Amid all the buzz around green tech, here are some names you won't likely hear again: Biofuel Box, Imara, E3 Biofuels, GreenFuel Technologies. Once considered promising green-tech start-ups, each of those companies has closed down or gone bankrupt.
Failed businesses are a normal part of technology investing, so their demise doesn't mean clean-energy innovation is dying on the vine--far from it. But if you expected an army of well-intentioned entrepreneurs to upend the mammoth energy industry and find a quick path to profitability, think again.
Those start-up failures hint at some of the challenges that U.S. tech entrepreneurs face when trying to make green--as in, money--by being green. Unlike IT, the energy business requires lots of money to scale up, there's resistance to new technologies, and there are many non-technology risks, such as fluctuating energy prices and fickle government policies.
Still, technology clearly has a big role to play when it comes to lightening our load on the Earth. So for Earth Day, let's take stock of where green-technology innovation is, weighing the progress and the challenges.
The good news: There's a lot going on. From universities to giant corporations to garage start-ups, innovation around sustainable energy and materials is high on the agenda. Ten years ago, solar and wind dominated the discussion of alternative energy, but the field is far broader now. At the ARPA-E Summit in March, for example, scientists showed off algae harvesting systems, more efficient internal combustion engines, solid-state batteries, and efficient LED lighting. (See video here.) Many people (although not enough) from IT or biotech are migrating toward clean energy because they see it as the next wave of innovation in the economy.
The not-so-good news: Making energy cheap and clean is a tough nut to crack. People have known how to coax an electrical current from a photovoltaic cell in the sun for decades, but burning fossil fuels to generate electricity is still cheaper.
Although the size of energy markets is huge, breaking into them is very hard. Consider the massive investment of the oil and gas industry--pipelines, refineries, wells, gas stations--and the deep pockets of entrenched providers. When an algae biofuel entrepreneur, for example, develops a replacement product, there's a sizable barrier to entry purely on a business level. Often, these products are commodities--electrons flowing through a wall socket, fuel at the pump, concrete, or plastics--and it's difficult to get a premium just because it's a "green product."
The good news: Around the world, money is flowing into clean energy-related technologies from the private sector and governments seeking to develop new industries. One of the most dramatic changes over the past two years has been the emergence of China as a huge consumer and supplier of wind and solar power. In the U.S., federal programs put tens of billions of dollars toward research and development and deploying existing technologies, such as solar, wind, or manufacturing batteries for plug-in vehicles.
When it comes to funding start-ups through venture capital or private equity, the U.S. outpaces other countries, according to New Energy Finance. And after a downward slide in 2009, venture capital investment in green tech picked up in the first quarter of 2010, rising to $1.9 billion globally, according to the Cleantech Group. Many venture investors are hoping that U.S.-based tech companies, including Tesla Motors, Codexis, Solyndra, and Amyris Biotechnologies, will have great success going public this year.
The not-so-good news: The general trend in funding is up, based on investors' and governments' bet on green technologies as an engine of economic growth. But scratch beneath the surface a bit and there are some troubling signs.
The first-quarter venture capital numbers show more activity--180 deals more than previous quarters--but the amount of money going to companies is going down from a high mark in 2008. That's a reflection of how many companies are struggling to find financing, said Sheeraz Haji, the president of the Cleantech Group. Meanwhile, venture investors are looking to get a return on their start-ups, which is why the performance of green-tech IPOs is so important. But in many cases, the financial "exit" for young green companies will be through an acquisition, and there have only been a few of those in recent years. The lack of "viable exit strategies" is one of the threats to green-tech expansion, said Ron Pernick, the managing director of Clean Edge, in an annual report. He suggests that there need to be different financing models, based on private and public capital, to overcome the lack of financing options, particularly for scaling up these technologies.
The good news: Many state and federal politicians are convinced that investing in clean energy-related industries, through tax breaks or subsidies, is a good idea. The Obama administration has put a number of measures in place to jump-start nascent industries, such as battery manufacturing or the smart grid. It also adjusted the subsidy for solar and wind project finance to address the credit squeeze, although it's set to expire at the end of this year. Federally funded research has also gotten a real shot in the arm, with the Advanced Research Projects Agency-Energy (ARPA-E) catching the attention of many tech entrepreneurs and scientists. In all, there's been a heightened focus on the role government plays in energy.
The not-so-good news: The meltdown of the capital markets has done a number on the traditional methods to pay for large-scale renewable energy projects, particularly tax-equity funds and project finance. To some degree, governments around the world, with China and South Korea often cited as aggressive investors, have played the role of banker by providing incentives for businesses to invest. But U.S. Department of Energy loans, first authorized in 2007, have been slow in coming, according to some.
An energy and climate bill has been working its way through Congress, with a Senate proposal expected next week. But there are big questions around whether a climate and energy bill that effectively promotes low-carbon technologies can pass given the resistance from incumbent energy providers.
Green tech and consumers
So on balance, the wave of green-tech innovation from start-ups we've seen in the U.S. over the past six or seven years has had successes--to a point. The next big challenge is scaling up their technologies and converting what were once upstart companies into global players. Government policies aimed at, for example, revitalizing U.S. manufacturing or accounting for carbon emissions in the economy, can help pave the way for green innovators. But they still need to create competitive companies with compelling products that deliver a good return to investors.
Meanwhile, there's the hype that Bloom Energy or some other green-tech outfit is the next Google. Certainly, a high-profile success story--a "Netscape moment," as investor John Doerr calls it--will raise awareness for the potential of green-tech innovation. But a lot of clean-energy technologies will never touch consumers--a Bloom Energy box or efficient LED lighting system, for example, is more likely to be adopted by businesses until the up-front costs go down.
That said, consumers are getting in on the act. The smart grid should help us better manage our electricity, electric vehicles can decrease oil imports, and efficient appliances lower our energy usage. But green technologies are just an enabler for people to use energy and other natural resources more efficiently. So it goes for the planet as a whole: tech can help protect the environment but in many ways, it's the consumer that's in charge.