Guest essay by Eric Worrall
Wall Street Journal has written a fascinating explanation for why venture capitalists have given up on renewables.
Why Venture Capitalists Abandoned Clean Energy
Two experts say high costs and low returns sent venture capitalists fleeing. A new funding model, they say, is crucial.
A decade ago, clean-energy companies were the hot trend that venture capitalists were chasing. Oil and natural-gas prices were on the rise and Al Gore’s “An Inconvenient Truth” had just made its premiere.
But high hopes that the clean-energy sector would replicate the big returns of biomedical and software startups quickly faded. Instead, monumental losses piled up: Venture-capital investors lost more than half of the $25 billion they pumped into clean-energy technology startups from 2006 to 2011.
A study of why venture capital and clean energy haven’t been a good match was launched by Benjamin Gaddy, director of technology development at Clean Energy Trust, a startup accelerator in Chicago, and Varun Sivaram, the Douglas Dillon fellow at the Council on Foreign Relations. In a paper recently published through the MIT Energy Initiative and written with Francis O’Sullivan, the Energy Initiative’s director of research, they predict future funding for energy startups increasingly will come from more-patient providers than venture capitalists—including groups like the Breakthrough Energy Coalition, formed by Bill Gates and more than two dozen wealthy investors last year. And they argue that established energy companies and governments need to play a bigger role in nurturing clean-energy startups.
DR. GADDY: Ultimately, when we looked at the data, when we looked at companies that got venture-capital investment, [clean-tech firms] were slightly more risky [than software or biomedical], but the real difference was the returns. Those outsize multiples simply weren’t there.
This home-run return requirement—that the 1-out-of-10 successes need to pay back the entire fund—we found that that simply was not true for clean-tech companies. When clean-tech companies exited they didn’t return sufficient capital to investors.
Third, energy companies or clean-tech companies were going into markets that are legacy industries, for which a product already exists that does a pretty good job. So when you’re a solar-panel company competing with cheap electricity from natural gas, you don’t have the benefits of high margins. You instead have to compete at the razor-thin margins of the commodity markets.
I believe the article skirts around the real reason renewables are a dead end. Even if breakthroughs occurred, and someone discovered a way to say produce 100% efficient solar cells, the improvement in the viability of renewable energy would not be game changing.
Once venture capitalists realised this fundamental showstopper, there really was no valid financial reason to continue. Of course, the renewable VCs could still get lucky – even worthless assets can generate a return, if you can find a financially illiterate politician who is stupid enough to pour taxpayer’s money into schemes which have already failed.