John Denniston

The Word Is Green in Silicon Valley

April / May 2007 By: Dean Takahashi Volume 5 Number 2

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Talk about having influence. Floyd Kvamme, a partner at the renowned Silicon Valley venture capital firm Kleiner Perkins Caufield & Byers was able to look at the alternative fuel goals that President Bush used in his State of the Union speech—€”before Bush talked about them in public.

"I looked it over to see if the numbers were practical," said Kvamme.
Of course, it helps that Kvamme is co-chair of the President's Council on Science and Technology, an influential group that submitted a report in November on the nation's energy situation and how alternative energy technologies can make a difference.

In the speech, Bush said that within 10 years he wanted 20 percent of the nation's transportation fuel to come from alternative sources such as ethanol. By Kvamme's calculations, that means the country will need to increase its production of ethanol by many billions of gallons a year. Hitting those targets and making advances with other green technologies will help the country achieve important national goals: reducing the impact of global warming, cutting dependence on foreign energy sources, and making the U.S. more competitive in key technologies on a global stage.

Suddenly, after decades of work, green technologies are hot. John Denniston, another partner at Kleiner Perkins, says a confluence of events has made it all happen. The 9/11 attacks, the Iraq war, rising oil prices and the California energy crisis have made it clear to everyone that it's strategically important to become less dependent on foreign oil. On top of that, Hurricane Katrina, Al Gore's Oscar-winning An Inconvenient Truth and new research corroborating global warming trends have made action more urgent. The change in control of congress and the president's own initiatives have added momentum to the trend favoring green technologies.

"There really has been a sea change in public awareness of this," Denniston said.

Venture capitalists are seizing the opportunity. In 2006, more than $1.28 billion was invested in clean technologies, according to Dow Jones VentureOne and Ernst & Young. That is double the $664 million invested in 2005, and far more than the $416 million invested in 2001. The money is pouring into alternative fuels such as ethanol, solar electricity, electric vehicles, batteries and low-power electronics. More than 100 clean-tech companies a year are now getting venture money. The good thing for U.S. national competitiveness is that two-thirds of the money is going to U.S. companies.

Why is so much venture money going into clean tech? Vinod Khosla, head of Khosla Ventures, says that entrepreneurs have a huge $60 billion market to target in alternative fuels alone. How does he get to that size of market? He says that if the country meets Bush's target of 20 percent alternative fuels, it's easy to calculate the value of that, assuming gasoline averages about $2 a gallon. By comparison, Denniston notes that Internet advertising is only $20 billion in annual revenues.

That explains the rush into new technologies. Roughly a third of all of the green tech investments are going into Silicon Valley companies, according to VentureOne. Part of the reason is that pioneering companies such as SunPower, a maker of solar cells, have grown up in the valley and spun out of the semiconductor industry. The industry got a shot in the arm last fall when a bill curbing emissions in California to 1990 levels by the year 2020 was signed.

With so much momentum, the VCs and technology lobbyists are turning their attention to Washington, D.C. A year ago, Kleiner Perkins formed the Greentech Innovations Network, a group of 50 prominent startups, investors, policy makers, academics and technology experts whose aim is to bring the right people together to grease the skids for commercial enterprises.

"The network's goals are to identify the most important technology initiatives that could solve the problems and the most important policy initiatives that could solve the problems," Denniston said.

TechNet, a group of technology company CEOs, also has a green technology task force that is working on a policy report. A survey by TechNet showed that 77 percent of Americans feel that the U.S. should do more to promote new technologies. And the National Venture Capital Association is also working on a green technology initiative. The report from Kvamme's PCAST group also lists dozens of startups at http://www.ostp.gov/pcast/PCAST-EnergyImperative_FINAL.pdf
Denniston hopes that big initiatives will happen on the federal level in 2007.
The government could pass national versions of California's laws on curbing emissions and granting subsidies for those using alternative energy sources such as solar electricity.

The national energy labs are sure to benefit from all of the added momentum. Alain Harrus, a partner at Crosslink Capital, says that the energy labs are good places to scout for new technologies. He also says they're a good source of scientists who can work at the newly minted startups.

In Silicon Valley, there are multiple prongs to attack the problem. Investments in cellulosic ethanol, clean coal, electric cars, batteries, fuel cells and even low-power consumption electronics could reduce harmful emissions. Some of the technologies have been around for decades, but investors such as Kvamme and Khosla think that the technologies are on the verge of fundamental breakthroughs. They know that not every investment will pay off, but it makes sense to make a lot of different bets.

Kvamme says there could be great value in helping the startups communicate with veteran technologists at places such as the National Renewable Energy Lab in Colorado. He notes that technology companies will lead the way because they typically invest 15 percent of revenues in research in development. By contrast, Exxon Mobil invests less than 1 percent of its revenues in R&D. But Kvamme is encouraged by events such as BP's decision to invest $500 million in alternative energy research being led by the Lawrence Berkeley National Laboratory.

Some people have expressed concerned that green tech is another bubble that the VCs may soon abandon once something else becomes more fashionable. But Barry Cinnamon, CEO of solar installer Akeena Solar in Los Gatos, Calif., says that the comparison to the internet bubble a few years ago isn't accurate. While the dotcom bust killed off a lot of startups, he notes that there isn't as much of a frenzy in green tech yet. Few green tech companies have gone public and they aren't enjoying huge valuations just yet. VentureOne noted that the average value of green startups is smaller than the average value of overall technology startups. Kvamme notes that the solar industry could grow 50 percent a year and still not fill more than 10 percent of the nation's overall electricity needs by 2030. The size of the potential market—€”as big as the oil and gas industries today—€”thus justifies all of the new love from the venture community.

Dean Takahashi is a columnist at the San Jose Mercury News.