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