CleanTech’s Carnage and its Redemption

Background

The world experienced many disasters like the Gujarat Floods, Hurricane Katrina, Kashmir Earthquakes, etc, in the 2000s that caused damages worth billions and was referred to as the “decade of disaster” by The Guardian. Everyone agreed that there should be technological developments that would reduce the negative environmental impacts caused by climate change and it gave rise to a new industry named “cleantech”.

The gas prices were at their all-time high and experts predicted that they would continue to rise. There was massive consumer awareness sparked by then U.S vice president AL Gore’s campaign about global warming. It seemed like the perfect time for cleantech enterprises to enter the market and cleantech startups and venture capitalists fell in love just like Romeo and Juliet. Venture capitalists don’t expect all their investments to turn into gold, they expect few startups to turn into goldmines which would make up for the loss of the majority of the investment and cleantech startups seemed to fit this risk-return strategy.

The Carnage

Much like Romeo and Juliet, the love story between venture capitalists and cleantech startups would end in tragic demise. At the peak of the romance, venture capitalists flooded startups with $25 billion and they received huge government grants and subsidies but failed to see the perfect storm brewing. By 2008 the value of investments in cleantech startups fell to $5 billion. The first of many reasons was the sudden decline in oil prices which were prompted by hydraulic fracturing and horizontal drilling known as fracking. Natural gas prices which were expected to rise fell from $10 in 2006 to $3 in 2011. The next was the sudden fall in the price of silicon solar cells which plummeted by 85% in 5 years. It was due to several scientific breakthroughs and investments in solar cells by China and other Asian countries. As the startups were struggling financially with poor margins and dismal sales turned to venture capitalists who were suffering from an economic depression caused by the housing crisis of 2008. Naturally, funds dried out. Almost 150 cleantech startups filed for bankruptcy.

The Redemption

The success of an enterprise is guaranteed only when its system/technology is at least 5 times more efficient than what was used before. Cleantech startups focused more on speed and values and didn't have deep technological commitment. They often offered products that were less efficient than previous systems.

There was no clear engineering solution for improving effectiveness. There was no doubt that cleantech was a trillion-dollar market but what comes with it is ruthless competition. Many companies exaggerated their uniqueness and were providing similar products in the market. Instead of focusing on technology and product development, entrepreneurs focused more on funding and lobbying the government. Eventually, many companies failed but their mistakes gave rise to the new wave of cleantech.

Entrepreneurs have emphasized the “last mover advantage” in which startups can look back on the mistakes made by previous startups. Venture capitalists realized that cleantech companies will not yield the same return as IT companies or health tech companies. It is not fair to expect a 10x return from cleantech startups(which is reasonable for tech companies) because most cleantech startups take time to develop the technology and after entering the market, they go through several modifications. Cleantech startups fit the venture capital model but not a traditional one in which one would expect a prosperous return in 5 years.

Ernestine Fu, who is an investor at the venture capital firm “Alsop Louie Partners”, provided the perfect analogy, “investing in cleantech companies today is like ocean exploration in the early days, you either create a new trade route or end up in a big loss”. The early investments in finding trade routes turned out to be highly profitable and crucial in the subsequent development of modern economics. Bill Gates and a few other billionaires pledged to provide patient capital, invest early in cleantech startups, and endure poor returns in the short term.

Now there are venture capital firms that specialize in investing in cleantech. Investors can differentiate between entrepreneurs who walk the walk and entrepreneurs who talk the talk. The new wave of cleantech companies takes on a hybrid approach by focusing on technology and development rather than showing deep commitments to speed.

The Government played a crucial role in bringing back the investment frenzy in cleantech startups. The number of public policies that were favorable to cleantech startups has risen since the Paris Agreement in 2015. Governments are using creative policy designs to fund startups through debt, equity, incubations, matchmaking and grants. They are retreating from traditional ways of investing in public funds for cleantech Research and Development. The American government provides startups with access to laboratories and technical support when needed. The Clean Energy International Incubation center has built dedicated equipment in India and mixes public and private funds to provide access to the facilities of large electronic distribution companies. Many countries have set ambitious targets to reduce global warming by committing to zero carbon emissions and they are relying on entrepreneurs to achieve their targets.

Cleantech 2.0

Blackrock CEO Larry Fink, who manages the largest asset manager stated that “the next 1000 unicorns would be cleantech companies”. It was similar to the hyperbole used during the first wave of the cleantech boom but experts predict there wouldn't be similar repercussions. The Climate tech newsletter tracked over $16 billion in investments made in the year 2021. Products that were leading 10 years ago are lagging in terms of firms interested in developing technology. Food and water are the biggest categories of emissions today. That is the largest sector in which climate tech entrepreneurs are interested and is followed by transportation in second place and industrial in third place. This sectoral rearrangement exhibits how much lithium-ion batteries, wind, solar and other industrial services have matured over time.

In India, around 120 startups raised over $1.2 billion in investment. It was fueled by the rise in the demand for solar panels whose prices have plummeted and has identified maximum demand coming from tier 1 and tier 2 cities where power is failing. Due to several technological advances, biofuels are becoming cheaper and their rising demand is attributed to millennials who want to inculcate a sustainable lifestyle. Observing the exponential rise in the demand for electric vehicles, several automobile giants like Volkswagen are aggressively trying to electrify their vehicles. Other European, Japanese and Chinese manufacturers have followed suit. The cleantech revolution is growing stronger every day but is facing obvious challenges like the economic problems due to the recession. A sharp rise in inflation, rising world debt, and shrinking middle class are not favorable conditions for cleantech's stakeholders. Entrepreneurs must face imminent problems with creative solutions because they are creating the technology of the future.

Combining social causes and business can be very tricky. Entrepreneurs often focus on the social cause and neglect focusing on the business part. It was a mistake made by entrepreneurs in the first wave of cleantech. Tesla is one exception because it constantly focused on developing technology and growing its market share rather than getting caught up on values. How often do you see more money invested in a once failed industry? Giving up on cleantech companies is not an option. More mistakes will be made, and investors might run out of cash but money should be continuously invested in cleantech because the technology created by these companies will save your life and is crucial for humanity's survival.