Venture Capital Investment in the Clean Energy Sector

Abstract

We examine the extent to which venture capital is adequately positioned for the rapid commercialization of clean energy technologies in the United States. While there are several start-ups in clean energy that are well-suited to the traditional venture capital investment model, our analysis highlights a number of structural challenges related to VC investment in the sector that are particularly acute for start-ups involved in the production of clean energy. One of key bottlenecks threatening innovation in energy production is the inability of VCs to exit their investments at the appropriate time. This hurdle did exist in industries such as biotechnology and communications networking that faced a similar problem when they first emerged, but was ultimately overcome by changes in the innovation ecosystem. However, incumbents in the oil and power sector are different in two respects. First, they are producing a commodity and hence face little end-user pressure to adopt new technologies. Second, they do not tend to feel as threatened by potential competition from clean energy start-ups, given the market structure and regulatory environment in the energy sector. We highlight that the problem is unlikely to get solved without the active involvement of the government. Even if it does, historical experience suggests it may take several years.