Billion Dollar Opportunities in Cleantech

by David Anthony

It’s true. Cleantech investment hasn’t worked out exactly how people dreamt it would back in the overly-optimistic days of the last decade. One of the main obstacles deterring venture capital investors from the sector is the frequently lengthy time lag between investment and commercialization. More importantly, the number of successful cleantech exits remains few — often because either the technology is not as disruptive as competing solutions or it is simply taking longer to adopt it.

The other fly in the ointment is the large-scale capital expenditures required to develop the technology in the first place. Clean technologies can be incredibly capital-intensive in the developmental and commercialization stages.  The level of investment required can and have discouraged further investors from committing to later and larger rounds of capital raises. When this problem is compounded with that of actually getting to commercialization it is not hard to see why many venture capital funds are decidedly more cautious about investment in cleantech than they were just a few years ago.

And these are not the only snags. The downturn in the world economy has drastically reduced the political appetite for renewable energy, especially in the US; the untimely death of President Obama’s cap-and-trade bill is testament to that. So although Feed-in-Tariffs continue to provide incentives for new developments, the fact that there is no price on carbon production and no penalties for over-producing it in the US mean that alternative energy remains a less attractive alternative than fossil-fuel.

But despite this doom and gloom, there are still very good reasons for investors to stay the course and persevere with the cleantech sector. The primary reason for this is the still-gigantic potential in a number of key markets which, when successfully exploited, are going to reap huge dividends for those who crack them and invested in the achievement.

Look, for example, at utility-scale energy storage. Lack of energy storage means that wind and solar energy is less viable at the moment than it could be.  Because energy from these sources is often produced at times which do not correlate with peak energy demand and because a viable utility scale storage solution has yet to emerge, renewable energy has been unable to achieve grid parity. In West Texas, some wind power generators have had to pay the state grid operator to take the energy off their hands in order to continue qualifying for federal tax credits. These costs are inevitably passed on to the consumer, so a breakthrough in large-scale energy storage will have an enormous impact on the profitability of renewables such as wind and solar. Whoever manages to solve this problem and develop an affordable method of energy storage is going to be able to sell it to every alternative energy generator in the world, and the returns on their investments will be huge.

Another massive potential market is the development of a viable system for carbon capture and sequestration. The two largest economies in the world, the U.S. and China, possess the world’s largest and third-largest coal reserves respectively, and it is highly unlikely that they will completely ignore such a cheap and abundant source of energy. But the environmental effects of burning coal have extremely heavy long-term costs, so the development of efficient, zero-emissions coal plants will revolutionize the energy market. It is a simply inescapable fact that the rewards for anyone who has the vision and staying power to invest in developing this technology will match the size of the gigantic market for clean coal-derived energy.

Low-cost desalination is going to be yet another definite winner in the near future. Climate change is creating new and unforeseen changes in global weather patterns. For example, there are fears that the south Asian monsoons will weaken and become less consistent. Given that the monsoon accounts for 80 percent of India’s total rainfall, a serious change in this weather pattern would without a shadow of a doubt need to be redressed with alternative sources of clean water. Benjamin Franklin was wrong; it’s not just death and taxes that are certain in this world, the market for clean water is too because we simply cannot live without it. Low cost desalination will be developed; the only question is who will have had the foresight to invest.

Vertical (or protected) farming could be another huge future market. The rising middle class in the two most populous nations on earth, China and India, is increasing global demand for food. If this new emerging middle class population’s shopping patterns mirror the US middle class’s grocery trends – where the number one grocery item is bagged leafy greens, for example – there is sure to be a sharp increase in demands for greater availability and variety of produce. To sustain the world’s ever increasing demand for food, new farming methods will have to be developed to feed today’s seven billion hungry mouths and the nine billion of 2050. Low-cost protected farming, using hydroponic and aeroponic farming methods within large urban structures, could provide one of the answers to the conundrum of feeding an ever-growing world population. It would also improve food freshness, cut down on carbon emissions caused by food refrigeration and transportation and halt soil degradation caused by pesticide and herbicide usage. Like the issue of fresh water, this is a riddle that will be solved because it has to be solved. And, once it is solved, everyone will be buying.

And the world’s most abundant energy source must not be forgotten either. The photovoltaic cells that convert solar energy into electricity currently lack the efficiency to achieve grid parity, making solar energy and PV systems a viable, long-term prospect for replacing fossil fuels. But improved efficiency of 30 to 40 percent will make solar power a much more competitive energy source. The development of light-trapping photovoltaic cells, and the adaptation of manufacturing lines to accommodate the new technology, could deliver the required increase in efficiency. Once this is achieved, harnessing the output of the gargantuan energy factory we call the Sun will become competitive and another enormous market will have been created.

What is most needed at the present time, though, is an ability to look beyond the current obstacles to the rewards that renewed investment and perseverance will reap for those who commit and stay the course. The cut-and-run trend witnessed of late in the cleantech sector is exceedingly myopic as the development of clean and green technologies is a necessity the world cannot do without. Climate change, the growing unpredictability of global weather patterns, urbanization, a mushrooming middle class within the emerging economies and depletion of fossil fuels are all global problems that need to be rapidly addressed. Necessity is the mother of invention and these issues will be solved one way or another. The only question is, who will have the prescience and perspicacity to be part of the future?

David Anthony is the Managing Partner of 21Ventures, LLC, a VC management firm that has provided seed, growth, and bridge capital to over 40 technology ventures across the globe, mainly in the cleantech arena. David Anthony is also Adjunct Professor at the New York Academy of Sciences (NYAS) and the NYU Stern School of Business where he began teaching technology entrepreneurship in 2009.

David received his MBA from The Tuck School of Business at Dartmouth College in 1989 and a BA in economics from George Washington University in 1982. He is an entrepreneurship mentor at the Land Center for Entrepreneurship at Columbia University Graduate School of Business. In 2002, David was awarded the Distinguished Mentor of the Year Award from Columbia University.

David blogs at David Anthony VC

13 replies
  1. JOHNSON
    JOHNSON says:

    Don't worry Mr. Anthony, the a.e. cream will rise to the top, it just may not be yours. Billions have been wasted in a.e. venture capital due to poor execution, many of the beneficiaries didn't have the skills nor experience to commercialize a product where cost and outdoor reliability are all that matters. And where is the value to a potential acquire when the chinese can likely copy the product or some grad student at one of hundreds of universities in dozens of countries everyday could possibly invent some amazing lowcost/high efficient solar compound? There is a very low barrier to entry as compared to the advent of microprocessors, memory chips, operating systems, etc.

    As far as needing to seed more venture capital, bad idea if you think it's critical to get low cost products to market ASAP. Incentivize large companies that have the resources and experience for R&D and manufacturing such CSCO, AMAT, JDSU, GE, DUPONT, 3M, JCI, GM, etc.

    • David Anthony
      David Anthony says:

      Johnson,
      I am curious. Why do you beleive that clean tech is different than other industries where small vc backed companies have disrupted the traditional large companies? For example , in media, the large distributors with the power to crush the start ups have failed. Again, why should this be different in clean tech and why should capital go to the large multi-nationals like GE or Siemens? Thank you for your post.
      David

      • JOHNSON
        JOHNSON says:

        If media startups needed to be certified by UL and/or other independent certification agencies that could take months, needed to spend a year or two on pilots, depended on govt. subsidies that might not be there when the product was ready, had to produce income (electricity) reliably for 20 years while being subjected to harsh environments, needed environmental approval by govt agencies, had to bid competitively for every customer against other bidders that can afford to just break even, needed to find 3rd party financing for every job, had to worry about the political climate, had to outsource the actual design and hosting of their website….. and had to compete against established media companies that could do just as good a job at a cheaper cost – fossil fuels – than i would speculate that they would have a similar success rate.
        What's there to discuss? It's a reality. You actually answered your own question in another interview about the smart grid: http://davidanthonyvc.com/?p=355

        It's absolutely ridiculous comparing media v.c. to electricity creating v.c.

  2. Muir Woods
    Muir Woods says:

    Renewable Energy has proven to be a poor investment class for Venture Capitalists because it is not a market that particularly rewards innovation, the fundamental VC investment strategy. RE is a market that demands proven products that can go into the field and last 30-50 years. Having satisfied that requirement, it’s all about scale and execution. There is a place for innovation in RE, but I would argue that it is in the area of public policy, external cost capture and project finance.

    The uncaptured external costs of fossil fuel usage are large, and probably much greater than the cost differential between conventional and renewable energy. These would be: 1. Air pollution and the associated increase in mortality, lost productivity and healthcare, 2. Climate change and increased agricultural and private property losses from a more energetic atmosphere, 3. Military spending to defend oil producing regimes and sea lanes, and 4. The failure to consider replacement costs from our inherited bounty of fossil fuels which are exhaustible and irreplaceable at current costs.

    Until these external costs are properly captured and monetized by our economic system, Renewable Energy will appear to be more expensive, and we won't have any rational way of deciding which RE investments make sense, and which don't. And, although RE may eventually out-compete conventional energy without external cost capture, the time scales to do so are many times the investment windows of VC firms as they are currently organized.

    • David Anthony
      David Anthony says:

      Muir,
      The industry model you describe is very similar to biotech. Yet, biotech has proven extremely successful for innovators, and investors. What do you think is the difference between biotech and clean tech? Both require proven technolgies, both require government approval, and both require significant capital and long lead times. To me they are very similar. Am I wrong? Most likely. Thank you for your post.
      David

    • Bob Mitchell
      Bob Mitchell says:

      I agree with your point about the uncaptured external costs needing to be factored into the equation, but have my doubts that it will happen anytime soon.

      That said, it's only a matter of time before these costs will become too evident to ignore. When that happens, it's going to be crazy! In the mean time, RE is still in it's infancy and we don't know what we don't know yet. Some guy working in his garage or maybe a little startup very well may come up with a big game changer and I can almost guarantee that others will come up with money makers.

      Bob "Free As The Wind" Mitchell

  3. Donald Missey
    Donald Missey says:

    I think there are a set of primary failures at work in the cleantech industry at the moment.

    The first is the illusion that discovery of breakthroughs in existing lines of research in batteries, fuel cells, PV and other long existing technologies will yield significant alterations to our energy use patterns. They won't. Each technology has arrived at a point of diminishing returns, and the players are simply re-formulating aspirin.

    The second is the industry itself. Major players are actually risk aversive, and a herd mentality protects weak professionals in several areas. Go to any cleantech conference and look at the dreary rows of booths with identical individuals and lifeless and impractical technologies that simply don't pencil out. The Tesla is a Delorean without the coke, the Chevy Volt is a battery operated Studabaker.

    The real breakthroughs and disruptive technologies always happen without major support, and often in vigorous opposition to the prevailing mindset.

    If you want to look to the future of cleantech, it will be in the enormous realignment of our energy use patterns, rebuilding entire communities to be walkable, entire cities to be LEED certified.

    • david anthony
      david anthony says:

      Donal,
      If I interpret your post correctly, you beleive that education and awareness by consumers of energy is the primary task to creating a cleaner world. Is that correct?
      If so, many energy efficiency start-ups have adopted this strategy with good success.
      In your conclusion regarding living methods and changed living habits, what do you think will , or can, accelerate this process?
      thank you.
      David

  4. Andy leventhal
    Andy leventhal says:

    How can we discuss multi billion dollar cleantech industries and not list energy efficiency in the first sentence? it doesnt require significant investment, tremendous innovation or even imagination? It requires strategic government incentives, utility cooperation, manufacturers support and a healthy services sector to support both the homeowner and commercial / industrial sectors. reduce before you produce is quite simple concept that still isnt firing on all cylinders. According to the Center for American Progress, It’s estimated that retrofitting just 40 percent of the residential and commercial building stock in the United States would:
    •Create 625,000 sustained full-time jobs over a decade
    •Spark $500 billion in new investments to upgrade 50 million homes and office buildings
    •Generate as much as $64 billion a year in cost savings for U.S. ratepayers, freeing consumers to spend their money in more productive ways

  5. Brijendra
    Brijendra says:

    David, you are right, there is million dollar opportunities only need to find these opportunities and cash them. In coming next 10 years we will be dependable on Sun and wind for our energy requirements and due to this it is a bright sector where we can invest with our 10 years business strategies.

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