ERASMUS UNIVERSITY OF ROTTERDAM Reprint Prohibited
ERASMUS SCHOOL OF ECONOMICS
MASTER THESIS
VENTURE CAPITAL
A DRIVING FORCE FOR THE DEVELOPMENT
OF THE CLEANTECH INDUSTRY
IN THE U.S.A
NAME: SAVVAS IOSIFIDIS
STUDENT NUMBER: 332984
SUPERVISOR’S NAME: JOERN BLOCK
Rotterdam, September 2010
*Contact Information. E-mail address: ; phone: +31 (0) 62 634 7769
Abstract
Venture capitalists’ trends have been changing over time reflecting the fast reaction of the industry to emerging investment opportunities. The so called cleantech industry is the new target market for the venture capital (VC), especially in the U.S.A. Climate change and environmental concerns, increasing oil prices and governmental policies have driven the tendency towards sustainable energy.
While ICT and biotech have attracted the majority of the research literature little attention has been paid in the renewable energy sector. After a detailed presentation of the cleantech and the VC industries in the present paper, an empirical analysis conducted, aiming to prove the contribution of the VC financing to the development of the renewable energy technologies in the U.S.A. Comparing a number of cleantech firms with equal number of consumer web businesses it was found that cleantech industry appears to grow in terms of innovativeness and establishing networks. Human capital was also found to be a significant factor in the development of the renewable energy sector in the U.S.A.
Keywords: Cleantech, Venture Capital, Development
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Table of Contents
Abstract 2
1. Introduction 4
2. The Cleantech Industry in the U.S.A 6
2.1 Definition of “Cleantech” 7
2.1.1 Solar Power and Photovoltaic Systems 8
2.1.2 Wind Power and Conversion Systems 9
2.1.3 Hydroelectric power 10
2.1.4 Geothermal Power 10
2.1.5 Biofuels-Biomass Energy 11
2.2 Public Policies Enforcing the Cleantech Development in the U.S.A 12
3. The Venture Capital Industry 14
3.1 Definition and Characteristics of the Venture Capital 14
3.1.1 Human Capital and Venture Capital Investments 16
3.1.2 How Venture Capital Investments Influence Firm Growth 18
3.2 The History of the Venture Capital Industry and the Transition from the “dot com” to the Cleantech Industry 19
4. Hypotheses 21
4.1 Individual Characteristics of Founders Influencing Venture Capitalists’ Investment 21
4.2 Firm-specific Characteristics-Indicators of Development 23
5. Data and Operationalization 27
5.1 Descriptive Statistics 27
5.2 Measures 28
5.2.1 Dependent Variable 28
5.2.2 Independent Variables 28
5.2.3 Control Variables 30
5.3 Methodology 30
6. Results and Discussion 31
6.1 Individual Covariates 32
6.2 Firm Covariates 34
7. Conclusion and Further Research 37
Appendices 40
References 53
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1. Introduction
Varied factors are emerging for change towards cleaner and more energy efficient technologies and services: climate change and other environmental concerns, increasing oil prices, and rising living standards around the world that are putting an ever-increasing strain on the environment. Russo (2003) contends that there are strong social and institutional factors pushing towards greening. In recent times, these factors have driven the creation of a clean technology (“cleantech”) venture capital market where both independent venture capitalists (VCs) and corporate venture capitalists (CVCs) have invested in the cleantech industry. According to Parker (2005), the most prominent area of investment has been the energy sector, as approximately 40% of all cleantech VC investments have gone to clean energy.
This thesis is motivated by the scant attention by researchers to venturing in the area of clean energy (Teppo, 2006), especially in the U.S.A The present study focuses on the role of investors and particular VC firms play in the development of the clean energy market in the U.S.A. Additionally, general human capital is also considered to be a valuable factor for the development of the renewable sector and therefore it is included in the research part. The contribution of this paper to the existing literature results from the strong evidence of the empirical analysis.
The empirical evidence is based on data from the CrunchBase (January 2010), “the free database of technology companies, people, and investors that anyone can edit”, introduced by TechCrunch, one of the most prominent blogs that promotes technological innovations related to the Internet. CrunchBase is a detailed overview of companies, individuals and investors focused on US high-tech sectors. In this study, a total of 472 companies were included; 236 US VC backed internet present firms from the cleantech industry and equal number of consumer web businesses.
The econometric results indicate that cleantech firms are more innovative than web ventures after receiving VC financing. Theoretical and descriptive literature of firm growth emphasizes that innovation is a crucial factor for firms wishing to expand (Coad and Rao, 2008). Furthermore, human capital of founders has been investigated for the purposes of this research and was found that management experience and skills and high education expertise play a significant role in the development of the cleantech industry. A strand of literature relates educational and management experience to received financial resources. Based on traditional human-capital studies (e.g., Becker, 1964), Bates (1990) and Robinson and Sexton (1994) find that high educational attainment is correlated with the munificence of received financial resources. Such education and work experience has also been positively related with venture growth (Colombo and Grilli, 2005). In addition, cleantech firms were found to have established networks with suppliers, customers etc after the VC investments. According to (Niederkofler, 1991) valuable strategic networks help firms develop technological and human capabilities which are admittedly a growth pattern.
The paper provides detailed information of the cleantech and the VC industries in Section 2 and 3 respectively. Section 4 introduces and discusses the hypothesis while Section 5 includes the data and methodology used to investigate the influence of the VC in the development of the cleantech industry in the U.S.A. The following Section presents the results and the discussion of the empirical analysis. Conclusion and further interesting research extensions follows in Section 7.
2. The Cleantech Industry in the U.S.A
“The science tells us that GHG emissions are an externality; in other words, our emissions affect the lives of others. When people do not pay for the consequences of their actions we have market failure. This is the greatest market failure the world has seen. It is an externality that goes beyond those of ordinary congestion or pollution, although many of the same economic principles apply for its analysis.”
-Nicholas Stern-
Climate change has been identified by governments and policy makers globally as one of the greatest market failures the world has ever seen (Stern 2007). The source of this failure is the emission of carbon dioxide equivalent which scientists have identified as the basis for global warming. A key aspect of this global issue is financing and commercializing the technologies which will facilitate economic transition to a low carbon economy (Stern, 2007).
A review of the world's renewable and nonrenewable energy resources indicates that the depletion of non-renewable resources is a matter of time, while the renewable resources provide us with a hope for a better future (Quareshi, 1984). Wei et al. (2010) underline in their research paper that greater use of renewable resources and renewable energy systems and energy efficiency provides economic benefits while at the same time protecting the economy from political and economic risks. Furthermore, it has been realized that renewable energy sources and systems can have a valuable impact on crucial technical, environmental, economic, and political issues of the world (Dincer, 1999).
The current energy system landscape is changing as concerns over climate change, energy price volatility, and energy security have motivated government, entrepreneurs, and civil society to explore for energy system alternatives (Stephens and Jiusto, 2010). The term “Cleantech” has been mainly used to describe these energy system alternatives such as renewable energy technologies, energy conservation, and energy storage technologies.
2.1 Definition of “Cleantech”
The term “clean technology” or “green technology” (or “cleantech”) is relatively new and has taken on a variety of meanings. According to Knight (2010), cleantech is defined as the collection of technologies aimed at transforming the carbon base of the energy sector. These technologies are primarily on the supply side and refer to biofuels technologies (liquid fuels derived from biomass), renewable energy generation technologies (such as solar, wind, etc), and technologies which complement coal-fired electricity generation to reduce its carbon-intensity (such as carbon, capture and storage). On the demand side, clean technologies refer to technologies which improve the efficiency of energy demand (such as smart meters) (Knight, 2010).
The Cleantech Group directs attention to the difference between the term "cleantech," with those of environmental technology or "green tech", popularized in the 1970s and 80s. Cleantech is new technology and relevant business models offering remarkable returns for investors and customers while providing solutions to global problems (Cleantech Group LLC, 2008). Cleantech addresses the issue of ecological problems with new science, emphasizing natural approaches such as biomimicry and biology.
The most representative and descriptive definition of the cleantech is given by Pernick and Wilder (2007). In their book “The Clean Tech Revolution”, cleantech refers to every product, service, procedure that delivers value exploiting limited or zero nonrenewable resources and/or creates radically less waste than conventional offerings. According to their written, cleantech includes a range of products and services, such as solar systems and hybrid electric vehicles (HEVs) that utilize renewable materials and energy sources or reduce the use of natural resources by using them in a more efficient and productive way, cut or eliminate pollution and toxic wastes, provide investors, customers and companies with the promise of exceptional returns, reduced costs and lower prices (Pernick and Wilder, 2007).
The following sessions provide detailed information for the five major clean technologies that optimize the harness of natural resources, offering a cleaner and/or less wasteful alternative to traditional products and services concerning energy generation and storage, transportation, materials and recycling.
2.1.1 Solar Power and Photovoltaic Systems
The amount of energy supplied by the sun to the earth is more than five times larger than the world electric power consumption to keep modern civilization going. The direct conversion of solar energy to electricity by photovoltaic (PV) systems has a number of considerable advantages as an electricity generator. Roofing tile PV generation, for example, saves excess thermal heat and conserves the local heat balance which causes a considerable reduction of thermal pollution in densely populated city areas (Hamakawa, 2002).
It was in 1890 that the PV effect was observed by Henri Becquerel and this became a subject of scientific investigation through the early 20th century. In 1954, Bell Labs in the U.S. introduced the first solar PV device while 4 years later solar cells were being used in small-scale scientific and commercial applications (Shirland, 1966). From 1984 through 1990, the first solar electric generation station (SEGS) plants were built in California's Mohave Desert and still operate today after being upgraded (SEIA, 2010).
Research and production progress continue every day resulting to cost-effective PVs in a rapidly growing number of areas. Global PV market growth has averaged more than 25 percent annually over the last decade, with worldwide growth rates for the last 5 years well over 35 percent (SEIA, 2010).
The U.S. solar energy market grew more than 48 percent in 2007 as a result of state and federal policies, incentives and cost-reducing programs while factors like a cost for emitting carbon may help the solar energy reach cost-parity faster than expected. Despite the fact that consumption of solar energy has exploded since 2005, concerns about rising costs, energy security and supplies, new state and federal incentives, solar energy represents less than 1 percent of the U.S. energy mix.
The U.S. ranked fourth in the world for new solar electric installations in 2009. Germany was first, Italy was second, and Japan was third. In 2009, the U.S. solar industry supported 17,000 new jobs. Total employment in the U.S. solar industry at the end of 2009 was 46,000 with expected estimations of 60,000 by the end of 2010 (SEIA, 2010).
−Insert Figure 1 about here−
2.1.2 Wind Power and Conversion Systems
Until the early twentieth century wind power was used to provide mechanical power to pump water or to grind grain (Ackermann and Soder, 2002) while windmills were used across the Great Plains to pump water and generate electricity (DOE).
The magnitude of wind energy usage has always fluctuated with the price of fossil fuels. When fuel prices fell after World War II, interest in wind turbines weakened but when the price of oil over-increased in the 1970s, so did worldwide interest in wind turbine generators. However, this time, the main focus was on wind power providing electrical energy instead of mechanical energy (Ackermann and Soder, 2002). During the last decade of the twentieth century, world-wide wind capacity has doubled approximately every three years and the costs of electricity from wind power have declined to about one-sixth since the early 1980s (Ackermann and Soder, 2002).
Development slowed down extensively in North America after the boom in California during the mid-1980s. In 1998, a second boom started in the U.S.A and wind energy has re-emerged as one of the most important sustainable energy resources. The first megawatt (MW) turbines have been installed in 1999 and in 2001 many projects have used MW turbines. Major projects were carried out in the states of Minnesota, California, Wyoming and Texas due to financial incentives, e.g. offered by the California Energy Commission (CEC), as well as green pricing programs (Ackermann and Soder, 2002).
It is important to mention that more than 83% of the world-wide wind capacity is installed in only five countries: Germany, USA, Denmark, India and Spain. Hence, most of the wind energy knowledge is based in these countries. The U.S. wind industry broke all previous records by installing nearly 10,000 MW of new generating capacity in 2009. The total wind power capacity now operating in the U.S. is over 35,600 MW, generating enough to power the equivalent of 9.7 million homes. America’s wind power fleet will avoid an estimated 62 million tons of carbon dioxide annually, equivalent to taking 10.5 million cars off the road, and will conserve approximately 20 billion gallons of water annually (AWEA, 2010).
−Insert Figure 2 about here−
2.1.3 Hydroelectric power
Hydroelectric power or hydropower passed in the energy matrix as a result of a sequence of technological innovations in the late 19th century. Rapidly expanding electricity demand turned hydropower in numerous countries into an ‘‘energy bridge’’. Hydropower continues to serve as ‘‘energy bridge’’ in many parts of the world, but in most countries it can only cover a small fraction of the total electricity needs (Sternberg, 2008).