As the “Venture Capital (VC) guy” for the Office of Advocacy, I have been frequently asked whether venture capitalists are truly jumping into green technologies with both feet or are tentatively dipping a toe into the water. The answer is more complicated than those questions suggest, but many VCs are going long and strong into this sector.
In fact, according to the National Venture Capital Association, clean technology investments have increased from 90 deals worth over $550 million in 2005 to 277 deals worth over $4 billion in 2008. Last year, three of the five biggest IPO’s were in the solar industry.
Why is this important? Venture capital investment is one of the clearest signs of a technology’s potential acceptance into the marketplace. Without it, many technological breakthroughs would not make it to the market. According to a 2007 Global Insight study, venture-backed companies accounted for 10.4 million jobs and $2.4 trillion in revenue in the U.S. in 2006.
The issues come down to diversification and the ability of the industry to produce a VC exit strategy. Most VCs have a diverse portfolio of investments, which could include biotech, computers, financial services, medical devices, or other industry sectors. This diversification is important for the longevity of a VC fund and the ultimate positive outcome. As is the case with biotech investment, VCs started small but have become very active in the market in recent years. In fact, many VCs are raising or have raised money specifically to invest in a diversified portfolio of green technologies.
The second issue concerns viability of green industries. For years, the country has pushed toward cleaner and greener technologies, but cost obstacles have limited the success of this effort. With the government’s push into making these technologies cost efficient, from tax credits and funds included in the recently passed American Recovery and Reinvestment Act (ARRA) to requirements for utilities to provide a percentage of their power through clean technologies, the commitment to clean and green will make more and more VCs jump into the market.
The green technology push has already had a tremendous affect on the cost of solar. One company based in Arizona has recently announced that it has reduced manufacturing cost for solar modules to 98 cents per watt, breaking the $1 per watt price barrier. From 2004 through today, the firm’s manufacturing costs have declined two-thirds from over $3 per watt to less than $1 per watt. As these types of breakthroughs become more pronounced, the ability of the market to stand on its own without government subsidies improves. As we get closer to this reality, you will find many VCs actively investing at least a portion of their portfolio into green technologies.
Additional data and information on VCs and green technologies is located at:
www.businessweek.com/smallbiz/content/jun2006/sb20060620_080126.htm
— Michael Hull – Regional Advocate