We can thank Moore’s Law for the VC cleantech bust

One of the more in-depth pieces on the cleantech venture capital boom and bust cycles was published in Wired this week. While not all of my peers will agree with me (I have already gotten in some heated debates over this), I think the story was a solid analysis of how a lot of VCs piled into cleantech investing in 2007 and 2008 with not a whole lot of knowledge of the sector and now have backed out of it (we have covered this a lot, too). The long-term promise of cleantech itself isn’t dead, but the boom VC cycle has clearly ended, much the way the dotcom boom went bust and the promise of the Internet arrived later on.
But another layer to this story is that one of the key misplaced assumptions that VCs made in the cleantech boom times is that the rapid progress of Moore’s Law — which says that the number of transistors that can be placed on a chip doubles every two years — could be created for cleantech with a little bit of VC funding and Silicon Valley smarts. The notion (which is seductive but not true in most cases) is that the traditional energy industries throughout the world just didn’t do the right kind of innovation and that the Valley’s can-do spirit and open wallets would be able to unleash this potential.
It could still happen in a few cases: Tesla (s TSLA) has this mentality for the traditional auto industry and electric cars and seems to be doing well. However, unfortunately there is no Moore’s Law that we have discovered for energy, clean power or batteries, so the two-year rapid progress rate doesn’t apply to these verticals. It is going to take decades and billions of dollars in funding to move the needle on many of these industries, which Professor Vaclav Smil has written about in-depth.
The slow movement of progress for batteries and biofuels has been particularly obvious. Venture-backed next-gen biofuel companies have routinely set time lines of a few years to scale up into commercial behemoths that can compete with the oil industry, but none of these Valley startups have successfully made it to that commercial competitive stage yet.
Battery and electric vehicle companies are commonly struggling with batteries that are too expensive and not enough demand. Battery maker Ener1 declared bankruptcy last week, while Think, Aptera and others have closed shop. When I visited Jay Leno’s garage for our Green Overdrive Show, he drove me around in a 1900s-era electric car, and the range of the car battery was 100 miles — about the same as the Nissan LEAF.
As Bill Gates put it a couple of years ago in a fascinating talk on energy, “We’ve all been spoiled and deeply confused by the IT model . . . There are things that just don’t move forward. Nuclear energy stopped in the 1970s. We have to have a blended model, the optimism of our IT, and the realism of the energy sector.”
So what’s next?
There are a few things that will dominate the cleantech discussion going forward. There will be an increasing emphasis on trying to get government funding for incremental research in these areas. That will be a difficult request for the DOE, but programs like ARPA-E (high-risk early stage grants) seem to be working. Gates and Bill Clinton will be speaking at the upcoming ARPA-E event in Washington, D.C., this month. Other countries’ governments — like India and China — will be leading this.
There will also be a greater focus on the intersection of cleantech and IT. Investor Sunil Paul and others are putting money into the so-called cleanweb, where the returns and time lines do look a lot more like IT’s and Moore’s Law’s.
Other sectors like solar panels seem to have a better progress rate and cost curve — though not equal to Moore’s Law — and will do just fine. However, startup innovation in these areas when they transition to commodities becomes less common.
Also unfortunately I think there will be a lot more high-profile cleantech startup failures in 2012 and 2013. Some of these companies that raised hundreds of millions of dollars are maturing after five to seven years and will need to find exits or raise more money, and many of them will struggle.
Image courtesy of psd