Bubble shmubble, say clean-tech investors

NEW YORK--You can't avoid the bubble question when it comes to clean-tech investing. Get used to it: with a massive movement of capital into the sector projected in the future, people are bound to fret.

It's understandable. Billions of dollars worth of venture capital have gone into this sector, which wasn't on the radar screens of most Sand Hill Road venture capitalists just a few years ago.

A panel of private equity and venture capital investment pros addressed the bubble question at the Renewable Energy Finance Forum here last week. In general, the response was that there is not an over-investment. In fact, investors are just getting started.

Bill Green, a panelist from VantagePoint Venture Partners, had a chart that made the point in a compelling way.

On one side was the market capitalization of the top 10 companies in energy, chemicals, auto, materials, and water--a whopping $3.5 trillion. Venture capital investment in the clean-tech sector--which sells into all of those industries--was about $2.2 billion last year.

Meanwhile, the market capitalization for the top 10 IT firms is $1.5 trillion. Venture capital investment into all IT-related sectors was $16.4 billion.

So in the scheme of things, private-sector money going into the industrial energy market, which includes clean tech, is relatively small, he and his colleagues asserted.

"Remember, even though you've heard about these technologies for decades, we really only had spotty R&D funding until recently," said Nancy Floyd, an investor at Nth Power, one of the oldest energy-technology venture capital firms. "Venture capital is the funding mechanism to take new products to market."

Green argued that consistent government policies, such as setting targets for renewable energy at utilities, will send far more money into "green" ventures.

A good example of inconsistent policy is an existing investment tax credit for renewable energy, which is set to expire at the end of this year, a situation that is hurting the industry, say people in the business.

"The amount of money that is still on the sidelines because we as an (investment) community don't have the regulatory visibility in this country is unfathomable," Green said.

Green said that if more companies go public, the sector could attract more money from people or funds that want to hold stock in, for example, an electric-car company.

Although the stock market is not particularly receptive to initial public offerings (IPOs) right now, there have a been a number of IPOs of clean-tech companies in solar and energy efficiency over the past few years. In 2004, the solar market was worth $1 billion; now it's worth more than $100 billion.

Ira Ehrenpreis, a partner at venture firm Technology Partners, predicted that there will be 10 to 20 clean-tech companies worth a billion dollars by 2010 or 2011.

Big numbers
Projections for the amount of money that will go into clean energy over the long term are staggering.

The International Energy Agency (IEA) recently estimated that $45 trillion worth of investment is required to halve carbon emissions by 2050 by cutting down on fossil fuel use.

The number of clean-tech deals broken out by sector.

(Credit: PricewaterhouseCoopers and the National Venture Capital Association)

Research firm New Energy Finance said that number is not at all far-fetched, pointing out that the clean-energy sector is already on its way to delivering the necessary technologies.

Its research shows that new investment in clean energy worldwide was $148 billion in 2007, up 60 percent from the previous year and five times higher than in 2004.

It estimates that by 2030, $10 trillion must be spent to create a "low-carbon energy industry."

But even though the forces driving clean tech--high energy prices, a push for energy security, and concerns over global warming--are strong, the sector has been hit with some rough patches.

A credit crunch has hurt energy projects that require financing, and high commodity prices have made everything in a capital-intensive industry, from ethanol plants to wind farms, more expensive to build.

Scaling up
And amid it all, there is some actual bubble behavior, according to venture capitalists.

The sectors of clean tech that are getting the most attention--solar energy and biofuels--are bound to have some unfulfilled promises, as ventures fail for various reasons.

That high pace of start-up creation and questions over policy make limited partners, the investors in private equity funds, hesitant, said Neil Auerbach, managing director at private equity firm Hudson Clean Energy Partners.

"Many limited partners are very quizzical about the bubble issue, and they are cautious about investing in a subsidy-driven industry," he said.

At the same time, clean energy is showing signs of maturity. Auerbach's firm, like others, is involved in funding projects to commercialize technology.

For example, a cellulosic ethanol company could spent a few years developing its core technology but then need potentially hundreds of millions of dollars to build a plant to produce fuel on a large scale.

The amount of equity put into energy-related projects, such as constructing an ethanol plant or solar power plant, is four or five times the amount going into funding start-ups, he noted.

"The consequences of scale in our industry are starting to show," Auerbach said. "The clean-tech space will be the single largest wealth creation opportunity in the world."

[ToddWBeaver]

Beware of investing in ventures that require a tax break or a subsidy in order to be profitable. The tax laws can change at any time and companies in that position often sink or swim based on their lobbying instead of their products or services.

[humanssssss]

Bubble ... in economic this is called temporal asymmetric breaking of demand and supply. It is when the best innovation put forth and only a few innovations will have a sustainable revenue to compete. All else will fail attempting to survive. Once the innovation period is over, the incumbents will be met with new entrants developing on the same innovation or improving on the same innovation marginally. That which is what drives the market to zero profit.

Before any try to counter what I just wrote, please read up on EM theory. It helps to have a bit of economic back to debate, otherwise I have to roll up my sleeves and take out my box gloves to battle you on the ring. Of course, I'll lose but that's how most people beat me with my intellectual by using force, especially the government.

[Andrew Wolfe]

Of course they are "willing to risk it." The standard VC/Private equity manager deal is that they get 20% of the upside during the boom and pay 0% of the loss during the crash. They love bubbles.