Editor’s note: Rob Day is a venture capital and project finance investor with Black Coral Capital, a private-equity firm based in Boston, Mass.
I’m old enough to remember when the smartest folks on Sand Hill Road thought cleantech was going to be the next big thing. When venture dollars into the “sector” (really, a loose collection of very different markets and technologies, bundled together under a convenient label) were growing by leaps and bounds year over year. When the New York Times declared “Capitalism to the Rescue” in embarrassingly fawning terms. When Alan Salzman of VantagePoint declared that cleantech startups would be bigger than Google, Cisco, and Amgen. And of course, CalPERS’ “Green Wave.”
Today, of course, “cleantech” is almost a forbidden word on Sand Hill Road. Only a few stalwart specialist investors still wave the banner; quarterly venture capital investments into clean energy are only around a third or less of what they were at their peak in 2008, according to Bloomberg New Energy Finance. Cleantech specialist VCs are getting shut down, and generalist VCs often refuse to take meetings with cleantech entrepreneurs.
How on earth did we get here?
Cleantech is on the outs among VCs right now because it got overhyped. Badly overhyped.
Is this the natural result of a huge “cleantech crash,” as 60 Minutes portrayed it a year ago? How can that be true, when these markets are actually booming. According to Greentech Media, US solar PV installations grew at a compound annual growth rate of over 60 percent from 2009 to 2014; the industry is now 108 times larger than it was a decade ago. The market for efficient lighting is expected by some analysts to grow to over $50 billion in 2015. Electric vehicle sales, led by Tesla, are booming.
Yes, there was a “cleantech crash,” but it was limited to selected upstream commodity markets like panel manufacturing and biofuels. And that price collapse led to an explosion of downstream markets like rooftop solar. Furthermore, the need for new resource solutions isn’t going away anytime soon — dry enough for ya, Californian readers? As a result of clear market needs and increasingly attractive economics, global revenue from advanced energy reached nearly $1.3 trillion last year.
Okay, so is it instead that investors found out — as CalPERS’ former CIO publicly stated last year — that cleantech “has been a noble way to lose money”? That, regardless of markets, even smart investors can’t make returns in the sector? Well, CalPERS’ own experience may match that negative perspective.
But data from Cambridge Associates, looking more broadly across all of the venture capital world and not just the firms that CalPERS chose to back, suggests that investors have indeed made money in cleantech. Not the kind of returns that were hyped up nearly a decade ago by Sand Hill Road’s best and brightest, sure, and certainly not in the kind of upstream, capital-intensive, commodity manufacturing plays that were en vogue back then.
But Cambridge Associates found that investments made in the sector with other strategies have actually provided results roughly on par with returns for the overall venture capital industry during the same period.
Basically, the lesson isn’t that you can’t make returns in cleantech. The lesson is that if we investors can’t figure out how to generate attractive returns off of the growth going on in these markets right now, blame the investors and the strategies we chose. Don’t blame the markets.
Well then, maybe it’s just that cleantech investors can’t generate exits? Okay, exit volumes definitely have been lower than hoped. But it’s not like there haven’t been some great outcomes to point to (you may have heard of companies like Tesla, Nest and SolarCity at some point). And despite the lack of excitement in these markets among VCs, large corporate acquirers from GE to Google have all been eagerly ramping up their commitments to these markets. Besides, what proof is there that a lack of exits dampens VC enthusiasm for putting money to work when otherwise things seem exciting?
Disruptions replace old, wasteful networks with new dynamic ones.
Cleantech is on the outs among VCs right now because it got overhyped. Badly overhyped. And when the dominant investment strategy at the height of the hype cycle didn’t work out, coinciding with the overall economic meltdown of seven years ago, VCs declared the entire sector a failure. And that word got out to their limited partners. And now it’s the LPs saying “don’t go there.” Thus, cleantech specialist VCs can’t raise new funds. And generalist VCs can’t even mention being intrigued by these markets without getting pushback from even the most loyal of their LPs.
But this is 2015, not 2008. The sector now is very different. Entrepreneurs have learned hard lessons, and a new generation of investors are establishing new strategies that seem to be bearing fruit.
On the whole, capital-intensive, long-gestation-period, deep technology innovation plays don’t define cleantech entrepreneurship any longer. Instead, entrepreneurs and investors still charging ahead in the sector are following the same script that has been working well for the rest of the venture industry.
They’re tackling the market opportunity with web and SaaS models. With new financing platforms, and new service models. They’re looking to be downstream, close to those juicy, fast-growth markets, with new channels and new marketplaces. Even in hardware, they’ve moved to distributed, smaller, modular, automated and intelligent hardware. After all, as Marc Andreessen declared, “Software is eating the world” and these markets are no exception.
In fact, the commoditization of IT and communications technologies, matched with the commoditization of clean technologies like solar panels and batteries, is underpinning the rapid growth of distributed generation and other similar markets. And some of us have learned how to finance projects at massive scale without having to pour hundreds of millions of dollars into Series E rounds.
But all is for naught. Because cleantech investors can’t raise money, and thus cleantech entrepreneurs can’t raise capital, and thus cleantech is dead. The end.
Or is it? There’s a basic truth at work in entrepreneurship and innovation, that most often a key advantage of successful new approaches is that they are in some way more efficient than the old, established systems. Disruptions replace old, wasteful networks with new dynamic ones. Along the way (on purpose or as a happy accident), natural resource savings are captured. And this means it’s increasingly hard to draw boundaries between “cleantech” and mainstream venture capital right now.
To give an example from our own portfolio, Digital Lumens sells lighting systems that save 90 percent of the energy older lighting systems use — and they’re doing this by embedding controls and intelligence into every LED fixture. It’s an operating system for lights, leveraging the fact that lights are increasingly solid state devices at their core. For their customers, such as big commercial retail and manufacturers, there’s a lot more value to be gained than just the energy savings, once they start using the data from all of these ceiling-mounted intelligent devices for other purposes as well. It’s this IT-driven value proposition, and the OS-like network effects, that attracted our co-investors to the company — investors that for the most part would never label themselves “cleantech.”
After all, a list of what’s hot in VC land these days would definitely include Internet of Things, as well as food/agtech, transportation and fintech. And guess what you’ll find in many cleantech investor portfolios? The same list.
A few months back I was at a lunch with several limited partners, and when I described that my group focuses on cleantech, everyone kind of politely nodded appreciatively, mumbled something about how hard the sector is, and then started talking about other things. Much more exciting things, like Google’s $3.2 billion acquisition of Nest. “You know,” I mentioned to the person who had brought up that example, “Nest was actually a big win for the cleantech sector.”
He smirked and replied, “But Nest isn’t really cleantech, is it.”
There is a huge economic transfer underway, from century-old, inflexible incumbents, to new upstarts led by entrepreneurs who don’t care what label you apply to them.
Yes, I know energy savings weren’t the core motivation for Tony and team to tackle smart thermostats as their first product. And there were definitely investors in that company who didn’t care much about energy savings; they loved the team and their audacity. But there were also investors that I know firsthand who were attracted to the company because of the efficiency angle. Cleantech investors who rightfully point to Nest as one of their big wins.
The distinction between cleantech and tech is increasingly fuzzy and meaningless.
So… entrepreneurs are indeed still excited about these markets. And mainstream VCs are indeed still investing in cleantech. They’re just not calling it as such, or defining it with the same subcategories. Instead, innovators and investors are defining the companies in terms of what they actually do.
They’re lending platforms financing billions in commercial building improvements. They’re using the Internet of Things and automation to break up the old electric utility’s natural monopoly. They’re building new channels, touching tens of thousands of consumers every year, helping bring new technology into the home. They’re new “sharing economy” platforms that provide convenience and superior customer experience for travelers, while — oh by the way — leading to fewer hotels being built and fewer cars added to the road. Just don’t call it “cleantech” please.
We are in the midst of a radical transformation in how we feed ourselves, how we travel, and how we power our lives. There is a huge economic transfer underway, from century-old, inflexible incumbents, to new upstarts led by entrepreneurs who don’t care what label you apply to them. So why should anyone else bother with what label we all use, either, as the boundaries between cleantech and tech continue to break down?
These are exciting times, as the marriage between IT and physical innovations and new business models are poised to disrupt some of the biggest and most outdated industries in the world. Who cares what we call it.
Cleantech is dead. Long live cleantech.