The shakeup of Kleiner Perkins exposes the short comings of venture capital

Valley venture capital firm Kleiner Perkins’ aggressive bet on cleantech has turned out to be a major driving force behind its struggles and recent shakeup. We’ve covered the topic many times (see the dangers of righteous investing) but Pandodaily nicely captured this week the essence of what’s at stake for Kleiner’s leader John Doerr — the guy who ushered Kleiner into its internet investing heights of the 90’s and led the decision to go whole hog into cleantech in recent years — if he can’t right the ship.

However, underlying Kleiner’s cleantech missteps is the reality of the short comings of traditional venture capital itself. Entrepreneurs, tech execs and media in the Valley look to the institution of venture capitalism as being the engine of innovation and the revolutionary spark needed to ignite disruptive change. But it’s actually just one way to fund innovation and it’s only proved to be particularly good at backing digital technologies based on the quick, large and predictable growth curves that Moore’s Law provides.

Workers inspecting panels in Solyndra's factory in April
Workers inspecting panels in Solyndra’s factory

The square peg in a cleantech hole

As we’ve written before, traditional VC hasn’t proven to be a good model for funding many of the sectors in cleantech, such as making solar panels, producing electric cars, and developing biofuels. It’s not good at funding basic scientific research, like driving breakthroughs in battery chemistry.

Many of these technologies have needed more money and taken longer to scale up from lab to commercial product than afforded by the traditional venture capital time frame. Just read the story of SunPower’s journey, and it’s enough to make you avoid the energy sector completely.

The energy startups also have failed to find as many exits, both IPOs and acquisitions, as desired, partly because the companies outside of tech don’t acquire startups at the pace that tech companies do (yet), and partly because commercial products and revenues have seemed to take longer for energy manufacturing companies to produce than web companies. As Bill Gates has put it, Moore’s Law has spoiled us.

Row of Fisker Karmas
Row of Fisker Karmas

For those of you who haven’t spent years following VC funds, this is how they work: traditional venture capital firms raise funds from groups of limited partners (LPs), which are made up of outside investors, like endowments, large corporates, wealthy individuals, and even peer investors. A VC firm can invest in whatever they want, but in order to continue to raise future funds from these LPs, the firm needs to make money for those LPs off of a few big exits from their investments. If the fund performs badly enough for long enough, they’ll have a hard time raising future money — and a venture firm’s lifeblood is its fund.

As many of us know, a lot of the venture capitalists that invested in young companies in these energy manufacturing sectors lost their shirts and, like Kleiner, had to restructure and change their investing strategies. Sure, investments in anything digital that still adheres to Moore’s Law, like Kleiner’s Opower and Nest, are a much better fit with the traditional venture capital. And of course there are outliers like Tesla that braved all odds and was led by a visionary.

The evolution of VC

But part of Kleiner’s problem has also been that traditional venture capital has been evolving. Accelerators now crowd the space trying to recreate the success of Y Combinator and Tech Stars. 500 Startups is out playing Moneyball and winning over young entrepreneurs. VC firms are experimenting with new things like design programs, and hiring “Communication Partners” in ways to stay relevant. VC is broken in other ways beyond its dabble with cleantech.

Every couple of months someone writes an article about how we were promised jet packs and we got Facebook. Well, Kleiner Perkins tried to create jetpacks and it got fracked. Disruptive innovation outside of digital in age-old industries like manufacturing, energy, chemicals, and transportation is expensive, difficult and not for the faint of heart.

A lot of that jetpack innovation will have to come from outside of the Valley. There are many other ways to fund innovation, like R&D from big companies, various methods of government support, academia, and investing from outside VC like private equity. Unfortunately these funding methods are much slower moving and their backers are less willing to take risks than VCs.

Corporations in particular have started to spend more on funding these types of energy innovations. They have the balance sheets to tackle these hard problems both through investments in startups as well as internally. I don’t think the corporates will be the answer to the cleantech VC bust, but they’re interesting nonetheless.

At our Roadmap conference in November, Om asked GE CMO Beth Comstock why a young person would want to work at GE when there are hot companies like Facebook out there. If there’s one compelling reason why anyone would want to, it’s because a company like GE can invest in R&D and tackle some of these massive, basic science, infrastructure and manufacturing problems. Because who’s more likely to deliver a jetpack, GE or Facebook?