— Deborah Cohen covers small business for Reuters.com. She can be reached at firstname.lastname@example.org —
By Deborah L. Cohen
Total investments in clean technology - including wind, solar, bio-fuels and a host of related technologies - totaled $4.09 billion through the end of 2008, compared to just $1.44 billion in 2006, according to the National Venture Capital Association (NVCA). That’s still just a fraction of the overall $28.2 billion in venture capital investments but the area is steadily gaining momentum.
In a recent interview with Reuters.com, Mark G. Heesen, president of the NVCA, the leading trade association for venture capitalists in the United States, representing the interests of more than 450 member firms, discussed the growing interest in clean technology and how this fast-growing sector will shape the future of early-stage investing.
Despite a fall-off in interest in the sector in the first quarter of 2009, Heesen expects clean-tech to eclipse the traditional VC mainstays such as information technology and medical devices, within five years, helped in part by the federal government’s commitment to reduce greenhouse gas emissions and dependence on foreign oil.
Here are excerpts from the interview.
Reuters.com: Clean tech investing still trails information technology and life sciences, among other sectors. What’s the outlook like?
Heesen: Certainly the first quarter of this year you saw a dramatic fall-off. One quarter does not make a trend. Five years ago about 2 percent of (venture capital) money was going to clean tech. Today it’s about 15 percent. I honestly believe in the not-too-distant future this sector will be the largest sector for venture investment. It’s hot. There’s no question about that and there will be lots of money lost in this area, but from a long-term perspective, this is what I call quintessential venture capital. It’s an area that’s crying out for fundamental change, and, as we call it, for destructive technologies that totally upset the existing structure.
Reuters.com: Overall, how would you define what’s happening in clean tech?
Heesen: From a venture capital perspective, what clean tech represents is a convergence of a lot of other technologies that we’ve seen in the past. This is an area where you’re really seeing a convergence of life sciences, IT, communications, all of these different sectors kind of melding together. The energy area is where we seem to be focused on.
Reuters.com: What areas are covered under the clean tech umbrella?
Heesen: We’re also talking about what we call brown tech and that is trying to make the existing areas of energy consumption more efficient. If we’re going to dig a well, it’s getting 100 percent of the oil out of that well, not just 82 percent. If we’re going to burn coal, we want a more efficient, cleaner way of burning that coal. It’s at least trying to upset the existing status quo when it comes to energy production and consumption. The other misconception out there is that all of these projects are huge, huge projects - wind farms and solar farms. But a lot of what we do today is very simple: it’s things like better building materials, better lighting, better carpeting, better paint, all of these kind of mundane things that at the end of the day can actually save quite a bit of money. Water purification is another area. All of these areas are not as grandiose as some of these major projects, but they’re a very integral part of what we view as changing the existing system.
Reuters.com: How does clean tech fit with broader trends?
Heesen: You have governments around the world, now including the United States, which understand its importance from an energy policy perspective, from an economic perspective and from a national security perspective. Governments … are willing to subsidize some of this change. Consumers around the world, particularly in Europe, are willing to pay, even pay a little more in this sector, because they understand global warming, and that this isn’t just a fraud perpetrated on the marketplace, that global warming is really something that we need to be concerned about. I think that in five years this will be the largest sector in venture inventing.
Reuters.com: How are venture capital firms adjusting to prepare for these investments?
Heesen: I see venture capitalists and venture firms bringing on experts in this area, as well as becoming much smarter in this area in general. I think people understand that there’s a societal good that can come out of this but there’s also money that can be made here. And you’re also seeing our investors, people that invest in us, colleges and university pension funds, willing to see venture capitalists invest in this sector. I actually think that’s a turnaround as well. They were very pensive a few years ago. I think they understand that this is an area that is ripe for investing.
Reuters.com: How are the abrupt changes in the automotive industry helping to shape clean tech?
Heesen: I think that’s what’s interesting with a place like Detroit or just even the Upper Midwest is that clean tech isn’t as much as a coastal phenomenon. What you’re seeing with clean tech - I call it almost the democratization of venture capital - there are going to be pockets around the country that have experts already in place in specific areas. In the Upper Midwest, people understand battery technology; a lot of these people have come out of the auto industry. I think this is going to become a strong area for that particular part of the clean tech equation. When you look at the mountain west, some of the best mining and engineering schools are out there. In the southwest, solar just makes perfect sense. When you look at clean coal, there’s a different part of the company that has experts. We could possibly see little fiefdoms around the country kind of spring up in these different centers of clean tech. If the infrastructure is there and the other experts are there and the entrepreneur is there, you’re going to create an indigenous area and the venture capitalists are going to hop on that plane and go to them instead of the other way around.
Reuters.com: So you see more VC firms developing in those areas as well?
Heesen: Our industry is actually shrinking. And I think it will continue to shrink for the next couple of years but I do think after that you’ll start to see an uptick. What you will see down the line are large venture capital firms that are industry agnostic, geographically agnostic, stage agnostic. And you’re going to see many more (smaller) firms like (Chicago-based) OCA that are more regionally focused, that are not going to be raising hundreds of millions of dollars, that kind of will stick to their knitting, will understand very much the local community … and will have a real pulse on a very specific geographic region.
Reuters.com: What kind of mood are you hearing from your members about these investments?
Heesen: I’m hearing much more optimistic notes today than I was just a few months ago. I’m certainly hearing a lot more venture capitalists encouraged by the very early stage deals right now. The entrepreneurs that are left standing right now are the true entrepreneurs. These are solid individuals that understand they are not going to make money overnight. These are very talented individuals who have been through downturns in the past, maybe not as severe at this one but I think understand and can relate to venture capitalists. What really is critical here is an exit market for us and we still haven’t seen that; we’re still not seeing M&A transactions at the levels that we need. Until we can make money and give it back to our investors, investors are going to be very skittish about investing. We still have that major issue to get through.
Reuters.com: What do think went wrong in the U.S. ethanol space, and where do you see biofuels heading?
Heesen: This is an area where you say government should not be in the job of picking technologies. Certainly when you have a lot of senators from not very populous states who have lots of corn in their states that are going to be able to drive an agenda that is maybe very positive from their angle but certainly not as positive from the economic perspective in general. Certainly oil going down to $40 a barrel did not help. I think there is absolutely still a role for ethanol, but the question is what type of ethanol? Is it cellulosic? Is it corn-based? Is it what they’ve been doing down in Brazil, what they’ve been looking at with sugar cane? There’s lots of different ways to skin this cat. We like to see the marketplace pick those winners and losers. At the end of the day, the marketplace does not look at things from election years; it looks at things from a long-term perspective.
Reuters.com: How well is the U.S. positioned in clean tech overall?
Heesen: When you look at the IT side, when you look at the biotechnology side, we’re not only the leaders, we were the creators in these very sectors. In the clean tech area, we’re not. We’re actually followers. When you look at the Germans and the Spaniards, particularly in solar energy, they have been very much more advanced than we have. When you look at the Brazilians in some of their ethanol products, once again many would say we’re behind the eight ball. When you look at consumers in general and the acceptance of alternative fuels - once again it’s a harder sell in the United States. I think that’s all turning, but we are not in the pre-eminent position in many of these alternative fuels areas. I think what clean tech shows us is that we are truly in a global economy and that the United States cannot take for granted that we are going to be preeminent in this next new wave of technological advancement.
Reuters.com: Do you see more cooperation between government and VC firms?
Heesen: What clean tech shows us is that government is even more important. (VC firms) are starting to realize that, particularly when it comes to clean tech, it (government) is a critical link. Basic R&D is done by the federal government and by its labs and colleges and universities. We need these small companies subsidized - they are not going to be able to compete against the Exxon Mobils unless they are subsidized. That runs counter to the basic premise of most venture capitalists. But they understand that in this particular area, these companies will not survive but for the help of the government pushing these technologies out into the market. We’re seeing more VCs come to Washington than ever before. Policy makers want to see them because they understand these are the innovators of the country and they need to know what they are doing.
Reuters.com: Ultimately, what characterizes these start-ups and how do they differ from other early-stage companies?
Heesen: This isn’t the 22-year-old IT geek who is going to create a new company. These are mostly people who have had experience in a very specific … and are bringing technical expertise to this, and that’s what we need. We also need some people with some business acumen as well. That’s going to be the tough sell in the end, trying to get people who understand both, but it is I think a different type of entrepreneur in this area. There’s more students interested in going into engineering, because of the clean tech arena; they want to find solutions in this very specific space. That’s what you’re going to get the young out of the box ideas. You have to have people thinking out of the box, particularly with the disruptive technologies. We do believe at the end of the day the Exxon Mobils and the huge energy companies will actually come to that same feeling; that a lot of these smaller companies are actually very worthy acquisition targets.