For much of the past decade, venture capitalists showered dollars upon clean-technology startups with promising-sounding ideas in areas like solar, electric cars and biofuels.
That era appears to have ended.
Venture capital for clean tech has sharply declined, but giant corporations are filling in some of the lost investment. These Fortune 500 companies have entered the California clean-energy landscape like a spaceship, beaming up new technologies to integrate into their existing offerings.
The emergence of financing from big companies is viewed as a positive for the sector amid a time of uncertainty, but firms receiving funding from major corporations are subject to a different set of expectations and limitations. For entrepreneurs, it can be a troubling new way to view their role in the industry.
“The game plan becomes, and I hate to say it too flippantly, product-development outsourcing for big companies,” says Dan Lankford, managing director of Wavepoint Ventures, an investment firm with offices in Menlo Park and El Dorado Hills.
Partnering with big companies can open the door for micromanaging or the opposite, feeling neglected by the giant corporation. And since large companies focus on improving their existing offerings, innovators have less opportunity to conceive stand-alone products that could fundamentally change energy consumption and turn inventors into celebrity entrepreneurs.
In other words, the chance of becoming the Steve Jobs of clean energy is vanishing.
“Are there people who don’t want to go to work for large companies? Absolutely. But you have to understand what the game is, and it may not be too pretty,” adds Lankford, a former CEO of Element Energy, which built systems to improve multicell batteries until the firm was acquired last year. “You could end up with the next Facebook or Google, but there’s also a probability that you will end up with no money and having wasted a lot of time.”
In forecasting the future of the clean-tech industry, it’s important to grasp the scale of the boom in recent years for all things labeled eco, clean or green. For investors and entrepreneurs, clean technology was one of the wildest parties of the 2000s. The technology began sprouting new purchasable products amid growing fears of foreign oil dependence and climate change.
The first gasoline/electric hybrid, the Prius, hit the American marketplace in 2000. Al Gore filled up shots of anti-global warming fervor with “An Inconvenient Truth” in 2006. Next came an explosion of venture capital funding as investors, seeking to deploy capital in a new industry following the dotcom bust, began stampeding toward the sector.
“A wall of money arrived in quick supply, unleashing the start of a second wave characterized by the explosion of investment into young companies,” wrote Richard Youngman, Cleantech Group’s managing director for Europe and Asia, in a 2012 report. “The early years of the second wave saw lots of new first-time clean tech funds, hundreds of companies founded, billions of dollars invested, optimism in abundance, and clean energy companies (especially solar, but to some degree biofuels) all the rage.”
In 2004, the amount of clean-tech venture capital investments in U.S. companies was $878 million. The next year it shot up to $1.4 billion, the next year, $3.1 billion, and the year after that, $4.1 billion, according to Cleantech Group, a market research company.
Then in 2008, nationwide gas prices skyrocketed to more than $5 a gallon, and candidate Barack Obama responded to growing fears of Middle Eastern oil dependence by promising the creation of five million new green-energy jobs. The market responded. Investments in U.S. clean tech nearly doubled, to $7.1 billion.
But the incredible gas prices in 2008 brought something else: an incentive for gas companies to ramp up fracking. The technology behind hydraulic fracturing — injecting fluid into rocks to crack them and release gas — had been around for decades, but a major energy bill in 2005 exempted fracking from a number of policies promoting clean air and water. As gas prices rose, so did investments in the technology, and during the decade that ended in 2010, shale gas production went from 1 percent of the U.S. market to nearly a quarter of total natural gas production.
The shale gas boom has alleviated fears that the world will soon run out of oil. Experts predict clean energy will continue to grow, but by 2030, oil, gas and coal will still account for 69 percent of all U.S. energy.
The 2008 financial crisis was also a critical blow to venture capital overall. As part of a retrenching effort, recognition grew within the VC community that alternative energy companies take too long to make a profit, or even prove they can make a profit. Venture capitalists prefer a three- to five-year timeline to produce returns so they can redeploy that capital elsewhere. Energy startups sometimes require years of research and factory building before they can even prove their product is viable.
“When you map out what makes venture capital work, and you map out what the clean-tech sector is like, it doesn’t fit very well. Companies take a long time to grow. Customers don’t turn over (to new energy products) that fast,” says Andrew Hargadon, founding director of the UC Davis Energy Efficiency Center, and a professor whose research focuses on the commercialization of sustainable energies.
The VC investment in clean tech has soured. In the second quarter of 2013, venture capitalists invested just $364 million toward clean technology, the lowest quarterly sum on record since the ‘cleantech’ boom began in 2006.
“It’s a bit like sobering up,” says Hargadon. “It’s a little bit of disillusionment and a little awakening that this is going to be longer and harder than we thought. The guys in the big companies have always known this. They know these things don’t change overnight.”
Filling the financing void, large corporations have become an increasingly important source of early-stage funding for clean tech firms. Of the $7.57 billion invested in global clean technology in 2012, a record 40 percent included corporate participation, according to Cleantech Group.
Big corporations are less interested in breakthrough-sounding ideas — they want innovations that integrate with their existing technology. The recession forced many companies to reduce in-house innovation. Now, with the economy improving, big corporations have “cash but no products,” says Lankford. Rather than try to keep up with rapidly advancing technology, companies like GE and Chevron are scouting for startups that appear to be cutting edge.
“It’s hard to go do internal innovation when the market moves very quickly,” Lankford says. “It’s easier to scout the radar for entrepreneurs who are creating products.”
Investment and partnerships from big companies present a strong opportunity for small energy firms, along with a host of challenges. Multinational corporations have an established brand and wide marketing reach. In addition to providing steady work, they can help build the brand of a smaller firm.
“The larger companies have been really good for us in terms of the namesake projects,” says Tobin Booth, CEO of Blue Oak Energy in Davis, a designer and builder of photovoltaic systems. “Being able to say, ‘I work for Google,’ immediately somebody recognizes how important you are because you have that name attached to your portfolio of work.”
Blue Oak has overseen solar panel installations for Wal-Mart, REI, and yes, Google.
There are inherent difficulties in working for big companies, however.
RCS Technology, a small firm based in Rancho Cordova, makes hardware that enables home control systems to do things like direct sprinklers, lighting and cable from a central remote. In 2007, the company secured a $5 million contract with GE to help design its Ecomagination home control system. Ecomagination was a multipronged effort by GE to position itself as a green company.
GE partnered with RCS to create a single remote that would monitor solar panels, thermostats, water flow, and a home security system. Over the five-year contract, Mike Kuhlmann, CEO of RCS, says GE was so massive that major divisions lacked communication and cohesion.
“We as a small company fell to having to coordinate all these internal divisions inside a big company,” Kuhlmann says. “Above and beyond what we were doing for them, we were acting as a project coordinator.”
Kuhlmann also struggled with constant pressure to lower his price. GE would warn RCS of foreign manufacturers offering similar products at a lower cost. Kuhlman always convinced GE that his customer service outweighed any discounted competitor, but those conversations were still distressing.
Speaking generally about big companies, Kuhlmann says, “They live on the backs of small businesses and will crush them if [the small business is] not careful. Many times, they do.”
But regardless of capitalistic realities, there is a market-driven and altruistic need for clean energy, and for that reason, financiers believe the industry will continue to grow. Clean technology offers an alternative to petroleum, coal and natural gas, fossil fuels that are widely recognized as a source of climate change. In a recently released draft United Nations climate report, a panel of several hundred scientists from across the world claim to be 95 percent certain that greenhouse emissions influence global warming.
Puon Penn, a senior vice president and head of the National CleanTech & Emerging Tech Markets sector at Wells Fargo, which provides debt financing as opposed to venture capital, says his team continues to be “very bullish” about the sector.
“In the early days of clean tech, there were a lot of people that had really grandiose visions to take on coal or internal combustion-engine vehicles or existing industries. And that was probably not the most realistic approach. These industries have been around for a very long time with a lot of resources and they are going to defend their market position, he says.
“The ones that seemed to be successful understood that you just don’t go into battle by yourself, there’s a whole bunch of other partners. You’ve got to have a strategy for building a relationship with those partners, helping them to succeed. That kind of realistic approach is what we try to look for.”
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