For more than a year, media outlets have posted stories on various major venture capital firms throwing their arms up in frustration and feeling woe over their cleantech investment portfolios. These down-and-out VC stories have been coupled with broader reporting on the drop in the total VC funds issued for cleantech after two years of growth in 2010 and 2011.
Indeed, Q4 2012 experienced a particularly low VC investment period for the alternative energy and fuels subset of cleantech, with just about $70 million in investment, the lowest quarterly mark in at least four years. Total cleantech investments in Q1 2013 were at an even more dramatic seven-year low.
This negative has have left many pundits with a dour attitude and confused understanding of the viability of investments in clean energy and related technologies.
Clean energy investment way up in the U.S., just not from VCs
VCs invest when the both the risks and potential rewards are high. Inspiring stories of VC investments in two folks toiling away in a garage on a clever idea is a bit at the far end of risk for VCs, but certainly they do usually make bets on companies that are pre-positive cash flow, and not infrequently, pre-revenue. Once a market begins to reach a level of early maturity, risks and rewards come down, and VCs exit all but the leading edge of the space.
This transition mostly occurred many years ago in the utility-scale wind and solar project finance market, including the backing of development companies, and is in mid-transition for distributed solar PV projects. A good example of this transition is distributed solar PV developer SolarCity, previously backed primarily by VCs but then floating a portion of its common equity to retail investors in an IPO in December.
Today’s situation, with the vast majority of clean energy investment not coming from VCs, is actually a positive indicator for the maturation of clean energy markets. PricewaterhouseCoopers tracked VC investments at $3.3 billion in U.S.-based cleantech companies in 2012. Yet U.S. project investments in wind and solar — both experiencing record totals in 2012 — exceeded $25 billion and $11 billion, respectively. The combined $36 billion is more than 11 times cleantech VC investments in 2012. Yet wind and solar are only a subset of alternative energy.
Furthermore, alternative energy is just a subset of cleantech, generally inclusive of environmental advances in other markets including smart grid, energy storage, energy efficiency, waste management, transportation, water provision, wastewater management and pollution abatement. Combining the project, corporate and other non-VC investments in newer technologies in these markets likely produces a ratio in the vicinity of 100 times.
Granted, some consider the word “cleantech” to explicitly describe only the VC stage (possibly coupled with the private equity stage) of environmentally beneficial tech-based investments, but this characterization isn’t fully appreciated outside of the financial community and certainly not sufficiently comprehended by the general public.
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