May 16, 2007 1:26 PM PDT

Not one, but two, clean tech bubbles, says investor

Posted by Martin LaMonica

AUSTIN, Texas--There are two answers to the question as to whether there is a clean tech bubble, according to venture capitalist Maurice Gunderson: yes and yes.

Gunderson, who spoke at the Clean Energy Venture Summit here on Wednesday about good and bad energy investment ideas, is a veteran energy-sector investor who co-founded energy investment firm Nth Power and now works at CMEA Ventures.

The surge in clean technology investment has two areas--solar photovoltaics and biofuels--where there is over-investment on the part of venture capitalists, what many people would consider a bubble.

The problem with solar photovoltaics is that government incentives are allowing some companies to operate at a higher cost than they should.

Gunderson believes that government incentives are appropriate. The problem is that they "draw a lot of capital into marginal companies," or what he called me-too companies.

A company with a reliable product can sell it. But that same company could have manufacturing costs that are too high, which are obscured by government incentives.

"You have a situation where if you have a reliable product you can sell it regardless of the manufacturing costs," Gunderson said. "As incentives go away, the high-cost producers will go away."

Biofuels, specifically the area of ethanol, is undergoing a boom to be followed by a bust, he said.

The nature of ethanol production is that it requires large amounts of capital to build and operate a plant. In the rush to get into alternative fuels, capacity has been over built and done by the wrong investors.

"In terms of investment, there's a lot of venture capital in what should be project finance deals," Gunderson said. "I think there will be a retrenchment and investment will go down.

Instead of following the pack, Gunderson recommended betting on transformational technologies, most of which involve new materials.

In the area of solar, that means more efficient photovoltaics that use advances in nanotechnology. In biofuels, his firm is looking at technologies that will make current ethanol plants obsolete.

"We're looking at feedstocks and processes--not in production capacity--where the opportunity for drastic cost reductions are," he said.