The Color Of Money

Silicon valley venture capitalists are typically reluctant to invest in companies more than an hour's drive from their offices. Far-flung start-ups are simply too difficult to manage. So it was curious, a few weeks ago, to find John Doerr, the most famous partner at the Valley's most storied venture capital firm, Kleiner Perkins Caufield & Byers, scouting for investment opportunities all the way in Brazil. In a two-day, 10-meeting whirlwind trip, Doerr, his KP partner Ellen Pao, and Doerr's friend, author Thomas Friedman, barnstormed the country's ethanol industry, which produces half of Brazil's automobile fuel from sugar cane. The trio met with energy entrepreneurs and took a helicopter to the world's second largest ethanol mill, where 100,000 tons

of raw sugar is converted into 21 million gallons of ethanol each year. "You don't appreciate what Brazil has achieved until you've been there and see the endless fields of sugar receding over the horizon," Doerr says.

Something unusual is happening at Kleiner Perkins. Earlier this year the firm—known for making enormously profitable bets on the likes of Google, Amazon, Netscape and Sun Microsystems—pledged to devote $200 million of its new $600 million investment fund to green technologies like solar panels and biofuel. It recently initiated a biannual conference for energy entrepreneurs and experts, and began lobbying for state and federal legislation that would lower greenhouse-gas emissions and raise taxes on oil drilling to fund alternative-energy research. Doerr calls the world's transition to clean energy "the biggest business transformation of the decade and maybe even the first half of the century," which sounds like predictable hype from the man who said the same thing about the Internet even as the dot-com economy crashed.

But this time, Doerr's characteristic hyperbole may be good for the country and the planet. Though KP wasn't the first to embrace the green religion, it now leads an enormous wave of financial and political capital being spent on breaking our dangerous reliance on fossil fuels. U.S. investors are on track to pour $2.5 billion into green-tech start-ups this year, up from $1 billion in 2002, according to the Cleantech Venture Network. None of KP's green companies has produced actual products or revenue yet, so it's too soon to tell whether this is merely another frothy Silicon Valley bubble. But KP's decision to go green, after five years of gradually dipping its toes in the sector, signals even bigger industrywide bets to come. After all, where mighty KP goes, other investors usually follow. KP's 1994 investment in Netscape, for example, helped spark the Internet revolution; its backing of Amazon in 1996 kick-started e-commerce. "Their decision to move forward aggressively on green-tech causes others who even a few years ago ignored this space to finally pay attention," says Dan Reicher, president of New Energy Capital in Vermont.

The story of how Kleiner Perkins Caufield & Byers went green begins with inventor Dean Kamen, whose overhyped, underperforming start-up, Segway, was financially backed by KP in 2000. As the dot-com bust was swamping many of KP's Internet investments, Kamen's green-themed pitch for the Segway personal transporter deeply affected many of the partners. In speeches that year, Doerr declared that 300 emerging Asian cities with populations of more than 10 million people would surely overwhelm the planet's natural resources unless new sources of clean water, power and transportation were developed. Former Oracle president Ray Lane, a Republican, joined the firm that year and was surprised that Kamen's politics had so clearly swayed his new partners. "I didn't realize that I had joined a firm of tree-huggers," he says.

It took India-born mechanical engineer KR Sridhar to convert that general interest into KP's first real financial commitment. In the late '90s, Sridhar was a visiting scientist at the NASA Ames Research Center in Silicon Valley. His microwave-oven-size electrolyzer experiment, set to launch on the 2003 Mars Lander mission, was designed to convert solar-generated electricity into air, water and methane, and to grow an actual living plant inside an inflatable tent on the Martian surface. After NASA lost two Mars missions in the late '90s, the space agency scrubbed Sridhar's project. Pondering his next move, he realized that he could build a business by reversing his electrolyzer technology into a fuel cell—in other words, using water, oxygen and a hydrogen source such as natural gas to cleanly generate electricity. Henry McDonald, then the director of Ames, introduced Sridhar to KP partner Vinod Khosla.

At the time, KP had little actual experience with clean technology. It hired three outside consultants to scour Sridhar's proposal, and in 2002 invested unspecified millions in the start-up. KP partner Aileen Lee says that the investment in the company, now named Bloom Energy and still working on its first stationary-fuel-cell product, inspired a shift inside the investment firm. Sridhar evangelized for renewable energy and "made us feel like it was possible to build new companies in the energy industry," she says.

The firm made a few cautious investments over the next couple of years, but the next spark was provided in early 2005 by a new partner—Sun Microsystems cofounder Bill Joy. Industry observers at the time assumed that Joy would focus on traditional software and Internet investments. But Joy was already deeply interested in alternative energy, ironically thanks to an indulgence of the über-wealthy. Since 2004, he has spent tens of millions to build what he describes as the world's most environmentally friendly sailboat: a 190-foot superyacht, to be named Ethereal when it's finished in 2008.

As part of the boat's design process, Joy had been rethinking nearly every aspect of energy generation and efficiency. At KP, Joy developed a taxonomy of 65 investment categories and ranked each red, yellow or green, depending on whether the firm had an investment plan for the sector and was seeing new business plans.

That experience proved invaluable when, in the past year, the perfect storm of political and economic factors converged on the energy sector. The price of oil and gasoline climbed; the oil-drenched wars in the Middle East worsened. Al Gore's movie on global warming changed even the minds of Republicans like Lane, who joined the nonprofit Republicans for Environmental Protection after seeing it. It undoubtedly also reinforced KP's enthusiasm when Vinod Khosla separated from the firm and started investing his own money in ethanol start-ups—drawing plenty of positive press attention as a result. In March of this year, John Doerr showed a San Francisco clean-tech conference scary images of what an underwater Bay Area would look like if the ice caps melted. Two months later, KP made its public commitment to spend a large portion of its latest investment fund on green technology, and held the first of its Greentech Innovation Network conferences.

Since then, new green business plans from hopeful entrepreneurs have swamped the firm. "There's a lot of pent-up innovation in this space. It's like a dam bursting," says Joy, who says he's currently "drowning" in 40 plans waiting for his review. The firm has already invested in a dozen cleantech start-ups. The latest, the UC Berkeley spinoff Amyris Biotechnologies, has plans to bioengineer yeast cells to consume sugar and excrete a biofuel that can be used in cars. Another start-up that has received KP money, the Boston-based GreatPoint Energy, is building a factory in the Midwest to superheat coal and convert it into natural gas—a process called coal gasification. Cofounder Andrew Perlman says the KP partners heard him speak at a green-technology conference and closed a deal in two days.

Investing is only part of KP's green campaign. To change the energy equation, the partners realized they had to help remake the old quilt of energy subsidies, tariffs and taxes. "Unlike the Internet, policy is involved in every part of green tech," Doerr says. At KP's conference in May, participants in a policy working group mobilized around California's pending "AB32" legislation, which proposed reducing greenhouse-gas emissions to 1990 levels by 2020. KP partners organized a lobbying trip to Sacramento and brought along entrepreneurs like Dave Pearce, the founder of the KP solar firm Miasolé. Meanwhile, Ray Lane, a board member of the Shriver-family-sponsored Special Olympics, had the ear of Gov. Arnold Schwarzenegger, who signed AB32 in September. Environmental activists credit KP with an assist on the new law.

Even with the passage of AB32, KP and other green-tech investors face big challenges in an energy field still tilted toward producers of fossil fuels. But for many of the KP partners, being green has become personal. John Doerr regularly tells the story of his young daughter angrily admonishing him and his generation for fouling the planet. Beyond Bill Joy's wonky fixation on the details of his superyacht is actually an obsession with solving the world's most pressing engineering challenge. And Ray Lane, who once thought he had joined a firm of "tree-huggers," now finds himself frequently pressing his pro-green rationale of national security and economic independence on his Midwestern hunting buddies—with the same mixed results that plague many converts to the green movement. "Some of them have been very moved," Lane says. "The rest of them tell me, 'Ray, you've been living in California too long'."