Silicon Valley invested in cleantech in the early 2000s but had no understanding of the traditional industries interested in its innovations. After losing billions of money, Silicon Valley’s prominent VCs thought cleantech and venture capital were incompatible. But the recent floods of ESG and impact capital convinced them otherwise.
Investors invested a record $17 billion in 1,009 cleantech businesses in 2020. However, there is some debate as to whether cleantech VC can work “this year.”
The world lacks the technology necessary to achieve net-zero greenhouse gases emissions by 2050. This is why the cleantech resurgence has been so vital. Climate change will be controlled by cleantech investments today. This is the limit of climate change to 2deg Celsius above preindustrial levels. Beyond this point, risks are more severe and unpredictable.
So why did cleantech venture capitalism (VC) fall in the 2010s, and what will “cleantech2.0” look like?
My first investment in cleantech was in 2001. Silicon Valley needed a new, bright object to counter the Dotcom Bubble. At first, solar, biofuels, and hydrogen fuel cells technology started to attract attention. However, “cleantech” wasn’t a thing. People thought it was a brand new dry-cleaning technique.
All that changed when Vice President Al Gore’s 2006 documentary An Inconvenient Fact was made public. John Doer, Kleiner Perkins chief, announced his firm’s push into cleantech a year later in a tearful TED Talk. Al Gore became a partner in his firm. The Obama Administration’s procleantech policies soon encouraged capital flows into cleantech.
In the five years that followed, many cleantech darlings went bankrupt. Solyndra was a solar startup that filed for bankruptcy in 2011. It had received $535million in U.S. government-backed loans. Reuters stated that cleantech had “tarnished Kleiner, VC star John Doerr” in 2013. Cleantech had become a dirty term in Silicon Valley.
Cleantech was supposed “to be the next big thing.” However, VC investors lost more than half of their $25 billion in cleantech investments between 2006 and 2011, according to researchers at MIT. The paper was titled: “Venture Capital & Cleantech – The Wrong Model For Clean Energy Innovation.”
This paper was widely cited and became the definitive account of what went wrong. This paper argued that cleantech VC is problematic because of a few factors. First, the investment period is much more extended than the three- to the five-year timeframe that VCs prefer. Second, innovation based on engineering and science is more costly and takes longer to develop and test. Very true.
Cleantech VC failed due to Silicon Valley’s inability to “move quickly and break things” into new markets. As Facebook’s now-retired motto suggests, According to the researchers, the cleantech sector is also affected by a shortage of large corporations willing to invest in innovations.
I have had the opportunity to learn from executives, engineers, and scientists who work in traditional industries over my twenty-year career as a cleantech VC VC. I refer to oil and natural gas, cement, electric energy, mining, metals, petrochemicals, and shipping, which all enable modern life and help fuel climate change.
In their view, Silicon Valley’s failure in cleantech VC was not due to a lack of ingenuity. It was because they lack empathy and awareness. They saw Silicon Valley as a group that showed up in 2007 and declared, “Hi Al Gore, you tell us you’re destroying the planet.” But don’t panic. We, the people behind innovative ways to capture your face and share it with others, are here to help.
Silicon Valley was too quick to propose solutions for industry problems and did not study its suggestions’ system impacts or effectiveness. In search of immediate returns and ideologically driven, this cleantech approach was not well-suited to traditional industries that keep the lights on.
Although they are open to innovation, these industries cannot afford to be guineas pigs. These cleantech startups struggled to get satisfactory testing and development done, let alone reach a scaled market. Tesla was a notable exception.
There are many new cleantech funds and VCs claiming that Silicon Valley will save humanity from climate change. It’s like the early 2000s again. Is it possible that things will turn around this time?
Hopefully, there is nothing inherently contradictory about venture capital and cleantech. There’s no reason that cleantech funds should not achieve an internal rate (IRR) of more than 20%. There is, however, incompatibility among industrial firms trying to adapt to a future net-zero and Silicon Valley-ites, who too often act with hubris.
Venture capitalists must partner with and not preach to industrial businesses. It is costly to upgrade or replace the infrastructure of traditional industries, but it can provide long-lasting value. Steel plants, unlike smartphones, are tightly regulated. There are restrictions on zoning, safety, and disposal. They might be able to use their cash reserves to secure their future and help them survive the energy transition.
It does not exempt industrial companies from taking responsibility for greenhouse gas emissions and other forms of pollution. It is essential to approach cleantech VC humble and willing to learn. Don’t try to solve climate change. Instead, focus on solving business problems caused by fossil fuels. Traditional industries offer immense value, knowledge, and innovation potential.