By Mark Pabst, San Francisco
Given the roller coaster ride stocks took this week, investors can be forgiven for feeling a little nauseous. Between renewed fears about European debt, Standard and Poor’s recent downgrade of the U.S.’ own long-term debt, and the looming specter of a double dip recession, it took a strong stomach to stick with stocks. However, the uncertainty that underpinned the big swings on global exchanges is nothing compared to the uncertainty that is plaguing green energy finance.
Green energy, especially in North America, was already plagued by its own sector specific vagaries even before this week’s events roiled the global economy. In fact, any savvy venture capitalist with an interest in green energy is already well acquainted with Washington’s latest round of political dysfunction. An uncertain regulatory environment combined with even more uncertainty over the fate of government-backed financial support for green energy projects have given green energy investors a taste of the type of uncertainty that is now roiling the global markets.
On top of these issues green energy is plagued by a long-investment cycle, the relative unfamiliarity of many venture capitalists with the energy sector, and the simple fact that many companies never become commercially viable despite generous injections. Right before the most recent market mayhem showing a 44 percent decline in VC dollars for green energy in the second quarter of 2011 compared to same period last year. Of course, quarterly numbers do not equal a trend, and several observers have pointed out that VC investment in the green sector is still on pace to equal last year. However, such assertions do little to calm fears about VCs abandoning the sector for more promising plays in tech and transportation.
There is also concern that individual VCs with expertise in green energy may be moving on because of malaise in the sector. Eric Feng , presumably because the firm was not planning to do as many green energy deals as it had in the past. Just this week Jim Kim and Alex Kinnier announced their exit from Khosla Ventures, where as partners they supported some of the firm’s ambitious clean energy investments. Both Khosla and Kleiner Perkins played down the moves, and Khosla made no signs that it is any less bullish on opportunities in green energy.
Still, dropping some serious global uncertainty on top of the already existing uncertainties that have been plaguing green energy will not improve the investment climate. The last time there were this many questions about the health of the global economy, investment in green energy projects dropped 33 percent (in 2009) and investments in cleantech retreated to their 2003 levels. Considering the ongoing sector specific uncertainties, at least in North America, if the global economy tanks again the results could be a perfect storm for early (and late-stage) green energy investment.