Relying on venture capital alone is the reason the US hasn’t had a cleantech revolution – the CP is a necessary prerequisite to success

A clue to what is required to accelerate the green 'revolution' is found in the US, where government-funded initiatives are busy building on their understanding of what has worked in previous technological revolutions. But while the US has been good at connecting and leveraging academia, industry and entrepreneurship in its own push into clean technologies (historically with the Department of Energy and more recently with the Advanced Research Projects Agency-Energy, or ARPA-E), its performance has been uneven. As one of the 'first' countries to seriously push into wind and solar power in the 1980s (and the first crystalline silicon solar cells were invented in the US in the 1950s), the US failed to sustain support and watched as Europe (Denmark, Germany and Sweden, in particular), Japan and now China take the lead. Worse, the US failed to alter its energy mix significantly, setting up its position for decades as a world-leading C02 emitter. With world-class innovative capability, the world's largest economy and a massive energy grid, the US is ideally positioned to kick off a clean technology revolution, yet it has not. In the context of the 2012 election season, clean energy development was again facing extreme uncertainty, and the very real possibility of losing government support at a critical juncture.9 Jeffrey Immelt, CEO of GE, bluntly describes the current structure of the US energy industry and its lack of an energy policy as 'stupid', estimating that other nations already have a 10-year lead on the green economy (Glader 2010).

Pros and cons of the US model

Nudging with venture capital

A key reason for uneven US performance has been its heavy reliance on venture capital to 'nudge' the development of green technologies. The United States is the VC capital of the clean technology world, with $7 billion invested in 2011 versus $9 billion globally. The 2012 Jump- start Our Businesses Act (JOBS Act) has attempted to provide VCs with even less investment risk, by relaxing financial disclosure requirements for 'smaller' firms (those with less than $1 billion in annual revenue). It also legalizes 'crowd funding', meaning that VCs can recruit a wider range of investors (and individuals) when taking firms public. How this can generate actual job growth—when it seems tailored to ensure that VC investors can reap massive returns on small firms touting government technologies—is difficult to know. On the one hand, less transparency and 'information' about young companies increases the risk investors of all other kinds face. On the other hand, it could improve VC commitments to small firms given that risk is spread across a greater population of investors. If the struggles of current clean technology firms are evident, however, the long-term growth of the firm and hence job growth are much more sensitive to long-term government support than they are to initial public offering (IPO) returns (the usual target of VC). Moreover—as in the case of solar energy, for instance—VCs have shown themselves to be 'impatient capitalists': they are not interested in sustaining the risks and costs of technological development over a long-term period. VCs also have limits to the financial resources they can or want to allocate to fully finance the growth of clean technology companies.

Since some clean technologies are still in very early stages, when 'Knightian uncertainty' is highest, VC funding is focused on some of the safer bets rather than on the radical innovation that is required to allow the sector to transform society so as to meet the double objective of promoting economic growth and mitigating climate change. Ghosh and Nanda (2010, 9) argue that it is virtually only public sector money that is currently funding the riskiest and the most capital-intensive projects in clean technology—the ones in the upper right corner in Figure 16. VC funding is concentrating mainly in areas shown in the bottom left of the figure. This is highly problematic since it indicates that VCs do not seek out clean technology sectors that are both innovative and capital intensive. These sectors are those which could support development of advanced clean technologies. Unless the government eases capital constraints or makes its own investments, these important areas will continue to experience underinvestment and under development.

Clean technology companies, like those in biotech, can face a number of challenges while attempting to transition from R&D results to commercial production. Also, the amount of capital required to reach economies of scale is typically higher than in the IT sectors (which are where VC wealth originated in the first place). Indeed, the more recent trend has been that VCs were attracted to clean technology as a result of government support, and nearly all their funding poured into established technologies, some of which were already benefitting from decades of development (Bullis 2011).10