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The Coming Bust in Clean Technology
New clean technologies are the great hope for dealing with the challenges that the world faces in so many arenas, whether it is climate change, pollution, water, waste management and more. As the world grows richer and more populous, the pressure on our natural systems will become ever more intense. The only lever we have to diminish human impact on that environment is new technology.
Fortunately, an enormous amount of money—literally, billions of dollars—has been pouring into new start-ups, championing the technologies needed to solve the problems of energy, climate change, water and food scarcity and pollution. Unfortunately, a lot of that money will be lost because it is not being spent very intelligently.
Why do I believe that? The way in which venture investors are currently are pursuing clean technology is not sustainable. The approach has an element of reality to it and an element of hype.
Why is this true? Well, first of all, the time required for most of these new kinds of technology ventures to become profitable is usually much longer than the investment horizon of venture funds. Most clean technologies require integration with heavily regulated infrastructure, whether it’s electricity grids, pollution control systems, water systems or city infrastructure. Changes in these kinds of systems go notoriously slow and new standards take a long time to be negotiated. For example, changing standards on moving from copper pipe to plastic pipe, an important move to reduce the impact of real estate development on resource use took almost 30 years.
The typical timeframes to make clean technologies commercially successful are longer than the 7 to 10 year payout expected in venture funds. The latest successful large IPO – A123systems, an electrical storage device manufacturer – needed 8 years and significant amounts of corporate and government support to get to the finish line and this is one of the best cases.
A second major reason to be careful is that the technology is especially capital-intensive. Plants to build solar panels or wind turbines or are typically fairly expensive, north of tens to hundreds of millions of dollars. The entrepreneurs, for example, who are today trying to reinvent the automotive industry are looking at capital costs in the hundreds of millions to build a car plant for electric vehicles. The amounts exceed by far the funding capacity of the average venture fund, used to investments scaling up to a maximum of tens of millions of dollars as is common in the software industry. This drawback may be temporarily countered by the Department of Energy’s $30bn loan guarantee program to support renewable energy projects and modernization of the grid.
As it is, hardware typically has slimmer margins than software. Now that the global recession squeezes margins even more, investors are put in a position where they have to invest a great deal for a long time and can still only expect relatively modest returns.
Another key issue is the fact that many of the investors are driven more by ideology than by a real deep knowledge of the industry. What is going on is that many young investors with a fair amount of money see the hype and the urgency of the problem and decide to try an approach—which was not unusual in the venture industry—of let a thousand flowers bloom and hope that at least one or two of them will be the next giant. That may succeed, but a lot of capital will be destroyed along the way.
One of the keys to the early success of the venture capital industry was that it was founded by men, mostly, who came out of the semiconductor industry and continued to invest in that same industry. As a result, they were quite competent to make the judgments about technology, about people, about timing and thus built a stellar track record of success. Today, there are almost no energy,waste management, water or utility executives that have moved from those industries into venture capital. Until more experienced talent strengthens the ranks of venture capital, many clean tech investments run the risk of being miss-directed or poorly executed.
These three reasons – the time frame, the scale of investment and the quality of the investors – all argue that there’s a high probability that sometime over the next few years, we will see many of these investments go bad. In some cases, we may even see the funds behind them wilt, especially the funds set up at the early part of this decade, which means that they will be coming up again for cashing out sometime soon. As a result, we can expect to see a major downturn in investment in clean technology.
So, how do we improve the situation? How do we increase the likelihood of the success of clean tech venture investments? We do need them to succeed. Well, one thing we can do is learn from other, similar situations. The biotech industry went through a quite similar experience. A great deal of enthusiasm at the beginning and then the realization that it takes a long time – sometimes a decade or more of trials – before you can actually begin to see any revenue, let alone any profit from a new drug. A very long, uncertain, pay back period for what is often a very expensive front-end investment in research.
To overcome this problem, new investment vehicles were developed to enable biotech companies to bridge the valley of death that they were facing. Some were late-stage investment funds, others were new kinds of vehicles for off-balance sheet investment to finance R&D, like limited partnerships or SWORDS – stock warrant off-balance sheet research and development securities. CalPERS, with a number of venture funds like Alta Partners created late-stage funds to be able to pick up companies that were in the situation of having developed a drug, having it entered at trials, but not having enough resources to see it through the lengthy process to profitability.
A second important thing the clean tech investment sector can do is to attract talent from the sectors that they’re trying to enter, whether it is water, energy or waste management. These need to be experienced executives, entrepreneurial sorts, who see the opportunity and know the business well enough to help drive the investments to success.
And then finally, it is important to target arenas for investment that may be less capital-intensive, less regulatorily constrained and with technologies that can be adopted quickly into the infrastructure. Probably the best examples are in the arenas of efficiency technologies, efficiencies in the use of energy, efficiencies in the use land or water. These types of technologies often offer rather dramatic improvements and can be migrated into the demand side of the market without having to wrestle with the vested interests on the supply side of the equation.
So with those three things in mind—changing investment vehicles, attracting new talent and targeting less capital-intensive arenas—I think it may be possible to increase the likelihood of success in future investment and minimize the consequences of the coming bust in clean technology.
One Response to “The Coming Bust in Clean Technology”
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Peter Schwartz
GBN cofounder and chairman. An internationally renowned futurist and business strategist, Peter previously headed scenario planning for Royal Dutch/Shell and directed the Strategic Environment Center at SRI International.
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Excellent post as usual, thanks for writing all this helpful stuff on a regular basis.