Clean energy remains the new kid on the block for an energy sector dominated by fossil fuels for electricity generation both currently and for years to come. As the sector develops along with newly emerging technologies and falling costs, venture capitalists and other early-stage investors have seen enormous potential.
That potential has been regularly stymied to date by a number of factors, ranging from the specific like the financial crisis to the heavily regulated nature of an industry with reliability as its primary goal.
In the second part of a series on venture capital involvement in the energy business, PwC venture capital guru Tracy Lefteroff answers questions from Breaking Energy about his experiences to date and his forecasts for the coming year. Check out the first part of this conversation from earlier in the week here.
Q: What’s the state of clean tech venture capital investment at the start of 2012?
If you look at clean tech funding over the past year, it’s dramatically changed. Most VCs have been supporting their existing companies and new first time funding is down overall in general.
You could make an argument that given what has happened in the economy, that cleantech companies did OK. But I’m not sure I’d be saying they had a really good year.
We saw huge enthusiasm for the space as people jumped in a few years ago. Then they realised how capital intensive most of those companies are. Now we’re in a mode where people are very concerned about how they are going to get liquidity. We’ve not seen many clean tech IPOs, we’ve not seen much M&A activity and these companies have burn rates and eat through capital.
Venture guys in the cleantech industry hadn’t quite learned the lesson they’d learned on the IT
side in 1999 and 2000. In this bubble of enthusiasm they thought things would be OK. They’ve learned again and to their credit pulled back pretty quickly that they were headed down the same route in clean tech.
Q: Which cleantech segments have been the most resilient to the impact of the struggling economy?
Solar has been the most prolific and as close to commercialisation as any of them. Battery technology also got a lot of attention. The one that everyone seems to talk about but we haven’t really seen emerge yet is clean water. People tell you that’s a huge problem all over the planet. But it comes down to affordability – where are you going to find the customers to buy all of that stuff. Third World nations that need it aren’t going to pay for it.
Q: Has the state of the economy or investor sentiment towards particular technologies had the most impact in cleantech?
The economy has had some impact but it’s also the actual companies themselves. They’re finding out that the economics were not as compelling as they originally thought they were going to be.
Very few electric cars have been sold so far. But you’ve got four players competing in that space. Have any of them got enough traction to be independent yet?
The question with all these companies is can you take it beyond a novelty to something that is mainstream, like soccer moms driving that vehicle as opposed to 30-something single people that want to have the latest and greatest.
The test is that if you can’t reach the broad general markets like that how can you ever manufacture enough vehicles to sustain a profitable operation?
Q: Are clean tech investors particularly vulnerable to the gold rush mentality?
People get enthralled with companies. One of the old adages in the venture business is that this has got to be a business, not a science project. Technology is sometimes fascinating so it’s really easy to get caught up in: “this is wonderful technology, let’s develop it, let’s refine it and take it to the next level.” But at the end of the day, if you can’t really make a business out of it and sell product – someday you’ve got to grow up and become a real company. If you can’t see yourself ever doing that, or at least have a time frame, it’s probably a huge red flag as to whether you’re funding the right deal.
Nanotechnology was really hot in the clean tech sector for a while. But I can’t think of any successful nanotechnology company.
Q: Do VCs tend to be attracted by shiny gadgets they can see like solar, rather than less sexy investments like energy efficiency?
My instincts have always told me that the really good VCs learn very early in their careers to not be infatuated with a deal. The good ones tend to be much more objective about deals. In this day and age, you’ve got to do that. You cannot afford to continue to support something you’re just going to pull the plug on.
Q: What impact has Solyndra’s bankruptcy had on VC-backed solar?
Solar continues to get the most funding but it’s repeat rounds, not series A. There’s skepticism in that sector because of all the negative publicity around government funded deals that have gone under. These guys all watch these companies and see what their potential competition is doing it has a psychological impact.
But long term there’s no question that solar is going to be successful. It really is compelling and cost-effective.
Q: Would some technologies we now take for granted never have got off the ground without VC investment?
Absolutely, there are many technologies that would never see the light of day without venture money. In the cleantech sector, solar was out there but you never would have seen it become mainstream without venture money. Not only did it bring the cost of tech down, it also popularised it with the public because of the publicity of what was going on with that industry. VCs have their fingers on the pulse and are pretty good at sending out a positive message.
Q: Do VCs such as John Doerr at Kleiner Perkins Caulfield Byers really mean it when they say they want to prevent catastrophic climate change with their investments?
Venture guys have to be taken with a little grain of salt. KPCB has certainly been a leader in cleantech. They were one of the early ones there. It’s much easier to exhort other people to invest when you’ve already got all your other bets on the table. It’s the greater fool theory. The next one that comes along is going to pay twice what I paid for it – so for me it’s a great investment. For them, it may not be.
Q: Barack Obama has said that he wants to see 1m EVs on the road by 2015? Will you be driving an electric vehicle in 3 years’ time?
Probably not. Number one it would have to be cost effective for the type of driving that I do. It’s a 76 mile round trip from downtown San Jose where I work to San Francisco – that’s an average commute in the Bay Area. I couldn’t afford to have the battery go down on me. But they haven’t made a battery yet that gives you the ability to go long distances.
Infrastructure is where the growth has to happen before all the other growth can be facilitated. Oil and gas companies aren’t going to do that. Government could provide tax credits and incentives to the oil and gas companies but they’re not going to do it on their own. And they are not going to do it unless they have a big enough piece of the pie.
Q: What is your outlook for cleantech in 2012?
2012 will continue to see a contraction in the level of investment, including in cleantech, unless we see robust recovery in the stock markets that are driving a lot of the investor enthusiasm. It probably won’t happen in an election year. People have already got Obama figured out. If he gets re-elected it’s going to be a tough time for people who are creating wealth.
Tracy Lefteroff is PwC’s Global Managing Partner of the Venture Capital Practice based in San Jose, California.
Photo Caption: Soraa co-founder Steve DenBaars (2L), Calera CEO Brent Constantz (2R), and EcoMotors CEO Don Runkle (R) look on as former British Prime Minister Tony Blair (C) speaks during the Khosla Ventures Cleantech Discussion May 24, 2010 in Sausalito, California.