Thinking Tech

There is less venture capital and it is going to the wrong places

Posting in Energy

We need the push venture capital can offer to get the breakthroughs that will build our industry and bring true energy independence.

The National Venture Capital Association is out with its review of 2009, and while some of the news was expected -- total funding was down 31% -- it gets worse when you look inside the numbers.

(Image from the Venture Capital Blogger.)

As Gigaom notes, a lot of funding last year went to keep old investments afloat, not into new ideas. With the economy in the toilet, VCs spent last year buying time. Time is expensive.

Worse is where the money is going. I can see the turn away from IT. I can see the turn toward health care. But funding in the energy sector fell by two-thirds!

All of which speaks to horrible market incentives. Oil, gas and coal aren't places for venture capital -- returns are too sure, funding requirements too high. When we're talking about energy investments going down by two-thirds, we're talking about alternative energy being unable to get capital.

It is important at this point to note the purpose of venture capital. It's speculative. A VC expects most of his deals to go belly-up. He makes his money on the one in ten deals that pays off 10-1. Or more. It's like oil wildcatting in the 1930s -- a lot of dry holes, some small production, and the gushers make the whole thing pay.

The clean energy sector is filled with such speculative ideas. Most won't pan out. But the gushers are going to pay off big.

Assuming, of course, we have market incentives to assure this investment. Which we don't. That's why I call the climate bill a jobs bill.

Make carbon pay its external costs. Call it a tax if you want, but carbon pollution costs money, and should cost money. This provides the level playing field that wind, solar, tidal, and geothermal projects need. These provide the supply that make smart grid investments worthwhile.

We have seen some progress in the last year. Energy efficiency always pays. Better light bulbs, lower-power PCs and servers, more outdoor systems with their own solar panels. It adds up.

But we need more. We need the push venture capital can offer to get the breakthroughs that will build our industry and bring true energy independence.

We need to ask the right question. What must we do to get more venture capital to the places where we need it?

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Dana Blankenhorn

Contributing Editor

Contributing Editor Dana Blankenhorn has written for the Chicago Tribune, Advertising Age's "NetMarketing" supplement and founded the Interactive Age Daily for CMP Media. He holds degrees from Rice and Northwestern universities. He is based in Atlanta. Follow him on Twitter. Disclosure