VCs say cleantech stimulus money only offers partial help

Federal stimulus money has distorted the market for cleantech companies and may fail to drive cleantech forward as the Obama administration hopes, according to several venture capitalists and entrepreneurs who debated the topic last month at the smart grid conference, Connectivity Week, in Santa Clara, Calif.

“The stimulus for energy was well intentioned, but it has turned out to be a failure in the sense of having the government pick winners,” said David Anthony, a managing partner for 21Ventures. “A $500 million subsidy to General Motors could have supported $1 million grants to 500 [startups].”

Others at the conference were equally critical.

“The problem with our government is that what they’re backing is innovation, and what we need is integration of existing technology,” said John Moore, CEO of Acorn Energy. “We have an infrastructure problem, but most of the discussion is at the fringes. What is this Disneyland fuel source and how will it help me get elected?”

Since President Obama was elected in 2008, the federal government has poured billions of dollars into loans and grants for companies working on solar, wind and geothermal energy, electric transportation, nuclear energy and several other areas intended to lower U.S. emissions of greenhouse gasses.

At the annual conference of the National Venture Capital Association in early May, Jonathan Silver, a former managing director of Core Capital who’s now in charge of handing out cleantech loans from the U.S. Department of Energy, said he’s not trying to pick winners and losers like he did when he was a VC.

“We’re looking for interesting viable technology that the marketplace can embrace or not,” he told a roomful of VCs in Silicon Valley. “We’ll do concentrated tower solar and variations on that—the same technology but with different storage. I’m trying to get technology into the marketplace and at scale, but I’m not trying to find one that will make me most money

However, some VCs said that government funding can give companies an advantage in raising money, while others, such as Nat Goldhaber, managing director at Oakland, Calif.-based Claremont Creek Ventures, said it made no difference.

Goldhaber said that he is impressed with the experience of Silver, Energy Secretary and Nobel Prize winner Steven Chu, ARPA-e director Arun Majumdar, and the other government officials in charge of clean energy investments.

But nobody said they understood why the government has funded all the companies it has.

Battery maker A123 Systems, electric car maker Tesla Motors, and solar photovoltaic panel maker Solyndra (a Fremont, Calif.-based company that was visited by Obama last month) are just a few of the companies that have received government money so far.

“I would never have invested in [smart grid infrastructure developer] Silver Spring, because it’s too hard to start from scratch,” Moore said. “You have to get access to CEOs, and buyers in the smart grid are like the government. ‘Am I going to lose my job if I buy from this company?’ With my smart grid investments, I’m hoping that after 30 years of proving the products, maybe (people) won’t get fired for buying them.”

What are the VCs investing in? Energy efficiency, lighting, software management, especially for data, security, clean coal, nuclear energy and energy distribution, to name a few areas.

Some have made investments this year, although Anthony from 21Ventures has not.

“We had to allocate more capital to our existing portfolio companies,” he said. “The venture capital markets are locked up — investing is tough — but we expect to do two more by the end of the year.”

Debate about the government’s role in cleantech reverberated throughout the conference. One investment advisor, Kirk Bloede, director of Newforth Partners, which handles cleantech mergers and acquisitions, said at a different session that the government should focus on taking the risk out of cleantech investments by providing subsidized insurance, for example. He said that this could help investors, especially VCs, make longer term commitments of capital.

Everybody agreed that energy companies are hard to build. They take years, yet the founders have to be flexible enough to quickly change plans.

“Every time you go forward with a technology that’s IP-based, you’re opening a platform for new creative thinking and you will find new companies entering the space,” said Harvey Michaels, who previously founded two energy efficiency companies and is now a lecturer at the Massachusetts Institute of Technology.

“That’s the energy Internet. We’re unquestionably moving in that direction, which is great for society, but from the standpoint of your business, you need your exit point, or you have to keep reinvesting to stay on the front edge of the curve. Is it exit, or do you go on to the next technology frontier?”