Clean-Tech Investment Is Falling: What Does It Mean?

Scott Shane

These days, clean technology is the rage among the political elites. And there is a great deal of support in Washington for companies developing these technologies. Unfortunately for the politicians, the venture capital market doesn't respond strongly to political rhetoric.

According to data recently released by NVCA, the National Venture Capital Association, investment in clean-technology start-ups fell 84 percent from the last quarter of 2008 to the first quarter of 2009. The decline in clean-tech investment was much higher than the overall decline in venture capital investment, bringing clean-tech investment activity back to levels last seen in 2005, before the clean-tech investment craze began.

Clean tech offers a fascinating example of how markets depend on economics, not political rhetoric. While we have every bit as large a political problem with dependence on foreign oil as we did six months ago and greenhouse gases haven't stopped affecting the environment, the economics of clean-tech investments aren't as good as they were when oil prices were much higher.

As a result, it's not surprising that venture capitalists are less positively disposed to these investments than they were a year ago. Whatever their beliefs about the societal benefits of these investments, VCs have a fiduciary responsibility to their investors and need to look at the economics of clean-tech investments.

Entrepreneurs would be well advised to think in terms of the economics of new technologies rather than the politics. The current president may be more interested in clean tech than his predecessor, but VC investments in clean tech have not been very popular since he took office.

At the end of the day, it's the economics, not the politics, of clean tech that are going to determine whether a bunch of start-ups are going to get financed to produce it.

Now, if the political rhetoric led to large subsidies for clean tech, that would be a different story . . . .

Scott Shane is A. Malachi Mixon III p rofessor of entrepreneurial studies at Case Western Reserve University. He is the author of The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By , among other books.