It’s no secret that venture capitalists aren’t fond of clean technology investments these days. Indeed, an article in the Wall Street Journal this week notes that VC investors put $25 billion into clean energy tech start-ups between 2006 and 2011 — only to lose more than half of that.
Now, a new study seeks to understand why that is the case, and make prescriptions for how the clean tech industry can find the funding it needs.
The study was done by Benjamin Gaddy, director of technology development at the start-up accelerator Clean Energy Trust, and Varun Sivaram, acting director of the Program on Energy Security and Climate Change at the Council on Foreign Relations. A report they wrote with Francis O’Sullivan, director of research at the MIT Energy Initiative, says that future funding for clean tech start-ups needs to come from longer-term investors like pensions and endowments, and that governments as well as established energy companies have to do more to nurture clean energy companies.
A big reason for the failure of VC investments in the space was the simple absence of the “outsize multiples” that VC investors typically need, Gaddy tells the Journal. And clean tech investments tend to be far less liquid, requiring capital to be tied up for longer than the three to five years that many VC funds prefer, Sivaram says.
Another reason: “The valuation premium that companies might receive upon exit, even if they were successful, simply was not high enough to justify the investment put into them,” Sivaram tells the Journal.
He says investors like pensions, family offices and sovereign wealth funds need to apply their long-term investment horizon to the clean-tech space, and adds that there are “some signs” that such investors are becoming more willing to do so.
More financial support from the private sector and governments is also crucial. “We really need corporations to start to invest both as strategic investors in the equity of the company as well as fully acquiring companies,” Sivaram says. And a “trickle” of investment activity “can turn into a flood if the federal government is more expansive in its support for research and development but also demonstration of these technologies,” he tells the Journal.