Cleantech Temporarily Out Of Favor, But Not For Long

You may have noticed that cleantech is "out of favor" right now, but that’s a temporary situation and some of the biggest venture capital investors remain committed to it.

It’s become a losing venture to invest in most any cleantech stock and it’s a hard time to be looking for capital from the venture investment community.

Natural gas prices are low, making it hard for clean energy stocks to compete. That combined with the austerity environment in Europe has led to an oversupply of wind turbines and solar panels, and thus low prices and tiny margins for manufacturers.

But renewable energy manufacturers are not the only kinds of companies that make up the cleantech universe, and that’s the key, says venture capital investor Vinod Khosla in a blog in Forbes. 

Those that invested in the few areas that depend on subsidies – clean energy and advanced battery technology, for example – aren’t doing well. Khosla, on the other hand, invests across cleantech in Khosla Ventures. 

"With our sustainability strategy, we invest in many different categories – utility-scale clean energy generation (solar thermal), distributed generation (rooftop solar or efficient power generation engines for buildings), mechanical efficiency (engines), electrical efficiency (LED lighting), batteries, biofuels, biochemicals and bioplastics, materials (glass that blocks light at the push of a button), and agriculture (reduced fertilizer use) and food (produced more efficiently). This diversity limits the effects of any one segment going out of fashion, reducing the risk of the entire portfolio," explains Khosla.

He expects almost all of these categories represented in his portfolio to be profitable. 

Unfortunately, cleantech is also out of favor because of the press. They too tend to view cleantech as wind, solar or other energy generation techologies, and ignore a broader view.  

And they fall into the trap of repeating a few well-publicized and politicized failures. "Pundits in search of stories focus on the examples of a few well-highlighted but probably predictable failures, like Solyndra and A123, thus scaring off potential investors and, unfortunately, it appears that fewer good ideas are getting funded," he says. 

That’s led many investors toward softer deals, becoming wary of investing in high risk, capital intensive renewable energy start-ups.

Every investor knows that "for every 10 startups with new technology ideas, there are, at best, only a few winners." This is how the failures of Solyndra and A123 should be viewed, he says, not as representatives of failed technologies. Investors make their money on the few startups that win and strive to make more money than they lose overall.

Since 2006, when Khosla Ventures formed,"returns have well exceeded typical venture funds, be they clean tech, information technology or biotechnology funds." Their latest fund was oversubscribed during a tough time for the venture industry, with institutional investors ponying up $1 billion.

Even now, when cleantech companies are "out of fashion," strong companies with highly differentiated technologies are getting funded, he says. Raising capital takes longer and is more of a grind than when cleantech was hot. In 2012, Khosla invested in 11 companies at increasing valuations. Together they raised $500 million in equity finance and much more in debt.

Khosla Venures portfolio contains 60 cleantech firms. Among the successes so far is the sale of solar themal company Ausra, to Areva for $250 million after venture capital backing of $130 million. 

Recent investments include LightSail Energy, which is developing a "breakthrough" energy storage technology based on compressed air. Blue River Technology uses robotics, computer imaging and artificial intelligence to develop a no-chemicals approach to eliminate weeds in agriculture. EcoMotors International is working on cleaner diesel, gasoline and compressed natural gas engines. Stion, one of the few solar companies managing to raise funds, makes low cost thin-film solar modules. And Weatherbill sells weather insurance.

Khosla Ventures, Draper Fisher Jurvetson, Kleiner Perkins Caufield & Byers (KPCB), New Enterprise Associates, VantagePoint Capital Partners and Braemar Energy Ventures are some of the most active venture capital investors in cleantech right now.