Investing in early stage innovation is a risky proposition. It is a bet on a technology, a market, a team and the economy, all at once. During the late 1950’swhen there was a need for private capital to fund the digital revolution and the era of personal computing, certain investment methods and procedures were identifiedto help rationalize the process. From Intel to now Uber, venture capitalists (VC) have used this investment method and to spur innovation and bring the mostinnovative solutions to consumers. It is quite certain that without these venture capitalists the world would not have had the solutions that we use daily and take for granted. However, despite the decades of success seen by these investors and the investment methods, this model has had limited success in transitioninginnovations in clean technologies to the broader market. There are many examples of clean-tech startups that have had some stellar innovations and also had thebacking of venture capital. However, a vast majority of them did not scale to become main-stay companies. This article attempts at understanding why this is the casefor clean-tech by looking at the needs of the sector and showing why there is a conflict with the prevalent investment model. Finally, the articlebased on thesefindings will attempt to propose a more industry relevant investment model that could more sustainably help bring clean-tech innovation to the broader market.
B. Gaddy, V. Sivaram, and F. O. Sullivan in 2016 through the MIT Energy Initiative, quantified the performance of clean-tech venture investment and compared it to other sectors. The authors discovered thatclean-tech; particularly the capital-intensive innovations could be classified as high risks yet have had lower returns compared to other sectors. In the same year, Brookings published a report that studied clean-tech investment and found that between 2006 and 2011, venture capital spent about $25 billion on cleantech startups and about 50%, or $12B of the capital was lost. More than 90 percent of cleantech companies funded after 2007 ultimately failed to return even the initial capital. There are many such reports and articles that convey the same message. A more recent Ceres report titled “Clean tech 3.0: Venture Capital Investing in Early Stage Clean Energy” while highlighting the same issues, indicate a changing landscape for clean-tech investment. The report talks about the use of “patient” capital for clean-tech investing and provides various examples where clean-tech investors are not only investing but also providing operational support in the form of lab space, mentor support etc. While these are incremental and extremely positive changes to the investing model, a need is felt to more fundamentally understand the sector and build an investing model suitable for the entrepreneurs and the investors.
Early stage clean-tech needs versus the venture investing model
The standard venture investing model is well-suited to a variety of applications and sectors.However, there are some key differences that distinguish the clean techsector from other sectors making the venture investing model incompatible to the needs of clean-tech innovation. This below graphic provides a perspective to thestandard facts about the VC model and the nature of clean-tech startups and the section provides an explanation of the conflict.
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