Do venture capitalists really invest in good industries? Risk-return perceptions and path dependence in the emerging European energy VC market

Abstract

Venture Capital (VC) plays an important role in the commercialisation of innovation. Sectors like information and communication technologies and biotech account for two-thirds of all VC investments. Little attention has been paid to understanding how the venture capital market extends to new industries. Based on a survey of European energy technology VCs, we discuss the factors determining the emergence of a new market sector for VC investments. While there are sizeable investment opportunities, only 2-5% of all venture capital is invested in energy.Three factors can help explain differences between energy and other more popular VC sectors:• the perceived risk (market adoption risk, exit risk, technology risk, people risk, and regulatory risk) of investments in energy technologies • the perceived returns in energy VC investments • in an evolutionary perspective, the maturity of energy as a VC investment sector.

Which renewable energy policy is a venture capitalist's best friend? Empirical evidence from a survey of international cleantech investors

“…While the 60 funds in our sample already go clearly beyond previous work in this area (Kasemir et al, 2000;Randjelovic et al, 2003;Wüstenhagen and Teppo, 2006), notably because until recently the overall population of venture capital and private equity investors in the clean energy technology sector was also quite limited, the recent upsurge in investor interest in this area opens the opportunity to extend the analysis to larger samples, which would obviously add to the robustness of findings.…”

“…Only a few years after authors like Diefendorf (2000) and Wüstenhagen and Teppo (2006) have investigated why so little venture capital investment is directed to clean energy technologies, there has been a recent surge in investments in this area. As Usher (2008) points out, new investment in the renewable energy sector has matured and has recently surpassed $100 billion per year, the largest part being asset financing of renewable energy projects such as wind farms or biofuel projects.…”

“…However, there are also indications that venture capitalists and private equity investors may not be univocally positive about policy, and that some of them may have a stance that can perhaps be described as policy aversion. A particularly pronounced example of this is given by Wüstenhagen and Teppo (2006), quoting a venture capitalist who said: ''If there is no clear need for the government, make them stay out of the way.'' There is anecdotal evidence that some leading venture capital investors may recently have changed their view about energy policy and are starting to proactively manage regulatory risk as part of their overall risk management strategy in this sector (Richtel, 2007;Bürer and Wüstenhagen, 2008).…”

“…While venture capitalists have traditionally focused their investments in a small set of industries such as information and communication technologies or biotechnology (Wüstenhagen and Teppo, 2006), there has recently been increasing attention to ''cleantech'', an investment category which consists of renewable energy technologies such as solar energy, wave energy and biofuels, as well as a collection of other sustainability related subsectors (Usher, 2008). As experience in other industries has demonstrated, venture capital and private equity investments can significantly accelerate the market diffusion of new technologies (Florida and Smith, 1990;Kortum and Lerner, 2000), despite the fact that the early stage investments provided by these types of investors are a relatively small subset of overall investment flowing to clean energy (Usher, 2008).…”

Is Green the New Gold? Venture Capital and Green Entrepreneurship

“…Third, green ventures, even when successful, typically require longer time than nongreen ventures to become profitable, causing the extension of the investment duration, that exceeds the traditional time-to-return (approximately 7-10 years) VCs promise to their stakeholders (Knight 2010;Wüstenhagen and Teppo 2006). Additionally, new green ventures are typically highly capital intensive (Criscuolo and Menon 2015;Ghosh and Nanda 2010), which represents a barrier to a vast majority of VC firms, who are capital constrained for individual investments by the funds they manage (Cumming et al 2013).…”