In 2006, Al Gore’s seminal climate change documentary, An Inconvenient Truth, put global warming in the societal lexicon. People began heeding scientists’ warnings about a warming planet and started buying hybrid cars, low-flow shower heads, and more efficient appliances.
The venture capital community took notice, too. In 2005, VC firms invested $592 million in clean technology, according to Pricewaterhouse Coopers. After Gore’s film hit theaters, funding skyrocketed to $1.7 billion in 2006, $2.9 billion in 2007, and $4.1 billion in 2008. Clean tech was in the spotlight, but that bulb didn’t last as long as the high-efficiency LEDs the companies themselves were hawking.
“We had too many companies coming in, just like in the dot-com era, and everybody thought they had a great idea, but most of them weren’t good ideas,” said Susan Preston, a managing member of the Seattle Angel Fund who specializes in clean tech investments. “We followed the same pattern and did the same thing in clean tech (as in Internet tech during the dot-com era). Ours just wasn’t as big of a show.”
Clean tech’s mini bubble was a topic of discussion at the CleanTech Showcase Monday in Seattle. The conference, put on by the CleanTech Alliance, highlighted the companies and technologies popping up in the Seattle region, but on the money front, the message was clear: It’s tough out there. That $4.1 billion in VC funding back in ’08 dwarfs the $2 billion that was invested in 2014, and 2015 funding was down 72 percent in the first quarter.
Preston was part of a panel of clean tech financiers that detailed the challenges in the investment community, and the sting of that inconvenient bubble isn’t the lone challenge facing clean tech companies in the hunt for funding.
An important consideration is the age of the industry. Just as a young e-commerce cohort fell on its face during the dot-com bust, the clean tech field gained, and lost, much of its steam in a short few years. And by no means has the sector worked out all the kinks; no powerhouse companies have emerged to compete in a large scale against existing energy sources or infrastructure.
The industry’s relatively small presence in the larger technology and energy fields gives clean tech companies a niche connotation that is largely tied to the political left and targeted by “impact funds” that divvy up money among social and environmental causes. CleanTech Alliance President and CEO Tom Ranken said that when his organization underwent a rebranding phase, the staff considered dropping clean tech from the moniker.
“There are definitely some negative implications to that, certainly politically, and with finance,” Ranken said in the panel discussion. “But the other side of that coin is that this is not a hyped field. This is real stuff. People have been turning on light switches for 150 years, and they are going to continue doing it. As long as you have an idea that makes business sense, it doesn’t really matter what label you put on it.”
Innovation isn’t an issue, the panelists agreed, but they said business acumen among managers is lacking. “We’re not expecting historically profitable (profit and loss). We’re not expecting robust balance sheets. That’s not our job,” said John Berdes, CEO of clean-tech loan underwriter Craft3. “What we have to look for are the people who are going to do the boring job of production. We offset weakness with strengths, and one of those strengths has to be management.”
Managerial shortcomings are highlighted by the industry’s complexity, which distinguishes clean tech from, say, consumer tech. Many consumer tech CEOs are engineers, and many clean tech CEOs are engineers. But if a consumer app doesn’t work correctly, then the glitch can quickly be corrected and users can download an update. It’s neither cheap nor quick to update solar panels, battery systems, or wind turbines.
“Let’s take a battery company that uses a new electrolyte,” Preston said. “They’re going to test that for a year or two, because they can’t afford to have bad batteries out there. … It’s just like the utilities. Everybody carps about utilities being very slow or resistant to change. Well, the fact of the matter is, when you flick the switch, the lights have to come on.”
Energy’s importance makes any clean tech investment consequential. Companies and consumers alike won’t sacrifice a reliable and affordable energy system for something that’s expensive, unproven, or can’t scale, thus leading to slow adoption rates even for the most reliable of clean tech systems. Preston said heftier subsidies for both companies and consumers would help, as would transaction systems that help third-party retailers and installers recoup costs.
Another issue raised by Chris Ajemian, the Coalition for Green Capital’s Washington representative, is that market demand for clean tech hasn’t kept pace with society’s growing understanding of the implications of climate change.
“If we’re going to limit our carbon emissions and prevent the worst of global warming, we’re going to have to change how we operate,” said Chris Ajemian, Washington representative for Coalition for Green Capital. “That doesn’t create an automatic market for clean tech companies, however. So how do you create awareness for how you create value?”
To Ajemian, politics is crucial. Consumers by and large like the idea of clean energy, but it’s going to remain more expensive than fossil fuels unless a government either heavily subsidizes clean tech or taxes carbon.
And if a carbon tax or cap-and-trade were implemented? “This place would be packed,” Preston said in the Bell Harbor International Conference Center after the panel discussion. “It would look like 2007 in here.”
Editor’s note: 425 Business was a media sponsor of the CleanTech Showcase.