Even if you don’t know the first thing about climate change, it’s likely that you’ve heard of Al Gore’s documentary An Inconvenient Truth. When the film was released in 2006, climate change took the mainstage and the investment world saw business opportunities in the clean technology sector.
That same year venture capital funds invested $1.75 billion into cleantech startups, dwarfing the hundreds of millions invested in previous years. Investments in cleantech seemed promising with higher oil and gas prices and favorable U.S. government policies. Startups – which were creating innovative solar panel, battery, biofuel, and other energy solutions – received investment. By 2011, VC funds had invested over $25 billion in cleantech startups.
However, these startups failed to generate expected returns and VC funds eventually lost more than half of their total investment. Although due in part to falling gas prices from fracking, a glut of solar from China, and a lack of exit opportunities for investors, these losses cannot be solely blamed on the cleantech sector.
Numerous studies have found that cleantech startups do not fit a traditional VC investment model. Argued by three MIT professors in a 2016 study, cleantech “does not fit the risk, return, or time profiles of traditional venture capital investors. And as a result, the sector requires a more diverse set of actors and innovation models.” How can we remodel investments in early-stage cleantech startups for better returns ? Here are three needed improvements.
1. Sourcing talent and ideas based on their potential
At an early-stage startup, cleantech founders rarely have both the science and business expertise required to bring their idea to market. Rather than focusing on the current skillsets of the entrepreneur, early-stage investors need to get better at evaluating the potential of an entrepreneur.
An entrepreneur’s current business knowledge is not a true indicator of their potential for success. For example, Bill Gates and Steve Jobs dropped out of college yet were successful entrepreneurs. If an entrepreneur is new to business, their potential to learn, grow, and lead are important indicators that investors can overlook.
In my experience at Echoing Green, the seed stage accelerator where I currently work, a founder’s potential is evaluated on the individual’s passion, leadership, magnetism, and resilience. Partnering with the right entrepreneur is critical. According to Alberto Gomez-Obregon, Director of Portfolio for Acumen, a global early-stage impact investor focused on low-income consumers, “at the end of the day, it’s all about the entrepreneur. It is crucial they have strong values alignment, character, grit and resilience before we consider investing.” These softer metrics can help identify the founder and company’s true potential for success.
Additionally, research institutions that fund cleantech ideas are not necessarily the best evaluators of how inventions will succeed in the market. Angelo Campus, founder of BoxPower (a current Echoing Green fellow) deploying modular solar microgrids, ran into trouble when his university’s priorities and the market’s needs didn’t line up: “My first prototype funded by my university developed functionality like speed of deployment, which I later realized was not a market need, and so I had to make later iterations.” Cleantech investors need to see beyond current product and market gaps and evaluate if a technical innovation can be transformed into a profitable product.