Google and Entrenched Oil Interests Invest in Solar Energy Firm BrightSource

Fortune’s Green Wombat has out a couple items that I think provide some insight to the challenges and opportunities of green investing with regard to entrenched interests. First is a write up of a networking event sponsored by VentureBeat where Ray Lane of Kleiner Perkins compared green investing to biotech.

Unlike the first dot-com era or even the current Web 2.0 age, there’s no quick exit on the horizon for investments in green tech companies that may be years away from producing a product and require hundreds of millions, if not billions, in project financing to build car factories or solar energy power plants.

Lane compared investing in green tech to the long-term horizon needed for investing in biotech startups, where the key is to hit milestones that allow investors to calculate valuations.

The second was today’s news that Google would be investing $115 Million in start up solar energy company BrightSource.What’s interesting about this is not so much the Google investment - but instead the list of other BrightSource players - BP, StatoilHydro, and Chevron - which illustrate the degree to which we can expect the entrenched players to be active, if not dominate, in this space - and underlines Kane’s point about this not being the same as Internet investing.

There is one point, however, where I differ from Kane on his assessment of investor expectations - and that is the comparison to Biotech. I don’t see early stage Green Investing as an analog to Biotech. Instead I believe it is far more akin to investing in next generation Telecom in the late 90’s. While both require significant capital outlays and long paybacks, Biotech is far more binary in its return - making milestones exceptionally difficult to measure and determine - either the drugs get approved (or look like they will) and the company gets bought or its essentially a zero.

Telecom on the other hand is more about whether a company can amass the necessary funding to launch a large-scale capital spend on infrastructure, and then begin to show demand for services to allow for additional funding to scale out the business to reach profitability and dig out of the funding hole that building the infrastructure created. In that case, opposed to the all-or-nothing Biotech example, there are more tangible milestones to follow and more “outs” for investments.

One big difference between nextgen Telecom and Green Investments, however, and I think this bodes well for green investments is while Telecom companies were constantly battling to overcome downward pressure on pricing - making scale economics and timing a critical success factor - alternative energy companies like BrightSource have the benefit of upward pressure on alternatives such as oil or natural gas. This helps to keep profitability milestones more stable than what we saw with companies such as DSL CLECs or Fiber Companies during the Internet boom.

So what should investors learn from this? First off, I think that the Internet boom and books like The Innovator’s Dilemma, have conditioned us to see innovations as a net sum zero game - the entrenched would be losers on a relative basis and the big winners would be new companies that changed the rules so that the entrenched players were stuck between cannibalizing their own business or losing it outright to the newcomers, e.g., eBay, Google, Amazon, etc.

This, however, doesn’t really work for Green Investing - mostly due to those high barriers to entry discussed above. Sure many of these green players are game changing companies - but most with much higher hurdles to cross than Internet start-ups. Personally, I believe the future in Green will look a bit more like what SBC (now AT&T) did in the Telecom space - use some combination of established infrastructure (whether its dealership networks, distribution pipelines or electric grids) and government lobbying for protection and subsidies to box out new competitors as long as possible to protect their existing profits. Then let other firms and start-ups bite the bullet of the high cost of implementation of innovative technologies - stepping in a buy up assets of those technologies that emerge as winners down the road - all the while conserving cash to consolidate other players that have gotten overextended chasing every new idea under the sun.

This, of course, creates a dilemma for many green investors - especially those that have a social mandate as part of their activities - as the best investments in these sectors just might be the savviest of the entrenched old line players rather than some hot new firm out of the Valley.