Silicon Valley VCs look to clean up on techs

Published: May 1 2008

Some of Silicon Valley’s most successful venture capital firms have raised hundreds of millions of dollars in the past few weeks to invest in green technologies.

As they look for ways to deploy their mountains of cash, some VCs are looking beyond solar energy and biofuels – the two sectors that have attracted much of the attention and investment – towards other technologies that offer the prospect of quicker returns.

“We have identified 50 sectors in green tech. Two of those, solar and biofuels, are the most popular. [But] we think there are outstanding investment opportunities in [other] sectors,” he says.

Solar energy, biofuels and other technologies such as clean coal have the potential to increase the supply of alternative fuels. But opportunities on the demand side are just as promising, says Steve Vassallo, a partner at Foundation Capital.

“We think returns will come faster on the demand side than on the supply side,” Mr Vassallo says. “We think you can build the companies faster.”

Foundation last month closed a $750m investment fund, with $250m earmarked for investment in green technology start-ups.

Opportunities on the demand side include energy-saving building materials, “smart-grids” and other energy management systems for buildings, and energy storage.

Mr Vassallo points to EnerNOC, a smart grid company backed by Foundation that went public last year. EnerNOC makes money by helping energy companies and other industrial customers manage their energy demand.

“EnerNOC went public in five years,” says Mr Vassallo. “That’s unheard of on the supply side. There are fuel and solar companies that have been [demonstrating] their technologies for five years.”

Industrial applications are another potentially ripe area for venture capitalists working on the demand side of clean tech.

The industrial processes for creating cement, for example, are nearly a century old and involve huge amounts of energy. They also consume copious amounts of water, a resource that requires large amounts of energy to move. More efficient processes could have a significant effect on the amount of energy required to produce such building materials.

Demand-side technologies have another advantage that makes them attractive to venture capitalists: they are less reliant on government subsidies than supply-side investment such as solar installations or biofuels.

KPCB’s clean tech strategy is based on the assumption that oil will remain above $45 a barrel and that government policies will continue to be favourable towards clean technology.

This could be a safe bet, given the supply constraints that have led to record oil prices and the growing consensus on the need for action on climate change.

The increased focus on demand-side technologies does not mean that solar energy and biofuels are falling by the wayside. Interest remains strong.

“There are quite a few companies building pilot plants and small production plants,” says Vinod Khosla, founder of Khosla Ventures, a prominent green tech fund that has made about 45 investments in clean tech companies since it launched in 2004.

“It’s not that the supply side isn’t going to make folks money,” says Mr Vassallo. “It’s that it’s going to have more risks associated with financing – and you’re going to have to build your models around a different cost of capital.”

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