Now That the Cleantech Hype is Gone, the Real Venture Investment Opportunity Begins

David Gold, Managing Director, Access Venture Partners
November 09, 2012 | 3 Comments

The bubble has burst. The hype and euphoria of 2008 and 2009 is a distant memory. Fueled in part by the externality of the stimulus handouts from the stimulus package, and the (now fleeting) spike of natural gas and oil prices, cleantech has experienced its own mini dotcom era now followed by a dot bomb phase.

The politicization of Solyndra, the fracking revolution (that has dramatically increased U.S. fossil fuel reserves) and the realities of what it takes to build successful cleantech companies have all brought the cleantech venture capital space crashing back to earth. Available venture capital for cleantech companies has declined dramatically as some diversified funds pull out of making cleantech investments and cleantech-focused funds find it challenging to raise new capital. But this is not the beginning of the end for cleantech venture capital. Rather, it is the end of the beginning. While the cleantech hype has been fueled by a focus on global warming and the anticipation of government policies on carbon, the true underlying dynamics that will drive the explosion of clean technologies in a variety of sectors remain largely unchanged — the impending extraordinary growth in demand for commodities of all types.

In the 1960s, there was a widely held belief that world population growth would lead to the demise of the human race. In fact, based on the thinking of those experts, many of us should be dead by now. Back then, experts believed the world could not possibly supply the anticipated population with the necessary food for survival. But a wonderful thing occurred — the thing that separates humans from animals. The necessity of rapidly increased food supplies lead to the invention of disruptive advanced agricultural technologies. The result? In spite of population growth, today the world generates more food per capita than ever before.

It is that same type of dynamic that will be the true underlying driver behind cleantech innovation. Over the coming decade, the world will add about 1.5 billion people to the ranks of the middle class. That’s approximately a 75 percent increase from the number today. Such an increase will mean 1.5 billion more people who will buy cars, electronics, improved housing, higher protein foods, demand clean water and consume more energy. A Brookings Institute study estimated that this will yield a comparable increase in the world population’s overall consumption.

The authors of the doom and gloom books of the 60s would look at this and forecast extraordinary increases in the prices of all types of commodities, which would lead to global disruption and unrest. I do believe we will see increased volatility in a variety of commodity prices, but I also believe that this dynamic will drive innovation just like it did in agriculture. Rapid increases in demand for commodities, enormous markets and the ability for new technologies in certain segments to provide disruptive advantages will create an environment for compelling venture capital opportunities.

Many cleantech venture capitalists have focused on CO2 as the driving force for innovation. But I have always looked at cleantech as way to drive increased efficiency, reduce waste and create less expensive alternatives — the things that drive bottom line benefits in the free market. In other words, creating Gold by being Green (hence the name of my blog). The combination of the natural gas boom and the political reality of the unlikelihood of a price on CO2 emissions in the U.S. (or just about any nation that doesn’t already have one) has caused those with a CO2-focused investment thesis to face a very challenging environment.

If cleantech is viewed as synonymous with carbon emissions reductions, then the segment will be challenging from an investment perspective. But through the lens of GreenGold, where cleantech is about reducing the consumption of all sorts of non-renewable commodities, there will be many compelling investment opportunities yet to come. Undoubtedly the devil is in the details of which markets and areas of innovation will hold the best venture potential (ahh… fodder for a future post). But I believe that investors who run from anything remotely cleantech today will find themselves looking back and feeling like those who ran from investments in the Web in 2002. Now that the hype is gone we can focus on building real businesses. The next decade will be the one where real value is created in a number of segments of clean technologies and I, for one, plan to be making money by investing in some of those winners.

This article was originally published on GreenGold and was republished with permission.

Lead image: Traffic light via Shutterstock

3 Comments

ANONYMOUS
November 11, 2012

"....I would suggest that had not the concern over CO2/climate change caused the subsidy money to appear there would be no renewable energy industry for the free market to take over..."

I would point out that your perception of how the "free market" actually functions in a country like the US is incorrect. In the democratic society and "semi free market" economy we have in the US, people are mostly free to choose what they purchase and how they live their lives. I'm sure you'd agree this is a good thing, and for the most part the majority of our citizens tend to make informed decisions overall.

If your claim "...Left to the free market we wouldn't see 8MW turbines and <$1/watt PV until decades from now...." were true, we also would not have demand for premium products produced by the free market like the iPhone or Prius. Yet consumers are willing to pay a cost premium for the iPhone or Prius mostly because buying these products makes them feel better about themselves.

Rather than using the heavy hand of government regulation to force people to behave as you deem fit, wouldn't someone who embraces the ideals of freedom and liberty instead seek to adopt the approach used by free market businesses like Apple or Toyota? Where they use things like advertising to convince consumers to voluntarily purchase their product?

Finally, you made the comment "...the concern over CO2/climate change caused the subsidy money to appear there would be no renewable energy industry...". The concern over CO2/climate change only came about because of a successful public relations campaign by the environmental lobby. And that resulted in the voting public deciding to elect more politicians sensitive to this issue.

Since we live in a democratic society, we all need to accept the results of our legislative process whether we like them or not. But our elected officials also need to start playing by the rules.

Bob Wallace
November 10, 2012

I would suggest that had not the concern over CO2/climate change caused the subsidy money to appear there would be no renewable energy industry for the free market to take over and "drive increased efficiency, reduce waste and create less expensive alternatives".

Left to the free market we wouldn't see 8MW turbines and <$1/watt PV until decades from now when coal was clearly running out and prices soaring. The free market would be busy blowing the tops off mountains at an even higher rate.

Let's avoid getting all weepy-eyed over the free market, there's nothing holy about it. The free market is simply the field on which the most greedy do combat.

Hopefully we've advanced wind and solar to the point at which those who care not a fig about the environment and our future will turn their efforts from coal plants to wind farms. Let's hope we've used taxpayer money and the efforts of those who are concerned to create an adequately large "profit source" to fire up the capital of big business.

Social activist Utah Phillips told a story about how he was out on the road performing when he should be home plowing the garden for spring planting. He figured that the FBI was reading his mail so he wrote his wife "Don't do any digging in the garden. I hid the guns there."

A few days later he got a letter back from his wife telling him that a bunch of government men had showed up with shovels and dug up the whole garden and see was finishing up the planting.

With luck people who care about our future have written the letter and now the greedy 'free market' will do the digging....

ANONYMOUS
November 9, 2012

"...Many cleantech venture capitalists have focused on CO2 as the driving force for innovation. But I have always looked at cleantech as way to drive increased efficiency, reduce waste and create less expensive alternatives — the things that drive bottom line benefits in the free market...."

It's refreshing to begin to hear these types of comments coming from those in the investment world. Unfortunately, much of the private investment that went into RE during the recent past was intended to take advantage of generous government subsidies, tax credits, and cheap financing. Rather than advancing the state of RE technology. As the author notes, because these investments were not made based on the market economics of RE itself, it created a market bubble waiting to burst when the subsidies dried up.

RE technologies have made huge strides recently in terms of LCOE, especially commercial wind. In fact, if recent history is any guide, I think that within another 10 years commercial onshore wind LCOE will drop below that of NG. Even given the recent drop in NG prices due to fracking.

Consider this: Just 10 years ago the technology for hydraulic fracking already existed, but there were no commercial wind turbines for sale bigger than about 1.5MW. And just 10 short years later there are 8MW commercial wind turbines available. That's a huge leap in technology.

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David Gold

David Gold serves as the lead Partner for Clean Technology investments. He earned a Bachelor of Science degree in Mechanical Engineering with Special Honors from the University of Colorado and was a National Science Foundation Fellow while...