Gambling on Green

Grays Harbor, a foggy bay 90 minutes outside Seattle, has been known for two things: paper mills and the rock star Kurt Cobain, who was born there in 1967. Both are memories now, and in recent years the area had fallen on the hard times familiar to blue-collar communities across the U.S. But Grays Harbor is showing new color, thanks in part to the Seattle biofuel company Imperium Renewables, which just opened the nation's largest biodiesel plant there. The four-month-old refinery positively gleams (and smells vaguely like lawn clippings because of the vegetable oil used to make the biodiesel). As he scales a 500,000-gallon (1.9 million L) holding tank, plant manager Sid Watts can't conceal his pride. He points to the dock, where ships bring in vegetable oil from places like Indonesia and Malaysia, and to the rail terminal, where trains will help transport 100 million gallons (380 million L) of biodiesel a year to Imperium's customers. Watts is happy to see his refinery jump-start the economy of Grays Harbor, but he knows the benefits of Imperium's green, low-carbon fuel will be felt well beyond the town. "It just makes you feel good to work on something that's helping the planet," he says. "That matters to us."

None of this would have happened, however, without a spark of venture capital. That came from Martin Tobias of Seattle-based firm Ignition Partners. A restless ex-Microsoft executive, Tobias thought software had maxed out, and by 2004 he was looking for the next big thing. He found it in the emerging clean-tech sector — which encompasses renewable energy, environmental efficiency and water — and discovered the struggling start-up Seattle Biodiesel, which had just been launched by a former airline pilot. Tobias injected badly needed capital, eventually buying 20% of the company and becoming CEO of the renamed Imperium Renewables. ("Less local," he explains.) More funding came from angel investors and successful rounds of venture financing, and today Imperium is set to break ground on new plants in Hawaii, Pennsylvania and Argentina, and is preparing to go public. With Imperium, Tobias knows his money is making a difference. "Investors want to do something good, and they want to make money," he says. "Clean tech is a way to do that."

Once the province of those with long hair and short credit lines, today clean tech is a prime target for the smartest — and richest — investors in the world. Green investment by American venture-capital firms reached $2.6 billion in the first three quarters of 2007, the highest level ever recorded and nearly 50% more than the total for the whole of 2006. The European clean-energy sector is already producing winning companies in countries like Germany and Spain, and in rapidly growing China nearly 20% of all venture capital was channeled into clean companies in 2006 — double the percentage in the U.S. Green start-ups searching for cash "have gone from a desert to drinking from a fire hose," says Nancy Floyd, head of the alternative energy–focused venture-capital firm Nth Power, which also has invested in Imperium Renewables. Like Tobias, Silicon Valley stalwarts who helped power the IT revolution see clean tech as an investment opportunity that could have no ceiling — and that comes with the side benefit of potentially saving the world. Vinod Khosla, famous for being a co-founder of Sun Microsystems, has put massive bets on biofuels, while his former partners at leading venture capital firm Kleiner, Perkins, Caufield & Byers (Kleiner Perkins) have belatedly followed in a big way, investing more than $270 million in the green-tech sector and hiring Nobel prizewinner Al Gore as an active partner. As Kleiner Perkins' Bill Joy told a recent gathering of clean-tech CEOs in Boston, "We really do believe that energy and green technology is the largest economic opportunity we've seen so far this century."

That capital is already paying off. Revenues for companies in solar energy, wind, biofuels and fuel cells surged from $40 billion in 2005 to $55 billion in 2006, according to the research group Clean Edge. Clean energy–related companies raised over $10.3 billion in ipos in 2006, up from $4.3 billion in 2005, and hot new companies such as First Solar, whose stock jumped from $25 to $215 in the past year, are angling to become green Googles. In turn, green venture capital in the U.S. is projected to rise to $18 billion by 2010, according to Nicholas Parker of the research group Cleantech Network. "There are huge problems facing us, and the only way to solve them is through innovation," says Khosla. "That's what venture capital does best."

The new new thing
For CEOs who founded clean-tech companies before this explosion of interest, the sudden materialization of capital can seem too good to be true. When Tom Todaro launched Seattle-based Targeted Growth, which uses genetic engineering to greatly enhance the yields of crops, he thought the company's ability to multiply the amount of feedstock available for biodiesel or ethanol would make it a star of the emerging biofuels sector. But it was the late 1990s, when clean tech made up less than 1% of total venture-capital spending, and investors weren't interested. "I went begging to friends and families and small investment firms," Todaro recalls. "At one point we were 90 days away from having to cut back operations."

Though they couldn't be more different from former dotcom darlings like
 Pets.com, clean-tech start-ups were hit hard by the vaporization of venture capital in the wake of the tech and Internet bust of 2000. Funding for green venture capital plunged over the next three years. But it wasn't just flashbacks to that meltdown that initially kept venture capitalists cool on clean tech. Starting up an Internet company required relatively low levels of capital — at least before you started buying your employees massage chairs — and dangled the possibility of a quick and lucrative payoff. Cracking the energy sector, with its powerful incumbent companies and forbiddingly high capital costs, requires a more patient investor. "There may be some VCs willing to finance a $100 million project plant, but most can't," says Howard Berke, a veteran tech entrepreneur and co-founder of the solar company Konarka. "It could mean a longer [wait] for returns than what early-stage venture capitalists are accustomed to."

The tide began to turn in 2004, thanks partly to rapidly climbing oil prices that instantly made alternative energy more competitive, and partly to government action in the U.S. and elsewhere that provided support for clean tech. The Gore-approved narrative of climate change — as both a threat and an economic opportunity — penetrated the venture-capital community. Adam Grosser, a venture capitalist at the Silicon Valley firm Foundation Capital, struggled to convince his partners that they should expand beyond their traditional IT focus into clean tech. "When I first proposed it, my partners scoffed," he says. But Grosser persisted, and today clean tech accounts for 10% of Foundation's portfolio. "This is not a problem that is going away soon," he says. "This will be a trend like PCs were for the 1980s and networking was for the 1990s."