VC investment can’t create truly radical innovation because it can’t overcome uncertainty and long timeframes necessary for innovation – state investment is comparatively more successful

Advanced clean technologies (like all radical technologies) have many hurdles to clear. Some hurdles may relate to technical development (such as improving or inventing production techniques), others are due to market conditions or competition. In the case of renewable energy sources like wind or solar power, broad social acceptance and the need to provide energy at a price lower than possible by other firms and technologies are also major hurdles (Hopkins and Lazonick 2012). The residential, commercial and utility energy markets that they compete within are subject to unstable or inadequate government support.

Given these challenges, the financial risk of supporting a firm until such time that it can mass produce, capture market share and reach economies of scale, driving down unit costs, is too great for most VC funds (see Hopkins and Lazonick 2012, 7). VCs are also unwilling to participate in technological development that does not lead to a successful IPO, merger or acquisition. It is from these 'exit' opportunities that they derive their profits. While a high degree of speculation is behind all VC investment decisions, they are unlikely to invest at all without a strong push from government in the form of a targeted technological development. Indeed, in the absence of an appropriate investment model, VC will struggle to provide the 'patient capital' required for the full development of radical innovations.

In the innovation game, it is crucial that finance be 'patient', and be able to accept the fact that innovation is highly uncertain and takes a long time (Mazzucato 2010). Patient capital can come in different forms. German FIT policy is a good form of public 'patient capital' supporting the long-term growth of renewable energy markets. By contrast, the availability but also frequent uncertainty surrounding tax credits in the US and the UK are a form of 'impatient capital'— which indeed has not helped industry take off. The most visible patient capital made available to renewable technology manufacturers and developers has been delivered through State-funded investment or 'development banks'. According to the Global Wind Energy Council (GWEC):

The main factor that distinguishes development banks from private sector lending institutions is the ability of development banks to take more risk associated with political, economic and locational aspects. Further, since they are not required to pay dividends to private stakeholders, the development banks take higher risks than commercial banks to meet various national or international 'public good' objectives. Additionally, long-term finance from the private sector for more than a ten year maturity period is not available. (Fried, Shukla and Sawyer 2012, 6)

The role and scope of development banks are more diverse than simply financing projects. In fact, even within the broad category of 'financing projects', development banks (or State Investment Banks [SIBs]) play multiple roles, namely provision of countercyclical lending, funding of long-term capital development projects, finance for technology development and start-ups (venture capital role) and finance for projects that help address societal challenges (challenge-led role) (Mazzucato and Penna 2014). But development banks can also set conditions for access to their capital, in an effort to maximize economic or social value to their home country. Most development banks deliberately seek to invest in areas that have high social value, and are willing to make risky loans that the commercial sector would shy away from. Additionally, while these banks support consumption of renewable energy, they can also support manufacturing. Development banks are flexible financiers, and can provide significant capital to renewable energy projects, which can represent as great an investment risk as the capital seeking to produce new technologies.16

As we have observed in the United States, VCs typically provide the finance meant to bridge the company's transition into commercialized production, yet they often cannot provide the capital needed or are unwilling to do so should an expected IPO, merger or acquisition be delayed or prevented by market uncertainty. Commercial banks likewise may perceive small clean technology firms or renewable energy projects as too risky and cannot be expected to fill the investment gap. Indeed, this is because commercial and institutional investors do not 'see' technology—they see the returns (or lack thereof) being provided by managed risk portfolios over a period of time. Development banks can therefore provide opportunities by financing the growth of strategic firms such as those in the green industry and in the markets they supply.

Public finance (such as provided by State development banks) is therefore superior to VC or commercial banking in fostering innovation, because it is committed and 'patient', allowing time for companies to overcome the significant uncertainty engendered by innovation. State investment banks, especially but not only in emerging countries like China and Brazil, are revealing themselves to be crucial actors not only for 'countercyclical' lending—crucial especially in recessions—but also in the provision of support to highly uncertain and capital-intensive innovation in clean technology. Moreover, the returns earned by public investment banks allow for a virtuous cycle that rewards the use of taxpayers' money in a direct way, while creating other indirect benefits (e.g. public goods).

To be sure, as shown in previous chapters, business and the State have been historical partners in the process of economic and techno- logical development. Yet without governments that are willing to bear a key part of the risk, uncertainty and costs of disruptive technological development, businesses would not likely carry it out on their own.17 The financial and technological risks of developing modern renewable energy have been too high for VC to support, owing to the size and duration of technical risks beyond the traditional proof of concept. Even if proof of concept is achieved, it may not be feasible to produce at the scale required for profitable production. A key problem is that VCs are looking for returns that are not realistic with capital-intensive technologies, which are still very 'uncertain' both in terms of their production and distribution (demand). The speculative returns possible in the IT revolution are not a 'norm' to be replicated in all other high- tech industries.