Emotions Versus Intellect In Cleantech Investing

I often wonder whether venture capitalists fully grasp the emotional side of cleantech investing.

Intellectually, they comprehend the immense challenge of innovating in the energy field. Emotionally, they seem to hold out hope of unrealistic Moore’s Law like progress. Until one comes to terms with the other, expectations may outrun reality.

Moore’s Law, of course, is the tenet of technology that underpins the computer revolution. Every two years or so, for 40 years, the number of transistors on a chip has doubled. This remarkable progress spawned countless generations of hardware, software and Internet innovation in places such as Silicon Valley and along the Route 128 digital highway of Massachusetts.

If only battery, solar, flywheel and wind technologies showed the same progress, investments placed several years ago would show clearer signs of venture-sized returns. Admittedly, many factors other than technology influence these outcomes: political wavering, the inertia of incumbents, Luddite resistance to the scientific conclusions of climate science.

But all of these would be swept aside if technology were rapidly changing the cost equation of solar, battery and wind products – making them the irresistible low priced alternative to traditional power generation.

They most certainly will be someday. But not overnight. Take lithium ion batteries. I spoke earlier this year with former Bell Labs director and lithium ion battery expert Don Murphy, who said battery technology improves at the rate of 7% a year or less, compared with the 35% advance typical in high-tech electronics. At that pace, energy density will double in about 10 years, not two.

Prominent venture capitalists appear to secretly hope for more. One investor I ran across recently (who will remain unnamed) spoke glowingly of progress with his battery startups. A roughly 2X improvement in cathode efficiency, a 3X improvement elsewhere. It all adds up, he said, fingers crossed. Perhaps he is right. Perhaps innovation will occur in a shorter timeframe than Murphy expects. Perhaps not.

Look at solar. First Solar, one of the largest and most capable solar module producers in the world, manufactured products with a cost per watt of $1.40 in 2006. This year, the cost is 77 cents, a reduction of almost 50% in five years, not exactly a Moore’s Law pace. Yet until this year, money seemed to pour into solar startups with a Moore’s Law trajectory.

The reality is that cleantech is shaping up to look and feel more like health care investing, where companies gestate over eight or 10 years, and progress is slow, tortuously sometimes.

Many cleantech investors look to 2011 with the hope of a boom in IPO and M&A activity. Some upturn is likely. But progress may best be viewed on an intellectual, not emotional, level.

Mark Boslet writes for Thomson Reuters’ Venture Capital Journal. The opinions expressed are his own.