We can thank Moore’s Law for the VC cleantech bust

One of the more indepth pieces on the cleantech venture capital boom and bust cycles was published in Wired this week. While not all of my peers will agree with me (already got in some heated debates over this), I think the story was a solid analysis of how a lot of VCs piled into cleantech investing in 2007 and 2008, with not a whole lot of knowledge of the sector, and now have backed out of it (we’ve covered this a lot, too). The longterm promise of cleantech itself isn’t dead, just the boom VC cycle has clearly ended, much the way the dotcom boom went bust and the promise of the Internet arrived later on.

But another layer to this story is that one of the key misplaced assumptions that VCs made in the cleantech boom times is that the rapid progress of Moore’s Law — which says that the number of transistors that can be placed on a chip doubles every two years — could be created for cleantech with a little bit of VC funding and Valley smarts. The notion (which is seductive but not true in most cases) is that the traditional energy industries throughout the world just didn’t do the right kind of innovation, and that the Valley’s can-do spirit and open wallets would be able to unleash this potential.

It could still happen in a few cases — Tesla has this mentality for the traditional auto industry and electric cars and seems to be doing well. However unfortunately there is no Moore’s Law that we’ve discovered for energy, clean power, or batteries, so the two year rapid progress rate just doesn’t apply to these verticals. It’s going to take decades and billions of dollars in funding to move the needle on many of these industries, which Professor Vaclav Smil has written about in depth.

The slow movement of progress for batteries and biofuels has been particularly obvious. Venture-backed next-gen biofuel companies have routinely set timelines of a few years to scale up into commercial behemoths that can compete with the oil industry — but none of these Valley startups have successfully made it to that commercial competitive stage yet.

Battery and electric vehicle companies are commonly struggling with too-expensive batteries and not enough demand. Battery maker Ener1 declared bankruptcy last week, while Think, Aptera and others have closed shop. When I visited Jay Leno’s garage for our Green Overdrive Show, he drove me around in a 1900′s-era electric car and the range of the car battery was 100 miles — about the same of the Nissan LEAF.

As Bill Gates put it a couple years ago in a fascinating talk on energy, “We’ve all been spoiled and deeply confused by the IT model. . . There are things that just don’t move forward. Nuclear energy stopped in the 1970′s. We have to have a blended model, the optimism of our IT, and the realism of the energy sector.”

So what’s next?

There are a few things that I think will dominate the cleantech discussion going forward. I think there will be an increasing emphasis on trying to get government funding for incremental research in these areas. That’ll be a difficult request for the DOE, but programs like the ARPA-E (high-risk early stage grants) seem to be working. Gates and Bill Clinton will be speaking at the upcoming ARPA-E event in Washington DC this month. Other countries’ governments — like India and China — will be leading this.

There will also be a greater focus on the intersection of where cleantech meets IT. Investor Sunil Paul and others are putting money into the so-called Cleanweb, where the returns and timelines do look a lot more like IT and Moore’s Law.

Other sectors like solar panels seem to have a better progress rate and cost curve — though not the equal to Moore’s Law — and will do just fine. Though startup innovation in these areas when they become commodities, becomes less common.

Also unfortunately I think there will be a lot more high profile cleantech startup failures in 2012 and 2013. Some of these companies that raised hundreds of millions of dollars are maturing after 5 to 7 years and will need to find exits, or raise more money, and I think a bunch of them will struggle.

Image courtesy of psd.

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