Battle Over the Definition of Success in the ‘Cleantech’ Industry
This past week PayPal co-founder Peter Thiel — who was also an early investor in Facebook — made headlines when he declared that “Cleantech is an increasingly large disaster that people in Silicon Valley aren’t even talking about any more. The failure in energy and transportation points to a larger failure in clean energy — we aren’t moving any faster, literally, than we were when modern airplanes first came out.”
Those comments ruffled the feathers of Cleantech VC Vinod Khosla, who responded “Cleantech is not a disaster.” So who is correct? It depends entirely upon how one defines success:
Over the last 12 months, Khosla has generated more than $1 billion in profits from three IPOs and will “probably” see six more IPOs over the next 12 to 18 months, if the markets hold up, he said. “That $1 billion in profits over the last year is way more than most venture funds have done in IT in the last ten years cumulatively,” Khosla said. “I challenge anybody to claim clean-tech done right is a disaster.”
It is clear that these two are talking about entirely different metrics for success. Thiel’s metric seems to be the actual production of cost-competitive energy. Thiel noted that investment dollars in Cleantech are falling — and yet even after billions in investments these companies are still not producing cost-competitive energy. Thus, Thiel is correct with respect to the metric he is using to measure the industry.
But Khosla points out that his investors have made money. By his metric, he claims that the industry is a success. So which metric should we use?
Making Money, or Producing Energy and Displacing Oil?
I asked Khosla five years ago about his objectives. I wanted to know whether his primary objective was to make money, or whether his primary objective was to produce sustainable energy — which it seemed to be from all of the interviews he had done. He told me that he was in this out of concern over global warming and our dependence on fossil fuels, and that his primary objective was to displace oil. Clearly he wants to make money in the process, but by his own admission his metric for success was closer to Thiel’s.
And quite frankly, if the measure is whether people made money, then Range Fuels was a success even though they never delivered. But some people made money on Range Fuels. Solyndra — much in the news the past two weeks because taxpayers are going to be stuck with a $500+ million bill — made some people some money. Their CEO had a base salary of $400,000 a year, so he made money. The people hired to build their factory made money. But investors — and mostly taxpayers — lost a ton of money.
I simply don’t think that the fact that one can talk up a company and then IPO it at a profit is the proper metric for success. Some of those companies that have been IPO’d are grossly overvalued. Many of them won’t be around for long. (In fact, I wrestled hard this week with a decision to short one of them; I ultimately decided not to — but not because I don’t think the company is grossly overvalued). So is a company that is IPO’d, makes initial investors some money, and then ultimately goes bankrupt without producing energy a success? Not for the general public it isn’t. Those “successes” do not help wean us off of oil.
I would also question whether Khosla is counting up the losses when he claims to have made $1 billion in profits. We know investors lost a lot of money in Range Fuels. In fact, I was told this week by someone in Silicon Valley that the actual number is quite a bit higher than what has been publicized because the stake of the initial investors was never made public. The amount I was told is unconfirmed, so I won’t repeat it. But it is a fact that the overall investment in Range Fuels has never been published (to my knowledge); all we know is that the publicly announced funding was more than $300 million.
Conclusion: Clean Tech Has Not Delivered
So, by the measures that matter to most people: Increased energy security, more supplies of clean energy, displacement of oil — Thiel is correct. Clean Tech has not delivered. And for that matter, energy companies have never been high flying investments. They are in a very competitive, low-margin business, and their low PE ratios reflect that. So I don’t believe that Clean Tech stocks can be expected to behave like technology stocks in the long term. They aim to sell commodities, and that just isn’t a high growth business.
If I look at Vinod Khosla’s portfolio, I am unaware of any of those companies that are selling commercial volumes of competitive products. Of course there are sectors of his investments that are unfamiliar to me. I don’t know much about the companies he has classified under Electrical Efficiency, Mechanical Efficiency, or Batteries — for example — but I see companies in the liquid fuel portion of his portfolio that will never deliver per the promises they made and will never justify their current market valuation. (In fact I sometimes think I could make a fortune shorting some of the companies in his portfolio — but shorting is a lot more complex than just being 99% certain a company will fail).
Khosla needs to deliver cost-competitive energy to actually address his stated concerns about energy security. Until he does that, Clean Tech can’t be cast as a success, and any attempt to paint it that way is simply spin.