Tuesday, July 31, 2007

Cleantech investors and philanthropy

Carla Dearing recently asked cleantech investors to tell philanthropists where to put their money since cleantech venture investing has gotten so hot. It's a great question, and really brings home the fact that there's been rapid changes in expectations about a lot of cleantech sectors -- we IRR-focused VCs must really believe in the "10x" possibilities of clean technologies, markets and business models that used to be seen as taking too long to develop or otherwise not providing strong returns. Institutional VCs are not allowed to put their LPs' capital into investments without the expectations of those strong returns -- philanthropy is a different game. So Carla smartly asks what's therefore out of play for VCs, where patient capital and non-profits could still play an important role.

The fascinating thing about this question is how much of a moving target it really is. Even just a few months ago, for example, we might have included service offerings like solar financing plays as something VCs likely wouldn't invest in, because of the lack of defensible intellectual property and low barriers to entry (very generally speaking, of course). Now it's one of the hottest investment areas, as the rapidly-growing solar market has led to expectations that the market can support multiple "winners". Low-tech plays in biofuels and other hot sectors have been getting plenty of capital, too, even if not always from VCs (although, sometimes...).

So what's out of bounds? The very fact that this question is being seriously asked reflects a rapid expansion of investor appetite that is at the heart of the recent concerns about a cleantech venture capital "bubble", as we've discussed before. And, as we've described on this question, while there doesn't appear to be any "bubble" across the entire sector, certain subsectors and market niches can certainly feel frothy. Among other factors is the simple truth that not all "hot" investment areas will end up providing the returns some investors are currently expecting, so philanthropists can't consider a societal problem solved just because VCs are putting early money into potential solutions...

So Carla, my two cents' worth as of this moment in time would be: Put your money into the demand side of the market.

In other words, VCs and other institutional investors (project finance, public markets, etc.), not to mention government and academic research efforts, seem to be very happy to put money into the supply side, funding a rapidly growing list of cleantech technologies and services. I hesitate to nominate any particular technology or service sectors as being out of bounds for VCs, because that answer will continue to change as market conditions (and investor optimism) change. But without the anticipated growth in demand for these products and services, a lot of these investments will inevitably fall flat.

Water tech is a great example: There are some great technology development efforts underway that would clean up the water we drink and the wastewater we create, but the most likely buyers aren't buying. And there are a lot of energy efficiency options out there for homeowners and commercial/industrial building owners that make stunning financial sense, and yet still haven't been widely adopted like you'd expect. There are major segments of most clean/green technology markets that VCs and others still aren't putting their money into, but most of those un-addressed value chain segments tend to be downstream.

The most important thing philanthropists could do, in other words, would be to prime the engine of clean technology market adoption. Instead of catalyzing technology development, catalyze market development. Fund adoption of clean drinking water and solar and other distributed energy techs in emerging economies. Educate U.S. water and electric utilities (and their regulators) about the various new choices available, and how they can provide compelling economics and better quality at the same time. Be an angel investor for a local energy efficiency consultancy or green home product distributor. And help consumers understand their green and clean choices, empowering them to actually adopt the solutions that are in their best interest, but that they either don't know about or don't realize the economics around.

And thanks to Carla for asking a great question -- there are probably a lot of great ways philanthropists and investors can work together "profitably", by both sides' definition of the word...

Readers are encouraged to add their own comments and suggestions for Carla as well.


Anonymous Anonymous said...

I find this thumb sucking dilemma quite hard to believe. Web sites like mine or FreeEnergyNews.com report on numerous new, extremely clean technologies frequently, all with inventors and upstart companies starving for capital. Some prefer to keep the operation within a closed corporation, so the standard Vulture Capital formula of suckering the public with a fast and inflated IPO won't work, but there are genuine jewels in the rough, just waiting for capital to go into production and supply the hungry masses. I'm tired of hearing excuses to keep from confronting the oil sham head to head. It's quite apparent Big Oil controls the financial market more than anyone on Wall Street will admit. And nobody has the guts to redirect their mis-invested millions into something genuinely clean. And there's a LOT of working technologies that can eliminate the need for any hydrocarbon fuel altogether. Biofuels are NOT clean. They run up the cost of food for everyone. In Brazil, they are even abusing child labor to raise sugar cane for their biofuel market. VC's have been hugging their money in the bank vault too long. Their brains are starved for oxygen. Step out and breath some clean air for a change. You might help yourself and others in the process.

2:51 AM  
Anonymous Anonymous said...

Rob, great posting today.

I see three camps of opinion on this topic: a) mainstream VCs have become more patient regarding opportunities in this key sector, b)their trademark impatience, strong customer focus, and market sway will in fact bring energy technologies to market faster, and c)the key hurdles in this sector tend to have their roots in fundamental physics and are actually harder and will cost more and take longer than they initially expected. I doubt a) is realistic, I'm pulling for b), but would expect to see a fair amount of c).

I'd also add that one other constructive place for SRI investors to play (albeit back on the supply side)is to assist with the first-project financing hurdle, if they have the balance sheet for it. The provision of cheap debt to fund early-stage companies' capital-intensive first pilot plants can accelerate new technologies into the market. At one point, there was some general discussion around forming a patient capital "first-project fund" along these lines.

Eric Emmons, MA Green Energy Fund

10:19 AM  

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