Cleantech’s Comeback

What we learned from the collapse of investment in Cleantech 1.0 and how we can ensure the success of Cleantech 2.0.

By Michael Kearney, Senior Associate, The Engine

Michael Kearney is a Senior Associate at The Engine. He holds a Ph.D. from MIT Sloan School of Management, where his research focused on frictions in the commercialization of science, regulatory barriers to innovation and entrepreneurial strategy. Previously, he led development efforts at a cleantech startup called Ambri. Mike received an M.S. in Technology and Policy from MIT and a B.A. from Williams College

Lessons from Cleantech 1.0

In a thoughtful review of financial returns during Cleantech 1.0, Gaddy, Sivaram, and O’Sullivan (2016) evaluate the returns to cleantech venture capital investments relative to those in other sectors. Of the $25 billion that investors placed in cleantech firms from 2006–2011, they lost more than $12.5 billion (over 50%). Moreover, whereas successful cleantech investments returned 8.6 times the initial investment to VC firms, similarly successful investments in software companies returned 11.6 times the initial investment, and this likely understates the overall difference as cleantech companies in the sample were more likely to fail.

More change is necessary

These developments are exciting, but they could be largely immaterial if the commercialization path for cleantech companies is not streamlined. There remain significant barriers to the scale-up of clean technologies, barriers that stem not from the inherent technical challenges of innovation, but rather from the market dynamics within which these technologies have to compete.

Considering New Regulatory Frameworks

Unlike drug development, where there is a federally regulated but clear path to commercialization that delineates appropriate value inflection points across the life of technology development, the energy sector in the U.S. is regulated within each state, across collections of multi-state actors, and at the federal level. It is an opaque framework that encourages incumbents to be risk-averse and limits those incumbents’ ability to experiment with new technology.

A National Deployment Effort

Barriers to cleantech commercialization exist across stages of deployment for clean technologies from pilot projects to broad-scale commercialization. A National Deployment Effort that nurtures technologies from pilot projects to massive impact is necessary. Historically, the U.S. government has played an active role in later-stage commercialization efforts of foundational technologies, and that same effort is required for cleantech going forward.

Moving Forward

The data is clear: the investment community is currently rising to the challenge of supporting the next generation of clean technologies. It is doing so with new approaches and coalitions that address long-standing asymmetries between cleantech innovation and investment structures.

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