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Investors Find Green Technology Is Not an Easy Win


By Alexis Madrigal
CondéNet, Inc.
December 7, 2007


Half Moon Bay, California -- When Tony Perkins, author of The Internet Bubble,
hosts a venture conference featuring a panel about "Going Green," it underscores
that investors smell money in funding cleaner energy technologies.

In fact, enough investors have been chasing clean-tech investments that the talk
is already turning to a coming shakeout. Much of the clean-tech buzz at Perkins'
conference for investors and entrepreneurs, Venture Summit West, centered on
whether or not venture investors would see returns on the billions they've
already invested in biofuels, solar power and wind farms.

"In 2008, you're going to see a lot of (clean-tech) venture flameouts," said
Erik Straser, general partner at Mohr Davidow, which is heavily invested in
clean tech. "Fundamentally the market drivers are very strong for these
companies, but companies are going to have trouble in the market execution. And
a lot of capital has gone into a lot of companies."

Still, venture capitalists are fundamentally optimistic about green technology.
Much as VC-powered internet companies continue to challenge traditional media
businesses, investors are hoping their clean-tech investments will topple
another aging cash-rich industry: energy. Egged on by IPOs in the clean-energy
industry, but particularly in solar power, a host of venture capitalists has
raised clean-tech or green-tech funds. In the first three quarters of 2007, 168
separate investments channeled $2.6 billion into clean-tech startups, according
to Thomason Financial and the National Venture Capital Association. By
comparison, internet startups received $3.86 billion of funding over the same period.

VCs aren't in it to save the world: The only green discussed at the Venture
Summit West panel was the color of money. But if these investments help mitigate
climate change by reducing our dependence on carbon-heavy fuels like coal and
oil, so much the better.

Energy investments may be a big challenge for investors used to the technology
industry, however. Taking on the energy industry, where a single company like
ExxonMobil books over $3 billion in profit every month, requires real-space
infrastructure far beyond the servers and bandwidth that launched a thousand websites.

"Companies need to figure out if the existing infrastructure is their friend or foe," Straser said.

For example, he said, if you make biodiesel, the oil refineries are probably not your friend.

On the other hand, if you make a biocrude, which can fit into the existing
refinery framework, like LiveFuels, the distribution power of the energy
business works for your company, not against it.

"The fuel industry delivers 200 billion gallons of fuel a year in the U.S.,"
said Dave Jones, chief operating officer of LiveFuels, which is working on
technology to turn algae into crude oil. "Why take on the challenge of producing
reliable, quality fuel when someone has already done that?"

Other clean-tech companies are eschewing the big fish (transportation and
large-scale energy production) and going after smaller, niche markets. For
example, fuel cells were once billed as the clean answer to gasoline power, but
now many fuel-cell companies, like Jadoo, target mobile telecommunications and
TV production, areas where there's a smaller market but far less competition.
Venture capitalists at the conference were eager to guide general talk of clean
tech into more conversations about the variable funding requirements for specific areas.

"You talk about clean tech, but it's not a monolithic category," Ira Ehrenpreis,
general partner at Technology Partners, told an audience of about 50 at the
"Silicon Valley VCs Going Green" panel. "Some investments are like the ones
you'd make in IT companies, while others are much more analogous to biotech, in
terms of what it takes to get them from initial idea to market."

Biotech is notoriously capital- and time-intensive, with hundreds of millions of
dollars often required to bring a product to market.

But Straser stressed that, while the financing and technical risk is higher than
media and internet investments, the market risk for clean tech is actually lower than other sectors.

"Whether all 19-year-olds want to use their cellphones in a certain way, that's
not as sure a bet," said Straser. "But if I offer you transportation fuel for a
penny, I'm pretty sure you'll buy it."

Not surprisingly, given their collective bets on clean tech, the assembled
investors believe that breakthrough clean-tech technologies will emerge within the next few years.

"We're all investing in an ecosystem that hasn't seen the light of innovation in
decades, if not centuries," Ehrenpreis said.

Providing capital for innovators, the investors hope, will yield them the 10-
and 20-fold returns on their investments that VCs look for. For the crowd at
this conference, that's plenty green enough.

 

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