VCs Think Cleantech Is a Dirty Word
The world may have come one step closer to a global climate pact when the U.S. and China recently announced a deal to reduce greenhouse-gas emissions over the next decade and beyond. With potentially far-reaching consequences for alternative energy demand, it seems like just the push needed to encourage venture capitalists to invest in clean technologies like solar energy. Indeed, the government says it’s made money on its loans to renewable energy companies, and the results may help congressional pushes to fight climate change.
But it’s hard to believe the agreement can revive venture capital interest in a sector that’s tripped up lots of firms, including Khosla Ventures. A Khosla biofuel company, Kior, filed for bankruptcy protection this week under Chapter 11 of the U.S. Bankruptcy Code.
My former Fortune colleague Tory Newmyer just last year called Kior "Mississippi’s great green hope." That appraisal came after Kior had already raised $150 million in an earlier public offering. Now a share of Kior is worth less than a dime and the company is selling its assets.
Over the past few years other cleantech startups including Abound Solar, Beacon Power, Range Fuels, Cello Energy and A123 Systems also sought bankruptcy protection or shuttered after taking venture money from the likes of Benchmark, Crosslink Capital, Khosla and North Bridge Venture Partners.
Life’s been pretty meh for the venture-backed startups still chugging along. The median cleantech share price fell 31 percent in the third quarter of 2014, according to the National Venture Capital Association. Over the last two years those shares fell more between private financing rounds than shares in any other sector, according to the NVCA. No other type of investment has recently seen as many down rounds.
In lots of cases, the startups have taken longer than expected to create a product, and they burned through more cash than anticipated in the process. Any green energy company will have to fight an uphill battle against entrenched interests like coal and oil companies -- another long, expensive process that has little to do with the promise of their products. And investors can’t control things like dropping oil prices, which have lately made cleantech (and lots of other energy production) economically unviable.
Government initiatives have ignited venture optimism before. Back in 2006 and 2007, VCs saw lots of opportunities when former President George W. Bush signed an energy bill that included lending and other financial support for advanced car technology and alternative energy startups. Under President Barack Obama even more taxpayer funds flowed to fledgling startups with unproven production capabilities.
The VC dollars rushed after those new initiatives. After averaging about $299 million a year in cleantech investments between 1996 and 2005, venture firms invested $1.7 billion in cleantech startups in 2006, according to the NVCA. The inflow peaked at $4.3 billion in 2011.
Then came the losses. The solar panel startup Solyndra, which received $535 million in tax-payer backed loan guarantees before filing for Chapter 11 protection in 2011, was a particularly high-profile debacle. The press focused on the government loan program backing Solyndra and overlooked the fact that VCs such as Argonaut Ventures, CMEA Capital, Madrone Capital Partners and RockPort Capital had put more than $1 billion in equity into the company.
Debtors had first dibs on any payouts in the Solyndra bankruptcy. Most venture investors, having put in equity, were last in line and generally got wiped out. Some investors converted their preferred stock to common right before the company filed for bankruptcy -- meaning they improved their chances for a bankruptcy payout but also gave up any special shareholder protections that they’d created for themselves when they originally invested.
People sometimes forget that there’s a big difference between what the government considers a win and what VCs consider a win. According to a recent story from National Public Radio, the government netted just $30 million after disbursing a whopping $21.7 billion in loans and guarantees to green tech startups like Solyndra and Tesla Motors.
When your mission is to support a government policy and not lose taxpayer money in the process, that might be a perfectly acceptable return. But if you’re a VC guy asking pension funds and other limited partners for money and that's your track record, you’ll be passing the hat for a long, long time.
The financial rewards and growth rates for cleantech startups may only be attractive to long-term, patient investors such as the federal government. VCs, who are cut from very different cloth, are already making their preferences clear.
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Timothy L. O'Brien at email@example.com