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Bracing For The Green-tech Bubble

Al Gore often tends toward the apocalyptic whenever he's talking about global warming—and who can blame him? It's a dire subject. But Jon Gertner of The New York Times Magazine recently caught Gore in a startlingly good mood. It seems the former veep has been hobnobbing around with venture capitalists in Silicon Valley who are seeding all sorts of new and promising energy gizmos and gadgets—and came away more optimistic about the potential for technology to transform the economy. So Gertner did a long profile Kleiner Perkins, one of the bigger venture capital firms out there, who helped seed Google and Netscape and is now looking at clean tech:

Kleiner received a proposal from a professor at the University of Arizona named K. R. Sridhar, a former NASA scientist, who was working on a solid-oxide fuel cell in his garage in Tucson. Fuel cells are an old technology, dating back more than 150 years; they convert a fuel, like natural gas, into electricity through chemical reaction rather than combustion. Sridhar’s pitch had some novel technological aspects, and his business plan called for making energy generators — essentially, large box-shaped units for a home basement, or an office building — for buyers who either had no access to an electrical grid or wanted to disconnect themselves from one. “You could put natural gas into it and get electricity out,” Aileen Lee, the partner at Kleiner who researched Sridhar’s proposal, told me. “Or it could be fuel-flexible” — meaning the boxes could run on, say, ethanol. At least in theory, the units, which Sridhar called Bloom boxes (pictured right), would be reliable, quiet and very low in carbon emissions.

I heard a number of explanations about why the firm paused after investing in Bloom Energy in 2002. The consensus seems to be that it took time for the partnership to be persuaded that the economy would move in a greener direction and that green tech would have far larger potential payoffs than, say, the ideas for Web sites that were being financed at the time. Then, in late 2006, at one of Kleiner’s corporate retreats, Bill Joy, a founder of Sun Microsystems and a new partner at the firm, displayed what later became known within Kleiner as “the map of grand challenges.”

This was a matrix of colored squares that itemized the firm’s progress in locating potential investments in about 40 different categories: water, transportation, energy efficiency, electricity generation, energy storage and the like. In the blank spots there were lists of “things that ought to be possible,” in Doerr’s words — ideas, in short, that might produce huge changes and, if Kleiner bought a stake, huge profits. Thus the grand map was a rough, imaginary outline of a clean-energy economy that didn’t really exist and perhaps wouldn’t in any meaningful way for decades. But it helped Kleiner understand what to look for. That same year, Kleiner officially informed its investors that it would begin putting $100 million of its newest fund in green technology. Doerr, Joy, Ray Lane and John Denniston all joined the green-tech group.

Most of the projects Kleiner's funding are still top-secret, though Gertner got wind of a few (like Ausra, which deploys mirrors to concentrate solar energy on water pipes to produce steam—potentially a very low-cost way to harness solar power.) One big problem is that it's far trickier to seed energy technologies than new software or websites—it only took a couple of years and relatively small sums of venture capital (say, $25 million) before Google was ready to go public. Fuel cells take a lot more time and money, and luring financers in for each step on the trail isn't easy.

A few start-ups have made it to the IPO stage—like First Solar, which manufactures PV modules—but solar technology has been decades in the making, and the road's littered with the carcasses of failed solar companies. This past April, Reuters observed that big private-equity firms were starting to fill this funding gap (dubbed the "valley of death"), though all the financial convulsions of late could dull the appetite of investors for risky new energy technologies—the whole thing seemed like a much better idea back in the spring, when oil was preparing to smack into $140/barrel.

What about government, then? Obama has proposed a Clean Technologies Deployment Venture Capital Fund which would help companies bridge the valley of death—it'd be run by independent venture capitalists, similar to the CIA's In-Q-Tel fund, which has had a fair bit of success step-laddering new ideas to the market. And, of course, policy changes like carbon caps or renewable-electricity mandates would get investors perking up pretty quickly. Then the question is whether we'd eventually get a green-tech bubble—though given how backward and fossil-fuel dependent our energy economy still is, it's not obvious that a green-tech bubble would be the worst problem to have (uh, provided it doesn't take down the global economy when it eventually pops like the housing bubble did).

P.S. Here's a quite different report from James Fallows on a recent meeting in Silicon Valley about what the financial crisis could mean for venture-capital firms. The diagnosis doesn't sound good at all.

(Photo credit: The New York Times)

--Bradford Plumer