Atlas Venture dismisses talk of clean tech bubble

Venture capitalists are by nature a pretty optimistic breed. They may have an acute understanding of risk and many of the most successful investors may be inherently cautious, but ultimately when you are making multi-million pound bets on businesses so young many of the staff are still wearing short trousers you have to have a pretty up-beat outlook on things.

But even with this optimism taken into account it is still reassuring to hear a seasoned venture capitalist dismissing talk of a green tech investment bubble as over-blown scaremongering.

"To call it a bubble suggests there is no substance there," muses Martin Gibson, a Partner in the technology team at Atlas Venture, over coffee at a small eaterie opposite the investment firm's Mayfair offices. "But there is real substance here, not least in changing consumer attitudes. The red stand-by dot on your TV is not a mark of convenience any longer – it is a mark of guilt."

This shift in consumer attitudes has coincided with a global increase in energy prices which according to Gibson have made green products not just socially desirable but also economically viable: "Whether it is related to the availability of oil or not – and there are people in the industry who keep saying that there is not much new oil out there - the shift in energy prices means that whether it is because of their carbon footprint or cost savings people have two reasons to address energy use".

Other commentators have argued that despite these shifts in underlying economic conditions many clean tech companies are over valued and a correction, if not a full blown crash, is on the cards. A recent report from Lux Research argued that the clean energy sector in particular was looking " overheated".

But Gibson insists such concerns were to be expected as the hype cycle follows its natural course, but he insists these fears are based on a common mislabelling of the clean tech movement. He argues that far from being a discernable sector clean tech is a wide-reaching trend that reaches into countless different sectors. As such it is difficult to imagine all "clean tech " investments suddenly crashing.

Meanwhile, the investment case for clean tech firms has been strengthened in recent years by a spate of government subsidies that have made a wide range of clean tech innovations attractive. Atlas, for example, has been keeping a close eye on the area of tidal and wave energy and it is an interest that has become more acute since the government earlier this year increased the subsidies, or so called wet ROCs, available to the sector.

"The ideal business does not depend on subsidies but if they are available they can help early stage firms," observes Gibson. "The UK blew its chances with wind energy because the government wouldn’t back it and there are signs we are not going to make that same mistake with wave and tidal power."

Marine renewable energy has been a perennial next big thing for about 30 years, but Gibson is convinced that the technology is fast approaching maturity and with various studies estimating as much as 15 percent of the UK's energy could be generated by such technologies [see diagram] the potential revenue stream for marine renewable projects is huge.

Moreover, there are several attractive and highly-skilled companies out there developing the technology. "What is interesting is that the regions where this technology is necessarily developed, like the South West, Western Scotland and Northern Spain, are areas with a great engineering heritage through ship building or mining that have been under-exploited in recent years," comments Gibson. "There is a lot of untapped engineering talent out there."

The increase in government subsidies is one of the last pieces of the jigsaw for Gibson, making wave and tidal power technologies increasingly economically viable throughout their early stage development and allowing the sector to hopefully grow to a point where it becomes profitable without government backing.

Some critics have argued that relying on government subsides or the prospect of new regulations when making investment decisions represents a dangerous game. There is a feeling in some quarters that too many VC bets are being made on the assumption that governments will deliver an international framework that places a price on carbon and makes low carbon technologies commercially competitive. Based on this analysis the clean tech bubble would burst within hours of the US or Chinese delegations walking out of the next round of Kyoto talks – a prediction that has a concerning ring of plausibility.

Yet Gibson maintains that well-selected clean tech investments should be immune to such political vagaries. "Venture capitalists know that predicting what governments will do is very difficult so the focus has to be on businesses that can stand on their own two feet," he argues. "Subsidies are important and help make early stage businesses viable, but they are never the only consideration. It may sound hackneyed but what we're looking for are companies with potential markets, viable products, strong entrepreneurs, potential for internationalisation, and a capital efficient model that does not require too much capital too early – if there is a government framework that is just a plus. "