Energy Transition

3 hard-won lessons from a decade of negative cleantech returns

A general view shows solar panels to produce renewable energy at the photovoltaic park in Les Mees, in the department of Alpes-de-Haute-Provence, southern France March 31, 2015.

Is there to be sunshine after the rain for cleantech VC investors? Image: REUTERS/Jean-Paul Pelissier

Shai Kivity
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Private Investors

  • After a long period of failed investments, VC funds are once again flowing into the cleantech sector.
  • There are valuable lessons to take from the past decade of poor perfomance.
  • Here are three of them.

Two crucial weapons that can help us combat global warming are innovation and environmental regulation. Innovation pushes the market to become less oil-dependent and more environmentally friendly. Regulation, on the other hand, forces companies to invest capital, and to further reduce their carbon emissions.

One of the critical forces that encourages innovation is the venture capital (VC) industry, which has traditionally tried to avoid interacting with regulators. Not all investment sectors are created equal, however, as VC pioneers in the energy sector have discovered over the past decade of clean-energy investments.

Today, after a decade of failures, the clean-technology industry's maturity has finally reached an inflection point. The technology is now becoming economically viable, and new business models have emerged. As a result, funds are rapidly flowing into this sector. We are currently seeing $300 billion of annual investments in the sector, and this is expected to surpass $1 trillion within the next five years. Now, more than ever, new investors should remember the lessons learned during a decade of failures - and can use them to accelerate the transition towards a sustainable future.

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Unlike most of the VC sector, many energy VC funds have failed their investors. In the decade prior to 2016, energy-related VCs lost more than half of their investments - that's around $12.5 billion. Only in recent years have the survivors of that financial carnage been able to learn from the mistakes of the first movers, gaining the sophistication required to succeed in this challenging field.

The Westly Group, as well as many other subsequent funds, have emerged as industry leaders by implementing lessons from the their past investment strategies. The VC sector can benefit greatly by learning three lessons from their experiences; the search for capital efficiency, the need to understand the regulatory landscape, and the need to play in rapidly growing markets.

1. Energy investments are inherently prone to capital intensity - which means that in many cases, they require a lot of capital expenditure before revenues begin to appear. This is mostly a result of the need to develop energy-related hardware before a company can start the sales process. For that reason, to successfully encourage VC-led innovation, there is a need to focus on software-based, capital-efficient investments. Capital intensive, hardware research and development investments like energy capacity technologies should be left to corporations who can commit to multi-year research and devlopment budgets without seeing returns or to funds that have very specific hardware expertise.

Is cleantech investment stagnating?
Is cleantech investment stagnating? Image: BloombergNEF

2. In energy, regulation matters. Energy is a field that, in some crucial respects, is led by regulatory reforms such as carbon mandates, carbon taxes, energy rebates and emission goals, to name but a few. The ability to sell to regulated utilities poses a challenge that not every start-up can handle. This means that VCs who wish to succeed in the field need to both understand the way regulations develop, and be able to help entrepreneurs deal with sales to power stations and transmission companies. One great example is the $465 million government loan that saved Tesla at a crucial time. Without great VCs advocating for Tesla within the government, some say the company wouldn’t have been able to make it.

3. Not all fields and technologies within the energy sector grow in the same manner. Some areas, such as electric vehicles and energy storage, have experienced double and even triple-digit growth. At the same time, other sectors - such as internal combustion engine-driven vehicles - are in decline.

The cleantech investment industry is at a critical time in its history. VC investors should implement these hard-learned lessons to accelerate the transition to a cleaner future - one start-up at a time.

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