Green light for cleantech investment

Seemingly feel-good projects – like generating sustainable energy or cleaning up our lakes and rivers – finally have solid business models that can produce returns for investors while improving life for everyone

The greatest startup idea can fail for any number of reasons – mismanagement, poor strategy, cashflow problems – but it often comes down to one thing: timing.

In 1998, a talented team of young Israelis came back from a gap year in Thailand from where they had tried – and failed – to share videos of their adventures with friends. In those early days of digital photography, when computers connected via dial-up modems, most video was captured on analog camcorders. They formed a company called EarthNoise and created technology that digitized analog video and a website where you could upload it to share with friends. We got the backing of AOL and raised $12 million of investment. Despite the grainy, thumbnail videos, 500,000 daily users flocked to the site.

But the idea was ahead of its time. There seemed to be no viable business model and no way to popularize the service widely enough to sustain any kind of revenue stream. EarthNoise struggled into 2002 and was finally swept away by the dot.com crash. Less than three years later, YouTube was created. The timing was perfect. In 2006, it was snapped up by Google for $1.65 billion.

The following year, John Doerr of Kleiner Perkins Caufield & Byers used a tearful and now famous Ted Talk to urge investment in green technology which he said “could be the biggest economic opportunity of the 21st Century” and announced a $100 million investment in cleantech, renewable energy, biofuels, electric cars and water purification technology. Following Doerr’s lead, venture investors began pouring money into cleantech, increasing annual investment tenfold from about $400 million a year at the start of the decade to peak at $4.3 billion in 2011, according to a Harvard Business School study.

But Doerr’s bet failed to pay off. Kleiner Perkins’s cleantech portfolio did not give investors the returns they expected – a pattern echoed across many (though not all) green investments. By 2015, annual funding for cleantech startups had sunk below $1.5 billion.

There were exceptions, of course. Draper Fisher’s decision during this period to back Elon Musk at Tesla met with skepticism, if not ridicule. Now it looks like a stroke of prophetic genius.

Many early cleantech businesses pinned their hopes not on the market, but on government policy. Cashflow and revenue forecasts relied on calculations of expected government subsidies for technology that would reduce carbon emissions and slow climate change. As a result, many of the businesses collapsed when the projected subsidies failed to materialize, or when the companies failed in their bid to secure them.

The result was confusion. Were these actually companies built on sound business principles, or were they semi-charitable enterprises trying to do good and reliant on public funding?

Climate change

For years, most venture investors shied away from cleantech, despite the desire to save the planet from climate change. While the companies’ aim was correct, their timing was wrong. The perceived need had not yet created real demand and the technology had not yet matured to the point where it could sustain a business. It was just a lot of noise – a little like EarthNoise, our early video-sharing platform.

Now we have arrived at a cleantech inflection point. The worst wildfires in history have devastated vast swathes of Australia and California. The 2020 Atlantic hurricane season has broken records, with 28 named storms wreaking havoc and tipping the naming system from English to Greek. The UN recorded a “staggering” increase in climate emergencies in the first 20 years of the century with almost double the number of major incidents compared to the previous 20 years. Over these two decades, natural disasters affected more than four billion people, killed more than 1.2 million, and caused $2.97 trillion in losses to the global economy.

“This is clear evidence that in a world where the global average temperature in 2019 was 1.1 degrees Celsius above the pre-industrial period, the impacts are being felt in the increased frequency of extreme weather events including heatwaves, droughts, flooding, winter storms, hurricanes and wildfires,” the UN’s Office on Disaster Risk Reduction reported in October. 

A decade ago, the climate problems were not perceived as acute enough, the technology had not matured, and the solution set was basic. The urgency of the problem is now matched by the ability of technology to provide at least some of the answers. At the same time, the cost of producing energy from renewables – especially from photovoltaics and wind – has plummeted to a level where it can compete with fossil fuels.

Investor confidence

Investor confidence in green solutions is rising again. In 2018, Kleiner Perkins returned to cleantech with a $350 million fund from its spinoff company G2VP focused on digitizing industry. In October 2020, clean energy company NextEra Energy briefly overtook ExxonMobil and Saudi Aramco as the world’s most valuable energy producer – a “proof point that there are billions of dollars available for companies focused on renewable energy alone — and a sign that, finally, the floodgates may be about to open for companies that build their businesses to service a sustainability revolution,” according to Jonathan Shieber in TechCrunch. He also noted that Blackstone, Generate Capital, Warburg Pincus and the Canadian Pension Plan Investment Board were all investing heavily in renewable energy projects, while Lightspeed Venture Partners, Sequoia and Union Square Ventures were beginning to “plant flags around sustainable investments in startup companies.”

Even seemingly feel-good projects like cleaning up our lakes and rivers turn out to have solid business models. BlueGreen Technologies is ridding freshwater lakes in China, Africa and the United States of toxic algal blooms and was recently called in to treat Lake Okeechobee by Gov. Ron DeSantis in Florida. The young Israeli company, a recent addition to the OurCrowd portfolio, is already generating millions of dollars of revenue helping to solve a problem estimated to cause $20 billion in direct economic harm, $80 billion in harm to people’s health, and $170 billion in damage to the environment.

Attempts to reverse the disastrous impact of the Covid-19 pandemic could also trigger increased investment in green solutions. As governments plan multi-trillion-dollar stimulus packages to kick-start their slumped economies, an international coalition of local city leaders including the mayors of Los Angeles, Seattle, New Orleans, Montreal, Milan, Lisbon, London, Rotterdam and many others, said stimulus funds directed toward green solutions would spur a faster recovery, create millions of sustainable jobs and offer a rare chance to address the climate emergency by reducing emissions, preventing 270,000 premature deaths, saving $1.4 billion in healthcare costs and delivering economic benefits worth $280 billion over the next decade.

“Only a green and just recovery can help lift us out of this crisis, protect our planet, and lay the foundation for a more sustainable, equitable, and prosperous future,” said Eric Garcetti, Mayor of Los Angeles.

Times have changed. The climate problem is now obvious and acute. The technological solutions from sensors, IoT, big data and artificial intelligence have now ripened to the point where they can solve increasing numbers of the problems – and underpin sustainable business models. Now it looks like investors in cleantech can actually make money – and at the same time have an enormous impact on the future health of our society.