Cleantech Venture Capitalists Beware - What You Don't Know About Energy Can Kill You
Oil prices quietly (at least in the cleantech world), slipped below $80 last week, off some 50% from their highs a few months ago. Did I say 50%? Yes 50%. And gas has slipped, too, as with some variations, natural gas historically trades at a roughly 10:1 price ratio of Barrels to MCF.
It's easy to get caught up in the cleantech hype and forget that only 10 years ago this year oil prices fell two thirds, caught between rising supply from a decade of drilling and nasty Asian flu, triggered in part by, wait, a financial debt crisis, that time in emerging markets. Sound familiar? And oil hit less than $11 per barrel, less than 1/13th of its recent high, with people talking $6.
And it's easy to forget that the half decade following 1998 the not yet named as such cleantech investment sector hyped fuel cells, microturbines and distributed generation on the back of clean cheap natural gas, which was the fuel of the future.
And it's easy to forget that rising commodity prices wiped 99% of those business cases (only a few billion in value, though!) off the map until not a single cleantech venture investor today discusses distributed generation at all. But after a short hiatus, solar and ethanol exits on the back of some huge subsidies came through and cleantech was boomed.
And it's easy to forget that only a couple of years ago we as an industry debated the viability of hybrids and biofuels - because of a breakeven at $40-50/barrel or higher (the oilman's breakeven in Saudi Arabia is maybe $5/bbl)? Breakeven at $40 in biofuels? Corn ethanol maybe, cellulosic, dream on. But the switch from MTBE to ethanol came through on the policy side and unforeseen Chinese demand growth pushed oil prices stratospheric. And the corn ethanol plant owners built hundreds of plants at 5% of the size of average refinery, made hay and traded at tech multiples. Only to get crushed when corn prices, driven up by (gasp!) demand and higher natural gas and oil drove up their feedstock, fertilizer and transport costs and margins down. Welcome to refining, freshman.
And it's easy to forget that the core economic value proposition for solar has the ever present cost escalation analysis - "lock in your power costs, energy prices have risen x% per year, if they continue to do so you'll be paying 2.5x your current power prices in 30 years". And that the solar industry quietly ignores that energy prices will decline, not rise, with economic turmoil. But the ITC and feed in tariffs came through paying more than half the cost and so the party goes on.
It's easy to forget that energy is about commodity prices. And commodity prices are about cycles, supply AND demand. And that demand is GDP growth driven in energy. And that in our global markets GDP growth is more interlinked than ever, making it more, not less subject to cycles.
And that alternative energy is called alternative because it's the most expensive form of energy, meaning it's the swing producer, the type of guys who get killed in cycles (subsidies aside, of course).
And that the big fortunes made in cleantech investing to date have not been made on high risk early stage technology bets, but on 10 or 20 year old technologies who were in the right place at the right time when the policies came in. Or the low cost manufacturers of mature known technologies (think corn ethanol or wind developers and Chinese solar manufacturers) who moved fast when policies moved, making hordes of "that's not a venture" bets. Disruptive technology has never been the winner.
In energy, there is no disruptive technology, only disruptive policy that makes some technologies look disruptive after the fact. In energy, the risk is in the scale up, not the R&D, and the end application is so massive, so capital intensive, and so utterly dependent on commodity prices, that you can't invest in it like you invest in IT. It takes longer, 10x as much money, and the ante up to play the game for one project is the size of your largest fund. At scale, there is no capital efficient strategy in energy.
But we are Silicon Valley and we smash open gates with technology, and we know better than those energy dinosaurs in Houston, London, and Abu Dhabi, right? They just don't get it, right? One game changing technology can force the oil companies and power companies to their knees. The one I've found really is new and different. This entrepreneur has discovered something new. And it can be *cheaper* than oil (if you define cheaper right).
Beware Silicon Valley, the great fortunes, wars, and economic crises of the world for 100 years are not technology ones, they were energy made. Half the schools you went to were built by oil money. And the entrepreneurial spirit in this industry was born in the hardscrabble oilfields of Pennsylvania and Texas, and grew up in the far reaches of the globe. And the oil companies those entrepreneurs founded have forgotten more about technology in energy than you even know existed.
Be forewarned, you do not have a comparative advantage here. The oil men invented risk taking, AND risk management. The oil men are bigger, faster, smarter, richer, have more scientists and more entreprenuerial spirit than you, AND they know energy.
So while you fight the good fight to develop technology to change the world, don't forget, be humble, learn what can be learned, build what can be built, and walk softly, because the elephant in this room floats like a butterfly and stings like a bee, and he has yet to take the field.
The little guys whose pension funds are paying you a cushy 10 year guaranteed contract are counting on you to put aside your hubris.
Neal Dikeman is a partner at Jane Capital Partners and the CEO of Carbonflow. He is the Chairman of Cleantech.org and edits Cleantech Blog. He is from Houston, is a Texas Aggie, and believes in both energy and the power of technology to change the world.