Why cleantech investing has morphed into energy and sustainability

Originally published by Xconomy

Advocates of cleantech investing often make the case that there are enormous opportunities to make the world cleaner and more sustainable. But what if labeling yourself a cleantech investor or entrepreneur is actually limiting?

That’s the question I walked away with after a panel of venture investors at the Energy Symposium at the Harvard Business School last week. The discussion reflected how investors have had to rejigger their strategies and reconsider the basic assumptions they held five or six years ago. For entrepreneurs, their thinking provides clues on how best to frame what your company does and how to approach VCs as potential investors.

First, a bit of history: in the early to mid-2000s, venture capitalists became enamored with cleantech and poured billions into startups, with a heavy emphasis on solar and biofuels, only to lose money after many of these companies failed. Because there have been few high-profile successes, cleantech, ironically, has become a dirty word for many of the limited partners who put money into venture funds. Most venture funds have shut down or deemphasized their cleantech activities.

Not Clamoring for Carbon Cap
One of the key flaws many investors made was operating on the expectation that government policy would favor clean technologies. There certainly are policies that do—there’s a 30 percent tax credit for renewable energy until 2017, for instance—but more sweeping measures, such as economy-wide carbon regulations or massive research and development programs, never materialized.

Nowadays, people don’t expect those types of programs to happen and act accordingly, said Michael Linse, who runs the Green Growth fund at Kleiner Perkins Caufield & Byers. Five years ago, VCs were hopping onto planes to lobby in Washington, D.C., in an attempt to influence federal regulations. Now, he worries about much more standard “growth capital” concerns, such as how much money startups will need to fuel their growth.

“(Specific regulations) will affect a lot of our portfolio companies but it’s not existential because the cost curves have spoken and will continue going down pretty dramatically,” Linse said.

Five years ago, people still debated whether solar, wind, and electric vehicles would have a significant penetration. Now, the question isn’t whether they’ll be adopted but how quickly, Linse said.

Fewer Co-investors
Before the word cleantech was even around, there were venture funds specialized in energy and perhaps materials as well. Now those stalwarts are finding it much harder to find co-investors, which becomes most acute when a venture firm has provided seed money and then needs growth capital in the form of Series C or Series D rounds, said Todd Wilson, a partner at RockPort Capital Partners.

“The number of investors in this sector is shrinking and has been shrinking,” he said. “As a firm, we need to make sure we have more capital reserved in this environment than we would have five or six years ago.”

And if a firm is reserving more of its money for later-stage investing in existing portfolio companies, then it’s probably putting less seed money into new ventures. That helps explain why early-stage venture capital in cleantech has shrunk dramatically.

On the other hand, large corporations, or so-called strategic investors, are becoming more active, even in Series B rounds, said Bill Lese from Braemar Energy Ventures. For a startup, strategic investors provide money and potentially access to their distribution or they can act as a first customer for a new product.

“Large strategics in energy have become very venture friendly in recent years where it used to not be,” he said. “It’s really changed the whole thing.”

Energy Writ Large
The growing importance of large corporations in cleantech exposes a less-publicized but significant change happening among investors and entrepreneurs in this area: a shift toward energy technology, in general.

Certainly, there are many cleantech startups with a mission of replacing fossil fuels. But a number of companies are developing technologies designed to make existing “dirty” industries, including energy, cleaner and more efficient.

Alphabet Energy, for example, earlier this month released a generator that makes electricity from the exhaust gases of diesel generators used at mining sites and other industrial sites. The fact that it’s greener is good and may be worth publicizing, but the primary motivation of buying this type of product is to save money through efficiency.

Energy Ventures, for example, is dedicated entirely to making oil and gas operations cleaner and more efficient. It might be a stretch to call that cleantech. But these are willing customers, said partner Shantanu Agarwal. “There are a lot of inefficiencies in an oil field,” he said.

Indeed, it may be more useful—and socially impactful—to focus on developing products to modernize energy and other heavy industries. And it’s worth noting that oil and gas drilling in the U.S. is undergoing dramatic growth thanks to the spread of hydraulic fracturing and horizontal drilling.

Harvard Business School professor Joe Lassiter noted that startup C12 Energy originally wanted to sell its technology for storing CO2 underground to utilities as a way to lower emissions from power plants. Now, it’s working in the oil and gas business, where CO2 is injected underground to release more oil.

“There’s huge amounts of stuff to do here if instead of thinking about this as cleantech or green, you think of it as cleaner, safer, securer, and cheaper,” he said.

Some venture firms that did cleantech in the mid-2000s have shifted focus and taken on sustainability more explicitly. NGEN Partners, for instance, moved out of energy and into food and personal health. RockPort Capital Partners now calls itself a firm that invests in energy, sustainability, and mobile.

But RockPort Capital’s Wilson thinks that the investors who have stuck around will find some successes, which should attract more money and investors. “These things are cyclical,” he said.