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Clean energy: Don't believe the shakeout hype

Paul Dickerson and Thomas R. Burton III of the energy and clean technology practice, Mintz Levin
Thursday, 5 Sep 2013 | 11:10 AM ET
Sean Gallup | Getty Images

This summer, President Barack Obama unveiled far-reaching climate policy proposals that at least temporarily gave clean energy technology companies and their investors some much-needed relief from a barrage of negative headlines over the past two years.

The industry was hit with a 44 percent decline in venture capital investments from 2011 to 2012, according to venture capital database VentureSource, and eroding federal policy support has been a key culprit. Now, the pile-on effect is in full force, with plenty of stories this year suggesting the industry is down for the count.

Stop us if you've heard this one before, but those of us with short memories may have forgotten all "the Internet is dead" calls during the dot-com bust in 2000. In the end, the strong survived, rose off the mat and ended up landing one haymaker after another.

Since then, we've been treated to one of the most innovative periods in the history of the planet, one that has generated trillions of dollars of follow-on investment and increased the productivity of just about anyone with access to a computer.

(Read more: Apple plans Nevada solar farm and clean energy push)

The hard truth of investing in start-up companies is they often don't pan out. The growth trajectory for most industries isn't a straight line—it's a series of fits and starts.

When a new industry's growth takes the world by storm—as it did with the Internet and clean energy technology—those fits can be epic, fueling periods where a lot of half-baked ideas get funded along with the really good ones. Eventually, those ideas are seen for what they are and investors pull the plug, if the lights don't shut off before they can.

That's why this latest VC rationalization in the clean energy technology space is both inevitable and positive. The shakeout is forcing the industry's survivors to revisit their business models, seek out strategic partnerships and basically run their businesses better.

That's all for the good, as those leaner and meaner companies will likely define the industry in the years and decades to come.

And here's the other thing: The pendulum is starting to swing back the other way. Declines in year-over-year clean energy technology venture investments might be garnering the headlines right now, but beneath the surface a number of very smart and capable VC firms are opening new funds dedicated to helping develop clean energy technology start-ups.

(Read more: Tesla outsells Porsche and Jaguar in California)

Earlier this year, Lux Capital and The Westly Group closed new clean energy technology funds to go along with other recent fundraising successes by Braemar Energy Ventures and True North Venture Partners.

In these new funds, multinational corporations and other "strategic investors" are beginning to replace the pension funds and university endowments that helped push the clean energy technology sector to new heights over the past decade.

Investments from family offices and overseas players are also becoming increasingly prevalent and Chinese businesses are continuing a string of acquisitions in the LED, solar, electric vehicle and battery fields.

Tesla takes another victory lap
Tesla has sold more vehicles than Porsche, Land Rover, and Jaguar in California. Howard Lindzon, Stocktwits, and Jon Rettinger, TechnoBuffalo, both own shares of Tesla.

Clean energy technology companies and entrepreneurs still in need of expansion capital should take heart in such trends, but also understand that the rules of the game have changed.

There are some important common threads in those companies continuing to garner investment: They have much shorter time frames for going to market, they require smaller amounts of funding to grow and many of them have one foot in the IT world in that they have the potential to use so-called big data in exciting and profitable ways.

Those that don't fit the bill shouldn't give up hope, either. For the past couple of years, we have been helping our clean energy technology clients secure strategic partnerships with bigger partners that have both the patience and customer bases to allow good technologies to gain traction.

In fact, demand has been very consistent from those with deep pockets and patience, from government-sponsored entities in fast-growing countries like China, to family offices focused on growing their assets, to strategic corporate investors looking to add new technologies to their stable of products.

(Read more: Solar stocks have a day in the sun, or is it just a flare?)

The important thing to remember is that the world hasn't substantially changed in the last five years. Sure, natural gas prices have created some more opportunities for short-term substitution. But if we've learned anything as a country from our recent past, it's that we're going to need every energy technology we can get our hands on to take ownership over our nation's energy future, particularly as we begin to tap other markets—both domestic and foreign—for our abundant natural gas supplies.

Investment cycles are predictable, and so is the world's demand for energy. The clean energy industry is going to be a big part of the solution to meeting that demand. It's encouraging to know that many of us in the trenches still get it.

Thomas R. Burton III is the founder and chair of the energy and clean technology practice at Mintz Levin in Boston. Paul Dickerson, of counsel at the firm, is a former chief operating officer at the U.S. Department of Energy.

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