LEGITIMATION OF CLEANTECH COMPANIES: VENTURE CAPITAL FINANCING AND FEDERAL GOVERNMENT FUNDING(i)

By Lange, Julian; Fehsenfeld, Luke et al. | Journal of Business and Entrepreneurship, Fall 2014 | Go to article overview

LEGITIMATION OF CLEANTECH COMPANIES: VENTURE CAPITAL FINANCING AND FEDERAL GOVERNMENT FUNDING(i)


Lange, Julian, Fehsenfeld, Luke, Marram, Edward, Bygrave, William, Journal of Business and Entrepreneurship


INTRODUCTION

The U.S. Department of Energy provides one-half of the financing of young venture-capital-backed cleantech companies on average. It raises the question, what gives those companies legitimacy in the eyes of federal agencies evaluating their proposals for federal funds? When young venture-capital-backed cleantech companies seek federal funding they lack the legitimacy (Stinchcombe, 1965) that comes from years of operating successfully. Such companies have few or no customers, little or no revenue, operating losses, and negative operating cash flow. We propose three principal sources of their legitimacy: their venture capital; their venture capitalist's reputation (Marcus et al., 2013); and their lobbying expenditures.

Venture Capital Investment In Cleantech

According to Patel (2006), "Cleantech is a venture capital buzzword, making eyes sparkle the way 'biotech' and 'infotech' [and nanotech] once did." Cooke (2008) commented that while Patel's description is not a definition, it is probably an accurate characterization of cultural origins of this "particular technology species." Cooke also observed that venture capitalists' classification of cleantech is so indiscriminate and broad that it could conceivably encompass "dirtytech." Burtis, Epstein, and Huang's (2004) list of cleantech segments, for instance, covers a spectrum so wide that it accommodates items as mundane as consumer products like non-toxic household cleaners and biodegradable eating utensils to extraordinary advanced technologies such as nano-material for more efficient and fungible solar photovoltaic panels.

The annual total amount of venture capital invested in U.S. cleantech companies and the number of deals from the beginning of 1995 through to the end of 2012 are shown in Figure 1. The first peak, which occurred in 2000, coincided with the frenzy of venture capital investment during the Internet bubble. The rapid rise in cleantech venture capital investment began in 2005, peaked in 2008, dropped in 2009 in the aftermath of the banking industry meltdown, and recovered in 2010, one year after the 2009 peak in federal cleantech expenditure. At its peak in 2011, it accounted for 15.6% of all venture capital investment.

Total cleantech investment by all venture capital firms fell 28% in 2012; a decline that accelerated in 2013 when investment for the first nine months was down 60% from the previous year; it was the lowest level since 2005. The decline in investment is due to the dismal venture capital returns from cleantech. Lange et al. (2011) found the returns of 52 venture-capital-backed companies that had IPOs between 2000 and 2010 were not satisfactory. The median IRR for the first round of venture capital was 26.1% with a range from -10.4% to 140.0%. The median IRR on the third round was 24.5% with a range from 8.1% to 184.6%. Those median returns fell way short of the 80% that venture capitalists expect for successful early-stage investments and the 40% for successful later stage ones. To put it in perspective, the median venture capital return on first-round investments in Internet companies was 506.9%; in software companies 124.8%; and computer hardware companies 148.9% (Bygrave and Zacharakis, 2014). A median annual return of around 25% on cleantech IPOs is not high enough to sustain venture capital investment at 2008-2011 levels.

Kleiner Perkins Caufield & Byers is the most successful venture capital firm in the history of the industry, and generally regarded as a trendsetter that is followed both inside and outside the venture capital industry. It was the leading investor in cleantech. But its reputation has been tarnished by the poor returns on its cleantech portfolio (McBride and Groom, 2013). As a result it has cut back its cleantech activity.

Federal Support For Cleantech

The U.S. federal government has at least 92 different programs supporting cleantech (Jenkins et al, 2012). Cumulative cleantech spending on all federal programs in the period 2002-2008 was $51 billion; annual spending peaked at $44. …

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