I had a chance to join an interesting round table conversation at Stanford University on financing strategies for energy/cleantech. There were a lot of interesting ideas shared, from PACE financing efforts in California to bond structures, tax credits, REITs, MLPs and green bank concepts.

It was interesting, however, to note that pretty much every one sitting around the table was rather down on cleantech venture capital as a sector, essentially counting VCs out of the equation all together. While I don’t blame them given the lack of VC interest in the field in the recent past, there were some thoughts I shared there that maybe worth sharing here as well. In summary I believe VCs have brought, and will continue to bring, value to clean energy sectors, and there is much that can be done to create a better environment for them to participate.

1. Energy innovation would benefit by having VCs around the table. While deployment side companies are in vogue, we can’t just do incremental innovation from this point on. We need a mix of both. We need to continue funding crazier, out of the box, ideas in the sector so we have innovation ready for the next stage of deployment as well. VCs generally are able to take a slightly longer term, riskier tech view. It sounds a matter of fact now but the first VCs to take risks on building electric cars, putting solar on rooftops and taking us to Mars and beyond in search of resources were very brave, and thankfully so.

2. VCs have been burned in the sector, but it was a compounding of issues that led to that:

• There was over-enthusiasm around society’s desire to rid us of dependence on imported oil and dirty coal. That enthusiasm for ‘green’ was short lived, esp. post 2008 crash. Being clean and green has turned out to be nice to have, but economic equations matter more…and only now are we seeing those equations work in the favor of new technologies. Abundant supply of natural gas due to fracking may have been the last nail in the coffin for many cleantech companies of the last generation.
• The economic recession led to a serious re-structuring of timing and liquidity around cleantech exits. We are now starting to see some $1B+ successes that were expected 3-4 years ago.
• Many VCs did not spend enough time understanding the spaces they went into, and build supply without understanding demand. VCs were mostly clueless on happening around the world, esp in Asia. It is rarely a non-US company that creates competition for US startups in the digital/IT sector. That was not the case in energy/cleantech. Energy was a global commodity, and countries such as China decided to foot the bill for its companies to dominate in emerging sectors such as solar and LEDs. It is worthwhile noting that it wasn’t just Solyndra that went belly up. The largest solar company of China (way bigger than Solyndra) also went bankrupt in the mad race to the bottom. Fortunately for consumers, that led to dramatic reduction in solar costs, and net benefit for downstream solar companies.
• Agriculture lobby pushed for the biofuel mandates and ag-politics won over rationality. Cleantech companies got pulled into the frenzy even though technologies were far from ready, some VCs made ill-thought through promises, and the sector never took off, frankly.
• Cleantech VCs unfortunately fell into the trap of building companies for potential buyers who never buy companies at high multiples and on promises of the future. When Google buys Nest, eyes light up! Fortunately, Tesla has been a public company for a while now with tens of billions in market cap, and SolarCity continues to look good. Hardware is exciting again, especially because it enables data, analytics and indirect impact on other aspects of life. Energy/cleantech has become multi-disciplinary field, which is a good thing!
• Smart entrepreneurs and VCs invested outside of the mainstream solar, wind, biofuel sectors — such as in energy efficiency, energy management, and downstream applications — sectors where regulations mattered less, capex needs were low, foreign influence was difficult, and time to market was shorter. Sound economics led to interesting startups getting funded in such sectors that are now returning capital to their investors.

3. VCs need to see stability in the marketplace, and do not want to be involved in a political football match. The 2012 election year was brutal. While VCs would welcome regulatory support for bringing new technologies to market so they can replace older, high subsidized, dirty forms of energy, it is stability and steadiness of policy that is direly needed. We all remember 2012 as the year that wind industry nearly died…by the stroke of a pen. Nobody wants that in their portfolio. VCs don’t enjoy Washington DC the least bit and don’t want to return there if they can avoid it. The lack of financial VCs at the recent ARPA-E summit, even though it is a technology showcase venue, was in some ways a reflection not only on VC interest in the sector, but also how pissed off VCs are at DC itself.

4. VCs can play an important role in attracting bright, young talent to the energy/cleantech sector. We should want them there, despite their shortcomings. They bring forth (albeit not the only ones who do so) a promise of commercializing breakthrough ideas, high octane work environments, equity sharing that could lead to riches, and an enthusiasm for innovation to bring about positive change. VCs also bring lessons learned from other sectors: lean development, growth strategies, managing R&D roadmaps, hiring, M&A etc. VCs are not about to return to the sector en masse any time soon, but we certainly should not be treating them as a lost cause either.

5. Energy is still a trillion dollar sector where the infrastructure is crippling form the inside due to lack of innovation and investment. Global warming is a reality, whether politicians like it or not, and intense global competition demands that we find a way to be energy independent by making longer term investments in cleaner forms of energy. Perhaps in this sector, more than any other sector, we need to find a way for more private-private and private-public partnerships. Small companies innovating on technology need to find a way to work with larger entities to scale, and vice-versa. Some of this may not happen on its own, simply because of inertia, not-invented-here syndrome, and state sanctioned monopolies/oligopolies. Smart and long-term policy would be key to seeing venture capital return to the sector.

Humbly, I believe many VCs are still recovering and regrouping, and younger VCs that built businesses in the sector and/or spent time learning details of the sector are either raising new smaller funds, or finding ways to work with larger funds to make few, focused, high value bets. The environment hasn’t fully shifted yet to make the sector super attractive, but there is hope for that happening. A new generation of entrepreneurs are setting roots as we speak, and I really hope there will be risk-taking VCs available to them for exploiting science/engineering innovation.