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Venture Capital and Cleantech Innovation

If you know something about either venture capital or cleantech, you probably know the two are currently involved a heated love affair. Global VC investment in the sector grew from USD 1.7 billion in 2004 to USD 3.6 billion in 2006. The bulk of this went to clean and alternative energy projects.

That said, the field is not well understood, with a lot of hype reminiscent of the dotcom bubble. Two articles today shed a skeptical light on the sector.

In an oped titled “Global Warming, Inc.“, the Wall Street Journal takes a skeptical view of the alternative energy industry, arguing that the hiring by Kleiner Perkins of Al Gore suggests the industry does not really have an economically sustainable model, and remains dependent on government subsidies:

Nope, but then again alternative energy has never fit the usual venture model. Jack Biddle, co-founder of Novak Biddle Venture Partners, says there’s a reason few start-up companies try to build commercial jetliners. “Large, complex systems with slow deployment cycles do not play to venture’s strengths. The whole idea with venture-backed companies is speed, speed, speed.” Mr. Biddle says the size and complexity of energy systems “make 787s look like tinker toys. You need lots of capital, lots of time, lots of people.”

Which leads us to suspect that maybe Mr. Gore has been hired by Kleiner Perkins for more than his technological knowhow, investment acumen, or global vision. His new partners may have hired him for the more prosaic task of getting 60 Senate votes to keep those taxpayer greenbacks coming.

In a separate article, CNET asks why First Solar stands alone (for background, read how its stock went from $20 to $220 in one year)? Among the many conclusions, is one relevant to this discussion:

Patient Investors. John Walton, of the Walton family fortune, was an early investor and stuck by the company through the very difficult early years. Interestingly, Myers noted that none of the big solar success stories have been emerged from the usual Silicon Valley path of being fostered along and funded by VCs, which usually want a return after five years or so. Instead, these companies have taken years to incubate.

When the dotcom bubble burst, all the venture capitalists needed a new place to park their money. Luckily, climate change happened and cleantech became the new dotcom (see chart, and this post on evolution of the issue). But these articles suggest that venture capital may have to tweak its model, to accommodate longer innovation cycles, if it is to truly address the issue (of energy efficiency and use), rather than simply make use of subsidies. It also means that public policy will continue to be important, and developing countries risk being left out of the innovation cycle, if they are not aggressive in encouraging innovation in the sector.

Update: Separately, Cleantech.com reports (also on CNET) that OPEC nations have put up USD 750 million for a cleantech venture fund.

© 2007 The Discomfort Zone.