Gambling on Green

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By 2006, the clean-tech sector was absorbing 11% of all venture capital in North America and Europe. Investors started knocking on Todaro's door, and they haven't stopped since. "We went from hat in hand to not being able to return investor calls," Todaro says. The company won millions in financing, and has just announced a deal with a firm called Green Earth Fuels to develop 100 million gallons (380 million L) of biodiesel by 2010. Says Richard Kaufman, CEO of the international sustainable investment company Good Energies: "There is just a wall of money out there now."

No single venture capitalist may be more responsible for that shift than Khosla, who formed Khosla Ventures in 2004 in part because his Kleiner Perkins partners were still hesitant to dive into clean tech. Khosla had no such fears, and he has emerged as a clean-tech evangelist. "By 2000, I felt that software and other businesses were reaching a dead end," he says. "But energy was an area where there were large markets that could benefit from innovation." Khosla hasn't held back — in the first nine months of 2007, Khosla Ventures participated in 14 deals worth nearly $70 million. He has spread his bets along a range of clean-tech sectors, with a particular focus on biofuel start-ups such as Range Fuels, which is close to commercializing biofuel out of agricultural residue like wood chips, rather than food crops. Nothing has paid off big for him yet — in fact, prices for corn-based ethanol, which Khosla has also invested in, crashed in 2007, largely due to overproduction. But Khosla, who sees corn as a stepping stone to superior cellulosic ethanol, is undaunted. "This is a great market with great fundamentals," he says.

Still, the dotcom bust casts a shadow, with fears that once again too much money is chasing too few good ideas. The drive to go green, so strong today, could rapidly lose momentum if oil prices were to drop significantly, and it hasn't escaped notice that clean tech has yet to produce a bank-breaking success like Netscape, which made Kleiner Perkins a fortune. "Everybody with a dollar thinks they're a clean-tech investor now," says Foundation Capital's Grosser. "A ton of people could lose a lot of money on solar or biofuels." But defenders point out that the burgeoning energy needs of China and India mean that oil prices are unlikely to fall to previous levels, while the political push to put a higher price on fossil fuels through emissions caps or a carbon tax will make renewables a neccesity. "It's either a very important hedge against the future, or it could become the future," says Peter Bance, CEO of Ceres Power, a London-based fuel-cell company.

Big names from the mainstream business world are migrating into the clean-tech sector — because they want to help the planet and their bankbook. Lois Quam, a pioneering health-care executive, who was last year named one of Fortune's 50 Most Powerful Women in Business, joined the Minneapolis-based investment bank Piper Jaffray to guide its rapidly growing alternative-energy portfolio. "You see so many good companies and entrepreneurs entering this space," says Quam. "This is the biggest business opportunity for this country."

Prophets of profits
That's a message much of the rest of the world has already absorbed. Though the U.S. is easily the biggest player in green venture capital, Europe may be ahead on clean tech itself, thanks largely to the kind of generous government subsidies that have yet to be enacted in Washington. The enormous capital expenditure required to compete in the energy market makes government support all the more important. Many of the world's top solar and wind companies — like Germany's Q-Cells and Spain's Iberdrola — are based in the E.U., and with the region set to enact even stricter caps on carbon emissions, this head start is unlikely to disappear soon. "Europe is the clear leader in clean tech, from a market side, but also the technology side," says Felix von Schubert, a partner at London-based investment firm Zouk Ventures.

But both Europe and the U.S. may be less important than the nation that will soon be the world's top CO2 emitter: China. Cleaning up China is both the biggest challenge to green tech and its biggest opportunity, and venture capitalists are staking their claim, with their investments in green companies in China rising by 147% to $420 million between 2005 and 2006. Much of that money is being channeled into meeting China's ravenous energy needs — especially solar, which already has a homegrown success story in billionaire Shi Zhengrong, founder of Suntech Power. Water conservation and filtering is a growing field, too — a reminder that clean tech is about more than just carbon emissions. Another difference is the faster payoff for green investment in China, driven by lower fixed costs and intensifying demand for clean energy. "All clean ventures in China are nearly immediately profitable," says Roman Shaw, founding partner of Shanghai-based venture-capital fund DT Capital. "That rarely happens in the U.S." But while China is almost certain to become the world's biggest market for clean tech — the government is calling for 15% of the country's energy to come from renewables by 2020, the same target that President George W. Bush has threatened to veto in the U.S. — the nation's businesses have yet to show that they can create green innovations on a large scale, rather than buying and selling those developed elsewhere.

That pressing need for innovation is the ultimate challenge for everyone involved in the green sector, including the venture capitalists funding it. Some environmentalists like to say that we already have the technology we need to defeat global warming. This is not true. Creating the advances needed to rapidly decarbonize our energy supply — at a price the developing world can afford — will require the investment of countless billions of dollars for research and development. At the moment, we're not even close to victory, but many of the best, smartest and richest investors around have now joined the battle. At the end of a presentation on Kleiner Perkins' green-tech initiative at this year's TED (Technology, Entertainment, Design) conference, an invitation-only gathering of global thinkers, legendary venture capitalist John Doerr silenced his audience when he briefly broke down, pondering the future his 15-year-old daughter would face if nothing were done to stop climate change. "We face irreversible and catastrophic consequences," Doerr said. "We must act and we must act decisively." Investors like Doerr have financed revolutions before. Let's hope they spark another.