JUICE: Money Changes Everything

A growing number of venture capitalists are pursuing renewable energy and alternative fuels, although most investors are more interested in computer technology, software, and biotech. This new breed of investors entering the power market is a combination of energy policy wonks and venture capitalists. I call them venture wonks. Over the last month I've had the chance to speak with several venture wonks, but I'll focus on the remarks of two - Vinod Khosla of Khosla Ventures and Tim Newel of DFJ Element. Both men have political and policy interests in alternative energy technology. Both see funding alternative energy as a means to change energy policy to reduce dependence on fossil fuels and make a lot of money while they're at it. Cleantech - as the effort to start new alternative energy and fuel companies is called - is the third-largest investor area behind software and bioscience, according to Newell. He said that 250 venture-backed cleantech companies were funded last year with investments of $2.9 billion. Khosla founded and was chief executive officer of Sun Microsystems. He put more than $1 million of his own funds into last year's Proposition 87. That failed initiative would have taxed the extraction of oil underneath the state and used the funds to bolster research, development, and commercialization of alternative fuels (Circuit, Nov. 10, 2006). "Clearly the goal is to have some impact on the environment and have green technology become more viable in the marketplace," Khosla told me. "My goal is to have good, strong economic paybacks" for alternative energy technologies. On the defeat of Prop. 87 Khosla said, "We may have lost the battle, but we are winning the war." In less than a year, the Bush administration, for instance, has called for major increases in alternative fuels. Ethanol plants are suddenly being built in the state. BP is funding $500 million for a new biofuels institute at the University of California, Berkeley (Circuit, March 16, 2007). Khosla is betting on ethanol - but not ethanol made from food crops. "Biodiesel is a good green solution, but not a climate change solution, because it's not scalable enough," he said. "Solutions that work for climate change have to be more economic; otherwise, China and India won't adopt them. And if China and India don't adopt them, it doesn't matter." While Khosla said he's investing in about 25 companies - "some large, some small, some more impractical than others" - Newell said he doesn't look at alternative energy investing as a discrete company-by-company investment but as a "discipline" that allows economic growth within environmental constraints and limited resources. "It's a fundamental reengineering of our economy to make it resource efficient," he said. Prior to becoming a partner at DFJ Element, Element Venture Partners, Newell was deputy director for policy in the White House Office of Science and Technology Policy under President Bill Clinton. He also was legislative director for former representative Norman Mineta. The Prius-driving Newell believes that when greenhouse gases have a price, the investment world will change. He's already been advising the California Public Utilities Commission on the research and development fund that grew out of a $30 million settlement from Pacific Gas & Electric shareholders as part of the utility's bankruptcy deal. That California Clean Energy Fund was formed to make equity investments in clean energy companies. The way alternative energy technologies are funded is different from the parameters used to develop Silicon Valley-style tech companies. Unlike setting up software and Internet firms, launching alternative energy companies requires enormous amounts of capital. In the old model, "We used to do a Round A of $1 million, then a Round B, with a few more million. Round C, they'd get $8 million and off you go," Newell explained. With cleantech, investments run more like $25 million at Round A because that is what is needed to build the plants. Newell and others expect investments in alternative energy and fuels to easily exceed $100 billion in the near future. Khosla is investing in both alternative fuels and alternative-fueled engines. While most of that research and development is in vehicles, alternative fuels can be used to fuel electricity-producing plants, such as peakers or cogeneration (combined heat and power) plants. As the state is using ratepayer funds to hurry up solar development and commercialization through the Million Solar Roofs initiative, and the California Energy Commission fosters research and development of energy efficiency and alternative energy through its Public Interest Energy Research program, this new wave of venture wonks are attempting the same thing with private funding. The line between politics, policy, and traditional venture capital continues to blur. Khosla wants to help remake the state into a greener place. He didn't much want to talk about himself, but he did say that he's always cared about the environment. He is a Republican, probusiness, anti-government bureaucracy, and a free marketeer. He hopes to influence the change with money. Politics, he said, "is not something I enjoy." But we all know that money changes everything.

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