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Cleantech Investing: 2013 Predictions

Rob Day: December 27, 2012, 10:31 AM

First: Several folks asked if I could post my little Christmas Eve twitter poem. Well, Walt Frick was kind enough to do so here. So enjoy, typos and all! And my thanks to Walt...

It's that time of year again! Time for some prognostications of questionable accuracy, as we head into the new year. 2012 was hard for cleantech investors. Will 2013 be a rebound year? This time next year will we be looking back and smiling broadly at our good fortune?

Unfortunately, that's not what I'm expecting.

Our sector is at a pretty low point right now, and while I do personally believe cleantech is just in the "Trough of Disillusionment" and will eventually rebound, there aren't a lot of factors primed to trigger any upswing in the coming months. So 2013 seems like a "go-sideways" year, off of an already low starting point.

In fact, I think the term "cleantech" will continue to become unfashionable, although some (including myself) will continue to use it in very generic ways. But this will be a year where the cleantech sector gets a lot broader, in terms of where the (limited) activity is and who's interested in it, so that'll probably mean a lot of rebranding and proliferation of other terms as everyone tries to figure out their own renewed take on things.

But my track record on these things isn't very good, so don't get either too discouraged or encouraged by the following predictions:

1. U.S. cleantech deal counts will be flat in 2013 (within 10% plus or minus) of 2012 levels, and dollar amounts will be down.

Both venture dollars and deal counts were down in the first three quarters of 2012 (note: link opens pdf) and Q4 doesn't feel poised to surprise on the upside. Even follow-on funding has been down, but mostly it's the initial investments (Series A, etc) that have fallen by the wayside. This is driven by the significant withdrawal of generalists from the sector, and the reality that specialist VC firms are low on capital reserves. More on this below, but it doesn't seem like LPs will suddenly start demanding VCs invest in cleantech or start making big commitments to the sector, at least in the next few months, and there's a lag time between such shifts at the LP level and how deal volumes flow down through the GP level anyway.

That said, with 2012 levels already pretty low, I don't expect a major decline from these depressed levels either. So I expect a flat year for deal counts. I do think the shift toward smaller follow-ons and more capital efficient first rounds will continue, however, so even with deal counts staying the same I expect dollar amounts to continue to decline. Remember: I always say to look more at deal counts as an indicator of VC interest in a sector than the dollar amounts.

Note that I'm not making any prediction about international venture activity in cleantech. That's because I find the deal tracking outside of North America to be pretty squirrelly still, and I also cannot guess what's going to happen in some of those other markets. Generally speaking, Europe will continue to be an economic mess, BRICs will continue to grow and thus drive demand for "all of the above", and MENA will continue to diversify. To what extent, and to what effect on cleantech? I have no idea.

2. Agriculture-related investments will be the next "new new thing" area for venture investments. 

I don't quite know how to quantitatively define this, but I think 2013 will be a big year for venture investments in the agriculture / food sector, generally speaking. Most VCs I speak with now talk about this as being one of the sectors they're spending a lot of time looking at, and that often results in significant visible dealflow months later.

It would have been easier to forecast a big year for cleantech-related IT and web investments. But while I do think we'll see a lot of noise out of the "Cleanweb" sector in 2013, everyone can already see that coming. I didn't want to just be the 20th person to suggest 2013 will be "The Year of Cleanweb/ Cleantech IT". Whereas I do think Ag/Food might surprise some folks, so I'm highlighting that sector instead.

Interestingly, not all cleantech deal tallies include agriculture in their tracking, so it may or may not show up depending upon which analyst report you're looking at. And for many readers, they may not even consider agriculture and food to be "cleantech" in the first place, except for where it overlaps with biofuels. But regardless of how it's categorized and regardless of what label it receives, this seems like an area where there will be a visible uptick in venture activity -- and probably including a few deals that will make you stop and go "huh?" -- the sure sign of a hot sector.

3. There will be a wave of consolidation and shake-out in solar financing.

The consolidation wave and shake-out in upstream solar (panels, wafers, etc) is now obvious to all, and will continue. But downstream, installations are booming and solar financing is taking off, perhaps best illustrated by SolarCity's IPO this past month.

Heady times in downstream solar, to be sure, and that's probably not going away. 

That said, there are reasons to expect solar financing in particular will eventually be dominated by a few big players rather than the current somewhat fragmented group. Scale-driven efficiencies can be seen in branding, installer relationships, customer acquisition, and especially in cost of capital.

This latter area is where I'm already seeing a fair amount of separation starting to develop between "winners" and "losers". We've just been through a period where a small handful of investment banks (most prominently, perhaps, US Bancorp) spread around their commitments to rooftop solar financing across a number of solar financing players. But now I'm seeing indications that these banks are starting to gravitate toward a shorter list of rooftop solar financing players, even actively shifting away from others, because of factors like dealflow, quality of contracts, low cost of customer acquisition, etc. The rooftop solar financing players who can't obtain the lowest-cost capital from banks will be at a decided pricing disadvantage, and will be forced to join forces with other financing players, or to be acquired by upstream solar panel manufacturers looking for access to certain markets, or simply will go away. I think we'll start to see this happen in 2013. 

Just remember, when you see solar rooftop financing players start to fall out like this, it's not necessarily a sign of bad health for the entire sector. It's just a sorting out of winners and losers, and the winners will be likely doing quite nicely indeed.

4. Large corporates will continue to play a vital role in keeping cleantech entrepreneurship vibrant -- but there will be a shift from oil / chemicals to consumer products, IT and industrial equipment/controls strategics, in terms of level of activity.

Even as LPs and VCs have (temporarily) fallen out of love with cleantech, large corporates have continued to find these subsectors (again, under a variety of labels) strategically interesting. And over the past few years I feel like I've seen a significant upswing in the seriousness with which large corporates are looking to new energy and resource technologies for topline growth.

This seems poised to continue. Fortune 500ish companies have never been sitting on more cash, and the strategic interest in the cleantech sector broadly-defined hasn't waned much as far as I can tell. But with the emergence of low-cost natural gas in the US and the likelihood of low-cost gas (and to a lesser extent, oil) being readily available going forward, the major corporates that had been the strategic partners of choice seem to have less motivation to search for low-cost inputs. Namely, oil and gas giants, and large chemicals manufacturers. 

These are the large partners who had helped some of the capital-intensive plays in cleantech to address the first-project "valley of death" by doing things like JVs where they would provide the capital to put steel in the ground. And while this role likely won't be fully abandoned by them, a) many of them already have a pretty full dance card of startup partnerships by now; and b) low-cost traditional inputs reduces the need to find alternative inputs.

Meanwhile, the data side of cleantech has risen in prominence, and many customers still care about "green". This is attracting renewed interest amongst large players like Google and Facebook and IBM who view data as their bread and butter, and amongst consumer products companies eager to offer their customers green alternatives. In terms of focus and rhetoric it's almost a return to the days of emphasizing "sustainability" such as I used when working with such companies nearly two decades ago (and, btw, which will further drive interest in things like the Cleanweb and sustainable food/agriculture amongst investors), rather than just low-cost commodities production (such as dominated cleantech over the past decade).

Furthermore, while energy prices are currently low and on the decline, volatility of demand (especially in electricity) isn't going away. In my interactions with corporates in the industrial controls and equipment markets, there's a recognition that automation and optimization around energy will be a crucial complement to controls they already offer for production, quality, and so forth. So companies like Johnson Controls, Honeywell, Siemens are all poised to be important players in 2013, and I already see them getting serious about partnerships with smaller companies. Again, they may not consider it "cleantech" per se, but under whatever label you prefer they're getting serious about it.

5.  There will be no significant progress on US federal energy policy.

I plan to write up some observations soon from a couple of trips I made to DC in December to talk with policymakers, pundits, etc. about energy policy. But the short answer is that the White House and Capitol Hill don't have enough bandwidth to take on any major energy legislation effort this year -- pending some kind of unexpected disruptive disaster.

The Fiscal Cliff is taking all the air out of the room currently. And that won't be a quick resolution, even if there's some kind of 11th hour compromise that happens over the next couple of weeks -- there will be a lot of follow-on fights on the budget throughout this coming Congress. To the extent anything else can get done, the White House has already signaled that they care more about Immigration Reform and Gun Control as legislative priorities over Energy and Climate. It's not as if the White House doesn't care about energy policy. But they don't care about energy enough to elevate it over these topics and whatever other crisis-du-jour pops up along the way. Only if there is some kind of major unexpected disruption to energy supply, or some kind of horrific and obvious climate-driven disaster (because apparently even Sandy wasn't enough) will this topic pass the threshold from "yes, we should do something about it when we can" to the "we must do something immediately" category, at least in 2013. And clearly I'm not rooting for something like that to take place, so my hopes for any important happening legislatively are low. At least in terms of forward progress; there's always the chance of some rollback as the White House and Congress horse-trade in favor of higher priorities.

That said, there might be some small rationalization of energy policies that can be helpful on the margin. MLP treatment of renewables, for example, and more information-driven (as opposed to dollar-driven) efforts by the DOE to promote clean energy and energy efficiency. These would be good to see.

6. 2013 will be the year journalists (and thus everyone else) figures out that US cleantech entrepreneurship has become driven as much by family offices and other non-VCs as by VCs themselves.

Look, this is already the case. I came to the realization the other day that if I were to name the top 5 most active west coast investors I keep personally seeing engaged on potential cleantech venture deals I look at, at least two would be family offices. And on the east coast, our own group, a few angels, and quasi-governmental groups like the MassCEC and NYSERDA are as active as any remaining venture investors still investing in the sector. I don't mention this as a point of self-promotion, however, because I think it mostly points out just how far down the LP withdrawal from cleantech has taken institutional venture capital activity levels; it's not that suddenly Black Coral Capital and our breathren are taking on massively higher levels of deal activity. So it's more of a depressing thought than a point of pride, to have come to this realization. 

But while family offices and other non-VC offices are now, in my opinion, as important as VCs for funding cleantech entrepreneurship, you wouldn't be able to tell that from journalist coverage of the sector. And the simple reason is that VCs have the brand names and the PR efforts to get attention, and non-VC investors don't tend to report out their funding activities like VCs do (so a lot of their investments don't show up in the deal tallies, for example). That's all fine and good, that's the way most non-VC investors would like to keep things, they typically don't want attention. But sooner or later, we'll start to see journalists pick up on this shift and start to talk about it a lot more. If only because the VCs won't be feeding them enough cleantech-related stories to keep them busy...

7. Large-format (e.g., stationary) energy storage will be the next sector to see multiple high-profile flameouts.

I am personally a fan of grid-scale and distributed energy storage... over the long run. I see several promising technical efforts out there than might eventually result in very low-cost electricity storage suited for particular needs that would complement load control to help address variability for the electrical grid. 

But this is a sector that has seen a fair amount of venture dollars go into a number of capital-intensive startup efforts over the past few years, with very little revenue to show for it. In the current funding climate, that's not a recipe for raising follow-on financings. And indeed, in the third quarter PwC said that energy storage investments were down 99% year on year -- although that's probably an artifact of one particularly low quarter, it's indicative of a broader trend by investors away from long-development, capital-intensive plays like many grid-scale energy storage efforts. 

Thus, while some such startups will be able to carry on by combination of reduced cash burn, by reinventing their business models to accomodate existing storage/DG technology, and via the occasional follow-on financing, you have to guess that a number of them won't be able to carry forward and will be forced to shut down or sell for pennies on the investment dollar.

I'm loosely including SOFCs in this category, btw.

8. At least two well-known cleantech-focused venture capital firms will publicly shut their doors or at least acknowledge they won't be raising any future funds.

I've alluded to it several times above and written about it here, but the limited partner community has at this point really pulled back from the cleantech sector. And many of the cleantech specialist firms out there are at or nearing the end of their current fund cycles. I know several that delayed attempting their next funds in 2010, 2011, and now 2012 in hopes of finding a more receptive group of LPs later on. They limped through by supporting their existing portfolios, shedding some junior staff, and doing 1 or 2 new smallish deals a year to stay "in the game". But that game can only be drawn out so far. And several cleantech specialist VCs have some big smoking craters in their portfolios, which will make raising that next fund even harder. Believe me, I've been there.

So I certainly don't predict this with any happiness, but I do expect this will be the year when we see the cleantech venture capital shakeout extend from lesser-known firms and a pullback by the generalists, into the better-recognized cleantech specialist firms out there. 

Fortunately, there are others that still have dry powder, or that have been able to raise smaller new funds, and so while this is indeed an "extinction event" period right now for the sector, new and renewed champions will emerge.

This will eventually be looked back upon as a period of significant and healthy reinvention for the sector.

9. Natural gas prices in the US will spike at least 50% at some point during the year.

Most forecasts I've seen project only a slight rise in natgas prices going forward over the next few years, and I agree. Over the medium to long term we're clearly now in an era of cheap natural gas and it's having a major impact on the US energy market.

Henry Hub prices are currently around three and a half dollars per MMBtu, and consumers (especially power generators and chemicals manufacturers) are planning around that kind of price, perhaps drifting up to a bit over $4.00 per current 2013 forward contract prices.

But natural gas has a history of sudden price spikes. Why? Because of limited storage and a lagtime to increase production.

Gas drilling rig counts are well off of their 2011 highs. Horizontal drilling activity has stopped increasing and in fact has been flat or in decline throughout 2012. Therefore production was pretty flat throughout the year, and there's no sign of it increasing suddenly. Meanwhile, whereas throughout most of 2012 storage levels were significantly higher than during previous recent years, now they're back to more normal levels.

As powergen continues to shift from coal to gas and chemicals manufacturing recovers with the economy (and shifts to low-cost US gas supplies as well), short term natgas demand in the US feels once again pretty inelastic and primed for some kind of disruptive event (such as a major summer heat wave) that would rapidly deplete available storage and result in a price spike above $5 before drilling can kick back into gear. Potentially much higher than $5.

You don't have to disbelieve the fracking revolution to believe that a significant natgas price spike is inevitable. You just need to look back at historical price charts.

This is very important for the cleantech sector. Because while I don't myself believe low natgas prices are deadly to most clean technologies and applications, certainly I've heard sentiments to this effect amongst LPs and generalist VCs over the past few months. I definitely heard it from certain partisans in DC. There's currently this perception that low-cost natgas is here to stay and therefore that clean energy technologies are endangered and/or less important. That cleantech is "just a climate issue", no longer an economic issue. 

But it's not just the long-term price of energy that's economically important -- it's also the volatility. And natgas is historically one of the most volatile energy inputs. A big, disruptive price spike would serve to remind a lot of important constituencies that natgas should be an important part of the go-forward US energy mix... but that we can't let ourselves get so dependent upon it that a price spike hurts the economy as badly as an "oil shock" has done in the past. A price spike, when it happens, will hopefully remind everyone that we need an "all of the above" energy mix, and that emerging energy technologies -- and especially DG and load-control technologies -- are strategically crucial going forward.

10. The Redskins will make it at least to the NFC semifinals round of the 2013-2014 season.

Yep, I'm all in for RG3. He'll probably have some kind of a sophomore slump and/or get hurt again, but with one more draft to bolster the O-line and secondary, and hopefully a healthier receiver corps than this year's snake-bitten bunch, I think the Redskins will rejoin the NFC's elite teams.

I've even still got my fingers crossed for this year -- big game Sunday night.

So Hail! to a great 2013, everyone. Here's hoping I'm right about the positive predictions above, and wrong about the pessimistic ones. Have a terrific new year. 

Looking Back On 2012 Cleantech Investing Predictions

Rob Day: December 24, 2012, 12:07 PM

It's been a crazy year in cleantech, and a lot of things didn't go as expected.

Especially by me, apparently.

Even if I'm not particularly good at it, I find the annual prediction exercise to be useful for developing a coherent picture of the coming year, as at least a starting point for planning. And it's also just a bit of fun to take some guesses and see how they turn out.

2012 flummoxed me because I was too optimistic this time last year. I thought we were about to turn the corner on cleantech venture firm fundraising, and thus that we would start to see a rebound in dealmaking. I failed to see just how toxic the politicization of cleantech would become. And I generally was too aggressive on trends that I do believe are underway, but that are moving a lot more slowly than I'd projected.

"1. Both dollar totals and deal totals for U.S. cleantech venture capital will be up more than 20% over 2011."


We haven't gotten the 4th quarter tallies yet, but it would have to be a huge turnaround for the deal and dollar totals -- which have been declining throughout the first three quarters -- to end up even catching up to 2011 levels, much less expand upon them. I'd thought that economic stabilization was coming (somewhat true) and that therefore LPs would start making commitments to VCs this past year (not true at all).

2012 was clearly a down year for cleantech venture capital dealmaking. Will we see a rebound in 2013? 

"2. At least one 'brand-name IT entrepreneur' will launch or join a cleantech effort."


The merger of cleantech markets and IT/web business models is actively underway now, and it's become a strong driver of the current activity in the cleantech venture market. And I've seen strong entrepreneurs with an IT background get into the market this past year. I wouldn't say we've seen a "brand-name IT entrepreneur" jump very visibly into the sector this year, however (not counting those who'd done it earlier, of course). No offense intended to any who jumped in and feel I should consider them a brand-name, of course! 

"3. There will be at least one additional major syndicate of family offices launched to target cleantech (or a synonymous label for the sector)"


I've continued to see more and more family offices get into the sector and start to look to be active. But we just haven't seen any such additional syndicate officially launched. ...Yet.

"4. There will be no progress made on U.S. federal energy policy, and there will be a rollback of state-level policy."


Predicting very little progress on energy policy at the federal level seemed too obvious, so I just had to try to up the level of difficulty by projecting a rollback at the state level. D'oh. I still think attacking state-level policies is the next step for anti-cleantech forces out there in the political world, but really 2012 was more of a stalemate at that level than a rollback year.

"5. Significant and visible consolidation within the solar industry will occur."


And it will continue.

"6. 2012 will see the emergence of multiple 'roll-up' efforts."


I've talked with a lot of entrepreneurs and investors who are starting to see the opportunity to take advantage of today's low valuations to roll up separate vendors into a fuller offering for customers. I've seen it happen a few times as well. But I wouldn't say it's been a very significant and meaningful trend yet. Stay tuned.

"7. New hybrid investment models will emerge."


On the basis of talking with a lot of investors who are talking about and planning unique strategies (such as combined debt / equity offerings, venture capital + project finance, or investments into service models), I have now predicted the visible emergence of such hybrid approaches in 2010, 2011, and 2012. It's time to stop making this prediction. This appears to be one of those concepts that everyone agrees should happen, but for some structural reasons few investors have the flexibility to actually do it at scale.

"8. 2012 will see a big wave of corporate M&A in the cleantech sector."


We still don't have the Q4 numbers on this, of course, but the Cleantech Group data for the first three quarters indicate that global cleantech M&A activity was actually down slightly. I end up talking with more and more corporate managers about cleantech, and I see a lot more anecdotal evidence that large corporates are getting serious about investing in and making acquisitions in the sector. But thus far that hasn't presented itself in the data of completed deals.

"9. A major geopolitical event will spike oil prices above $120/barrel."


Here's what I wrote a year ago: "I predicted this last year as well, and sure enough, we had spikes because of geopolitical events, but in the end, the macroeconomic blues held down prices below $120/barrel for the entire year. As noted, I'm hopeful of at least some economic stabilization in 2012. On the basis of that hope, I'm willing to continue to bet on major price volatility for oil, one of the world's tightest and most easily manipulated markets. Until we finally figure out how damaging it is to our economy that we allow ourselves to be dependent upon such a headline-risk input, and start to wean ourselves off of Middle Eastern oil through smart policy and long-term capex decisions, markets will continue to be near-term price-inelastic and thus we will continue to see spikes whenever some crackpot somewhere around the world decides to make a stink.

"If China's economic expansion loses significant steam, or Europe fumbles and causes a global recession, this prediction will be wrong. But given even a halfway-decent economy in 2012, such volatility seems pretty inevitable. To borrow from Rick James, 'Oil is a hell of a drug.'"

Wrong two years in a row. And now there are more supply-driven downward pressures on oil than we've seen in several years.

"10. Several 'environmental markets' will collapse and shut down."


In fact, the launch of the California carbon trading market was good to see. Carbon credits and other environmental markets continue to have their difficulties, but I was wrong to suggest they were going away in 2012.

"11. There will be an overall pullback in non-U.S. cleantech venture capital deal counts, but an increase in project finance."


We need to wait to see the Q4 numbers, but early indications are that this guess ended up being right.

"12. The Redskins will have a losing record next season."


RG3 is even better than I'd hoped. 

So all in all, I was probably only around 25% right for 2012. Meh. In a few days I'll once again attempt to forecast the year ahead. Will I manage to do better for 2013? I hope that we all do, 2012 was a pretty lousy year for our sector.

An Open Letter to Limited Partners from a Cleantech Investor

Rob Day: December 10, 2012, 12:00 PM

Dear venture capital limited partners:

I get it.

You were promised that cleantech was going to be the Next Big Thing and it didn't happen. Instead, you've seen the GPs you've backed in the sector have to face a legislative/political headwind, a dearth of big exciting exits, and a number of high-profile flameouts. At this point you're doubtful that there are big returns to be made in the sector and your colleagues are telling you cleantech is a bad place to put capital and so you're pulling out altogether, at least for the time being.

Sure, some cleantech-focused GPs tell you that cleantech hasn't actually performed worse than other sectors for the venture capital category, and they're right, technically speaking. But that misses the point, doesn't it.

As one major LP told me a few years back, the major reason for LPs to put any money into venture capital at all, with its sub-par risk-reward performance over the past decade, is in the hopes of getting in ahead of the next great bubble... and he hoped that cleantech might become that. But that was a few years back -- at this point, cleantech looks very unlikely to become a bubble sector with lots of high-flying IPOs anytime soon. So what's the point of doing marginally better than the barely-returning-capital performance of the overall VC asset category when there's no upside to a particular subsector. Especially when some of the smartest investors in venture capital have seen some major smoking craters in their portfolios in the cleantech sector.

And yes, cleantech venture capital was supposed to save the world. This was supposed to be a feel-good story. Do well by doing good, and all that. But in the meantime bigger resource shifts (namely, natural gas abundance in the US) have led to reduced carbon emissions while also lowering the competitive price targets emerging energy technologies have to beat in order to look attractive. So again, what's the point?

By now, you view cleantech as a low-upside, very difficult, politicized, capital-intensive sector with bad to mediocre returns expectations. And so naturally, you're staying away. Like I said, I get it.

I'm not going to try to dissuade you from any of the above. I think we cleantech VCs took some very questionable approaches to investing in the sector over the past decade, and now deserve your skepticism. But of course I'm not actually a cleantech VC right now, I'm investing out of a family office and don't need to ask LPs for capital and don't have a vested interest in trying to promote one particular investment strategy or another. But I do want the sector to succeed. So for what it's worth, let me just make a few points, in hopes of getting you to take a more nuanced view on the sector...

1. What hasn't changed: In the long run we need some new, efficient solutions

Yes, carbon emissions have gone down in the US thanks to some natgas cannibalization of coal-powered generation capacity. But remember even just a year ago, when natural gas was supposed to be free? It can't possibly go back up, right? So we can't possibly need additional energy resources to support continued economic growth, right?

And even without getting into supply-demand energy arguments, climate change shifts are clearly going to need to be either addressed or accomodated. Because they're real. Just ask your real-asset colleagues what assumptions they're having to make regarding climate shifts when evaluating timber and agriculture resources, or any analyst covering the insurance industry. 

And speaking of which, if we look beyond energy of course there are a host of other resource-related pressures caused by climate change or the commodities boom that will lead to a need for more efficient ways to provide shelter, food and water to humans in the future.

I'm telling you what you already know, sorry. But it's worth noting that there are still some very basic, Maslovian underpinnings to the macrotrends underlying this umbrella investment thesis we've called "cleantech" for the past few years. They haven't gone away.

2. Not every "world-saving" innovation will be a fit for venture capital

I think there was an implicit assumption a few years back that if the solution was audacious and broad enough, it was going to lead directly to an opportunity for VCs to make returns going straight at it. So we need more and cleaner liquid fuels? The direct path to riches is to make them in as proprietary a way as possible. We need cheap solar power? A proprietary formula for making cheap solar panels will result in a big IPO or three. 

Indeed, while there have been some isolated wins in both of these examples, we should just simply acknowledge that a big business opportunity doesn't necessarily equate to a great venture capital opportunity. Capital intensity, risk and timeframes can make it difficult to tackle some major opportunities head-on with a venture capital model and make superior returns. Difficult but not impossible, absolutely. But difficult.

It's entirely possible, in fact probable, that those who create the really big solutions to climate change, etc., won't be able to capture much of the economic rent that they create. That fast-followers, large corporates, governments and others will grab enough value from first-movers that those who expensively created proprietary solutions won't get the returns they deserved for it.

It is what it is. But let's acknowledge it as such.

3. Not every great return in the "cleantech" sector will be world-saving

Re-inventing entire multi-trillion industries is very hard, naturally. But the flipside of that is that making even small dents in those multi-trillion industries can end up revealing multi-billion dollar "niche" and optimization opportunities, and consequently some great returns.

What does this mean? It means that some viscerally underwhelming plays may end up resulting in great venture capital investments, even if they're not radically changing how energy is produced and consumed. Coming up with complicated financial structures for residential rooftop solar can actually turn into big business opportunities, for instance. Helping homeowners get the residential energy information and improvements they've always lacked access to can be a big growth service business. Simply providing previously-missing information to commercial/industrial building owners and managers can help launch a new marketplace for new solutions. These things may not lend themselves to holiday party cocktail conversation like "I invested in an electric vehicle that'll change the world" would, but that's not really the ultimate point, is it.

If you want your GPs to be investing where others aren't, in cleantech that means they'll be investing in some arcane, niche-y and unsexy stuff at times. And so just separate out in your mind the idea that something has to be a Really Big Idea to make great venture capital returns in cleantech. Instead, it comes down to deal size/structure, and real economic value creation, which can happen in some obscure and seemingly marginal areas.

4. If any GP tells you they know how the global climate challenge will be solved, or the "right way to do cleantech venture capital", they're blowing smoke

I see it on Twitter all the time, these debates among investors and pundits about whether the best path forward for society and for investors is heavy-innovation in hopes of a breakthrough that will result in wholescale cannibalization of the incumbent energy industry, or more immediately-feasible efficiency improvements within the current industry structure. Between those like Vinod Khosla and Bill Gates who advocate emphasizing hardcore technical innovation, and those who emphasize figuring out how to more rapidly scale-up the more efficient solutions we already have in the marketplace.

"Yes, please" to both.

So-called Black Swan events happen in any number of industries and are likely to happen in the energy and resource industries over the next couple of decades, sure. But the nature of such events is that no one really sees them coming, and that those who precipitate them don't necessary get any economic benefit from having launched a new trend which others rapidly jump in on. On the other hand, making the current energy/resource scheme more efficient might just be rearranging deck-chairs on the Titanic, in an era when we're already locked into major climate shifts

I personally don't think you can make any money betting against the innovative and self-preservation capacities of the human race. So therefore, you might as well bet on an eventual reversion to a sustainable path forward one way or another, because otherwise what's the point, any other bets are moot. The problem is, you can't just assume one of these pathways (Big Innovation vs. Accelerated Deployment) is better than the other. Or decide ahead of time which pathway will lead to better returns.

So don't...


What do these four points together mean for limited partners?

It means that I understand why you have been pulling back from venture capitalists in the cleantech sector. But that I think perhaps it's been overdone a bit at this point.

I've seen many very smart venture capitalists with deep experience in this sector be forced out and into either non-cleantech investment roles, or non-VC roles altogether. I've seen innovative cleantech entrepreneurs who are actively trying to avoid the mistakes of the 2000s, but who can't get the funding to get their ideas into the marketplace. 

If you believe the above four points, you acknowledge that at some point -- now, or later -- there will be some solutions that come to the marketplace with some really strong potential economic gains. And like me (my firm has made several LP commitments, ourselves), you've likely been approached by a myriad of venture capitalists with new and innovative approaches to trying to make returns off of these solutions, be they revolutionary or evolutionary. You can probably see that at some point this sector will get momentum again, in a big way, although in a form that might be different from what you've been told to expect.

Unfortunately, because you and all your colleagues have decided not to put any dollars into cleantech venture capital at all, there's no push to help get this momentum going. There are almost no first-time and/or small cleantech-focused venture firms that can get off the ground and prove out their ideas or not, because they can't get LP funding. The generalist VCs are pulling back even from the 10-20% allocations they'd had into the sector, and losing the experienced investors who could help figure out new approaches at those larger platforms. Some of you are backing a very small cadre of high-profile investors in the sector, but by and large even they are not really trying new investment models, they're just shifting to later-stage investments where sectoral differences don't matter so much. And thereby creating an early stage funding gap that has now reached crisis levels.

So my plea to you is this: Fund some experimentation. Purposefully fund some smaller, emerging efforts -- at big-named firms or at fledgling firms -- to figure this sector out. Help get early promising reinvented strategies out into the marketplace. Place a few smaller, perhaps even sub-scale (from the perspective of your governance requirements) bets that will help support the experienced minds eagerly trying to figure out this cleantech venture capital problem. They may in fact not even call it a "cleantech" focus, amen to rebranding if that's what will help. 

Because I totally understand -- from your perspective, underperformance by the cleantech venture sector is indeed a legitimate problem. But eventually, with a problem as big and important as this one, those who come up with the solutions will end up making phenomenal financial returns one way or another, and their early backers (not the too-late, solution's-obvious-to-everyone backers) will too.

And in the end, no one solves a problem by just sitting on the sidelines and not trying anything.