Bust to boom – maybe soon

 By Jeff Bounds

Several factors have combined to make this the best time ever for venture capitalists to invest in young cleantech startups, according to experts and scholarly research…

Yet, VCs largely continue to shun the cleantech industry. According to estimates by researchers at the Massachusetts Institute of Technology, half of the $25 billion venture capital VCs had poured into green startups beginning in 2006 was wiped out in 2011 when the industry’s bubble burst.
Opportunities in early-stage cleantech “have changed significantly and favorably in recent years to offer the potential for greater risk-adjusted returns in the sector than ever before,” says a November 2017 report from Ceres, a sustainability nonprofit. (Registration required.)
Improvements in both technology and financing mean venture capitalists now have cleantech deals that fit their moonshot-or-bust investment formula, where a handful of big successes both pay for inevitable failures and provide returns worthy of the risks.
Today’s opportunities largely didn’t exist between 2006 and 2011, experts say. During those six bubble years, venture firms invested $8.33 for every $1 they had put into cleantech during the previous 11 years, according to MIT and Bloomberg data.
With little competition now for deals, VCs’ money can now acquire bigger pieces of early-stage cleantech firms, improving the odds of large paydays when they cash in their chips three to five years down the road, experts say.
But since 2009, roughly 80 percent of venture investment in renewable tech has gone into later-stage companies that were near profitability, according to the Brookings Institution.

U.S. Secretary of State Kerry speaks at CleanTech Challenge launch at Tamayo Museum in Mexico City (Reuters)

By 2016, only 13 percent of VCs’ clean energy deals were seed or first-round investments, compared with 32-plus percent in 2001, Brookings says.

From science projects to ecosystems

For venture firms, the key is that promising cleantech companies now have an “ecosystem,” or group of organizations to support them from idea to potential jackpot. This ranges from would-be customers and business incubators and accelerators to potential acquirers.
And in a nod toward fixing a vexing problem of the last decade, philanthropists and government agencies are helping pay for early research into clean technologies. Their goal: handing off successful technologies to the private sector when they are ready to go to market.
For instance, PRIME Coalition – an organization that invests philanthropists’ contributions in technologies that combat climate change – combines individual donations to support high-potential cleantech startups that otherwise might not land financial support. PRIME Coalition is also launching a venture-style fund to give benefactors the chance to support multiple startups.
In a similar vein, California has considered a “climate and energy research fund” paid for through its cap-and-trade program of issuing permits for industrial emissions.
Prior to 2009, many clean energy technologies were in the earlier stages of development when attempts were made to commercialize them,” the Ceres report says.
This led to venture investors funding what became known as “science projects,” the report notes. “Science project” is a pejorative term for technologies that take a long time to build and test, cost a lot of money to develop and are risky in that they don’t work as advertised or that or no customer will pay to use.
Rather than new technologies needing to be developed from scratch, they can (now) be developed by combining or extending existing technologies, which can be accomplished in a shorter time frame and with less risk,” the Ceres report says.

Customers appear, and not just in energy

Cleantech’s new ecosystem accounts for another key difference from the bubble years: customers who will pay for new technologies that solve problems in renewable energy.
Businesses big and small are increasingly adopting green fuels no matter what happens with government policy or fossil-fuel prices, Ceres notes. Indeed, technology powerhouses Apple and Google run all their operations on renewable energy, according to Forbes.
Companies can now get the cost advantages of buying 50 megawatts of utility-scale renewable power, but commit to purchasing as little as 2 megawatts over five years, according to EnerNOC, a provider of software that helps support energy-buying decisions.
A megawatt of solar power will run an average of 164 U.S. homes, according to the Solar Energy Industries Association.
By joining buying groups, mid-sized businesses and municipalities can access cost-effective renewable power, EnerNOC notes.
Non-energy giants such as Bank of America, Microsoft and Nestlé are reducing environmental risks from both their own operations and those of their suppliers, according to the Carbon Disclosure Project (CDP), a nonprofit.
“An internal carbon price is used by 84 percent and 79 percent of the (market value) in the utility and energy sectors, respectively,” a recent CDP report notes.

Paths to exit

For fledgling cleantech startups, would-be customers such as these represent a sea change from the bubble years. MIT notes that cleantech companies found it tough competing in commodity markets when oil and natural gas prices tumbled, as oil did in 2008 and gas in 2009. Customers drive startup growth, but also help venture investors justify risking capital on early-stage businesses to start with.
The corporate embrace of green power has added another piece to the puzzle for VCs’ opportunities in emerging cleantech: investors buy out the venture capitalists’ stakes. Since 2008, incumbent oil and gas players have used their corporate venture arms to invest in cleantech businesses. This includes Chevron (roughly 14 deals), BP (32), Total (33), Shell (17) and Saudi Aramco (6), according to CB Insights.
Also kicking cleantech tires is Energy Impact Partners, which invests primarily on behalf of utilities such as Southern Co. and Alliant Energy. And as one Silicon Valley VC has noted, companies outside the energy industry, including General Electric and Google, have expressed interest in renewable technology.
Opportunities in early-stage cleantech won’t get much better for VCs than they are now.

So the question is: Who will step up?

READ ALSO: The cleantech burn by Michelle Leslie

about the author
Jeff Bounds