Clean Energy Fusion Center     

The failure of clean technology ventures to live through the “Valley of Death” occurs when private and public funding is either unavailable in the first place or runs out, where the company’s net cash flow does not close the funding gap. 

Clean tech ventures face this gap more frequently than other companies because of four reasons: (1) clean tech ventures take longer than conventional VC-backed investments to come to fruition, frequently longer than the 10 year life of VC funds (for non-family offices), (2) alternative funding from state and federal government is either not readily available or unable to be obtained in a reasonably timely fashion, (3) both M&A and IPOs exits do not exist to incent early investors to provide directly or indirectly the resources necessary for the venture to get out of this jam and finally, (4) debt (not including venture debt tied to equity financing) or project financing is not typically available to early stage ventures. 

The “Valley of Death” facing clean tech ventures is not a new problem. 

One thing that is relatively new is that since the Obama administration took office both federal and many state governments have tried industriously to address this funding gap. The provocative new thing is that as a result, in the earliest stages of a clean tech venture’s lifecycle, a “Cradle of Death” has become more apparent.

After a promising third quarter of 2009, VCs again, but this time inexplicably, dramatically decreased U.S. clean tech funding. For VCs the assumption is that, in general, raising their own funds is hard to do these days so make many, smaller bets which pay off in a shorter timeframe. There is also the view that the VC community has stepped back, in response to US governmental support for early stage ventures.  This would amount to a ‘wait-and-see” approach that includes a preference for later, less risky rounds.  (I’m sure that the expression “no more science projects” has been bellowed in partner meetings more than once over the last six months.) In practical terms, many multiple $25, $50 or $100+ million clean tech investments for 10+ years is now untenable for any individual VC. Then who is going to step up to this funding gap? 

Angel investors, in turn, have also diminished their investments in early stage clean tech ventures. Angels, like VC are concerned about results vis-à-vis stock market returns but have an additional apprehension with clean tech investing: Staying power. Angels do not have the resources to play in later rounds of financing. An investment of $25,000 or $50,000 or $100,000 in an early stage clean tech venture is quickly washed out when $10’s and especially $100’s of millions are invested. Supporting green or clean ventures is commendable; but when money is short supporting ventures with dwindling value do not make sense. Also, many attractive investment prospects are being turned out by other angels, organizations like TechStars and other sub-$50 million VC funds. These early stage software and Internet companies are smaller and have shorter exit horizons than clean tech startups – a high priority on all angel investors’ wish lists.

To be clear, the “Cradle of Death” is especially vexing for clean tech ventures because early stage expenses, such as lab costs, prototypes, intellectual property (IP), other pre-deployment or commercialization costs and requisite salaries are much higher than, for example, software ventures. “Sweat equity”, for example, is much harder to negotiate with engineers because clean tech ventures’ period of engagement is longer and requires full-time employment. Put simply, it takes longer and more resources for a clean tech to get off the ground.

So today, interesting, important and necessary clean tech ventures are not even making it to the “Valley of Death”. They are suffering an ugly, tragic demise in the “Cradle of Death”.

There are many ideas and programs underway which may be able to address the “Cradle of Death”. Here are four ideas and solutions to the “Cradle of Death” problem in Massachusetts which are applicable to other states and deserve consideration:

1. Twenty-five $25k-$250k investments. After a web-based application process is put into place, a government advisory board of seven entrepreneurs, VCs and fellows or academics should be formed to quickly recommend 20 companies deserving of $50 to $100,000 investments to jump start a new group of clean tech companies. This can take 3 months to do if the right people are selected. Private matching funds would be useful, here, as well.

2. Corporate Investment. Government, trade associations and VC have to band together to get corporations to step up. Corporations have to provide part-time jobs to clean tech entrepreneurs to help support venture formation and growth. Corporations also have to fund more early stage investments. (Isn’t this more productive than funding political action committees and elections?)  Regulated utilities should also be so required to do the same. These costs can be spread among ratepayers.

3. Matching Sovereign Funds. Government and trade associations should work with sovereign funds (like the Saudi Arabian General Investment Authority) to create a pool of early stage capital and match their funding. 

Finally, the fact is that time heals all wounds. (I suspect some in government, trade associations and others are betting on this.) When the credit and equity markets improve and more exits occur, there will a natural inclination to fund “wait-and-see” or “out of favor” investments – like clean tech ventures. Then more funding will naturally flow to clean tech startups. Meanwhile, China leaps ahead of the US in this sector as well. This is a passive solution to the “Cradle of Death” but nonetheless real.  And one from which the US innovation economy may not recover.

Totten Energy, one of the companies operating out of the Fusion Center, we're currently working on a community renewables development project that includes a small turbine of less than 1MW.  I'm amazed at the problems that our engineering design and construction partner is having sourcing a turbine.

We've primarily been looking at European suppliers.  The first supplier, after about a month of email badgering, was happy to work with us as long as we were willing to purchase 5 turbines.  I guess it's not economical for them to ship less than 5 across the Atlantic.

Supplier number two was much more accommodating.  They supplied great information and a nice quote, but then just as we thought we had our supplier we received notice that due to consistent electrical failures with their U.S. installations they were suspending U.S. sales.

So, the quest continues.  Got any ideas?