Green Investing Is Tops in Silicon Valley

At the Web. 2.0 Summit, the business of environmental technology trumps the Internet in interest and excitement

By Katie Fehrenbacher

At last week's Web 2.0 Summit—the annual convention that has come to represent the new Web boom—a leading Web industry journalist asked me if green technology was here to stay, or if it is just another fad that would die at the hands of dropping gas prices and a recession. "I think it's one of the world's biggest opportunities," I responded, and what I wish I'd have added is this: It's also trumping the Web in terms of excitement, innovation, and inspiration for the next generation of entrepreneurs.

That cleantech is, at the very least, what people are excited about was obvious at last week's summit. Green startups—even those that had little to do with the Web—took over large parts of the show. Former Vice-President, Nobel Peace Prize laureate, and Kleiner Perkins cleantech investor Al Gore received a standing ovation for his keynote. Elon Musk, chairman and CEO of high-profile electric vehicle startup Tesla Motors, and Shai Agassi, CEO of electric vehicle infrastructure startup Better Place, both had long fireside chats with the conference organizers. And half of the startups in the launchpad section of the show were green companies—Carbonetworks, GoodGuide, and Sungevity.

Green: Where the Money Is

Perhaps the keynote of the show, though, was when John Doerr, partner at Kleiner Perkins Caufield & Byers, declared green technology to be "the growing thing in Silicon Valley" and said kick-starting energy research will be President-elect Barack Obama's most important task. Kleiner was responsible for Internet investments like Google (GOOG) and has now allocated a third of its fund to green investments—equal to the amount it's pumping into digital media/Web plays. Doerr even told the audience that Kleiner partner Bill Joy would be a good choice for Obama's chief technology officer; Joy has stated for the past year that he is staying away from most Internet investments and focusing entirely on innovations to fight climate change.

So far, the overall venture dollars have started to follow this path, too. According to PricewaterhouseCoopers and the National Venture Capital Assn., while venture funding for the third quarter of 2008 was down 7% from the second quarter, to $7.1 billion, cleantech's portion of that investment grew 14% over the second quarter, to $1 billion. Internet companies accounted for $1.1 billion of those venture dollars, a 36% drop from the second quarter. Back in 2006, cleantech became the third-largest venture category, under biotech and software, and remained the third-largest in the latest quarter.

That's not to say that cleantech investing won't be affected by the current financial crisis. Analysts with the Cleantech Group are expecting that in the next quarter later-stage green companies that need to raise a lot of capital—e.g., to fund biofuel plants, solar thermal farms, or green car factories—could find trouble. Tesla Motors has already been unable to raise a planned $100 million financing round on the terms it wanted and turned to an internal round of $40 million, with Tesla CEO Musk carrying half the load. Large clean power projects like T. Boone Pickens' wind farm are also getting cut back.

But the overall cleantech industry will survive a downturn. The opportunity for entrepreneurs and innovation is large—and just starting to be realized. Energy alone is a $6 trillion market, compared with $100 billion for the Internet. And the industries that cleantech entrepreneurs are trying to tackle—power generation, the power grid, the water system—have been largely neglected in terms of technology innovation. As Thomas Friedman points out in Hot, Flat, and Crowded, paraphrasing General Electric's CEO Jeffrey Immelt: Over three decades, GE has sold eight or nine generations of medical devices, but only one generation of energy technology.

Population Explosion

There's also the fact that the underlying problems that have led to the ascendancy of cleantech are still persistent. The price of gas might fluctuate wildly, but the planet is still growing increasingly warm, and the population is still expected to balloon to more than 9 billion in the next three decades—largely in developing countries like India and China. Cleantech is about figuring out smart, sustainable ways to allocate resources like energy, water, and raw materials, the need for which won't disappear in the face of temporarily cheap fuel.

The recession could also turn federal legislators green in the coming months. President-elect Obama is calling for the creation of 5 million green jobs in a decade and has pledged to provide more support for renewable energy than any other previous Administration. Josh Green, managing partner at Mohr Davidow Ventures, thinks that Obama's cleantech plan will make up part of the economic recovery package, as does Al Gore. If green jobs really can help ease the pain of the recession, the cleantech industry would find even more government and private-sector support when we eventually get to better financial times.

Provided by GigaOm—