Last week at the AlwaysOn GoingGreen conference, cleantech venture capitalist Vinod Khosla answered critics of cleantech investing by proclaiming that Khosla Ventures had netted a billion dollars in liquid profits from now-tradable shares. But for an industry with a moral imperative — to free the U.S. from the security risks associated with its dependence on fossil fuels and to save the earth from global warming — should we be measuring the success of an investment purely based on an IPO exit? If anything, the monofocus on IPO exits could be leading to some dangerous behavior for cleantech as a whole, with companies pushing to raise money in public markets well before there’s evidence that a viable business exists.
There has been no shortage of prominent tech billionaires who have stepped up in the past 12 months to let everyone know that cleantech investing is not working. Paypal co-founder Peter Thiel described cleantech as “an increasingly large disaster,” and Napster darling Sean Parker spoke about it in the past tense when he said, “it looks like it was a bubble.” As in, forget about the next deal that might yield a return. It’s over.
As many have pointed out, cleantech does not lend itself to the type of disruption that is the lifeblood of Silicon Valley startups. Rather, the business is built around the baseline price of a commodity — natural gas, oil, coal — and figuring out a way to compete with the price of that commodity. The government supports renewable energy because, as hard as it is for hard-core capitalists to accept, profitability isn’t the only goal. The goal centers on national security (energy independence) and global security (climate change). When Obama strayed from the strictness of these goals and claimed cleantech was a solution to unemployment, it actually backfired and ultimately, muddied the message.
My concern is that, because of the long-term and risky technology bets that are inherent in cleantech, many companies are beginning to think that public markets are a reasonable way to raise capital when private markets get tight or when government funding dries up. Given that 2011 has seen the most IPOs shelved ever, this is faulty logic at best, and at worst a very quick way for the cleantech industry to gain a reputation as the very IPO “bubble”Parker described.
If we look at Khosla’s big biofuel IPOs, one company has no revenue (Kior) and two have lost increasing amounts of money in terms of net income for the past three reported quarters (Gevo and Amyris). Cellulosic ethanol company Mascoma filed for a $100 million IPO a few weeks back with a net loss of $14.5 million in the first six months of 2011, $4 million more than it lost during the same period in 2010.
In the end, success for cleantech is not another IPO. Success is a company that offers a reliable supply of renewable and non-carbon emitting energy, and a roadmap for how that energy source will narrow the price gap with prevailing fossil fuels. The most widely deployed renewable energy, wind power, has shown signs recently of reaching parity with fossil fuels, as an August power auction in Brazil found wind power cheaper than natural gas. That’s the trend and message that companies should be focusing on.
The next 12–24 months will be critical. The Breakthrough Institute estimates that over 70 percent of federal funding support for clean energy has lapsed or will lapse in the next three years. If the funding mechanism of last resort becomes the IPO, then there will be a number of IPO disasters, which will, in turn, make earlier stage funding harder to come by for all cleantech companies. A resistance to cleantech will settle in on public markets and send a shockwave across all of cleantech finance. It’s a vicious cycle that no one wants.