Last week I was at the New England Venture Summit in Boston, and along with seeing a number of great companies and panels, I participated on a panel that discussed the trends in clean tech investing. My main takeaway from this event: reality has started to set in on clean tech investments, and finding cash for clean tech investments is getting difficult.
When the clean tech wave started to grow back in 2006, many were hoping for a clean tech “bubble” to rival the IT bubble and carry us to the next wave of macroeconomic growth. To a small degree, a bubble did occur and the economics were pushing all of this forward. Oil at $147 a barrel was making for an interesting gold rush in which people thought they could reinvent the cold, hard sciences around energy, transportation and industry, much like IT reinvented how we work, play and communicate. We saw a lot of time, money and talent go to companies with no real value proposition, either due to violations of the first law of thermodynamics or the laws of supply and demand. This is usually one sure sign of a bubble – dumb money. Now we are starting to see some of the “fruits” of those early investments: additional capital needs, delayed schedules and performance not matching up to predictions. It is a heady brew that does not make investors happy.
On the talent side, a couple of years ago every tech university was touting its green credentials, and every professor was dusting off his or her old/odd ideas, which had been on the back shelf since grad school. Now the talent and the investors have come to the same conclusion: clean tech is hard. It is capital intensive, the value proposition can be challenging, and the timeline is very long compared with that for IT companies. One cannot fix a wind mill by sending a patch over the Internet.
Unfortunately, many clean tech ideas are replacements for existing, working and in most cases economically efficient solutions. Oil and natural gas may be limited in quantity and carry real environmental concerns, but the fact remains that these resources are currently plentiful and technologically advanced enough to provide the reliability and convenience that consumers are looking for. So, how do you make a clean tech company/product that investors and consumers will want? Create a strong value proposition. If you are replacing an existing product with something less useful and more expensive than the existing product, you will need the government to subsidize its production and mandate its use (think ethanol). Otherwise, it will fail. Now, if you come up with a product that is better, cheaper and cleaner than existing products, you will generate sales and profits and win the attention of investors.
So let’s assume you have a great idea, which is cheaper, better and smarter. You have proven it out, and now you need capital to make it a commercial success. Where do you go for money? The good news is that, for young companies, there are numerous avenues for early-stage funding in the $100k area. Angel investors and smaller funds dedicated to startups, such as CI’s Pre-Seed Fund, help bring companies from conception to operation. From there, finding the bigger dollars gets harder as more and more VCs are moving down the capital trail and are only interested in companies with trailing revenues. Luckily, there are still VCs like Connecticut Innovations that have funds making Series A and expansion investments.
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