Are VCs Greenwashing, Or Just Nervous?
Heightened consumer pressure on companies to behave responsibly has led to frequent accusations of greenwashing: a practice by which an organization insincerely displays concern for the environment in an attempt to improve their reputation, and further their own agendas.
Given how often alternative energy was mentioned this election season, as a way to create jobs and further our path toward energy independence, one would think venture capital (VC) money going to clean tech investments is on the rise. But industry trends tell a different story, with PwC reporting a 34-percent decrease in funding for energy firms over the past two years, and a recent Forbes article citing an 18-percent decrease in water investments between 2010 and 2011. This gap between perceptions and reality, coupled with a recent conversation I had with a serial social entrepreneur who believes investors are talking a way bigger green game than they’re following through with, made me wonder: Are VCs greenwashing too?
Perhaps some are, but the overall decline has more likely been caused by prior clean tech investment failures creating increased hesitancy to invest, expected returns limiting potential deal flow, and social entrepreneurs falling victim to mission attachment—relying more heavily on the social or environmental impact of their ventures than financial returns.
The most broadly publicized failure in clean tech investments has been the solar company Solydnra, having received a $249 million government grant and filing for bankruptcy just one year later. Taxing solar imports from China may give solar manufacturers in America a needed boost, but the pattern of hope followed by investment and loss feels reminiscent of other alternative energy investment failures such as ethanol. Investor skepticism of capital-intensive businesses claiming to have truly breakthrough technology in the clean tech space is arguably warranted.
The solution to this, according to Laura Demmons—a clean tech entrepreneur and founder of Sylvan Source, is to avoid making unsubstantiated claims. Says Demmons, “In presenting data to investor and customer prospects, we have found an absolute requirement is for independent, third-party, validation by persons or organizations with credibility in a given segment.”
But many entrepreneurs lack such savvy, according to Shivani Ganguly, a startup consultant coaching clients through various stages of the funding cycle. “The biggest mistake I see social entrepreneurs making is to rely primarily on the social and environmental benefits of their ventures when discussing their ideas with investors. Even progressive investors are still looking for a financial return, and tend to see this as a secondary benefit."
Bob Frankenberg, a former tech executive and experienced angel investor, believes increased transparency on the part of venture capital firms would help. Says Frankenberg, “If entrepreneurs were aware of the screening criteria used to inform selection they could better prepare in advance, increasing their chances of receiving funding.” Having some well-publicized successes would increase investor confidence, making it easier for VCs to continue raising green funds, but it may also be worthwhile to consider alternative funding models that rely less on acquisition for financial gain. A revenue sharing model, for example, would allow investors to take a percentage of profits generated, increasing the appeal of businesses with lower returns and slower payback periods than VCs typically demand.