For folks in the energy and cleantech industries, you’ve likely read or heard about the paper the MIT Energy Initiative recently published, “Venture Capital and Cleantech: The Wrong Model for Clean Energy Innovation.” The impressive report, co-authored by Dr. Ben Gaddy, Director of Technology Development, Clean Energy Trust; Dr. Varun Sivaram, Douglas Dillon Fellow, Council on Foreign Relations; and Dr. Francis O’Sullivan, Director of Research and Analysis, MIT Energy Initiative, details the state of venture capital investment in cleantech startups since the sector’s boom in 2006, its bust in 2009, its current status in 2016 and its future.
Sadly, their research findings aren’t surprising, especially for those who have been working in the cleantech space over the past 10 years of ups and downs, but the key takeaways validate what most in the industry have believed to be true. Cleantech companies, particularly those focused on hardware, materials or chemicals:
- require a lot of capital;
- take a long time to develop, much longer than the timeframe VCs prefer;
- are rarely acquired due to their high risk; and
- are not a strong fit in commodity markets because of their small margins.
A notable aspect of the report is the way in which the authors compared the risk and reward for VC investment in cleantech, software and medical technologies between 2006 and 2011. Interestingly enough, the report states that “across all rounds of funding, startups in the three sectors received similar amounts of funding at similar points in a company’s lifecycle,” because during that timeframe VCs were investing fairly evenly across the sectors and expecting them to perform similarly.
Unfortunately, the cleantech sector stood out as the lowest performer among the three sectors because cleantech investments yielded lower returns and internal rates of return than the two other sectors during that timeframe. These results were found to be especially true for cleantech companies commercializing new materials and processes which ultimately led to more cleantech-focused software or software-as-a-service startups.
Since all cleantech companies will never fit the perfect square peg VCs are looking for them to squeeze into, its time for the cleantech sector to uncover more unique funding and innovation models. The report outlines a variety of potential options, including:
- involving institutional investors in cleantech investing, especially those who are okay with long-term return on their investments;
- having public policy makers encourage more cleantech investment by increasing access to alternative funding outlets like SBIR grants;
- deepening the Department of Energy’s support of entrepreneurship at national labs and providing more access to federal research institutes;
- continuing the development of a national manufacturing program; and
- extending governmental incentivization of regional partnerships between large corporations, startups and incubators.
All of these suggestions resonate with our community at Greentown Labs but the final two bullets really caught our eye. Why? Because as an incubator that strives to provide all of the resources our member companies need to grow, we believe partnerships with corporations serve as a key element in helping move our startups closer to commercialization. Our wide array of corporate partners and sponsors play a critical role within our community by providing advice, strategic consulting, potential investment and pilot opportunities for Greentown Labs member companies.
Moreover, we’ve developed a first-of-its-kind accelerator program called Greentown Launch, in which we partner with a corporation that’s interested in one specific technology. We work with the partner to identify a select group of startups working on that technology and then run a 6-month prototype accelerator program to help selected companies advance their prototypes into a market-ready product. Learn more about our current Launch program with DSM here.
The report’s recommendation to establish a national manufacturing program reiterated another startup need Greentown Labs is already addressing. In 2014 we launched the Greentown Labs Manufacturing Initiative in partnership with the Massachusetts Manufacturing Extension Partnership to better facilitate connections between startups and manufacturers throughout Massachusetts and to help both parties better understand how to work with one another. Since its launch, the Greentown Labs Manufacturing Initiative has helped create more than 20 signed contracts between local startups and local manufacturers which not only helps our startups in their development but also helps our local economy. We’re incredibly proud of the impact the program has had on both startups and manufacturers because we believe if you have a great idea in Massachusetts, you should be able to make it in Massachusetts.
The Greentown Labs team thanks Drs. Gaddy, Sivaram and O’Sullivan and the MIT Energy Initiative for sharing this interesting and thorough report with the world! Having the numbers and data regarding VC investment in the cleantech space is helpful and highlights how we all need to continue working together to uncover new and creative funding opportunities for the next generation of clean technologies. Onward and upward!
To learn more about the Venture Capital and Cleantech report, check out some of these great resources the team of authors published alongside the formal paper:
- On the Clean Energy Trust blog: Why Silicon Valley and Cleantech Don’t Mix
- From Greentech Media: Software Ate Cleantech: Now What?
- From a Greentech Media Podcast, the Interchange: Cleantech Venture Capital Is Dead! Long Live Cleantech Venture Capital!From Energy
- From Financial Times: Clean Energy Technology Investors Need Fresh Support After VC Losses
- From Council on Foreign Relations: Why the Silicon Valley Model Failed Cleantech
- From Greenwire: Venture capital ‘broken’ for clean energy — analysis