Analysis: green bubble?

The next US President wants to encourage clean energy. E&T looks at the green investment market.

As he prepares for power on 20 January 2009, US President-elect Barack Obama has to ask himself one important question: "How much money do I really have?" The answer to that will dictate how far and how fast he can go with a political agenda drawn up before his country formally enters a recession. Promises may not necessarily be broken - although it is difficult to see how that can be avoided - but many will be taken off the fast track.

Delivery on the green economy is especially vulnerable. Obama's manifesto has the specific spending goal of inserting $150bn into clean energy technologies over the next decade so that the US can virtually eliminate the need to import oil from the Middle East and Venezuela, generate 25 per cent of energy from renewable sources by 2025, and develop a local plug-in hybrid automotive industry. Obama aims to create five million 'green collar' jobs.

To get some idea of the extent to which this plan could boost the green investment market, consider that the existing National Nanotechnology Initiative has an average annual federal budget of $1.5bn. Obama's energy initiative could therefore be two orders of magnitude greater.

The current state of play for private sector 'green' investment is very unbalanced. Speaking at MIT Technology Review's recent EmTech conference, Robert Day, a principal with venture capital (VC) firm@ventures, noted that while the global energy industry is three times the size of the IT and telecoms market, it currently receives only one-third of the VC funding. "And healthcare takes in four times," he added.

Ernst & Young has broken down the 'clean technology' market into 19 subcategories and estimates that 45 per cent of today's VC investment targets only two of those: solar energy and biofuels. "So you can argue that there are bubbles in there, but overall, the whole market is actually pretty undercapitalised," Day said.

The problem may be primarily two-fold. The word on the street is that there is very little left to find in either solar or biofuels, although some investors have alighted on the nascent technology of synthetic biology as offering a new set of choices. Jack Wadsworth, honorary chairman of Morgan Stanley Asia and co-founder of Ceyuan Ventures, said at the Synthetic Biology 4.0 conference in Hong Kong last month: "Until recently, I was one of the nine out of ten people in the US who do not know what synthetic biology is. Now I think it has the potential to change the world."

Even the most promising technologies may encounter obstacles. "Looking specifically at solar, you could even have a really good technology being offered at early stage now and it would still be a difficult call," explained Jim Kim, a senior partner with VC group CMEA Ventures. "Because it would need to be pretty spectacular, given that rival technologies would be likely to be reaching commercialisation while it was still in development. It's not just the quality, but also the timing of the opportunity."

The second factor is whether or not those making investments understand the energy market. "There are a lot of people coming straight across from pretty traditional Silicon Valley markets and thinking you can translate all of those skills directly," said Kim. "In fact, it's very different."

Kim noted that energy already has a huge number of very rich companies - utilities, oil companies, infrastructure suppliers - that have been making in-house and corporate venturing investments themselves. The wind power market, for example, is dominated by that most traditional of conglomerates, General Electric. Moreover, with the route to a stock market launch now blocked for many VC-backed companies, the trade sale to one of these energy giants is the most viable exit strategy.

VCs looking to invest in synthetic biology companies readily admit that those start-ups will not have the clout to take a biofuel-generating microbe or plant fully to market; they will need to work closely with the big energy companies.

Karl Handelsman, partner at CMEA Ventures, said the funding model for VCs in biofuels is different from conventional practice. Instead of taking a start-up all the way to the point where it can float, people like Handelsman are aware that their main role will be to take away some of the technology risk from conservative energy giants. All they will be able to do is provide enough money to get a start-up to the point where it can support relatively small-scale production. "We come in at the beginning and we end at the beginning," he said.

A further complication lies in the role of government. "Outside defence, technology investors probably aren't used to dealing with government that much - and yet here you have government as not only client and end-user, but also as regulator," said Kim.

Kim and Day both believe that there remain plenty of potentially attractive investments. Smart metering and infrastructure are cited in several reports as good opportunities.

Kim noted: "There have been 1,200 deals out there this year because there are some great companies doing some great work. At the same time, we're also seeing a lot of companies that don't deserve financing getting it - there are going to be carcasses at the side of the road."

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