Generally Accepted Truths of Cleantech Investing…Debunked

It is generally accepted in Cleantech investing that (1) the companies are capital intensive, (2) there is a sustainability premium associated with buying the companies’ products and (3) the adoption of the companies’ technologies requires a change of behavior.  All three can slow adoption and negatively impact scalability and internal rate of return.  Certainly this can be true for many Cleantech companies, but it isn't true for many others.

There has been an evolution and broadening in the definition of Cleantech, call it 2.0.  Cleantech 1.0 involved funding solar, wind, battery and biofuel technologies.  Many drew parallels to biotech investing in which large sums of capital and extended timeframes preceded product viability.  Then add in the need to build factories and infrastructure.  The faint of heart don’t change the world.

Often these 1.0 technologies required the end user to pay more for their use, many required subsidies or incentives to be competitive.  For example, there is a generally accepted “sustainability premium” associated with receiving power by solar relative to coal or natural gas.   The technologies also required a change in behavior, such as installing new infrastructure on the roof of your building.  Ironically, many of today’s demand response applications require the consumer to monitor or use energy in response to new information (i.e. creating more work).

So, these three so-called truths have validity, but now let’s debunk them with some real life examples in the world of Cleantech 2.0.

Every year billions of dollars in corroded metal hit the scrap heap.  Some are recycled.  Besides filling our landfills with pollutants, these metals and their coatings require enormous inputs of energy to create and recycle (been to a steel mill lately?).  Various coatings are added to metals to help them last longer; there have been remarkable improvements.  The old rust-bucket automobile is a rare sight today.  But, coatings get damaged after which corrosion ensues.  What if the coating could last several times longer?  It would reduce the need for chemicals used in cleaning and recoating metals and keep more items out of the scrap heap.  Today, self-healing polymers can be added to a coating in small quantities to prolong the life of the coating and underlying material.  Manufacturing can be outsourced to established suppliers and the paint can be applied like any other without a major behavioral change.  The sustainability premium is small relative to the performance gain and the reduction in painting cycles.

When a 500-bedroom hotel wants to heat water, how do they do it?  They typically keep large tanks of water hot with a boiler system.  These systems are large, expensive and redundant.  They keep large quantities of water hot even during times when little is being used.  Enter on-demand technology, which only heats water when it is being used and has no storage tanks.  On-demand technology is now available for use in commercial and industrial environments. Interestingly enough, the system can be less capital intensive than the system it replaces.  It can cost the hotel the same or less to buy and install, avoiding the sustainability premium.  And, it doesn't require a significant change in behavior as it uses the same natural gas and connects in a similar fashion (it actually can be a little easier to install due to smaller form factor and cooler exhaust).

Beta Glucan is used to promote animal (and human) health and as an alternative to the potential overuse of antibiotics in our food sources.  The conventional method of production involves extracting beta glucan from yeast.  It is costly, messy and involves harsh chemicals.  There is now a proprietary method to produce Beta Glucan from algae in sterile fermentation tanks (not too dissimilar to the ones used to brew beer).  It is a cleaner and more energy efficient method of producing Beta Glucan and results in a product with greater purity and lower cost.  The sustainability comes with a discount rather than a premium.  The end product is used essentially the same requiring no change for the end user.  And the production tanks are inexpensive – just as it is relatively inexpensive to start a craft brewery today.

These are just three examples of technologies that contradict these commonly accepted truths; there are many more.

Cleantech 2.0 isn't “better”; it’s just different.  Many disruptive and important technologies come with aforementioned truths and our world needs the investors who support them.   A Tesla automobile doesn't exist without major capital investments and a willingness of consumers to change the way they source fuel for their cars (the sustainability premium is dropping).

Rather, the objective of this article is to cast light on these generally accepted truths that have scared away many an investor or acted like blinders covering the eyes of others. 

The unaccepted truth is that there are numerous options to positively change the world without having to settle for a less attractive investment profile.  As Cleantech investors ourselves, we don’t necessarily want too many investors back in the game, but a few additional kindred spirits wouldn't hurt.

Copyright 2015. The VentureLab.