The problems with righteous investing

Ask the very best investors and entrepreneurs about the secrets to their success and many of them will say it’s all about the passion. Falling in love with an idea, or a product, to the point of obsession can be a powerful catalyst that makes a venture work. But what happens when passion for an idea actually blinds us to deep problems with that idea? That’s one of the key things I think went wrong with the first wave of cleantech venture capital investing.

This week Reuters published a report, citing anonymous sources, saying that Kleiner Perkins held a meeting with its limited partners (the funds and endowments that put money into Kleiner’s fund) where Kleiner leader John Doerr apologized for a weak fund performance and promised to do better in the future. Kleiner closed on a new $525 million fund a little less than a year ago, and at the time made a bunch of changes.

Kleiner's Gore and Doerr Pitching Green Growth FundKleiner was one of the most aggressive and high-profile venture capital firms to put money into cleantech startups, and at one point had been hoping to invest a third of its funds into green companies. Part of Kleiner’s poor fund performance no doubt has to do with its greentech investments that haven’t made the firm money. And actually a bunch of its investments struggled mightily, like Miasole, Fisker Automotive, and Amonix.

I’ve written a lot on why cleantech and VC is a difficult match. Check out these pieces from over the years:

But one of the more nuanced reasons that I haven’t spent much time on is passion: what I think was investor passion for doing good, for helping fight global warming and for saving the planet. It’s hard to paint that type of enthusiasm as a bad thing. But I think the drive to be known as an investor that makes the world a better place was something that could have distorted the lens used to find investments that will make money.

A lot of the venture investors in Silicon Valley are cut from the same cloth. Many are environmentally-leaning Californians who have kids and who are in their mid-50s and 60s. Many made their fortunes — either through startups or investing — off of the IT sector. The general mindset several years ago was to look for what came next after IT, and greentech provided them with something they could feel good about doing and providing the right legacy for their kids.

That feeling of righteousness is a powerful drug that can cloud rational thinking sometimes. A startup with a potentially game changing innovation that can save the world should succeed — we all want it to succeed — but how much of these investments were hopeful money, blinded by do-gooder passion, as opposed to rational money?

That Doerr put his own personal money into some of these companies as they struggled highlights just how strong the do-gooder pull is and how personal these investments were sometimes. Reuters reported last month that Doerr dipped into his own pocket for the about $2.5 million that struggling solar company Miasole needed to make payroll before it was sold. I’ve heard rumors that Miasole isn’t the only company that Doerr, and Kleiner Partner Ray Lane, put personal funds into. When those companies fail, it’s a slap to the identity of the investor as the savior.

More money going into greentech innovations is the right thing to do from the perspective of the world. The planet needs this technology. But it will likely have to come from non-VC pockets of money, like government funds or project finance.

While Kleiner is the highest profile of the venture firms to make an aggressive bet on cleantech and then (seemingly) retrench, it by no means is the only one. VantagePoint Venture Partners admitted recently that it had to curb its cleantech fund due to lack of interest from investors. Private equity firm Hudson Clean Energy Partners also halted its clean energy fundraising process and the managing director resigned.

Other firms, like Draper Fisher Jurvetson and Mohr Davidow, have shifted strategies to focus on cleantech lite, or cleanweb startups. There’s a few VC firms left that are still trying to do investments in new energy tech and sustainability-focused startups like Khosla Ventures, Braemar Energy Ventures, and Lux Capital, but these are few and far between. The silver lining for those guys is that there’s a lot less competition out there now.

Clearly over-exuberant save-the-world optimism wasn’t the only problem with cleantech. The sector is vast, complex, science-heavy, partly regulated, partly government dependent, and many areas haven’t seen innovation in decades.

We’ll be watching closely to see if some of the cleantech 2.0 strategies are actually working and if those include that same do-gooder passion.