product development or manufacturing milestones without having to line up hundreds of millions in capital. One wonders if Khosla has come to appreciate these companies a lot more after seeing several of his biofuel investments stumbling mightily to overcome technical problems or raise funds to build the first commercial refinery.

In the past two years, government funding has achieved an intended effect of helping the companies attract investors. Just look at which solar companies attracted some of the biggest deals in 2010: Solyndra raised $175 million in convertible promissory notes to build a factory (it won a $535 million federal loan); Abound Solar raised $110 million in equity to build a factory (it closed a federal loan of $400 million); and BrightSource Energy raised $150 million in equity as it was getting ready to build its first solar farm (the government offered it a loan guarantee of $1.37 billion). Public funding helps companies that would otherwise have a hard time raising the capital needed to bring their products to the masses. 

But as Peachtree Capital Advisors noted in its report on 2010 fundraising activities in the United States, the bulk of the money didn’t go to early-stage companies. Why? Because investors were wary of taking chances.

“While advanced-stage funding was a popular theme, new investments proved difficult to obtain as many solar investors — still waiting on results from portfolio companies in which they have invested and continue to invest significant capital — had little appetite to stomach additional solar plays,” according to Peachtree’s report.

The report also noted that bioenergy deals slowed in 2010. The sector attracted $1.4 billion in investments, which counted capital fundraising, initial public offerings and mergers and acquisitions, in 2010, a 27 percent drop from 2009.

While VCs and their limited partners reassess their investment strategies, evidence shows that more corporate VCs have stepped in to support younger companies. General Electric recently formed a joint venture with NRG Energy and ConocoPhillips – the latter two are newcomers in the venture capital investment world. Last week the companies said they had committed $300 million to their VC firm, called Energy Technology Ventures.

The first three companies to get money from Energy Technology Ventures include Alta Devices, the somewhat stealthy company that is developing what appears to be an ultra-thin layer of semiconductor material for converting sunlight into electricity. Another company, CoolPlanetBioFuels, is developing ways to convert cellulosic biomass into fuels and, in the process, produce carbon that can be buried in the soil as fertilizer. 

To kick the innovation engine into high gear, as Obama is calling on the nation to do, we will need VCs who aren’t shy about investing in early efforts to investigate new materials, manufacturing processes and business models. Perhaps the investors will regain their appetite once they see an improved appetite for initial public offerings and more acquisitions. Maybe Congress will pass a climate bill to set a price on carbon (a big maybe). Or, we will have to move the clean energy goal post beyond 2035.

UPDATE: On Feb. 3, the U.S. Department of Energy noted that its early-stage technology funding program, ARPA-E, has given six solar, wind and battery startups a total of $23.6 million, and these companies then attracted more than $100 million in private equity. The DOE didn't specify how much of the private equity was venture capital. In his speech, Obama said he plans to ask Congress for more money to fund startups.

Disclosure: Abu Dhabi government paid for my travel and lodging for the 2011 World Future Energy Summit.