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What will it take for investors to succeed?

A recent report published by the MIT Energy Initiative, entitled Venture Capital and Cleantech: The Wrong Model for Clean Energy Innovation, published July 2016, has stirred up a lot of renewed interest in clean energy investment models. It was followed by an article “Software Ate Cleantech: Now What?” written by one of the study’s authors.

The study and article concluded that early clean technology investments failed for five key reasons:

  1. Long development cycles. Developing breakthrough materials, such as those for next-generation solar panels, can take 20 to 30 years.

  2. Significant capital requirements. To reach scale, venture capital money was used to build factories, sometimes before R&D was completed.

  3. Business model failures. Many companies faced expensive customer acquisition and long sales cycles.

  4. No sales premium. Energy companies were selling into established commodity markets where price (of electricity or of the solar panel itself) was the main driver.

  5. Few exit opportunities. Acquirers in the utility and industrial sectors were not eager to take risks or place a premium on a startup’s growth.”

Unfortunately, the study itself is deeply flawed in several regards:

1. It compares a teenager to two adults. The study compares compare investment results between CleanTech, BioTech and InfoTech over the period between 2006 and 2011, a period in which CleanTech investment was still nascent, but the other two categories were already over 30 years into the venture investment cycles. An appropriate comparison would have been to take the early hardware centric years of InfoTech (i.e. 1976 through 1981) or similar formative years (1986 through 1991) for the BioTech sector and compare them to CleanTech between 2006 and 2011. For those of us investing in IT and BT in those years, the results were far, far closer to what we have seen for CleanTech than the comparative periods used.

2. It ignores the development cycle of industries. The study either fails to comprehend or it just ignores the development cycle that new industries go through. First comes the hardware and capital centric phase (think personal computers, disc drives, monitors, and memory). Then comes the first overlay of application software that improves the functionality of the hardware. Then comes the networking phase in which hardware and software are connected to each other and function in unison. Last comes the “cloud” phase in which functions move to where they best operate in a seamlessly orchestrated system that ties together all of the foregoing elements. Go back and look at just how successful the overall VC community was in building personal computers and semiconductor hardware — not so much., by today’s standards.

3. It ignores the relevance of markets. In the early phases of an industry you don’t build innovative parts or software, you build the entire machine and the factory needed to produce it. At that point in the market, there is neither a supply chain nor a distribution channel nor a ready audience of buyers. That was as true of the auto industry and the personal computer industry as it was of the early phases of building wind turbines and solar panels. Until you had an active automotive market, you couldn’t make money designing anti-lock brakes or automatic transmissions. Until you had a vibrant computer market, it was hard to make money on subcomponents. But as these industries matured, they enabled an ever broader and ever more global range of innovators and entrepreneurs to build subcomponents that propel the industry forward. We are only now approaching that phase of CleanTech.

4. It ignores the differences between replacing incumbency and venturing into whitespace. One reason that computing, software and the Internet have been so successful for the venture capital model is these industries played into open whitespaces between existing industries rather than trying to compete with or replace existing industries head on. Biotechnology has been a far less fruitful pursuit for the venture model because it was producing drugs that, by and large, competed directly with those of the incumbent pharmaceutical industry.

5. It ignores the difference between consumer products and B-to-B products. Computers, software and drugs are largely purchased by us as individual consumers. Energy is largely purchased by utilities or large corporate buyers. Almost by definition, consumer markets change more rapidly than do B-to-B markets. Is it any surprise then that the three most successful CleanTech companies to date (Tesla, SolarCity and Nest) were all three consumer oriented businesses?

So did the Study get anything right? Can anything be gleaned from the study’s conclusions?

1. Long Development Cycles. Both BioTech and CleanTech suffer from long timelines, and InfoTech hardware did so much more than today’s software and internet-apps based businesses. By definition, investing in technologies that take 20-plus years to mature out of 10-year lived funds is difficult, if not impossible. Most of us have known that for some time, but LPs have been slow to adopt alternative investment vehicles. Until we do, this remains a valid constraint on producing desired investment results. Solving it means either accelerating the speed of inventive iteration (which is coming rapidly in energy) or changing the investment vehicle (which is being explored by several of the new initiatives).

Bottom line: Development cycles are shortening, technology is becoming more modular, contract manufacturing is more available, and iterative speed is improving — all of which mean this restraint is less important today.

2. Significant Capital Requirements. This was far more true of the early stages of InfoTech and will have been more true of the early phases of CleanTech. But today we have solar factories, wind factories and battery factories, so today’s clean energy innovations can improve processes in these factories without having to build an entirely new factory. Second, as more solar panels, wind turbines and batteries are deployed, a growing number of companies are finding software, communications and Internet tools that manage these hardware technologies more effectively — meaning the next generation of improvements are already less capital intensive, have far shorter development timelines and look more like the InfoTech investments of the mid-1990’s. Only those trying to build entirely new infrastructure or hardware modalities today must go through building out, proving and then scaling entirely new factories.

Bottom line: Because companies can develop drop-in improvements (think about 1366’s innovative way to produce silicon wafers, or Amprius and others work on anodes rather than complete batteries), capital requirements are falling. Players like Jabil, Foxconn and Flextronics have established large scale clean energy outsourced manufacturing capabilities. Existing hardware is being made more efficient and more effective through software. So the capital requirements are falling.

3. Business Model Failures. InfoTech and biotech primarily produce customer products. Energy has historically been bought by utilities and charged through to ratepayers. By definition, big-ticket B-to-B sales cycles are far longer than retail consumer sales cycles. But that was as true for companies selling nuclear plants, coal plants and gas turbines as it has been for wind and solar. The learning here that is relevant is the transition InfoTech made from mainframes to minicomputers to PCs and now back to servers comprising thousands of microprocessors. That is very much where the solar and battery industries are headed and their growth is increasingly being driven by retail customers (and large corporate buyers).

Bottom line: So here too the business model is evolving as it did in InfoTech, toward shorter sales cycles and more consumer-focused products. It isn’t happening overnight but the trend is highly parallel to that of IT and that should improve investment returns.

4. No Sales Premium. This is an excuse based on too few years of experience. Ask the oil and gas fracking companies whether they are getting paid a premium on their “technology-based” energy sales. The answer is no; and yet fracking is very much the case of a new energy technology rapidly overtaking the old, even at commodity prices. Now fracking relied heavily on government funding of its underlying technology and was 25 plus years in development when it “burst upon the scene” in 2005. But there is absolutely no reason the ongoing cost/price declines in wind, solar, batteries and electric vehicles shouldn’t continue to take market share from energy sources that cannot innovate at the same pace.

Bottom line: All industries commoditize. Over time software and business model innovations outstrip hardware innovations and reap greater returns per dollar of capital invested. It is all part of how industries change and absorb innovation. What is surprising is how short our memories are. Most InfoTech entrepreneurs (and the authors of the MIT study) weren’t in business when the hardware phase of the InfoTech industry was being built. But without those predecessors who carried the heavy loads, the current It industry would not exist. So too, the energy industry of our future is being built on the shoulders of those early CleanTech failures.

5. Few Exit Opportunities. Exits reflect success. So it is hard to complain there are few exits when almost nothing is finished. Even Tesla, the most celebrated “CleanTech” success company is far from being fully grown up. Practically speaking, this criticism is calling the game at half time.

Bottom line: There will be big clean energy winners and they will affect the pricing and premiums paid for others in the sector. What is true is that technology is trying to disrupt an industry with a 100-year change cycle history, we have in less than 50 years reduced those change cycles by half. If we can now reduce that 50 years by half again, then the future of clean energy will be bright.

Stephan Dolezalek is one of the founders of, an organization focused on revitalizing investment in the clean energy industry and continuing the quest to battle climate change.

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