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Khosla’s bet on cleantech looks speculative

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If the world is counting on innovative companies to solve global warming, we may be in trouble. Venture investment in cleantech is slumping. Venture capitalists in the US poured $2 billion into 139 cleantech start-ups in the first half of 2008, according to data from PricewaterhouseCoopers. In the first half of this year, venture investments in the sector plummeted to $513 million in 89 companies.

Of course, venture investment in general has gone off a cliff, from over $15 billion in the first half of 2008 to $6.8 billion this year. But it seems odd that cleantech, the new, new thing that VCs seek, has plunged more than the average.

Some of the slide can be attributed to a sensible response to economics. In the middle of last year oil was north of $120 a barrel. Today it’s $68. That makes alternative energy a much tougher economic proposition, whatever one believes about the importance of reducing carbon emissions globally. What about government regulation to make alternatives more attractive? Drive east on I-580 from Silicon Valley and you’ll get to the Altamont Pass. Nearly 5,000 small wind turbines were installed there in the 1970s because of a favorable tax break for wind power which eventually lapsed, pulling the rug out from under the nascent wind industry. It’s a powerful reminder that fiscal policies can be fickle and a bad foundation for an enduring company.

With energy generation a tougher proposition, the VC investment that remains is shifting to energy efficiency. Some of the Valley’s blue-chip VCs are eager to pump Silver Spring Networks, which makes software and services for a smart energy grid. There’s grand talk about 1.5 billion electricity meters needing to go digital over the next several years. But it’s hard to see Silver Spring or any of the other current portfolio companies being the next Netscape, EBay or Google — the kind of venture home-run that really sets investor hearts beating faster. Given the scale of the energy industry — about $1 trillion in the US alone — there should be plenty of space for that kind of transformational business hit. It hasn’t happened yet.

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