by Justin Mullins, New Scientist, May 28, 2008

"IF THE best way to create the future is to invent it, we say the second-best way is to finance it." John Doerr is only half joking. He is one of the most influential venture capitalists in Silicon Valley, and he knows a thing or two about financing the future. As a partner at Kleiner Perkins Caufield & Byers (KPCB), one of the Valley's best-known venture-capital firms, Doerr has enjoyed a phenomenal run of success, backing technology companies such as Sun Microsystems, Google and Amazon (as well as the odd failure, such as computing start-up GO Corporation, which famously burned through $75 million of venture funding). In the process, he has made himself a personal fortune in excess of $1 billion.

But ask him what he's focused on now and you won't hear venture-capital buzz-phrases such as "Web 2.0". These days, Doerr is firmly focused on clean technology - and in particular, energy technologies that can save the planet from global warming. This month his firm set up a $500 million fund for investment in green technology, on top of the $200 million it has already invested.

This doesn't mean Doerr has ditched capitalism for more worthy goals; his new direction is still driven by an instinct for profit. "Remember the internet? Green tech is bigger," he told TED, the annual technology entertainment design conference in Monterey on the southern fringes of Silicon Valley last year. "This could be the biggest economic opportunity of the 21st century." He tantalised his audience with the mouth-watering fact that the global energy business is worth $6 trillion per year. That puts in the shade anything measured in mere billions, such as the market for computers. "Energy is the mother of all markets," he said.

Even a tiny slice of such a market would keep a venture capitalist in beige chinos and blue shirts for life, but there is more to this story than the search for riches.

In 2000, a financial earthquake hit the area of green rolling hills just to the south of San Francisco known the world over as Silicon Valley. The Valley had enjoyed a decade of seemingly unstoppable growth - the greatest period of legal wealth creation in history, as Doerr famously put it at the height of the boom. The trick had been to finance and build the technology behind the dotcom revolution. In the space of 10 years the internet changed the planet, bringing fantastic wealth to the small band of Silicon Valley venture capitalists who had financed the companies behind it.

In took only a few months, however, for billions to be wiped off the value of these companies. Many disappeared overnight. Within a year, the Valley's once-buzzing cafes, restaurants and networking bars were empty. Many companies and individuals faced ruin, and Silicon Valley changed from a hive of entrepreneurial activity to a ghost town of empty office blocks and internet has-beens.

Eight years on, though, the Valley is buzzing again. The people who funded the extraordinary success stories of the 1990s have taken on a bigger challenge: this time they want to save the planet. Venture capitalists are falling over themselves to invest in green energy. In 2007, they invested $1.1 billion in clean-energy technology, according to CleanTech Group (see Chart). That's an increase of 94 per cent over 2006, a rate of growth that is bringing back happy memories of the dotcom boom. Even the credit crunch has so far had little impact, according to a survey by BusinessGreen.com.

Silicon Valley's venture capitalists aren't the first investors to wake up to the fact that an energy technology able to compete with coal or gas is going to clean up in more ways than one. But their mindset is different. By applying the techniques they perfected in the dotcom era for rapidly turning ideas into money, the Valley venture capitalists believe they can reach the ultimate goal - energy that is cheaper and cleaner than coal or gas - in just a few years.

In support of this ambitious, perhaps even arrogant, claim, the venture capitalists point out that they've done it before. Half a century ago, this part of California was a small farming community known for its apricots rather than its Apples. Then in 1956, William Shockley, co-discoverer of the transistor, set up a company in Mountain View to commercialise the invention. The move triggered the birth of an entirely new industry based on the silicon chip, and spawned household names such as Intel and Apple.

Behind the scenes, an extraordinary support network emerged to help set up, finance and staff the new companies. The ideas and minds came from nearby universities such as Stanford and Berkeley, the administrative know-how from a web of legal and accountancy firms and the money from venture capitalists - wealthy individuals prepared to stake money on high-risk start-up companies in exchange for shares. Silicon Valley became a melting pot of innovation, entrepreneurship and risk-taking unrivalled anywhere on the planet.

Such was its unique ethos that the Valley coped well with the economic downturns of the 70s, 80s and 90s. If anything it thrived on them, turning the hard times to good use by sniffing out ideas that would help it bounce back when the wind changed. In this way the Valley found itself well placed to finance and build the internet revolution that produced the Amazons, Googles and Yahoos that now dominate the online world. And when the dotcom bubble burst in 2000, the Valley did what it had done before: it bided its time until the next big opportunity came along.

A hint of what that opportunity would be came in 2003 as the price of oil began to rise, and when it rocketed to more than $100 a barrel last year the Valley financiers were galvanised into action. The energy business needed reinventing and they were ready for the challenge.

Vinod Khosla, one of the Valley's most successful venture capitalists, explains how the skills it gained from the high-tech industry now put it in pole position. "They're about managing technology risk," he says, pointing out that whether you're dealing with computers or energy, those risks are the same. Khosla is no stranger to managing risk. He co-founded Sun Microsystems in 1982 (with funding from Doerr), making a small fortune in the process. In 1986, with the PC revolution getting into its stride, he left to join Doerr at KPCB and by 2004 a series of entrepreneurial hits had put him in a position to start his own investment firm, Khosla Ventures.

It has to be fast

Khosla is now one of the Valley's biggest investors - and believers - in new energy technologies. Improving energy efficiency or changing laws can only produce small, incremental gains, he told New Scientist. "A new technology, on the other hand, can make a 200 per cent or a 400 per cent or a 1000 per cent difference. Technology is a sure-shot solution."

The hard part is picking the right technologies to invest in. To make that call, Khosla applies a number of tests learned from his years investing in computing and internet ventures. One key factor is whether the rate of innovation is fast enough. A rapid innovation cycle - the time it takes to turn promising ideas into goods that can be sold - is crucial to progress, he says, because it allows new ideas to hit the market quickly and gives investors the prospect of a quick return.

To illustrate the role of innovation cycles, Khosla cites two contrasting ways of generating electricity: nuclear energy and solar thermal technology. "It takes 15 years to build a nuclear power plant," he points out. So while there may be exciting ideas that could have a big impact, the rate of innovation is too slow to make it an attractive investment.

Solar thermal technology, which uses the sun's heat to generate steam to drive a turbine, is at the opposite end of the spectrum. It takes just two years to build a solar thermal plant and in that time the technology will have improved further still. "With solar thermal, I can fit several cycles of innovation into the time it takes to build a nuclear plant," Khosla says.

Last year, Khosla Ventures and KPCB invested a total of $40 million in Ausra, a Palo Alto solar thermal company which claims to be already generating electricity at market competitive rates. Advocates of solar thermal energy, Khosla among them, say the US could eliminate half its greenhouse emissions by installing solar thermal technology on an area less than 150 kilometres square. Solar thermal power is not suitable for every climate, but in places where the sun shines regularly and predictably it is gaining in popularity as successive innovation cycles improve efficiency and drive down costs.

Just as important as the innovation cycle is how well a technology "scales": does the product get cheaper as it is made in larger quantities, like the silicon chip?

Consider the biofuel ethanol. Today, this is most commonly made from crops such as corn (maize) and costs in the region of 65 cents a litre, significantly less than the 95 cents Americans are now paying for a litre of gasoline. But far from benefiting from economies of scale corn ethanol gets more expensive as you make more of it, not least because corn is also a food crop. Converting it into ethanol pushes up demand and triggers a spiralling increase in prices. And the more corn ethanol you make, the higher the cost of your feedstock.

There is, however, an alternative biofuel that scales well. Cellulosic ethanol can be made from almost any plant matter and so can exploit material such as corn stalks that would otherwise go to waste. Khosla says that companies such as Range Fuels in Broomfield, Colorado, and Macoma in Cambridge, Massachusetts, (both of which he funds) produce cellulosic ethanol at a cost of less than 55 cents a litre. With the supply of feedstock practically limitless, simple economies of scale mean that the more cellulosic ethanol you make the cheaper it becomes. Other technologies that pass Khosla's tests include synthetic biology for biofuels and thin-film solar photovoltaics (see "Ripe for exploitation").

Where Doerr and Khosla have led, other investors are now following. One of these is Lightspeed Venture Partners of Menlo Park. Principal investor Andrew Chung says investment decisions in clean technology are made more difficult by the complex economic environment in which energy companies operate. Solar power, for example, still relies on subsidies, which are dangerously dependent on the whims of public and political opinion. On top of that, solar-power companies have to sell their product into a market that is sensitive to regulatory changes. These unpredictable and unfamiliar factors add significantly to the risk. Nevertheless, Lightspeed now funds a range of companies developing everything from "clean coal" to bioengineered algae for biofuel manufacture.

Ira Ehrenpreis of Technology Partners, a venture capital firm in Palo Alto which has taken a similar plunge, says many of these worries have eased as public and political opinion has swung in favour of green energy. "We have come a long way, from a country that was divided over green energy to one that is essentially united," he told a meeting of Silicon Valley's legendary networking society, the Churchill Club, in January.

It's not just venture capitalists who are crowding into green tech. Google's philanthropic arm Google.org has made a series of investments, including $10 million in solar thermal company eSolar and another $10 million in Makani, which hopes to launch a fleet of high-flying kites to extract energy from the wind (New Scientist, 17 May, p 38). Investors are also starting to look beyond energy-generating technologies to other aspects of the energy economy. Technology Partners has backed APX, which helps companies buy, use and trade energy more efficiently, and Tesla Motors, which makes an electric sports car that can do 0 to 60 miles per hour in 3.9 seconds.

So will Silicon Valley's ongoing investment in the evolution of green technology make an Earth-changing difference? "We need people who are looking at over-the-horizon technologies," says David Downie, director of the Global Roundtable on Climate Change, a group of influential academics, companies and government representatives brought together by the Earth Institute at Columbia University in New York. Yet while he acknowledges that the technologies being fostered by the venture capitalists will make a difference, they will never be the whole solution. "Silicon Valley can't negotiate with the Chinese and US governments; it can't mandate new policies on deforestation and zero emissions," he says.

It's a limitation the venture capitalists accept too. "Technology can't solve the problem of deforestation," says Khosla. The key will be a team effort that includes entrepreneurs, politicians and ordinary people. "Can Silicon Valley save the planet? Not on its own," says Downie. But ask him whether we can save the planet without the Valley and he pauses: "That's much more interesting. There's no question we need it."