Intelligent Energy

Green tech moves to the top of the class at Wharton

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Venture capitalists foresee enormous investment opportunities in green technology, giving the VC model the capacity to solve the world's energy sustainability problems.

Green technology was the topic of discussion at one of the nation’s premier business schools this week when a forum at the University of Pennsylvania’s Wharton School sought to determine whether the venture capital model would work to push the world toward sustainable energy solutions.

Wharton professor Eric Orts assembled a panel of VC industry experts for the school’s 40th Wharton Global Alumni Forum ‘Venture Capital’s Influence on Environmental Sustainability’ event.

The panelists cited remarkable growth in funding for green technology and how there is a “perfect storm” of conditions for investing in it. Here are some of the insights that each participant had to share:

Ashmeet Sidana, general partner, Foundation Capital

  • Venture capital fuels innovation; innovation solves the world's problems.
  • China is adding two coal plants every week and Japan just had a major nuclear incident – those are not paths to sustainability.
  • VC firms are looking for companies that have a high risk/high reward pay off, but prospects must be capital efficient.
  • Department of Energy loan guarantees and government regulations are useful in some cases, but “will not get us to nirvana.”

Foundation Capital has invested into energy management software manager EnerNOC, smart grid firm Silver Spring Networks, and sustainable brick maker CalStar.

Andrew Chung, principal, Lightspeed Venture Partners

  • There has been significant clean tech investment since 2001; it now accounts for 20 percent of all dollars invested in global VC. US$7-8B was invested last year alone.
  • Expect clean technology to grow and become more important to venture capitalists as exits come and the industry matures.
  • Renewal energy technologies are reaching grid parity for the first time in history.
  • Weave in corporate, government, and social imperatives, and they create a perfect storm of elements to create momentum around clean technology.
  • It is a good time to invest in VC for clean tech and to be a clean tech entrepreneur.

Lightspeed Venture Partners has $2B in committed capital, and is operating on an $800M round raised in 2008. Some of its beneficiaries include Solarzyme, a now public company that produces algae based fuel and oil byproducts.

Cynthia Ringo, managing partner, DBL Investors

  • Its early investment in Tesla was ridiculed; Telsa is now the most capital efficient car company that ever delivered a product onto the road.
  • DBL has “invested long” in solar power, backing start-ups such as Solar City (an integrator), Solaria (concentrated PV panel maker), thin film panel maker Solexant, and smart glass manufacturer Soladigm.
  • Soladigm’s Mississippi factory was able to more easily ramp up manufacturing to become capital efficient with a state grant of $40M to cover the plant’s cost.
  • We try not to count on public policy – it is too unpredictable.

“We look for things that will be very large. Is this or is this not going to be a huge market, and does the company have something disruptive enough to create tremendous amount of value?” she said.

Robert MacDonald, managing partner, Craton Equity Partners

  • Rising energy prices and a focus on addressing climate change renewed VC interest in funding clean technology.
  • Pension funds drove investment in clean technology. Less than $500M was invested in the sector in 2000; $9B was invested in 2010 alone with over $200B invested worldwide.
  • Stakeholder corporations have come full circle from zero interest in clean technology to buying products and services as well as investing side-by-side with venture capitalists. “They are providing exit strategies for our companies.”
  • In 2010, there was $34B in MA (merger and acquisition) activities from Fortune 500 companies.
  • IPO markets are coming into clean technology for “exits.”
  • Water will be a growing area of investment.

Craton Equity Partners’ $200M fund is now fully committed, he said. Its target is to raise 2x that capital in the near future. MacDonald highlighted Petra Solar, a company that makes solar panels that are mounted on top of utilities poles, and waste water treatment firm Liquid Environmental Solutions.

The latter treats food preparation wastewater from over 1,500 Wal-Mart locations, removing fats, oils, and grease so that water may be treated locally.

Bank of America Merrill Lynch, Global head of clean technology investment banking, Jon Krahulik

  • Bank of America gets involved when clients are looking for exit strategies. He sees “massive” opportunity in the MA realm. Also, public markets are open to successful exits.
  • In 2005, just 3 percent of VC funding went to clean tech, and today it’s over 20 percent.
  • Energy supply and energy management companies will be the “stars” – specific mentions were made about building products, oil, solar power, and water.
  • Companies that figure out how to fund their models are on the best path. VC firms are doing a good job helping start-ups find corporate partners in stakeholder industries and keeping their expenses low.
  • Sustainability boils down to economics: products must be cost competitive without a subsidy. Consumers gravitate toward something that has a sustainability element if it has acceptable features and costs benefits.

There is a $20B commitment towards sustainability at Bank of America, Krahulik said.

The VC model ultimately still makes sense for new ideas for breakthrough technologies that could change the planet, Wharton’s Orts told SmartPlanet. “It’s the only place where crazy new ideas can be sold to someone looking to make money on a crazy idea that no one knows about yet.”

“A lot of business models are dependent on government subsidies, competing against countries like China who is very heavily subsidizing renewable energy. The EU is the same. It’s not exactly a level playing field for US companies.”

David Worthington

Contributing Editor

David Worthington has written for BetaNews, eWeek, PC World, Technologizer and ZDNet. Formerly, he was a senior editor at SD Times. He holds a business degree from Temple University. He is based in New York. Follow him on Twitter. Disclosure