Flying beneath our collective radar was the first floppy disk drive by IBM, the world’s first e-mail sent by Ray Tomlinson, the launch of the first laser printer by Xerox PARC and the Cream Soda Computer by Bill Fernandez and Steve Wozniak (who would found the Apple Computer company with Steve Advancedmd Jobs a few years later).
Times have not changed that much. It’s 2011 and many of us face a similar disconnect with the events occurring around us. We are at the equivalent of 1986, a year on the cusp of the personal computer and the Internet fundamentally changing our world. 1986 was also the year that marked the beginning of a major financial shift into new markets. Venture Capital (VC) experienced its most substantial finance-raising season, with approximately $750 million, and the NASDAQ was established to help create a market for these companies.
Leading this charge was Kleiner Perkins Caulfield & Beyers (KPCB), a firm that turned technical expertise into possibly the most successful IT venture capital firm in Silicon Valley. The IT model looked for a percentage of big successes to offset losses: an investment like the $8 million in Cerent, which was sold to Cisco Systems for $6.9 billion, could make up for a lot of great ideas that didn’t quite make it.
Changing Financial Models
But the VC model that worked so well for information and telecommunications doesn’t work in the new revolution. Not only is the financing scale of the cleantech revolution orders of magnitude larger than the last, this early in the game even analysts are struggling to see the future.
Steven Milunovich, who hosted the BofA Merrill Lynch Global Research lunch, remarked that each revolution has an innovation phase which may last for as long as 25 years, followed by an implementation phase of another 25. Most money is made in the first 20 years, so real players want to get in early. But the question is: Get in where, for how much and with whom?
There is still market scepticism and uncertainty about the staying power of the clean energy revolution. Milunovich estimates that many institutional investors don’t believe in global warming, and adopt a “wait and see” attitude complicated by government impasse on energy security legislation. For those who are looking at these markets, their motivation ranges from concerns about oil scarcity, supremacy in the “new Sputnik” race, the shoring up of homeland security and – for some – a concern about the effects of climate change. Many look askance at those who see that we are in the midst of a fundamental change in how we produce and use energy. Milunovich, for all these reasons, is “cautious in the short term, bullish on the long.”
The Valley of Death
Every new technology brings with it needs for new financing. In the sixth revolution, with budget needs 10 times those of IT, the challenge is moving from idea to prototype to commercialization. The Valley of Death, as a recent Bloomberg New Energy Finance whitepaper, Crossing the Valley of Death pointed out, is the gap between technology creation and commercial maturity.
But some investors and policy makers continue to hope that private capital will fuel this gap, much as it did the last. They express concern over the debt from government programs like the stimulus funds (American Recovery and Reinvestment Act) which have invested millions in new technologies in the clean energy sector, as well as helping states with rebuilding infrastructure and other projects. They question why the traditional financing models, which made the United States the world leader in information technology and telecommunications, can’t be made to work today, if the Government would just get out of the way.
But analysts from many sides of financing believe that government support, of some kind, is essential to move projects forward, because cleantech and biotech projects require a much larger input of capital in order to get to commercialization. This gap not only affects commercialization, but is also affecting investments in new technologies, because financial interests are concerned that their investment might not see fruition – get to commercial scale.