I’m probably one of the last people on the planet to watch Al Gore’s “An Inconvenient Truth”, particularly after its performance at the Oscars. But my wife and I finally did sit down and watch this thought-provoking documentary cum college lecture from our former vice president and Green Cheerleader-in-Chief.
I have to say it was far more impactful than I had thought it would be. The data presented was overwhelming and impressive. Recent cover story articles in The Economist and Business Week underscore the importance and responsibility we all have to address this issue. My wife and I are beginning to adjust how we operate as a family in order to attempt to reduce our carbon emissions. And it changed my thinking on all the hoopla over venture investments in the alternative energy market.
Like many others, I had dismissed the alternative energy investment efforts as pie-in-the-sky and inconsistent with the fundamental early-stage venture capital equation: invest small dollars in early-stage technologies that are 1-2 years away from commercialization and 4-6 years from creating enough value to sell to the public or, more likely, another company at a healthy multiple. At least that’s the equation when practiced successfully!
But most of the alternative energy projects we have reviewed appear to be more “science projects”, 4-6 years away from commercialization, very capital intensive and with uncertain exit potential and candidates. Further, this category seemed to me to be falling into the trap you see in numerous “hot” sectors – too much capital chasing too few ideas, thereby increasing price competition for the best deals as well as an oversupply of exit candidates for a small number of exit targets, all resulting in depressed return potential. The numbers bear out these warnings. Dow Jones VentureOne and E&Y reported last week that VCs invested $1.28 billion into 140 “clean tech” deals in 2006, up from $664 million and 103 companies in 2005.
But having seen Al Gore’s movie (and sitting with a few knowledgeable entrepreneurs in the space), I have changed my view on the sector. At least in America, it appears that the consumer mood has shifted such that “being green” is now being seen as a positive brand attribute, akin to “organic” or “all natural”. Thus, it is likely that large industrial companies will begin to make aggressive acquisitions of technology, once they are proven out by aspiring entrepreneurs. Perhaps the time horizon will still be elongated, but state and national subsidies are becoming more available to supplement equity capital. When an investor gets in early enough, you never know what might happen when big dollars from multiple sources get thrown at arguably the biggest problem on the planet.
And if there does end up being an overall over-investment in alternative energy industries? Good for the planet. But bad for our returns.