Venture capital can jump-start sustainable-energy technologies and projects, but it will take far more financial muscle to bring them to fruition. That was a key message of panelists who discussed the question, “Can Venture Capital Really Influence Environmental Sustainability?” at the Wharton Global Alumni Forum in San Francisco.
“The American venture capital model may not be the best approach to financing cleantech projects,” noted moderator Eric Orts, Wharton professor of legal studies and business ethics, and director of the Initiative for Global Environmental Leadership (IGEL). “The Chinese provide direct government support and they are beating us with consistent funding. There are also high levels of government funding in Europe, and maybe that’s an indication we need policy alternatives.”
Without government or major private backing, many promising U.S. companies are left to languish in the so-called Valley of Death — the gap between receiving startup funding and producing a commercial product. Those stuck in the valley include companies with a host of innovative ideas. Among them are technologies covering wind and solar power; energy efficiency; water purification; fuel cells; algae as a fuel stock, and cellulosic ethanol from non-edible parts of plants.
“You need more than venture capital to get to launch,” said panelist Bernard David, a serial entrepreneur and fellow at IGEL. “To reach the commercial stage, you often need $100 million or more, so your choices for that level of funding become private equity firms, large companies that have enough cash on their balance sheets, or the public markets.”
Meanwhile, the pace of venture funding for cleantech is growing, according to panelist Jon Krahulic, global head of clean technology banking at Bank of America. Krahulic noted that 20% of venture funding now goes to sustainable energy efforts, up from just 3% in 2005.
Bank of America is committed to investing $20 billion in renewable energy sources and sustainability over the next 10 years. But the money won’t be there to shore up shaky companies. The firms most likely to get funded are those that can compete in the marketplace without subsidies, Krahulic added.
However, even healthy companies are going to have a hard time finding sources of large-scale financing in the near term, given the fragile state of the global economy. “Project financing,” says David, “became very difficult to obtain with the economic downturn, and that’s why there has been such an emphasis on government loan sources.”
Private funding remains available to companies that present a compelling case, said Chris Hansen, director of corporate strategy for the global information company IHS and a speaker at the Wharton Energy Conference in 2010. For example, some private equity funds are now cash-rich and becoming less risk-averse, Hansen said. “They are chasing after some earlier-stage investment,” he added. But for many American companies unable to find that private financing, waiting for elusive government funding has become a way of life.
U.S. Government Support Continues to Lag
U.S. Energy Secretary Steven Chu recognizes the challenges ahead. “There is a race under way to develop the clean energy technologies the world will demand,” Chu told a Department of Energy (DOE) conference last February. “China, the European Union countries and others recognize there will be huge opportunities, and they are investing big money.”
Spain is the current investment leader in terms of the size of its economy. Chu showed a slide in which Spain’s clean energy investments totaled 0.71% of the country’s Gross Domestic Product (GDP). Spain was followed by China (0.70%); Great Britain (0.51%); Brazil (0.47%), Canada (0.25%) and India (0.19%). The United States trailed all those countries with just 0.13% of its GDP devoted to investment in cleantech. However, Spain’s 2011 debt crisis and credit downgrade may push it out of the lead.
Strong and consistent government subsidies have borne fruit in China, Japan and Europe. China has surpassed the United States as the largest investor in clean-energy technologies in terms of the overall size of its investment. And while the 51% increase for U.S. cleantech funding between 2009 and 2010 may seem dramatic, it was dwarfed by the 273% gain for the period in Mexico, according to Bloomberg New Energy Finance. Also showing big gains were Italy (207%), Australia (119%) and Canada (56%).
The rise of Asia’s “Cleantech Tigers,” a group that includes China, Japan, South Korea and India, has been strongly buoyed by government spending. Beijing pledged $200 billion in funding for Chinese green initiatives in 2009, topping the U.S. by 79%, according to John Adamo, a capital markets associate at Think Green Global Advisors. With 16 of the world’s most polluted cities, China has a powerful incentive to shift from its traditional reliance on coal power to renewable sources. China’s goals include production of 20 gigawatts of solar power and 100 gigawatts of wind power by 2020. China wants to generate 15% of its energy from renewable sources by that date, and has begun installing the low-loss, high-voltage transmission lines that will make this possible.
The China Development Bank Corporation has been a major funder of cleantech projects. The bank, lent Chinese wind and solar companies $35.4 billion in 2010, according to Bloomberg Businessweek. By contrast, the United States provided $4 billion in grants and $16 billion in loan guarantees to American wind and solar concerns last year.
South Korea also is coming on strong. While Seoul’s support for cleantech is less well-known, the country’s installed solar base has grown at a 52% annual clip since 2001. And the “Green New Deal” that South Korea unveiled in 2009 assigns $84 billion to the cleantech sector, with $46 billion of that earmarked for technology development. South Korean startups are also eligible for tax benefits and reduced import tariffs.
The United States lags in funding even as it enjoys a substantial edge in innovative technologies. Microsoft founder Bill Gates noted last spring that the country holds a “dominant position” when it comes to “the power to innovate” in energy. Speaking at a fundraiser for the clean-energy nonprofit Climate Solutions, Gates stated: “I know of 100 great new energy ideas, companies being started. I’d say 70% of them are based here in the United States, even if they’re looking at doing some manufacturing [elsewhere].” The Chinese “need our innovation,” said Gates, “and any solution that turns the energy game into a nationalistic one-upsmanship thing isn’t going to get us where we need to go.”
Examples of technologies that were developed but never commercialized in the United States include the high-speed magnetic levitation (maglev) train, which can travel more than 300 miles per hour by using magnets to rise above and zip along a guideway. Maglev technology has found willing takers among transit systems in Europe and Asia. But when new technology relocates overseas, it takes jobs and supplier contracts with it.
Here Today, Gone Tomorrow
U.S. government support for cleantech has been sporadic. Hansen of HIS cited a telling example of here-today, gone-tomorrow cleantech funding. From 1998 to 2000, Hansen worked for the U.S. Department of Commerce’s innovative Advanced Technology Program (ATP), an early cleantech sponsor that provided 50-50 matching grants of up to $500 million to help commercialize new technology. “The funding provided a huge halo effect,” Hansen said. “We saw many companies get access to capital after they were selected.”
But the program, which was launched under President George H. W. Bush, eventually lost political support. It turned into the Technology Innovation Program under the second President Bush and was “zeroed out” of the federal budget for fiscal 2011, which ends on September 30.
Some slack has been taken up by the DOE’s Advanced Research Projects Agency-Energy (ARPA-E), which received $400 million in 2009 under the American Recovery and Reinvestment Act. This agency is modeled on the military’s Defense Advanced Research Projects Agency, or DARPA, which spawned the Internet. ARPA-E’s mission includes addressing early-stage “Valley of Death” problems and supporting what the agency calls “creative ‘out-of-the-box’ transformational energy research that industry by itself cannot or will not support due to its high risk but where success would provide dramatic benefits for the nation.”
ARPA-E has funded dozens of projects supporting better batteries, biofuels and grid-level energy storage, among other technologies. But the agency, which requires private-sector matching funds for projects that get federal money, also faces the need to maintain political support for consistent funding. For fiscal 2011, $180 million was allocated ARPA-E through the appropriations process.
The agency’s awards to energy companies range from a few hundred thousand dollars to $10 million and are designed to support “really disruptive game-changing technologies that can have huge impacts,” according to Ilan Gur, senior advisor for commercialization at ARPA-E, in an August interview with Wharton. Gur cautioned that ARPA-E doesn’t provide late-stage project finance. It supports companies that are trying to prove their technology or build their first prototype so that private funding can then come in.
As one of the few government agencies that finances innovation, ARPA-E is deluged with proposals. It received 3,700 applications for 37 awards in its first round of funding. “We’re extremely excited to see that the technologies we’re supporting have been able to help companies across the funding gaps,” Gur said. “It looks like we will have some of the game-changing impacts we were set up to provide.”
While the 2009 Recovery Act provided some project-level support beyond ARPA-E, any further large-scale cleantech funding faces an uncertain future. The stimulus package extended production and investment tax credits for renewable energy through 2012. This extension aims to boost commercial photovoltaic sector capacity 15% over a business-as-usual scenario, and to more than double the amount of wind generation that would otherwise be produced. But the extension is still a finite window, and the trend in recent years has been toward last-minute renewals that create market uncertainty about whether they will be granted. The production tax credit actually expired three separate times between 1999 and 2004, for example.
The Recovery Act also provided $80 billion in federal spending for renewable energy. This included grants covering as much as 30% of the installation cost of renewable energy facilities. Also included were $11 billion to modernize the power grid, $4.5 billion to make federal buildings more energy efficient and a DOE loan guarantee program. It was a massive boost for the sector, but also one-time funding rather than steady support. That level of stimulus spending is not likely to be repeated anytime soon.
Government funding affirms a company’s technology, making it easier for the firm to locate other sources of capital. Obtaining DOE loans or loan guarantees is “a pretty laborious process to go through,” said panelist David. But for the lucky few that clear all the hurdles, the affirmation is a huge vote of confidence.
David pointed to the positive impact of government support on Palo Alto-based Tesla Motors. The maker of all-electric vehicles received a $465 million low-interest loan from DOE in 2009. Tesla then obtained a $50-million investment from Toyota and $30 million from Panasonic in 2010 and raised $226 million by going public that same year. “Tesla would never have made it to market with just venture capital,” said David. “It needed, and got, larger funding. All of it came through.”
But for every Tesla, there are 20 companies that haven’t reached the commercialization stage for want of project financing. Government funding remains an essential, if flawed, pathway for them. “Given unpredictable regulatory trends,” noted moderator Orts, it’s difficult for governments to plan what to subsidize, and also to demonstrate that they have been successful with their tech funding.”
Yet Washington does have a good track record of funding new and unproven technologies that business is later able to capitalize on, Orts added. He cited NASA’s Apollo man-on-the-moon program, which led to such innovations as freeze-dried food, effective water purification, commercial fuel cells, insulation that was later used in green buildings, and flame-resistant textiles that are now used to protect firefighters and soldiers.
The Military Option
Orts pointed to DARPA as a defense agency that is providing crucial investment to startup companies while pursuing its own strategic energy independence. For example, algae fuels producer Solazyme holds two U.S. Navy contracts totaling $8.7 million to deliver demonstration amounts of algae-based jet and ship fuel. The South San Francisco company also develops algae-based products in areas as diverse as cosmetics and food. While the Navy contracts are hardly large enough to commercialize algae fuel, they provided considerable momentum to Solazyme and helped the company attract other investments.
A military contract boosted Bright Automotive, an Anderson, Ind., startup that has developed a plug-in hybrid delivery van called the IDEA. Bright ran through startup backing from Google, Johnson Controls, Duke Energy and others, but then hit a wall in locating funding to commercialize the IDEA. The U.S. Army provided a short-term lifeline in 2009 in the form of a $1.4 million contract to test the IDEA in non-combat military applications. Bright then received $5 million from GM Ventures, the automaker’s investment arm, in 2010.
A much-needed $1.29 million Army contract also helped EnerDel, an Indianapolis supplier of rechargeable lithium-ion batteries for electric cars from Volvo and Norway’s Think Global. The contract calls for EnerDel to develop batteries for a hybrid version of the Army’s Humvee. “Defense funding is a good alternative — if you can get it,” said David. “You can’t count on government funding, and it’s important to hedge your bets and look for other possible sources.”
Indeed, startups that hope to cross the Valley of Death need a clear timeline and a path to the market, according to James Balaschak, energy and resources principal at Deloitte Consulting and a speaker at the Wharton Energy Conference in 2010. Such companies “have to show they’re in control of where they’re going and how they will spend the cash,” he added. “It can’t just be throwing money at their ideas.”
That’s especially true in today’s financially constrained investment climate. The projects most likely to win private and government support, said Orts, are those that maximize energy efficiency and “can immediately show cost savings” that justify ongoing investment.