Saturday, May 31, 2008

why I care about cleantech

Recently I have had a number of conversations with VC's, angels, and entrepreneurs on why cleantech (broadly defined) is important. Often times, the conversation quickly shifts to global warming, etc.I wanted to take this opportunity to clarify why I care about cleantech, and why you should care as well, regardless of your current views on global warming.

To start, just to make sure we are all in the same page -- Cleantech, as a category, represents products that will increasinglybe adopted from the environmental challenges that the world is facing (climate change being one of the drivers). This product category includes solutions for cleaner energy, clean water, improving efficiency of basic materials, lighting, etc (see GreenTech Media Taxonomy). For a long-time a purely socially conscious mission was the driver of environmental pursuits -- organizations wanted to make sure we were not affecting our planet. However, the fact is that there were enough resources to fulfill the basic needs of the developed countries, and this included energy, water, food, etc.

Today, though, the situation is changing and we are moving to an era of scarcity of real-world resources. (This is quite ironic, given that for the last 30 years the innovations of Silicon Valley have created a digital infrastructure that has brought to us an era of abundance in the digital world). This scarcity is primarily driven by the accelerated growth and demands of emerging markets (China, India, Brazil, etc) whose populations are now looking to attain some of the living-standard luxuries that all of us in developed markets take for granted. As we fast forward over the next 50 years, these countries will become more powerful, commanding aggregate GDP levels equivalent to that of the U.S. and EU (I will run through some of my calcs in another blog). At an individual level, the consumers in these countries will be commanding better access to basic resources that will push their standards of living above of the menial conditions that most live in today (ex: majority of India lives at under $1 per day). Combining this grass-roots consumer push for a better quality of life, and the stronger political power from aggregate GDP levels, these countries will become stronger negotiators to receive their fare share of resources.

Now why does this hypothetical scenario matter and how does it connect to the need for cleantech? Well the fact remains that unless we do things differently, the world will not be able to sustain a path for development for these countries that follows the path of development using the same solutions for resources that worked in the U.S. and Europe (oil, energy intesive processing, always on, etc). We have to find new ways to assure economic development, otherwise the competition we are witnessing for basic resources will accelerate, and the existing negotiations may escalate to major conflicts (think about what 200 M people will be willing to do if they can't get access to clean water). So to me, the investment in clean technologies is necessary to assure sustainable development!

So where does the climate change discussion come into play? The changes from climate change will only make this situation bleaker. Climate change will impact the availability of resources in emerging markets, further escalating both the rate and the degree of competition for resources. A perfect example of this point is if we look at water. Countries like India and China already have a relative scarcity of water (with growing strains) and with truly drastic climate change scenarios, this scarcity will only become more severe.

To bring about another point, a lot of investors point to price of commodities as being the driver for cleantech investment. Although I agree that prices is the catalyst that makes most individuals in the mainstream market finally care, this is looking at the effect side of the cause/effect relationship. Prices for energy today are increasing because of growing competition for the known energy resource we have relied on for years (oil). Regardless on your views of what OPEC should do to the supply that they make available, the largest change in demand has been from increasing pull from emerging markets for this resources and continuing growth of energy in developed economies (see oil tracking chart). Even if they increase their supply of oil, this is not a sustainable approach for next 100 years (even dismissing the climate change argument). The national security point is important, especially when it comes to making sure that we have access to energy and aren't dependent on imports. Hopefully though, by helping other countries improve access to resources themselves, we help create generally more peaceful global context.

My perspective is that developers of clean technologies will be increasingly rewarded from the growing interest and customer spend for solutions that will allow for both (1) to increase availability of clean resources available and (2) assure efficient use of existing resources. Today, the market multiples and transaction comparables for some of these sectors are showing the value that the market demonstrates for innovations targeted at this space (ex: solar multiples, etc). However, for the majority of other sectors this has not been the case.

My hypothesis is though, that as people realize the magnitude of the problem (that there are just fewer basic resources available for consumption and that need for these resources is accelerating from rapid global development), the sense of urgency will rise. Innovators who today begin to identify solutions to help lower the cost curve of some of this solutions (and increase efficiency) in my mind will be increasingly rewarded for the economic value and social value they create.

If you ask my opinion on global warming, it is clear in my mind that there are significant environmental changes that have been created through increased development (including species extinction, habitat pollution, etc) from the consumption based habits we have chosen to embrace and reward as a population. CO2 induced temperature changes in my mind is just one of the most significant and impactful.

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