Silicon Valley venture capitalist John Doerr famously described the late 1990s Internet boom as the “largest legal creation of wealth in human history.”
Of course, it was simply a classic “bubble,” and although we’re still reeling from the hangover, everyone seems to be hoping for another bubble.
The silent prayer in the technology sector is, “Please, Lord, just give me ONE MORE bubble. I won’t screw it up this time.”
In the words of Prince, are we “gonna party like it’s 1999?”
Will Vancouver’s big focus on green technology be the money-spinner?
Or will big money flow from the raft of web 2.0 lean startups that populate every nook, cranny and downtown office space available?
To examine this, I sat with Paul Kedrosky, fresh from running a panel on investing in energy innovation at the Southwest Energy Information Forum.
Kedrosky knows B.C.’s technology sector and brings a wider perspective as senior fellow with the Kauffman Foundation – the world’s largest foundation devoted to entrepreneurship and innovation – and editor of the widely read financial blog Infectious Greed.
Kedrosky’s take on bubbles is simple: “A bubble happens when there’s euphoria in excess of what underlying economics justify – either on the supply or exit side.”
Does Kedrosky see a bubble forming in web 2.0 startups?
“Not at all. As Stewart Alsop said, ‘We’re mainly seeing an echo bubble, a vestigial bounce of the tail end of the Internet’s consumer side. The last few avenues are being played out from the web-go-round that ended in mid-2000.’
“Because web 2.0 capital requirements to get initial customer contact have plunged, people can become venture capitalists with tiny investments. Low barriers to entry have disrupted the venture industry.
“The supply side of tiny startups has gone through the roof. But for all the churn and froth, there are fewer real results.
“What’s solid now is moving web experiments into the business world. How to launch, what’s the right metrics, capturing enterprise customers – these require a lot more capital and expertise to build out and monetize than is possible with thinly funded startups.”
OK, maybe Web 2.0 isn’t where the gold is buried. So we examined “green” technology.
B.C. boasts the largest Canadian cleantech cluster, with more than 1,300 companies and 18,000 workers. Cleantech neatly splits into two segments: energy efficiency and energy generation.
Energy efficiency is the hottest financing segment, solar companies lead energy-generation deals and alternative fuels draw the least investment.
Unhappily, B.C.’s cleantech prospects look uncertain, despite a rash of startups that drew investment in recent years.
Since 2009, venture capital dollars into cleantech have dropped 55% in the U.S.A. and 30% worldwide. Cleantech’s mini-bubble resulted from investors jumping in without having any background in the sector. Despite similarities to the IT and biotech sectors, cleantech is different, triggering investors to take a breather. Investment into many “hot” projects, rather than actual business models, have yet to show a hint of return.
“The fundamental problem [for cleantech investors],” Kedrosky said, “is that there’s no ‘new tool,’ no widely applicable innovation that can apply broadly and transform the industry. The nature of cleantech means the economics just don’t justify the interest. So investors pull back.”
Kedrosky believes that past cleantech projects were “too heroic; there were too many giant science projects, big capital without exit plans. VCs don’t have 10-year investment horizons.”
B.C. cleantech funding now flows to later-stage investments, proven technology and companies seeking to ramp up production, not development.
In stark disconnect to Victoria’s proclaimed desire to lead in the world green economy, a new report outlines how emerging B.C. cleantech companies are struggling to secure vital financing.
“Cleantech Access to Venture Capital in British Columbia: Analysis and Recommendations” outlines how “public policy influences where venture capitalists invest, and in this global recession climate, clean-technology development is seen as high risk.”
Commercialization risks, delayed revenue, unhelpful energy purchase practices, insufficient government support and a lack of manufacturing expertise for the sector are all seen as culprits.
The lack of carbon tax to dampen volatile oil economics and dirt-cheap energy prices are not helping cleantech development, either.
Yes, change in the cleantech and Web 2.0 sectors is uncomfortable, but surely our mix of enterprises will eventually deliver profitable growth.
But a bubble? Sorry. We’ll have to content ourselves with building rational, market-driven value – the old-fashioned way.
