Interest in Clean Technology Dims Among Venture Capitalists
Insurance Experts' Forum, October 18, 2010
I’ve always thought that if you really want to know what’s going on with the economy, you should look to the people who study companies hardest and make the riskiest investments—venture capitalists.
Thus, I find it interesting that a recent PriceWaterhouseCoopers and National Venture Capital Association study (as reported by Associated Press) found that venture capitalists poured less money into U.S. start-ups in the third quarter of 2010 and split this among more companies, “signaling that investors are trying to be more economical with their funds.”
That’s really not terribly surprising. The U.S. economy continues to suck wind, unemployment (even at the artificially lowered numbers the federal government will admit to) remains disturbingly high, and people are still losing jobs. The risk is greater, so the prudent investor is being more careful with his or her discretionary funds.
According to the study, start-up investments declined 7% to $4.8 billion in the July-September period, compared with $5.2 billion invested during the same three-month period in 2009. A total of 780 start-ups received funding during the quarter—9% more than the 716 companies that received investments last year.
But here’s the really interesting part. The study says that much of the decline stemmed from a drop in large investments in clean technology. “Funding in clean-tech start-ups, which include alternative energy, recycling, conservation and power supply companies, has been mercurial lately. It fell every quarter last year compared with the previous year, but has been climbing this year—until the third quarter,” says the report.
These numbers confirm for me an idea that I’ve held for the past year or so; namely that while clean technologies are a trendy investment that makes the investor feel like a benefactor, they are not always particularly profitable. It’s all well and good to take a flyer on some “green” technology that has conservationists and environmental advocates oohing and ahing, but the bottom line for venture capitalists is capital. The apparent message here is that—at least at this point in time—there’s just not enough gold in them thar “green” hills.
This doesn’t necessarily mean that insurers and others with facilities and systems should give up on the idea of being “green.” It does mean, however, that it takes more than oohs and ahs to make a sound investment—or a sound strategy for a company. Getting carried away by a cause, no matter how noble, must be balanced by sound fiscal judgment.
The study also notes that by industry, software start-ups got the most funding in the quarter ($1 billion) while biotechnology start-ups came in second, garnering $943.7 million. Investments in clean technology, which was higher last quarter at $1.5 billion than any quarter since the study began keeping track of investments in 1995, fell to $625.2 million—a drop of 32% from the same quarter in 2009.
So the other message is that software remains a hot technology investment area, which is a hopeful sign for our industry, in which insurance-specific applications have had stellar success. Maybe it’s not as politically correct as the “green” concept, but every company has a duty to do the right thing financially by its investors.
On the other hand, if there’s a green technology out there that can demonstrate solid and sustained profitability, we should all be looking at that. We can only hope that sound judgment will prevail among our investors and within our organizations.
Ara C. Trembly (www.aratremblytechnology.com) is the founder of Ara Trembly, The Tech Consultant, and a longtime observer of technology in insurance and financial services.
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