The bubble has burst. The hype and
euphoria of 2008 and 2009 is a distant memory. Fueled in part by the
externality of the handouts from the stimulus package, and the (now
fleeting) spike of natural gas and oil prices, cleantech has experienced its
own mini dotcom era now followed by a dot bomb phase.
The politicization of Solyndra, the
fracking revolution (that has dramatically increased U.S. fossil fuel reserves)
and the realities of what it takes to build successful cleantech companies have
all brought the cleantech venture capital space crashing back to earth. Available
venture capital for cleantech companies has declined dramatically as some
diversified funds pull out of making cleantech investments and cleantech-focused
funds find it challenging to raise new capital. But this is not the beginning
of the end for cleantech venture capital. Rather, it is the end of the
beginning. While the cleantech hype has been fueled by a focus on global
warming and the anticipation of government policies on carbon, the true
underlying dynamics that will drive the explosion of clean technologies in a
variety of sectors remain largely unchanged -- the impending extraordinary
growth in demand for commodities of all types.
In the
1960s, there was a widely held belief that world population growth
would lead to the demise of the human race. In fact, based on the thinking of
those experts, many of us should be dead by now. Back then, experts believed the
world could not possibly supply the anticipated population with the necessary
food for survival. But a wonderful thing occurred -- the thing that separates humans
from animals. The necessity of rapidly increased food supplies lead to the
invention of disruptive advanced agricultural technologies. The result? In
spite of population growth, today the world generates more food per capita than
ever before.
It is that same type of dynamic
that will be the true underlying driver behind cleantech innovation. Over the
coming decade, the world will add about 1.5 billion
people to the ranks of the middle class. That’s approximately a 75 percent
increase from the number today. Such an increase will mean 1.5 billion more people
who will buy cars, electronics, improved housing, higher protein foods, demand
clean water and consume more energy. A Brookings
Institute study estimated that this will yield a comparable increase in the
world population’s overall consumption.
The authors of the doom and gloom
books of the 60s would look at this and forecast extraordinary increases in the
prices of all types of commodities, which would lead to global disruption and
unrest. I do believe we will see increased volatility in a variety of commodity
prices, but I also believe that this dynamic will drive innovation just like it
did in agriculture. Rapid increases in demand for commodities, enormous markets
and the ability for new technologies in certain segments to provide disruptive
advantages will create an environment for compelling venture capital
opportunities.
Many cleantech venture capitalists have
focused on CO2 as the driving force for innovation. But I have always looked at
cleantech as way to drive increased efficiency, reduce waste and create less
expensive alternatives -- the things that drive bottom line benefits in the
free market. In other words, creating Gold by being Green (hence the name of my
blog). The combination of the natural gas boom and the political reality of the
unlikelihood of a price on CO2 emissions in the U.S. (or just about any nation
that doesn’t already have one) has caused those with a CO2-focused investment
thesis to face a very challenging environment.
If cleantech is viewed as synonymous
with carbon emissions reductions, then the segment will be challenging from an
investment perspective. But through the lens of GreenGold, where cleantech is
about reducing the consumption of all sorts of non-renewable commodities, there
will be many compelling investment opportunities yet to come. Undoubtedly the
devil is in the details of which markets and areas of innovation will hold the best
venture potential (ahh… fodder for a future post). But I believe that investors
who run from anything remotely cleantech today will find themselves looking
back and feeling like those who ran from investments in the Web in 2002. Now
that the hype is gone we can focus on building real businesses. The next decade
will be the one where real value is created in a number of segments of clean
technologies and I, for one, plan to be making money by investing in some of
those winners.
