Bridging the Cleantech "valley of death"

I was fascinated by this article by Wade Roush in Scientific American on the challenge of funding for higher risk technology such as cleantech (thanks to Hyperion Search for sharing the link). 

It is certainly an interesting dilemma. Roush argues that Venture Capital is “supposed” to invest in higher risk ventures, and whilst true, LPs require a good return for this risk; the inconvenient truth is that cleantech has, historically, provided lower returns than other sectors. In addition to the fact that nascent technology has a high failure rate, in energy in particular, the logical acquiring companies of successful ventures - eg utilities - have thin margins and low multiples themselves, meaning the typical exit price VCs can achieve in clean tech are paradoxically low for a high-risk sector. When considering this alongside the declaration of a climate emergency in many countries - and the clear need for new technology to facilitate meeting national and international targets - it is hard not to conclude that in most western countries the state isn't playing enough of a role. 

But how?

The problem is that market forces have created a cleantech “valley of death” between early-stage (accelerator, seed) investments where cheque sizes are small and more mature scale-ups where the technology has become more proven and the risk profile is acceptable for the traditional VCs. Different thinking is needed in this environment and The Engine’s approach of a longer term fund is a great step forward. Direct state investment and ownership is unlikely to yield greater results as it is hard to see the state being able to better select successful technologies and companies, whilst it risks diluting VC / founder stakes, returns and commitment. 

Perhaps, instead, we could look to the charity sector for inspiration. If the problem is that “tough tech” is high-risk but low-return, then the only solution is to bolster those returns for investors. Perversely, it might also result in the state competing against the private sector, driving prices higher. So-called “matching funding” in the form of tax reliefs to investors (institutional as well as individual) or grants to the companies - like the U.K. gift-aid or EIS schemes - are proven to work well and bring in more overall investment than direct state funding. An enhanced form of this for cleantech hardware and technology would allow the existing actors in the system to play their role whilst facilitating greater returns for investors and founders alike. By improving the risk-reward equation it would lower bar for VCs to invest in higher risk ventures and would attract additional funds to the sector in the form of new investors and VCs. Without it, I fear that we will go too slow in the short-term and risk a counterproductive boom and bust as the climate emergency escalates.

#cleantech #venturecapital #climatemergency #cleanenergy