SAN FRANCISCO--Venture capitalists have become bipolar when it comes to green-technology investing in a debate affecting the pace of innovation.
The core question is whether it's better financially and environmentally to bet on technology breakthroughs or to play it safer by developing incremental improvements over existing products. It's an undercurrent to the AlwaysOn GoingGreen conference here this week and reflection of how green-tech investing has changed over the past three years.
"It's a huge debate, but we're in the second inning of an extra-inning game," said Andrew Chung, who recently joined Khosla Ventures as a partner. "Clean-tech investing is really tough and it has only been around for five years, so we're still figuring out how to do it."
Khosla Ventures, led by famed investor Vinod Khosla, most visibly represents the "go big or go home" approach of placing many bets on potential breakthroughs developed by start-ups. Its strategy is to place dozens of bets in a wide range of energy and industrial sectors with the hopes that a handful of successes will make up for the duds.
So far, the buckshot approach has worked out for Khosla Ventures, which has over $1 billion under management. A number of his biofuels and chemicals companies in the portfolio have gone public or filed to go public, including Kior, which has already netted his fund $1 billion, he said during a talk yesterday.
But green-tech venture capitalists, in general, have grown more conservative because of the economic downturn, uncertain federal energy policies, and the large amount of money to fund some types of companies, such as solar manufacturers. So instead of betting on science experiments, more investors are funding companies considered less risky and less expensive to develop.
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At the conference, a number of entrepreneurs pitched businesses in various fields, including grid storage, grid efficiency, and biofuels. A stealthy company called Powergetics, for example, is designing grid services for businesses and other big energy consumers to cut their electricity consumption by 10 to 15 percent.
The problem with incremental changes to the status quo is that they are not enough to address current economic and environmental problems, said Wal van Lierop , the CEO of green-tech venture firm Chrysalix, who complained that not enough entrepreneurs are taking home run swings.
"Most of the startups I see at clean-tech conferences are pretty marginal ideas," he said. "Nuclear fusion or next-generation solar or a solution for wastewater in the tar sands (of Canada) or doing water desalination in a much more energy efficient way--we need these types of solutions."
In their defense, entrepreneurs and others who espouse more of an incremental approach argue that a niche product can act as a "wedge" which will eventually make a broader impact.
Daintree Networks, for example, is developing wireless controllers for lighting systems, which allow building owners to centrally control lights and save energy. But its longer-term plan is to build a software and communications platform for managing all manner of building equipment, such as thermostats and temperature sensors, said CEO Danny Yu.
Similarly, solar startup Bandgap Engineering is developing products in three phases starting with the lowest cost and lowest risk. Its first technology is designed to improve the efficiency of solar cells by adding a step to a traditional solar manufacturing line. Its highest-risk technology, which would take years to advance, would lead to be a quantum jump in solar efficiency, effectively than doubling the efficiency of today's products, said chief technology officer and founder Marcie Black.
Ultimately, the debate over whether it's better to fund technology breakthroughs or niche improvements is a false dichotomy as there's a role--and a need--for both types. Energy efficiency-related technologies, for example, are typically considered less glamorous than inventing a new solar cell material but the aggregate effect of many small efficiency improvements is very substantial.
To pick up the pace of technology innovation, energy should be like other industries which deployed existing products while some companies pursued disruptive technologies. In the computer industry, mainframe and minicomputers were the status quo until PCs took hold and now tablets are now taking off as a laptop replacement.
It's worth noting, too, that not every green energy business is a good fit for the venture capital model. Companies, such as a home energy efficiency services firm, could be funded by other sources of money, such as angel investors.
Bob Schwarz is the CFO of a Agilyx, a startup that has a process for converting waste plastic into oil, which he calls a "shoot for the moon" technology. But he sees a role for other green-tech start-ups trying to hit singles and doubles, too.
"It's not different than any other area--we're just on a learning curve now," said Schwarz. "Early on there weren't so many good companies to choose from but there will be as there's more awareness that we need to clean up our environment and do something for future generations."