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What’s the Potential of Disruptive Green Technology?

Nancy Pfund & Daniel Gross & Stuart Patterson & Rosemary Ripley — July 2014

Green tech investors want to put their money behind firms with the potential to disrupt their industries and bring both positive environmental impacts and financial success. But what’s disruptive is by its nature unprecedented and unpredictable. How do investors assess the potential of a green technology company?

Everyone is looking for the idea, product, or company that is really going to shake things up. For those willing to accept significant risk and uncertainty there are opportunities to make early-stage investments in disruptive innovations in the quickly expanding field of green technology. But what does disruption look like in that sector?

Four experts offered their answers in a June 24 online discussion. Nancy Pfund '82, managing partner at DBL Investors and lecturer in the practice of management at Yale SOM, moderated the conversation. The panelists were Daniel Gross '98, managing director at Oaktree Capital Management; Stuart Patterson '83, an experienced tech sector investor and entrepreneur and currently president and COO of RAMP; and Rosemary Ripley '80, managing director of NGEN.

Pfund described how her venture-stage firm approached putting money behind a green vehicle. "Any improvement on the internal combustion engine is an improvement in terms of climate impact," she said. But DBL considered hybrids to be an incremental step. Seeking a truly disruptive choice, she invested in 2005 in a company working on an all-electric vehicle. That company was Tesla.

One piece of finding a disruptive opportunity is understanding the industry. As in other industries, Patterson said, investors start by looking for "earlier, better, and cheaper." But there are important differences in green tech. Internet startups don't take a lot of money to get going; green tech requires expensive research and development. "If you want to have something that's truly disruptive and is going to have a major impact on the clean tech space," he said, "you need to allocate in the tens of millions if not hundreds of millions of dollars." Green tech also requires patience, he added. It often takes years to refine the technology and business model.

In these ways—and in the need to negotiate significant regulatory overhang—green tech is more like the life sciences than other parts of the technology industry, Patterson pointed out.

On the other hand, there are periods where change happens quickly in a new industry, and that can be a source of opportunity. Gross, who focuses on the growth stage, said, "Clean tech is such a rapidly growing industry that whenever you see things scaling up, as an investor, you can step back and look for the natural constraints." He added, "If you can spot companies that don't face those bottlenecks or control those bottlenecks, they are likely positioned for growth and market disruption."

As an example, he pointed to a period when demand for silicon exceeded supply, resulting in prices spiking from $24 per kilogram in 2004 to $450 per kilogram in 2008. First Solar, which Gross invested in while at Goldman Sachs, "was the only company that had a proven, in-market technology to make a solar panel that didn't use silicon," Gross said. Instead, the company used cadmium telluride in its "thin film" modules. First Solar went public in 2006 and remains a major player.

Real disruption isn't just a few months of buzz that drive an IPO. It creates ripple effects, Ripley said, that reshape multi-billion dollar industries. When she is considering an investment, she looks at how the company might maintain its initial advantage. "Once a new idea gets proven, the big players will come charging in. What does a new firm have that means the business model, product, service, or technology will remain differentiated and sustainable over time?"

Listen to the webinar:

This webinar was a collaboration with the Yale Center for Business and the Environment, the Yale SOM MBA for Executives program, and the Yale SOM Office of Alumni Relations.