Cleantech, energytech, and the gov’t R&D factor

For the past few years, energytech has completely dominated the cleantech sector.  To the point where to many people the terms are synonymous.  But as regular readers of this site will attest, there’s a lot more to cleantech than just energy-related markets.

In the pool of U.S., privately-held, VC-backed companies tracked by Ernst & Young, only 39% are in the Water, Industry, or Environment categories (the other 61% are in the categories Energy Generation, Energy Storage, Energy Efficiency and Alternative Fuels).  And even more telling, those 39% of companies have only taken in 28% of the capital E&Y has tracked since 2006.

So why does everything non-energy get so little relative attention these days?  There are quite a few good reasons for the disparity, but it still feels a bit imbalanced.  And one reason that doesn’t get talked about a lot, but is nonetheless a factor that bears examination, is the role of government-sponsored research in these areas.

Department of Energy budgets for non-defense-related R&D have averaged between $5-6B per year since the 1980s, and are trending strongly upward.  That’s a good thing (even if a huge amount of it is in fossil fuel related research).  Such research and development is also at the heart of a lot of the innovations driving the current clean energy upswing.  Solar technologies now at privately-held companies and attracting hundreds of millions of VC investments are often based upon patented innovations from DOE-run national laboratories (e.g., NREL, Sandia).  Biofuels startups have been garnering strong incentives from DOE budgets as they look to bridge the “valley of death” between proving their technologies in the lab, and building commercial-scale facilities.  DOE lab research is at the heart of at least two of the energy tech companies in my firm’s current portfolio, and the continued support from the labs have played an important role in those companies’ development.  Efforts like the DOE’s Energy Efficiency and Renewable Energy (EERE) Program to help commercialize technology out of the lab have helped accelerate this, and now VC firms are even putting EIRs in place at some of the labs.  While the surge of investor and market interest in energy techs is due to a lot of different factors, certainly the role of government-sponsored R&D and commercialization support has been an important one.

But while the DOE has put a lot of money into clean energy R&D and commercialization support, other areas like water treatment and emissions abatement technologies tend to fall under the purview of other governmental bodies, such as the EPA.  So contrast the above DOE R&D figures with the EPA’s research budget of around $500mm (and falling).  To connect the dots, think about how many VC-backed startups in energy tech have been founded around DOE-sponsored research, and then think about how many VC-backed startups in water tech have been founded around EPA-sponsored research… And yet just about every VC will tell you these days that they’re looking for deals in water, for example, so the demand is there.  Clearly there is a vital role to be played by the public sector in encouraging research at stages too early for the private sector to take on.

A large part of this is simply a matter of government budget priorities and therefore in the political realm (ugh).  Perhaps as water shortages raise the profile of water treatment technologies this lack of emphasis might slowly change over time.  But also there are programmatic differences in how each research body approaches the commercialization of their innovations.

Thus it’s great to see this EPA report (note: link opens very large pdf) released earlier this year, “EPA and the Venture Capital Community:  Building Bridges to Commercialize Technology”.  It summarizes the results from a series of conversations between representatives/advisors of the EPA and members of the venture capital community (including yours truly) about ways to better engage with each other and accelerate commercialization.  The recommendations in the report are common sense and would be a great first step toward helping to “fill the innovation pipeline” in non-energy tech cleantech areas.

There’s no sign that water and materials, etc., are going to overtake energy as investment areas within cleantech anytime soon.   But more emphasis on and support during the innovation stage for these “other cleantech sectors” would go a long way toward bringing these other areas closer to the kind of innovation-driven growth cycle that we’re currently seeing in energy generation and biofuels…