“Commercializing a new technology is a difficult endeavor, and many potentially breakthrough technologies languish due to lack of investment,” according to an article on the Americans for Energy Leadership website.
Experts suggest that despite the development of promising products, commercialization of technologies is an expensive and lengthy undertaking, with many promising startups going under due to funding problems.
Many venture capital (VC) firms are reluctant to put their money into development and production of clean energy products because their objective is to get in, make huge returns, sell to the market, and go on to other ventures.
Investment experts suggest that increasing government subsidies for the clean energy sector is imperative given the miniscule private sector funding opportunities.
“The level of capital required for clean energy demonstration projects has proven to be a dilemma that the private sector cannot sufficiently address, implying the need for significant government support,” stated Americans for Energy Leadership.
Venture Capital Opportunities
“Despite this growing interest in the sector, the number of venture capital firms with a strong focus on clean energy remains small. Less than 30 U.S. VCs have a substantial portion of their portfolio targeted towards clean energy investments,” according to a Harvard Business School working paper titled “Venture Capital Investment in the Clean Energy Sector.”
In the United States, only 43 VC startup firms raised capital in 2002, at a value of around $230 million. By 2008, around 200 of such firms received $4.1 billion in VC, which was about 15 percent of all U.S. VCs. In 2009, venture capitalists reduced their investments in clean energy production to 8 percent of all U.S. VCs.
During the third quarter of 2010, VC for clean energy firms dried up by 20 percent, from $5.7 billion during the second quarter in 2010, pumping into the sector only $4.6 billion. A mere 16 companies raised capital during 3Q10, a decline of $203 million over the prior quarter.
California-based Trilliant Inc. raised $106 million in funds during the third quarter 2010 from Investor Growth Capital, VantagePoint Venture Partners, ABB, GE, and other investors. It also raised an undisclosed amount of VC from Taiwan-based UMC Capital Corp. in December 2010, according to a December press release.
Nexant Inc., also based in California, raised $93 million of VC. It was awarded $43 million from Oak Investment Partners, Intel Capital, and others in September and another $50 million from the Symphony Technology Group and others in November 2010.
“We identified Nexant as a successful and profitable company that is ready to be taken to the next level. ... This funding provides additional resources for Nexant to accelerate development of its offerings and grow its market share significantly,” said Bandel Carano, managing partner at Oak Investment Partners, in a statement.
Crossing the ‘Valley of Death’
“Since startups with new technologies rarely have internal cash flow to draw upon and are too risky to get debt finance, they depend critically on the provision of venture capital for their survival,” according to the Harvard Business School working paper.
VC funds prefer to invest in sectors where capital isn’t the driving factor for the company’s survival. Therefore, venture capitalists are reluctant to invest their funds in a startup or firms that have not reached the commercial stage.
The major concern for venture capitalists when investing in startups is that despite the invention working in the laboratory, it might not be workable when it is ready to be produced on a large scale.
Typically, VC firms discover that 60 percent of the amount invested in a startup is lost, as the projects are not commercially viable. This does not comply with what a VC firm expects, which is a 70 percent return on the portfolio.
“One of the most important bottlenecks threatening the innovation pipeline in energy production is the inability of VCs to exit their investments at the appropriate time,” said the two Harvard researchers in their working paper.
The two researchers explained that the U.S. Department of Energy provided Solyndra Inc., a solar power solutions firm, with a $535 million loan. In addition, the company had to raise $870 million in equity financing in mid-2010 to show commercial practicality. For a green energy startup, such fundraising is almost unheard of.
“Such investments are thus typically too capital intensive for VCs. ... These startups are still too risky for debt and project finance investors to fund their demonstration or first commercial plants. Debt investors are able to deploy large sums of capital, but require commercial viability to have been established well before they make their investments,” according to the Harvard Business School working paper.
The VC industry calls the dilemma of an investment opportunity that doesn’t bring in the profit needed to fund other projects the “Valley of Death.” The “Valley of Death” is the time between when the development is complete and the costly commercialization process begins.
“Unfortunately, these investments are many times too risky for the major lenders on Wall Street, and too expensive for Silicon Valley VCs. This is the point where many promising startups inevitably falter and fold,” according to the Americans for Energy Leadership article.
Future Clean Energy Investment Opportunities
“If clean energy policies are strengthened significantly in the coming years, we project that $2.3 trillion will be invested in clean power assets over the next 10 years, offering companies and countries enormous opportunities to compete for investments, jobs and export markets,” said researchers in a recently published report “Global Clean Power: A $2.3 Trillion Opportunity” by the Pew Charitable Trusts.
Should the world’s leaders decide to maintain existing policies, total investments would not exceed $1.7 trillion between now and 2020.
Between 2005 and 2009, clean energy investments increased by $162 billion, with China leading the world in clean energy investments, the United States falling into second place, and India edging up to the third position.
The Pew report looked at three different scenarios, each dependent on the G-20 members’ decisions. G-20 was formed in 1999 to bring developing nations into the world leaders’ economic decision-making process. Leading members, named the G-8, are the United States, Japan, Germany, France, Canada, Russia, the United Kingdom, and Italy, because they are responsible for the majority of the world’s economy.
The first scenario assumes that the G-20 countries implement existing policies and remain at status quo. The second scenario looks at the Copenhagen Policies concerning climate, where the members agreed to put into practice policies as promoted under the United Nations Framework Convention on Climate Change in 2009. The last scenario calls for all G-20 countries to put into place augmented clean energy policies, which would call for major venture capital, grants, and other types of investments.
Projections are that under the third scenario, investments would grow by $200 billion by 2020, increasing by 161 percent. Predictions for the second scenario are far more restrained, as investments would increase only between 46 and 64 percent.
“The message of this report is clear: countries that want to maximize private investments, spur job creation, invigorate manufacturing and seize export opportunities should strengthen their clean energy policies,” said Phyllis Cuttino, director of the Pew Climate and Energy program, in a recent statement.
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