Venture Capital’s Disconnect with Clean Tech

Clean-tech start-ups depend on patience and public policy to thrive—the Internet models for VC funding don't apply. That's why Harvard Business School professor Joseph Lassiter is making an unusual recommendation to his entrepreneurship students: Spend a few years serving time in a government job. Key concepts include:
  • MBA students and young venture capitalists often assume that all promising start-ups can grow and exit as fast as Internet start-ups, but they're mistaken.
  • Clean-tech start-ups are often stymied by a "valley of death"—that precarious stage between researching and developing a product and going to market.
  • The success of clean-tech companies often is dependent on public policy, so it behooves budding VCs and entrepreneurs to spend a few years learning the ropes in a government or corporate job.
by Carmen Nobel

MBA students often fall into one of two categories—those hungry to rush into careers as venture capitalists, and those eager to found a venture-funded start-up. For all of them, Harvard Business School professor Joseph Lassiter has some intriguing advice: Spend a few years working for the federal government or a large corporate player first.

Those business school students and young venture capitalists frequently share a common misconception about start-ups in the heavily publicized clean-technology field, according to Lassiter, who teaches courses in both entrepreneurial finance and building green businesses.

"They tend to think clean-tech investing is like Internet investing," he says. "They think, 'It's gonna happen fast, and it's just gonna happen.' And the answer is no, it's not gonna be fast, and it might even not happen."

“They tend to think clean-tech investing is like Internet investing. They think, 'It's gonna happen fast, and it's just gonna happen.' And the answer is no, it's not gonna be fast, and it might even not happen.”

There are a couple of key differences that make the various clean-tech sectors and the broader green business world vastly different from the historically well-funded Internet start-up industry. In the Internet start-up world, VCs can reasonably assume that a company can go from launching a product to getting acquired—or even going public—within a few years. But clean-tech doesn't work that way.

While venture-funded Web companies can crank out a marketable prototype in a matter of months, clean-tech companies can take years to develop products—solar panels, batteries, biofuels, and the like. And even when a working prototype is born, it's hard for a clean-tech company to deliver economically viable production volumes without massive follow-on funding.

This creates a catch-22 situation. A clean-tech company can't prove its ability to scale without actually scaling. And venture capitalists are wary of funding a company that can't prove its ability to scale.

Valley Of Death

It's a problem that has squelched many promising start-ups, which, without multiple funding rounds, fell into a financial "Valley of Death"—that precarious stage between researching and developing a product and actually going to market with it. "You could raise enough money to fund the bench science, but not enough to build a prototype," Lassiter says. "The scientific risk of moving from the lab to the product was too great."

Furthermore, any industry that revolves around energy is heavily dependent on public policy, at both the federal and the local level, and much more so than the general high-tech sector. This is a big problem when product development cycles and election cycles don't mesh; government funding may be available with one administration and gone with the next.

Consider California's Global Warming Solutions Act of 2006, which mandates that the state's greenhouse gas emissions be reduced to 1990 levels by 2020. This creates an obvious market for clean-tech companies, which often focus on greenhouse gas emissions. But now voters are considering Proposition 23, an upcoming ballot initiative heavily funded by out-of-state companies. If passed in November, the proposition would suspend the emissions reduction law until the state's unemployment rate falls below 5.5 percent for four consecutive quarters.

"The cost curves you see in renewable energy are falling fairly predictably," Lassiter says. "But public policy is remarkably volatile…and the entrenched political opposition to changes in energy and environmental policy is unbelievably strong. For the time being, public policy support in the form of subsidies or mandates is required if renewables are to be used."

Learning From Government

To that end, Lassiter suggests that learning how policy affects business is one way to assure future success as a venture capitalist-especially in the clean-tech field. Actually effecting policy change is another way. That's why he's pushing would-be VCs at Harvard Business School to spend some time working in public policy positions after they receive their MBAs.

"I want them to think about government service," he says. "Whether you like the government or don't like the government, somehow we need to get more smart people into the government."

“I can't tell you how difficult it's going to be to build businesses in this area.”

Lassiter likens clean-tech energy production companies to the biotech firms that were sprouting up in the early 1980s. Their success, too, relied on government policy much more than that of general high-tech firms. He recalls former students who eschewed established company jobs for gigs at flashy biotech start-ups, only to find themselves spending the bulk of their time writing government grant applications. "For most folks who graduated from HBS in the 1980s and who wanted to work in biotech, the place to work wasn't in any of these first-generation start-up companies," he says. "The place to work was the National Institutes of Health or in business development at one of the established big pharma/medical device companies."

To further emphasize the role of government in clean-tech, next month Lassiter will teach a case called U.S. Department of Energy & Recovery Act Funding: Bridging the "Valley of Death." The case discusses the Department of Energy's attempt to bolster the green economy by investing more than $32 billion in clean-energy efforts, including $16.8 million for to energy efficiency and renewable energy companies. The DoE also gave $4 billion to a new loan guarantee program, dubbed "1705," dedicated to renewable energy, smart-grid, and biofuel projects. The grants also included $400 million for the Advanced Research Projects Agency-Energy (ARPA-E), a new government agency that provides grants for advanced, albeit financially risky energy research.

There's no question the DoE investments have made an initial impact. For instance, in March 2009, the DoE granted a $535 million valley-bridging loan guarantee to thin-film solar cell maker Solyndra, to support the company's plans to construct a commercial-scale manufacturing plant. In September, in conjunction with breaking ground on the new plant, Solyndra officials announced that the company had received $198 million in private equity since receiving the DoE loan guarantee.

"They've certainly been effective in bringing private money into the game," Lassiter says of the DoE. "It's definitely speeding things up compared with where they would have been without it."

Deals Declining

The question is how effective those publicly funded investments will be in the long term, especially in terms of a venture capitalist's idea of company success—that is, going public or getting bought. A few clean-tech start-ups, including Tesla and A123 Systems, have gone public, but many others appear stalled. Solyndra announced plans to file for an IPO in December 2009, but reneged on the filing the following June. Daqo New Energy, Trony Solar, and MiaSolé are among other clean-tech companies that have withdrawn or delayed IPOs.

And despite the boost from Recovery Act funding, VC interest in the space has been waning in the past few months. Following a record first quarter of 2010, when North American companies raised $1.5 billion in clean-tech venture investment—81 percent of the worldwide total that quarter—funding has withered. In the third quarter, according to the Cleantech Group, North American clean-tech companies raised just $928 million, down a whopping 42 percent from the second quarter, and accounting for only 62 percent of third-quarter global investments in the sector.

"I can't tell you how difficult it's going to be to build businesses in this area," Lassiter says. "But, in some sectors, there are real opportunities for entrepreneurs with ideas that can move the needle and not drain the bank."

Finding those breakthrough ideas and entrepreneurs is a tough task for venture capitalists, he says. In his classes, Lassiter teaches the case of Highland Capital: the venture firm evaluated some 400 clean-tech start-ups—and invested in only three of them.

About the Author

Carmen Nobel is the senior editor of Harvard Business School Working Knowledge.
    • Alex Perwich
    • President, Logos Energy
    How true! There is little/no margin for green. Energy is a commodity. You must compete on PRICE, RELIABILITY, DURABILITY and PERFORMANCE. A business model built on the presumption of long term subsidy is a poor business plan. There is no VALLEY OF DEATH, there is a MOUNTAIN OF DEATH. Lots of money over lots of time!

    In alternative energy plays, the key is aligning with key strategic players/investors who understand.
    • Clark Phippen B'62
    • Director, EnerTech Capital
    Professor Lassiter is certainly on target when he says we need to get more smart people into the government. However, since I would add "experienced" to his "smart" a newly minted MBA - even one from Harvard - does not necessarily qualify. I have been recommending to MBA grads that they consider jobs with utilities: companies that will be the ultimate providers of green energy and that truly need fresh bright talent to do it well. Adding 3-5 years of utility experience to an MBA will help exponentially catalyze the clean tech space.
    • Steve Eichenlaub MBA 1984H
    • Managing Director, Cleantech, Intel Capital
    Professor Lassiter's perspectives and cases provide excellent windows into key aspect and influences of cleantech venture investing, in the broad sense. However, breakthroughs and huge returns for VC funds and startups rarely happen "in the broad sense", they happen in niches (at first) or at the margin, where new technologies and business models can rebalance existing or create new value chains. Cleantech is replete with a growing number of such opportunities, but it's not all that visible, because these are "capital efficient" start-ups, and in many cases "stealth". Just (try) to keep an eye on top-tier firms like Kleiner Perkins and Khosla Ventures, et al., who are quietly (for now) building the next great companies that will positively impact multiple vertical industries and encourage both economic growth and climate-favorable policy changes for decades to come.

    That said, I too would strongly advocate budding HBS MBA's get a job in government or industry before leaping into the world of start-ups and VCs. But, I'd suggest doing it for the same reasons that were true back when I was at HBS and "cleantech" was a term as-yet uncooined: corporations and governments can accelerate or inhibit the success of any start-up, and generally their preference is to start out with the latter approach. "Living" how big companies and governments tick will give the MBA the tools and perspective on how to avoid or outmaneuver these growth inhibitors if and when she or he does find a great fit in a start-up or VC firm. You'll just be worth a heck of a lot more because you'll be more impactful.
    • Liddy Karter
    • Managing Director, IRON Ventures
    Thanks Professor Lassiter. You have pointed out what has become an impediment to moving clean tech forward. Venture funding in clean tech has carried the baggage of IP protected innovation models used in IT, software and telecom. That paradigm will drive only a small fraction of the value created by clean tech companies. They are primarily growing by deploying existing technologies efficiently through long term contractual relationships that protect the investment. The mindset of the VC community is a larger impediment to funding than the CAPEX or long adoption cycles you cite. In fact the opportuity for leverage in clean tech and government support make this a much more capital efficient sector than either IT or Telecom.

    Thanks for your insights.
    • Anonymous
    Excellent analysis with sound findings. It is nice to see that Professor Lassiter has identified the facts and correcetd the fallacies
    • Steve Ricci
    • observer/ partner, FlagshipVentures
    Lassiter, as frequently the case, is right on the mark. The capital intensity and cycle time of iteration/ implementation in energy is so different from those of software and telecom equipment businesses that VC grew up with. Life sciences start-ups have the regulatory aspects and similar price tags but the Pharma industry is there pretty early on to carry a lot of the financial load. We've gone into energy with eyes open trying to be as frugal as possible. It's hard to compress time. A successful tactic for some cases has been to find adjacent but relevant intermediate scale industrial applications big enough to prove out and refine core technology while mitigating scaling risk. Still a long way to go and we assume a rational national energy policy is years away.
    • Michael
    • owner and manager, LIACHIM S.A.
    In my opinion there should be a continuity in policy making legislation as far as government subsidizing scheme is concerned. Also the subordinate role of your state and federal jurisdiction is to be clarified as far as confederate republic mechanism is the gap for ongoing change of strategic bills. This hypothesis is may be one of rare advantages of centralized political formation or monarchy for its ability to identify a strategy with one person. It is as the metaphor of building engineering in
    which process every floor is completed by a different
    architecture and respective different style.
    The article is of a high value. Thanks to the author for the reason to think about the matter.
    • Muriel Taylor
    • CEO, AURORA UV Inc
    I agree completely with what Professor Lassiter identifies as the "Valley of Death". There is not a good path for hard-science based discoveries to go from the University to the market. In addition to a lack of a stable policy platform, these are capital intensive and long lead-time ventures. Missing is funding for "proof-of- concept" stage enterprises - what Lassiter calls "bench science" but also includes University spin-outs at a later stage of development. The Kauphman Foundation has identified this as a major disconnect see - M. A. Taylor
    • Muriel Taylor
    • CEO, AURORA UV Inc
    (corrected spelling of Kauffman Foundation)

    I agree completely with what Professor Lassiter identifies as the "Valley of Death". There is not a good path for hard-science based discoveries to go from the University to the market. In addition to a lack of a stable policy platform, these are capital intensive and long lead-time ventures. Missing is funding for "proof-of- concept" stage enterprises - what Lassiter calls "bench science" but also includes University spin-outs at a later stage of development. The Kauffman Foundation has identified this as a major disconnect see - M. A. Taylor
    • Steve Geiger
    • Co-founder, Masdar
    While he points out the obvious (cleantech investing often involves the impediments and capex levels of "big energy" and requires substantial and reliable political support), I doubt many bright MBA students will see government service as an attractive alternative to VC work. Working among entrenched career bureaucrats is usually neither stimulating nor supportive of innovative ideas.

    Perhaps another approach is to recognize that certain avenues of cleantech (i.e. power generation) require capital levels beyond the typical VC model level. So either better discipline is required or more inventive partnerships, such as risk-sharing with larger entities with resources better equipped to handle the Valley of Death (i.e large corporates and utilities).

    We made a number of large investments into the sector on behalf of a very well capitalized entity with strategic interests to help offset the pressure most VCs face for relatively-quick returns.
    • Dericka Frost
    • MBA Student, University of Sunshine Coast - Australia
    Thank you for the insights. In Australia there is discussion of the introduction of a carbon tax as an incentive for companies to clean up their respective acts. This seems a more prevalent discussion than investing in clean fuel technologies (CFTs). Perhaps short term revenue to an incumbent government is more appealing than a rational energy policy and the support of VC initiatives into CFTs?
    • Manish Rathi
    • Strategy & Marketing, GlobalLogic
    Great Article. We had fears for the same for a long time, but Professor Lassiter articulated it very well. Our observations also had been that the same VCs who had a portfolio of IT, Internet, Software, and Telecom companies were investing in Clean Tech too. Quite a mismatch in terms of how to look at investments.

    Having said the above - any suggestions from Professor Lassiter as to how VCs should structure their investments in Clean Tech?
    • Rebecca Lula
    • MBA 1985
    Having worked for 20+ years in the energy efficiency and alternative energy industries, I can say without a doubt that it has been a labor of love. While I had always hoped for the quick hit most of the companies I worked for or consulted to no longer exist -- XENERGY, Kenetech, Enershop, to name a few.

    A big lesson learned was the inability to get venture capital sources to suspend their disbelief regarding the ability of these alternative energy sources -- energy efficiency being in my mind both the best alternative and the most difficult to sell -- to deliver big enough financial profits to be interesting. So, some of the best sources of capital were commercial banks who would provide project financing for wind projects, cogeneration, energy efficiency projects, landfill gas projects, and more.

    Having a host site and the equivalent of a power sales agreement was a necessity. Targeting creditworthy hosts such as government entities or larger corporations was a must. Of course, they too had to suspend their disbelief as well as recognize the broader set of benefits which offset potentially higher relative costs of the energy generated but in fact many did.

    I started my career as an engineer for Shell Oil Company where I learned everything I needed to know about energy economics. It was invaluable for me. I also spent a few years in commercial real estate which helped me understand the dynamics of a large segment of energy consumers -- their needs and preferences. I came away from that experience with a very strongly held belief that energy is not a commodity since energy consumers use it in some many different ways with so many different outcomes. The adage is that the an energy provider thinks of a customer as a bill and the customer thinks of the energy provider as a meter. Break that belief and the opportunities for clean tech will seem more obvious.

    I can't imagine that sort of education being possible in a government position. If someone isn't ready to dive right in to a small company or can't find one, I would suggest as an alternative looking at corporations who have successfully undergone initiatives in clean tech or alternative energy. The one that always comes to mind for me is Johnson Controls but there are obviously many others. Utilities are an option but culturally are tough for anyone with entrepreneurial aspirations. There are also some very interesting nonprofits to work for or intern with -- if you are up for Bangladesh, I think Grameen Shakti would be terrific.
    • John Little
    • Mech engineer, Opnor Inc
    I wonder if Professor Lassiter or a reader could elaborate on Lassiter's comment, and I quote the article, '"The scientific risk of moving from the lab to the product was too great." ?

    Can Lassiter explain what he means by the scientific risk in some detail with examples in terms of technological risk and advancement that falls outside existing or standard engineering practice?
    • Tom Kadala
    • President, ResearchPAYS, Inc.
    I've spent the last year facilitating 7 debates that began at the UN and culminated in Dominican Republic. Our discussion topic was on evaluating risk reduction strategies for renewable energy investments using business model innovations. What 150+ participants had to say became part of a Final Report recently approved by the Minister of Energy in the DR and currently in consideration for implementation by a number of international institutions (financial and academic).

    The gist of our findings was that the Dominican Republic should become a center for innovation for field testing renewable energy inventions that come out of global labs. In addition to renting rooms to international tourists, a Dominican expertise, they can rent plots of land (with approved permits, zoning, etc.) with corresponding lab facilities, personnel etc. to international research teams.

    An incubator of this sort would reduce Professor Lassiter's "Valley of Death" syndrome significantly by letting lab scientist field test scaled versions of their work in conjunction with engineers and other scientist who would also be collaborating with this effort.

    My most important problem to progress is not financing but rather the need for improved dialogue about business model innovations among key sectors working together - private, public, academic, financial, and pioneer companies. Perhaps this observation supports Professor Lassiter's recommendation to have HBS MBA's spend time in the Public Sector, maybe not as much as an employee but rather as a consultant or facilitator, as I have. To me that is how I could see a mentored MBA add sustainable value to renewable issues. You can view some press coverage of my first UN debate at

    If anyone is interested in a copy of the Final Report, please shoot me an email.
    • Geetanjali Choori
    • CEO, Energy Guru
    I concur with the author. When we went to VCs in 2007, they used to have typical mentality of business. We quickly moved away from VCs to continue to self fund ourselves and focus on serving one customer at a time. By doing a consultative marketing and direct in person relationship with the utilities and developers, we assisted over 800MW of customers. We are here for a long run and not to get in and get out without establishing anything on the ground like some well-known VCs have done recently.
    • Marc Ventresca
    • Fellow, Oxford - Institute for Science, Innnovation, and Society
    Welcome Lassiter's careful insights and reminders about clean-tech specifics and how these create institutional differences from some current models in the 90s growth areas. I welcome his reminders that public service and infrastructure industries benefit from able people, in ways different and potentially long-lasting from the now standard MBA routes. A really refreshing and direct set of observations, comments. Thank you.
    • Anonymous
    I can't think of a worse place for a budding entrpeneurs or venture capitalist than the government. The red tape, lockstep promotion system, active discouragement of innovation, delay mechanisms, and umbilical cord reliance on a paycheck funded by someone else's money with no responsbility for a return - clearly not the way to go. Perhaps consulting to the government through contracting would get the benefits of the MBA to people who could use it.