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A Bubble in Green Tech? VCs say “Not”

September 24, 2008

Venture capital investing in green technology is soaring. So you have to wonder: Is this the beginning of the next tech bubble?

So far, VCs say no, according to a survey by KPMG of 301 venture capitalists, corporate executives, entrepreneurs and bankers. VCs expect investment in the greentech sector to significantly increase in 2009. KPMG found that 91 percent of respondents indicated they expect venture capital activity in the greentech sector to continue rising in 2009, compared to only 76 percent who indicated the same the previous year.

When asked which sub-sectors of greentech would receive the most investment over the next two years, no one category dominated. Fifteen percent of respondents say energy storage (fuel cells, batteries, etc.) will see the most funding, followed by clean coal and wind with 14 percent each. Alternative fuels and solar rounded out the top five with 11 percent and 10 percent respectively. When asked what will become the dominant clean-air energy source in the next 20 years, 39 percent of venture capitalists say solar, 27 percent say nuclear and 18 percent say wind.

I don’t believe this is wishful thinking. The energy problem is huge and complex. And green tech investing only began to take off two years ago. What’s more, these investments will tend to take longer to pay off than your typical Web 2.0 Valley play. But at a certain point, say three to five years from now, VCs will want to start to see some pay-off from all this investment. Already, big-time green VC Vinod Khosla has pooh-poohed green technologies that don’t have the ability to scale economically to the point where they can effect billions of people.

“If it doesn’t scale, it doesn’t matter,” says Khosla. “Most of what we talk about today–hybrid, biodiesel, ethanol, solar photovoltaics, geothermal–I believe are irrelevant to the scale of the problem” of climate change.