Entrepreneurs and investors in the U.S. are facing dueling narratives about cleantech: either it’s a failed experiment, or it’s central to our future economy. Which one is closer to the truth really depends on where you operate.
Venture capitalists—and their fund investors–have figured out that expensive, multi-year investments in solar, biofuels, and the like don’t mesh well with the classic venture model. Meanwhile, the federal stimulus of 2009 has run its course and the partisan politics around energy and climate change have become more divisive.
Yet in some places, more cleantech startups are being formed and existing ones are scaling up, buoyed by a more focused group of investors and state-level energy policies. In particular, Massachusetts, New York, and California are among the states that can boast growing cleantech startup clusters.
If cleantech has crashed, why are these entrepreneurs and investors still active? And if other states want to encourage economic development through clean technologies, what can they learn from these clusters?
There isn’t one pat answer, but some clues emerged in talking to people at the Forum 20/20 cleantech conference and other events in Boston last week. Discussions focused on activity in the Northeast, but they reflect some of the changes happening in cleantech investing and entrepreneurship nationally since the bubble years. One could argue whether cleantech is still a useful phrase, but it generally refers to companies that have a goal of using natural resources more efficiently or having a positive environmental impact.
Action is at the state level
Energy is highly influenced by policy, much more so than other innovation-based industries. Five years ago, cleantech companies couldn’t escape Solyndra when speaking to politicians in Washington. Since then, the discussion around energy policy has become more rational, said Bill Aulet, who teaches energy innovation at the MIT Sloan School of Management, during a panel.
But Paul Gaynor, the CEO of wind project developer First Wind, argued it’s still politicized and all about “red versus blue” states. As a result, his focus is on operating in specific states. “Our strategy is all about the states because that’s where things are happening,” Gaynor said.
A few states have emerged as good testing grounds for new grid technologies. Cambridge, MA-based battery maker Ambri’s first projects are in Hawaii and Massachusetts. Because it has a lot of variable wind and solar energy, Hawaii needs batteries to stabilize the grid. Meanwhile, Ambri benefited from a state-run program that partially pays for early projects to install a battery at a military base in Cape Cod.
New York, too, has very progressive regulations around the electric grid, which is pushing many utilities to experiment with new technologies, such as energy storage, solar, and demand response. But that’s not true in most states. “Very few executives at utilities are actually embracing future business models,” says Ambri CEO Phil Giudice.
Shifting funding strategies
Meanwhile, cleantech companies themselves are changing how they approach fund-rasing. A look at the winners of the Cleantech Open business plan competition, which were announced last week, reflects how entrepreneurs have adjusted to the exit of many venture capitalists.
The regional winners, who will go on to a national competition, do not appear to be companies that require tens of millions of dollars to commercialize a product. Many first-generation cleantech startups, such as solar companies or battery makers, did require big sums of money to prove out the materials science and then manufacture products.
By contrast, one of the regional winners—Sol Power from Somerville, MA—is purely a business model innovation. The company is developing solar charging stations for mobile phones at outdoor events and developing a business to host billboard advertising on the charging stations. Another regional winner was EcoVent, which is making controllable heating vents. It’s developed high-tech hardware, but the company, which raised $2.2 million from angel investors last month, still isn’t capital-intensive the way, say, a biofuel company, is.
In general, it’s much harder for cleantech startups to raise early-stage money or financing for first-of-a-kind demonstration projects. But some investors say they are comfortable with a multi-year path to potential profitability. “It’s reasonable to have a planning horizon that exceeds five years on an investment,” Peter Mitton at Greenseed Angels told me. “As long as the company seems like it can last long enough to get to the point where they can get that capital they need to build up a plant or get contract manufacturing. And that’s going to be a VC or a strategic [corporate] VC.”
Another feature of cleantech today versus five years ago is how varied the field has become—things have moved far beyond renewable energy and energy efficiency. In the Cleantech Open competition, there were companies in energy efficiency, water, agriculture, waste, and materials. I visited cleantech incubator Greentown Labs last week, too, and found new startups working in food, robotics, and 3-D printing.
Whether these companies can find an effective model for financing and scaling their companies remains to be seen. But the activity in the Northeast shows that innovation clusters can take root in states that have progressive energy policies and investors willing to invest in resource efficiency.