Cleantech Venture Capital
The cleantech investment category broadly includes investments in companies mitigating and adapting to climate change and encompasses several industry sectors. Research on venture capital in the cleantech space or some of its niches is rare. Prior research on the category depicts the characteristics and advantages but also challenges associated with cleantech and the VC industry. The following section overviews the scholarly work that involves the category and which played a significant role in shaping the discourse on cleantech investments.
Early work on VC and clean technologies opens the field by considering why so little capital had been invested in the sector and foresees a difficult future for the category (Diefendorf, 2000). Randjelovic, O’Rourke, and Orsato (2003) firstly mention the emergence of the cleantech category previously referred to as “environment-related VC” or “green VC”. They define the investment category and show characteristics, processes and mechanisms as well as drivers and barriers in the field. They predicted that the category - then mostly supported through the idea of socially responsible investments (SRI) and an added ecological orientation - would become more mainstream in the future. “Continuing affirmation of the existence and importance of the sector has resulted in the acceptance of, and support for, the sector by established multinationals as well as governments.” (Caprotti, 2012, p. 382). However, early levels of support, related technologies experience difficulties obtaining financing in this category due to policy preferences of investors in this field.
Wustenhagen and Teppo (2006) revisit the emergence of the cleantech sector and looked at the perceived risk and expected return characteristics while also clarifying the path dependencies occurring within VC developments. They specifically call for research addressing “how new market sectors for VC investment emerge” (Wustenhagen & Teppo, 2006, p. 81). O’Rourke (2009) examines the first decade (from 1995 to 2006) of the emergence of cleantech as an investment category. She describes the institutional processes of the emergence and creates a classification system for the category. Furthermore, she examines the investors which are active in the field and looks at their strategies. Caprotti (2012) analyses the development of the cleantech sector from a geographers standpoint over the period from 2000 to 2010. His work describes the sector through discursive logics as a socio-technical sector defined by a networks of actors. Three topics are core to the discourse: cleantech as a response to climate change, as a market opportunity and as a technological revolution.
Cleantech as a response to climate change. The social and ecological need for investments in renewable energies and clean technologies is stressed in a report for the
International Conference for Renewable Energies 2004. It emphasizes the role of VC to supply risk capital but foresees limited return possibilities in the highly risky sector (Sonntag-O’Brien & Usher, 2004).
Cleantech as a market opportunity. The few exit opportunities make it hard for investors to justify significant investments in risky clean energy technologies. Characteristics of path dependency are detected within the cleantech VC sector influencing investments in renewable energy and energy efficiency companies according to prevailing initial conditions (Marcus, Ellis, Malen, Drori, & Sened, 2011). A further work looks at the potential and limitations of VC for the clean energy sector. The authors analyze trends and draw the path to legitimization of the category. They raise several research questions for future scholars to pursue, one of them to research along the historical evolution of the category in a multisectoral way (Marcus et al., 2013). Burer (2008) adds a policy angle on investment decisions and risk management practices within the clean energy private equity and VC sector. She explains the supportive nature of market-pull policies in favor of technology-push options and emphasizes the general importance of government actions to create market opportunity within this investment category.
Cleantech as a technological revolution. Ghosh and Nanda (2010) research on the role of VC for the commercialization of clean energy technologies. They focus on the problem of innovations associated with too much technology risk and at the same time requiring too much funding until maturity. Cleantech ventures are hard to fund and face the so called “Valley of Death”. Establishing commercial viability for innovations already vetted and tested is difficult.
Kenney (2011b) is one sceptic concerning VC within the cleantech sector due to the lack of fit between traditional VC investment criteria and the characteristics of cleantech innovations. He suggests that in its current state, investments in cleantech would produce an unsustainable bubble. In contrast he advocates for investments in clean technologies that are more closely adapted to the traditional VC model and typical investment industries. For example, he suggests that investments in energy and efficiency software as well as smaller scale efficiency equipment are potential innovation paths. Another work that examines the fit of cleantech and VC considers the regulatory support mechanisms for the cleantech industry and criticizes the missing boundary conditions for a VC financed transformation through cleantech. Clean technology and in particular energy markets are generally large, however, they are not growing rapidly in most developed markets. The scalability of the highly capital intensive cleantech innovations due to production plants or material based processes is limited in comparison to many of the software based or biotech business models. Some exceptions might be technologies at the intersection between energy and the information technologies (Hargadon & Kenney, 2012). Otherwise, these conditions make it hard to find evidence for large and rapid value creation in cleantech markets. Therefore, in order to understand how new investment categories emerge, it is necessary to examine investment patterns in light of policy and market forces that hold the potential to influence investment decisions.