CIAO DATE: 07/2011
April 2011
Berkeley Roundtable on the International Economy
In the last half-‐century, venture capitalists have financed many of the most important new U.S. technology-‐based firms and industries. Most recently, venture capital has been touted as a key investor and driver of a new clean technology future. This paper examines the characteristics of successful venture capital investing and the structure and dynamics of clean technology markets to predict whether venture capital is the best model for financing a clean technology transition. We identify the following three key characteristics of technologies and markets in which venture capital can be successfully invested. First, the firm’s markets must be large and rapidly growing. Second, the firm’s solutions must be scalable, with the particular characteristic that a firm’s growth in revenue (and valuation) significantly outpaces the capital cost of achieving that growth. Third, there must be the potential for large andrapid payoff, as either a public stock offering or acquisition by another firm. In the U.S. clean technology market, with the exception of energy being a large market, in nearly all cases these characteristics do not hold. For these reasons, a venture capital model for funding clean technology innovation is unlikely to be successful and the imposition of venture capital goals on clean technology firms may even be harmful to their survival. The current Obama Administration’s strategy of providing enormous loan guarantees to a few chosen venture capital-‐financed firms is misguided because it is likely to truncate the chaotic business model search that characterizes the formation of new industries.
Resource link: Venture Capital and Clean Technology: Opportunities and Difficulties [PDF] - 308K