I just read an interesting article from Ben Gaddy and Varun Sivaram in the Financial Times—both are good folks I largely agree with. This particular article, however, seemed to skew the data and its conclusions the wrong way as they pertain to breakthrough climate change technology. I attempt to respond to their article with my interpretation of their facts.
Private sector capital should focus on the deployment of clean-energy infrastructure. Tweet This Quote
It has been about 10 years since Silicon Valley made a big bet on clean-energy technology. Instead of large profits (most were compelled by a need to “do well by doing good”), VC investors scoured the landscape looking for technology and business models that could scale and achieve VC-like returns. By 2009, they had invested over $1 billion in over 100 new clean-energy companies.
But, these investments have underperformed. With some exceptions, most investors have found cleantech difficult and disappointing. What went wrong?
With few exceptions, the companies they invested in competed in commodity markets achieving gross margins of less than 30 percent. At those gross margins, hypergrowth requires continued fundraising. Only when growth levels off does the insatiable need for equity give way to positive cash flows. This is similar to construction and infrastructure companies. This is a place for working capital, construction finance, and growth capital. To become a big company usually takes ten years or more—much too long a time line for VC investors.
Government R&D funding has led to the invention of hundreds of clean energy technologies since the 1970s. Tweet This Quote
So where should cleantech go from here? In short, private sector capital should focus on the deployment of infrastructure—construction to be exact. The good news is that government R&D funding has led to the invention of hundreds of technologies since the 1970s; their continued funding is producing more every day. There is a fairly reliable track record of these technologies being ready for the private sector to scale them up twenty years after they are invented. There are already hundreds of technologies that have reached this anniversary and are ready to be grow at gigaton scale.
This has been studied by the Deep Decarbonization Project, the International Energy Agency, Rocky Mountain Institute, PWC, Greenpeace, and many others. Yes, new technologies are desperately needed to meet the 2050 climate change goals. But as a cleantech VC boom and bust cycle has shown us, private sector capital’s role is really best suited for deployment of existing technologies—not bleeding edge technologies or Bill Gates’ “Energy Miracles.”
The US solar and wind industries alone will attract over $60 billion in project finance capital in 2016. Tweet This Quote
Construction companies need tremendous amounts of capital. The US solar and wind industries alone will attract over $60 billion in project finance capital in 2016. Energy efficiency, battery storage, electric vehicles, waste to energy, and other categories add even more capital. VCs have shifted their strategy to support technologies that improve the returns of project finance investors. Finance Tech makes deploying project finance capital faster, big data tools make building management more effective, tracking technology allows solar technologies to generate more production, and so on.
This strategy allows VCs with a fixed timescale the ability to achieve solid returns within five years to pay back investors. This model has been perfected by VCs like SJF Ventures which invested $25 million into NextTracker in December 2014 and sold the company to Flex ten months later for $330 million.
Investing in cleantech always seems to mean venture capital when they should be talking about project finance. Tweet This Quote
Sadly, in my experience, investing in “cleantech” always seems to mean venture capital when they should be talking about project finance. There are very few things that both presidential candidates agree on, and private sector investment into infrastructure is one of them. As the solar and wind industries have shown us, deployment leads to massive learning that leads to incremental R&D, predictable cost reduction, VC returns, government focus and tremendous political support. This cycle can be replicated within electric vehicles, green buildings, combined heat and power, fuel cells, anaerobic digesters, battery storage, solar hot water, and many other sectors.
Last year, Bill Gates and 27 other billionaires framed the problem around the need for energy miracles because today’s solutions simply weren’t up to the task. To seize the moment in Paris, they called a quick press conference with the 20 governments around the world to reclassify their existing investments into their curiosities in breakthrough cleantech ventures as part of the Breakthrough Energy Coalition.
Both presidential candidates agree on few things, but private sector investment in infrastructure is one of them. Tweet This Quote
After the press conference, they did not agree to hire professional help. Alas, they haven’t even created a website by which hungry entrepreneurs can contact them. Instead, they simply left the impression that today’s technologies will not meet the goal without “Energy Miracles.” They can clearly spend their money as they wish, but they have to be careful not to join Bjorn Lomborg as “deniers.” Not traditional climate change deniers, but almost as bad—folks who deny that scaling up current technologies can be relevant.
More importantly, governments are important to the work of deployment at scale. This is a serious role often undermined by the “R&D first” mantra. Governments love to satiate the public’s desire for change with future talk around R&D instead of doing the tedious work to unlock today’s solutions now. The US government has shown it can play an important role in scaling up solar deployment through the SunShot program.
But after intense lobbying, the US Department of Energy has deliberately not tried to replicate this best practice to any other industry sector, preferring instead to focus on more pilot projects and R&D. In fact, the US government already has the funding to deploy $80 billion of climate change solutions under the guise of saving tax payer money. Under the Obama administration, though, less than $5 billion of that money has actually been prioritized.
Governments are critical to the work of clean energy infrastructure deployment at scale. Tweet This Quote
Yes, the government is really the only group that can invest in R&D at scale, but they can also be a shining example of deployment at scale within its own infrastructure.
We all love a good story of cleantech VCs and resulting billionaires, but that is simply not the story of cleantech infrastructure. Cleantech infrastructure is a story of thousands of well-run companies worth less then $10 million dollars that have been started since 2003, hiring 1 out of every 80 people since the 2008 recession at wages exceeding $21/hour. Cleantech VCs have adjusted their ambitions to support the deployment of existing technologies and business model innovation where they can make reliable five-year returns.
I applaud Ben and Varun for their effort, but they simply missed the point. VCs will never get the rewards for breakthrough energy innovations because the commercialization timeline and total capital required is just too great. They are asking capitalists to invest into breakthrough technologies for which they will never be compensated fairly. This is a job solely for government and maybe charitable foundations of the uber wealthy—not for VCs who have to make compelling returns for their pension fund investors.
This post originally appeared on Jigar’s LinkedIn.