With all the venture capital money going to clean tech, it's easy to think that it's the dot-com bubble all over again. There's certainly a whiff of that gold rush mentality. But the inherent differences between the Internet and the energy business get clearer every week.
Today's installment is the mismatch between venture capital and clean tech--this time, at the small side of the money spectrum.
Entrepreneurs that want to start clean-tech companies from scratch are not being particularly well served by the traditional venture capital funds, a few articles this week argue. It appears that different sources are stepping in to fill the gap, moving under the radar of traditional venture funds.
The problem is that small seed investments--on the scale of $500,000 to a few million dollars--don't fit into venture capitalists' investment profile when they have hundreds of millions of dollars to invest.
Also, many technologies--think a more efficient solar cell or radical improvement in biofuels production--can require years of development. VCs need a return on their investment in five to seven years, which typically means selling that start-up to a larger firm or going public.
A piece in Sustainable Industries on Wednesday details how angel investors and state-sponsored clean energy funds are filling the need for seed funding.
Clean-tech VC and blogger Rob Day touched on this end of the funding environment as well this week, pointing to the emergence of "super angels" who can help get those ambitious entrepreneurs out beyond their fledgling stage.
Meanwhile, Stacey Higginbotham at BusinessWeek.com on Friday wrote about how venture capitalists are stalking the halls of national research labs because many don't have the patience for seed funding.
Gaps on both ends
I've written a few times about the emerging financial models to close the late-stage funding gap in clean tech, sometimes referred to as the "Valley of Death." That is, the need for lots of money--hundreds of millions of dollars--to commercialize technology on an industrial scale.
VC firms like Kleiner Perkins Caufield & Byers are adjusting to the need for late-stage capital by setting up funds designed for large investments to scale technology. Hedge funds and private equity are also moving into clean energy, although their appetite for technology risk is typically going to be lower than VCs.
There appear to be models evolving for more seed funding as well. That points to the need for a healthy angel investor network as well as state and federal level investments in the clean-energy business.
A number of companies are spun out of national labs, yet speakers at clean-tech conferences regularly complain that the funding levels for clean energies are far too low and, perhaps worse, inconsistent.
At the state level, there are funds like the Massachusetts Green Energy Fund and the California Clean Energy Fund. Entrepreneurs can also turn to foundations and university-sponsored competitions to get off the ground. But can cash-strapped states adequately prime the pump for clean-energy start-ups?
Consumers and businesses are looking for greener products, from fuel-efficient cars to clean electricity, but these innovations take years to mature, much longer than it takes to whip up a cool social-networking Web site.
So as we read the articles about technology advances and claims of breakthroughs, keep in mind, the money--and policies--need to keep pace as well.