Monday, April 25, 2011

Is Cleantech Venture Investing Dead?

Many in the investment community are wondering if cleantech venture investing is dead (or dying). While I disagree with the notion, the critique is not without merit:

Compared to the current boom in venture investing - cleantech has been a bust
This cannot be disputed. While segments in cleantech such as solar, electric vehicles and LEDs have had unprecedented growth, it simply cannot compare with what has happened in social media, mobile and IT in the last 3 years. We all know that Accel will have the best performing fund EVER with Facebook; but this is not just a Facebook/Twitter/Groupon story. There has been a fundamental paradigm shift in how we communicate, consume information, and generate and access data. This shift, coupled with the reduction in storage, hardware and computing costs, has opened up a huge disruption opportunity for startups. You take those factors, add strong balance sheets at public companies (for M&A), global growth, and robust equities markets - and you have the makings of a boom.

As Sunil Paul recently stated at the Green:Net 2011 conference, "We [cleantech] are winning, just not compared to everyone else".

Cleantech in the U.S. competes with natural gas, which is at all-time lows
We are in a different power price environment than we were in 3 years ago. The discovery and successful exploitation of shale gas in the U.S. has resulted in a historically low natural gas environment, which is expected to remain for some time. Because natural gas prices drive power prices, the abundance of shale gas has made it more difficult for renewables to reach grid parity in the U.S. As a result, the growth in renewables has really been a China story.

Climate change has disappeared from the national dialogue and governments are broke
I must admit, 3 years ago, I would have said we would have carbon legislation in some form by 2012. As Adam Grosser of Silver Lake Kraftwerk recently said, "we were naive about the regulatory environment. VCs were not aware of the capricious and byzantine nature of the regulatory environment." While RPS standards have been enacted in many regions, the budget deficits faced by most state and federal governments today does not bode well for these standards being enforced when push comes to shove. In short, regulations alone will not drive Cleantech.

So all of this begs the question - why do I believe in Cleantech investing?
While there will always be asset classes that provide higher returns at any point in time, I fundamentally believe that the macro story for cleantech is unmatched: We are in a resource-constrained planet, and we will increasingly consume more resources-per-capita to fuel our current rate of global economic growth. This would be sustainable, if we were getting more productive at tapping our resources. In fact, the opposite is true:

(1) Growth in crop yields has decreased substantially, despite the massive increase in fertilizer.
(2) Global oil production is peaking and is only sustained by deepwater & unconventional sources
(3) Precious metal prices have skyrocketed as we have moved to more difficult-to-access deposits

The result has been a commodity boom like no other in history (Source: GMO quarterly letter):

As Jeremy Grantham, recently put it "This is not about peak oil, but peak everything".

Cleantech is all about selling electrons. Electrons, after all, are a commodity. Cleantech will not be driven by carbon, or climate change or "Going green". As we have seen, those things come and go. Ultimately, investing in cleantech is all about moving up the resource productivity curve.

Our current rate of growth and resource productivity is unsustainable; and at some point, things that are unsustainable come to a halting stop.

No comments:

Post a Comment