Patient money and clean tech investment

slow money logo. clean tech investmentAll start-up companies require investment. Clean tech companies are no different. Clean tech investment, however, has problems.

For one thing, clean tech does not attract venture capital. Venture capitalists need a faster return on investment than renewable energy can supply.

Why does clean energy have such a poor record with venture capital? What alternatives exist?

The clean tech investment bubble

clean tech investment bubbleAl Gore’s “An Inconvenient Truth” appeared in 2006. It captured the imagination of venture capitalists looking to invest in clean energy.

In 2005 American VCs invested just over $500 million. In 2006, they more than doubled that amount, $1.7 billion given to 16 new companies.

By 2008 the investments climbed to $4.1 billion, spread to more than 100 new companies. Venture capital has never since come close to either figure.

That year the housing bubble burst, sending the economy into a tailspin. Much of the economy has rebounded. Venture capital investment in clean energy has not. The spectacular collapse of housing overshadowed a clean energy bubble that happened at the same time.

It followed the same pattern as the earlier dot.com bubble. Too much money chased too many ideas that proved unworkable. Many clean tech companies failed. Investment slowed to a trickle.

Companies launched with great fanfare that hadn’t thought through a workable business model. Some failed because of a bad product or high price. Others outgrew their ability to provide timely delivery. And unlike the dot.com bubble, no powerhouses emerged once the dust settled.

Globally, however, clean tech investment reached a peak of $310 billion in 2011. Investment did not fall from that peak as much, and by the middle of 2015 had approached it again.

Some governments offer subsidies like tax breaks. Large companies invest heavily. Developing countries like China, Brazil, and India spend almost as much as developed countries. And that despite the fact that clean tech has no subsidy support in some of them.

Venture capital has not returned.

Why clean tech investment is a problem

Wind farm. cleantech finance

Wind farm

Clean energy remains a small niche in the energy business. Meanwhile, the polarization in the wake of Gore’s documentary has chained that niche to left-wing politics.

Clean tech companies can’t blame all their capital woes on political polarization, however. Renewable energy start-ups can’t deliver as high return on investment as sectors like medicine or software.

Clean energy requires a long development cycle. It can take 20 years or more before a breakthrough material becomes ready for commercial application.

Another problem?

People trying to run clean energy companies have a great deal of technical knowledge. But too often not much business skill. Green companies must be managed as well as any other company in order to succeed.

I recently wrote about innovations hidden in academia. Some academic labs form companies to commercialize their findings. Without business and marketing expertise, they can’t succeed.

Venture capital is fast money. Clean tech companies need more patient money. Government research and development, for example.

The failure of Solyndra shows that the government shouldn’t fund companies who have no other source of income. It does not show that the government should stay out of research and development.

Government can aid the development of new materials In a couple of decades, when they’re ready, venture capitalists can scale them up to commercial production.

The special problems of biofuel

Switchgrass harvest. clean tech venture capital

Switchgrass harvest

Renewable liquid fuels also come under the heading of clean tech.  I wrote about some of the technological and political challenges earlier.

Now I want to highlight only the production challenges and their implications for funding.

George W. Bush announced research on new sources of ethanol, like switchgrass, in his 2006 State of the Union Message. He wanted “to make this new kind of ethanol practical and competitive within six years.” An unrealistic timeline for an important goal.

Suppose an ethanol plant makes 50 million gallons per year from cellulose.  If it can make 80 gallons from one ton of feedstock, it needs 625,000 tons every year. Any source of cellulose will do, but I will assume it uses only switchgrass for the sake of simple explanation.

If the plant operates every day of the year, it will need 1,712 tons of switchgrass, a very dense crop. If a truck can deliver 30 bales, each weighing 0.6 tons, it will need 95 deliveries every day or one every 15 minutes.

Transporting such dense feed stock more than 25 miles is not economically feasible. Bio-refineries must necessarily be small operations. A company will need to operate several refineries to make a profit. For the foreseeable future, though, they will be local or regional companies.

Companies that make innovative solar panels or batteries don’t have such severe restraints on how far they can transport raw materials. If venture capital funding won’t work for them, it certainly won’t work for bio-refineries.

VCs want to find the next household name. A solar installation company will fit that description decades sooner than a biofuel company.

Some financing alternatives for clean tech

cleantech fundingI have called venture capital “fast money.” There is an organization called Slow Money, but it appears to be concerned only with organic farming.

The concept ought to have broader application. I have used “patient money” to avoid confusion.

Something of the kind seems necessary for any kind of investment in sustainability.

But it’s a mistake to dismiss venture capital entirely. Some firms now specialize in financing green businesses. Websites like GreenVC help investors and entrepreneurs find each other.

Specialists ought to have a clearer understanding of the investment risks and likelihood of a good return.

The dollar amount of investment may eventually reach or exceed 2008 levels. But the money will go to fewer and better-vetted companies.

Many federal agencies award grants for research and development in green technology. Grant tend to be small. Governments award them only to companies with people who know how to apply properly. It is possible to seek and win more than one grant.

Recent years have seen the rise of Kickstarter and other crowdfunding platforms. Some of them specialize in funding renewable energy and other social change projects. GreenVC connects entrepreneurs to crowdfunding platforms as well as venture capital.

And if you’re looking for money for a project, don’t forget loans. Banks lend money to start-ups and small businesses. Peer-to-peer lending has emerged as an alternative in recent years.

A new and growing trend in institutional investment

For more established projects, a trend called “impact investing” has caught on with a variety of institutional investors. Impact investing seeks not only a good rate of return on investment, but also a positive impact on society. A positive environmental impact is but one example.

The Rockefeller Foundation first used the term a decade ago. More recently Goldman Sachs and the Roman Catholic Church have joined the movement. These are not venture capitalists, but institutional investors hoping to combine social impact with good income.

Startups can’t expect to attract the attention of these investors, but they can grow using government grants, crowdfunding, and/or peer-to-peer lending. Patient money, from whatever source, can grow companies to where institutional investors will take an interest. Impact investing can only be good news for clean tech.

The cost of renewable electricity has declined dramatically in recent years. Biofuels can take off once they overcome some scientific and technological hurdles. One way or another, companies that have a viable product and business plan will be able to find money.

Sources:
Clean technology is here, but the money’s not / Jake Bullinger, 425Business. June 22, 2015
Creative funding for green startups / Angie Picardo. Carbon 49, February 19, 2014
The rise, then fall, then rise again of cleantech / Daniel Thomas, BBC.com. June 12, 2015
Switchgrass (Panicum virgatum) for biofuel production / Rob Mitchell, Ken Vogel, and Marth Schmer, Extension. April 1, 2016
Why impact investing is great news for renewables / Nick Chronias, Renewable Energy World. August 12, 2016
Why Silicon Valley and cleantech don’t mix / Ben Gaddy, Clean Energy Trust. July 26, 2016

Photo credits:
Slow money logo. Source unknown
Investment bubble. Source unknown
Wind farm. © Copyright Stephen Craven and licensed for reuse under this Creative Commons Licence
Switchgrass harvest. Some rights reserved by eXtension Farm Energy.
Crowdfunding. Public domain from Wikimedia Commons

 


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