GreenTech at AlwaysOn

by francine Hardaway on December 7, 2007

Good Heavens, there’a a lot of activity in GreenTech in the Bay Area over this one week. I’ve been to two different conferences where it has been discussed. If that’s a symptom of the perpetual activity here, no other space is truly of interest right now.

You may think that’s because of Al Gore’s movie, but the panel of VCs I’m listening to now includes several people who have been in the space for as long as ten years.
The moderator, an analyst for Morgan Stanely, introduces the panel:
Raj Arluru, Draper Fisher
Erik Straser, Mohr Davidow
Bruce Pastnernak, CMEA Partners
Ira Ehrenpreis, Technology Paartners
Curtis Mo, Wilmer Hale

The panelists admit that even two years ago, clean technology was not the large market it is today. The three reasons why it now pays to invest in cleantech are:
1)Cost of clean energy sources coming down dramatically.
2)America needs energy security. We are transferring wealth to the Middle East.
In Europe, they are trying to get out from natural gas from Russia
3)The political spectrum  has changed with regard to climate change.
But…because this market is regulated and driven by government mandates, it has its own kind of risk. And it’s also a global market, so the government mandates can be a positive force in one country and a negative one in another.

Because of the potential market size, the big VCs have jumped in. Although lastt year’s investment in Cleantech was $1.8billion for the entire year, this year in only three Qs $2.6billion  has already been invested. And the market is still growing. Only 42 companies have a market cap of over $500 million. The two biggest are First Solar (17b) and Sunpower (11b), both in the solar industry.

The Cleantech markets are incredibly different for VCs, so they have to build new networks of service providers, etc. Cleantech is actually a diverse set of different sectors, some of which apply to IT and some to biotech, which is their previous experience. Part of understanding Cleantech is knowing its breadth and diversity.

And because much of clean tech is driven by government policy, change is slow. Even with government mandates, there is also the consideration of embedded infrastructure in the oil and auto industries, who  are trying to figure out  who they are and what products they’re selling in the future.

In addition, Cleantech companies are capital intensive. There is a financial complexity to building out these companies, because they are not a quick hit.  The VCs are taking less market risk, but more technology and and financial risk. It’s hard to find early stage money to take the technology risk in these companies, because until they get the manufacturing line running, you don’t know if these companies will really work out.

And these really are innovative and disruptive, in a sector where there has been no innovation for decades. That’s no joke.

Here’s what I conclude you have to be in order to invest in the green space:

1)Lots of money

2)A long time horizon

3)Deep knowledge of the space

4)The ability to structure complex deals

5)An appreciation of the role of government.

{ 2 comments… read them below or add one }

Eric Gonzalez December 7, 2007 at 3:43 pm

Good summary, thanks Francine. I’m wondering if the panel felt more bullish about investment opportunities in some cleantech sectors, while bearish in others? The two biggest cleantech being in the solar industry suggests a preference for that segment as opposed to say hydroelectric power. Any mention of this?

francine hardaway December 7, 2007 at 3:45 pm

The space they seemed least enthusiastic about was water, for many different reasons.

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