CleanTech Venture Capital Shortage Leaves Opportunities Wide Open for Wily Investors

Guest Post

The demand for clean and renewable energy sources will continue to rise in the next decade, particularly as governments, investors, and the general public digest the two recent reports from the United Nations and the U.S. government on the extent of climate change already under way and what is soon to come.

The Facts About VC Investments For Cleantech

Investment of venture capital in cleantech development declined rather than rose between 2011 and 2016. A recent Brookings Institution analysis of funding data shows that, in those 5 years:

  • The amount of venture capital invested in cleantech projects dropped from $7.5 billion to $5.24 billion.
  • Fewer funding deals were made (649 in 2011; 455 in 2016) with smaller amounts of funding in the individual deals.
  • In 2011, cleantech investment made up 16.8 percent of all venture capital projects; in 2016 cleantech projects were only 7.6 percent of the total.

So Why Did Cleantech Investment Decline?

The Brookings report identifies several reasons for the decline in investment:

1. Traditional sources of energy became much cheaper.

Cleantech investment grew throughout the 2000s until the crash of 2008 caused a steep decline. It then began to bounce back in 2010, but soon declined again. Several factors were in play, but the biggest factor, was new technologies in the traditional energy sector.  

Those new technologies opened up sources of natural gas and oil in North America that had previously been too costly to access profitably. Fracking and shale oil created a boom in oil and natural gas production that caused prices to fall. Alternative energy sources no longer appeared to be cost-effective investments.

2. Venture capital investment tended to concentrate in a few geographical regions.

The “big 4” locations for VC investments in the last decade have been San Francisco, San Jose, Boston and Los Angeles. Concentrations of start-up firms and promising research have drawn the capital to those places. But while cleantech projects make up some of those startup ventures, software and biotechnology innovations have shown far more activity in those four locations. When new venture capital arrives on the scene, it’s drawn to the geographical places and economical sectors where big things appear to be happening.

3. Venture capital likes late-stage investment, and cleantech VC has concentrated in areas that seem most likely to succeed, and prove their worth quickly.

Venture capital is drawn to projects that are close to the “take-off” point, where the research has been completed and confirmed, projects have been modeled and mapped out, and the startup just needs an infusion of capital to push it over the last hurdles and into the market. With projects at this stage, it’s much easier to estimate the overall cost and potential return on investment, with less time to wait for the payoff.

Thus cleantech investment has flooded to the areas within that sphere that showed the most promise of early success–mainly transportation, energy efficiency, and solar. All three areas had already had big technological developments, and the newer projects focused on refining and building on the basic concepts. These also tended to revolve around software-centric ventures like ride sharing, self-driving vehicles, and better batteries.

Other cleantech arenas like wind, geothermal, safer nuclear technologies, and others are still in more theoretical stages, and have attracted less VC funding because the paths to profitability are not yet clear.

Looking Forward

Despite apparent decline of cleantech investments, however, the future is clear. Cheaper traditional energy may be reaching an end point. The environmental damage caused by fracking and shale oil extraction has become evident, as the strong opposition to the Keystone Pipeline demonstrates. Alarms raised by the recent climate change reports will increase interest in all areas of cleantech.

You don’t have to wait for the future to invest in future-focused cleantech. Here are three ways you can find viable investment opportunities now, and get ahead of the move away from traditional resource usage.

Cleantech Investment Opportunities Are Out There for the Right Investors

It can feel like all the “good projects” have already been done, but the factors mentioned here also signal new opportunities waiting for the right investors. How to find them? Here are some possibilities:

  1. Look for projects in earlier stages of development, perhaps forming partnerships with governments, universities, or corporations to create a pipeline for projects from the “pure research” stage to marketable technologies.
  2. Explore new geographical areas. The Brookings report identifies locations like Houston and San Diego where there are more cleantech projects being developed, but which don’t attract the mass of VC investment that the “big 4” currently do.
  3. Most of the research that drives the current success in Silicon Valley, Los Angeles, and Boston came out of the top tech-oriented universities in those areas — MIT, Cal Tech, Stanford, Berkeley. What opportunities may await in cities like Atlanta, where Georgia Tech is located, or Pittsburgh, home of Carnegie-Mellon?

 

Investing in cleantech isn’t just investing for the sake of investing. We’re investing in cleaner air, potable water, more productive agriculture. Yes, the focus is future-facing, but the technologies have to happen now. As traditional methods of producing our daily needs dwindle, are you going to help push open better pathways?

 

 

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