By Daniel Gross
Sunday, July 23, 2006; B02
Spend some time hanging out with technology's elite, and you'll quickly realize that a hot new tech-based field has captured the fancy of today's digerati: alternative energy. With apologies to writer Michael Lewis , it's the New, New, New Thing.
Leaf through the pages of Wired and Business 2.0 , the print bibles of the dot-com boom, and you're likely to see stories about light-emitting diodes, zero-emission cars, rechargeable fuel cells and hackers who pimp their Prius hybrids to run even longer on electricity.
Meanwhile, many of the people who cooked up the Internet revolution are now fully engaged in transforming the energy industry. Bill Gross (no relation) is the founder of Idealab , the incubator of technology-based companies that in the 1990s spawned eToys, NetZero, WeddingChannel.com, PetSmart.com and a host of other dot-coms. Idealab was forced to pull its $300 million initial public offering in the fall of 2000 as the dot-com sector melted down.
But today, Gross is riding high again. One of Idealab's most promising portfolio companies, Energy Innovations , develops solar panels for commercial buildings. And he's still talking in revolutionary terms. "Reinventing energy is a multitrillion-dollar opportunity. It's the next big disruption," Gross told Wired last July. "It dwarfs any business opportunity in history."
Gross isn't the only Web promoter who has gone green. Vinod Khosla is a Silicon Valley aristocrat. A founder of Sun Microsystems, he was a partner at Kleiner, Perkins, Caufield and Byers , the venture capital firm that launched a thousand start-ups, including Amazon.com, Google and Excite. Today, Khosla is an enthusiast for producing ethanol derived from grains. Last month, he joined forces with Western Milling, the largest grain miller in California, to start a company that will build and operate ethanol-producing plants. Khosla is also (smartly) supporting an initiative on this fall's ballot in California that would tax oil companies, generating $4 billion to help encourage the use of alternative energy -- such as ethanol.
Khosla is one of many venture capitalists wading through golden wheat fields in search of gold. According to the Cleantech Venture Network, in the first quarter of 2006, venture capitalists plunged a record $513 million into so-called cleantech -- products and services that reduce, conserve and maximize the efficient use of energy resources. That's up 53 percent from the first quarter of 2005.
In some ways, it's a natural for Silicon Valley types to get in on alternative energy. Like computer software and hardware, alternative energy is an engineering- based business. Cypress Semiconductor, an established company in Silicon Valley, spun off a unit last fall that makes solar panels, SunPower. Investors have thronged to the stock, which trades at more than 100 times its expected earnings.
Indeed, just as they did with dot-com stocks in the 1990s, individual investors are latching onto pricey alternative-energy stocks. VeraSun Energy, an ethanol company that went public in June, raised $420 million and received a healthy 30 percent pop on its first day of trading. Last December brought the public offering of Suntech Power Holdings, a manufacturer of solar panels based in China. And just as the late 1990s saw the rollout of mutual funds that were devoted entirely to the Internet sector, investors today can buy a green-power Exchange Traded Fund, the PowerShares WilderHill Clean Energy Portfolio.
In the late 1990s, established companies quickly adapted to the new environment. Executives started dot-com subsidiaries, adopted business casual dress, and learned to talk the digital talk. Now Fortune 500 executives, having mastered the rudiments of webspeak, are becoming conversant in alternative energy. General Electric last year launched its Ecoimagination initiative, an image and business strategy that represents the effort of chief executive Jeffrey R. Immelt to stamp his imprint on the vast company. The goal: By 2010, GE plans to ring up $20 billion in annual sales of eco-friendly products -- wind turbines, fuel-efficient engines, energy-efficient appliances, solar energy panels and water treatment systems.
Wal-Mart has similarly sought to improve its image and its bottom line by going green. In an interview this spring, company chief executive H. Lee Scott Jr. sounded more like the head of the Sierra Club than a member of the Business Roundtable: "I had embraced this idea that the world's climate is changing and that man played a part in that, and that Wal-Mart can play a part in reducing man's impact." And so the company has built experimental green stores such as the one in McKinney, Tex ., which is equipped with solar panels and reuses cooking and motor oil, and embarked on a serious effort to double the fuel efficiency of its monster trucking fleet by 2015.
So, a quick review: Extravagant promises about a new technology, investor enthusiasm, grandiloquent statements by entrenched executives, herd behavior exhibited by venture capitalists. . . . You don't have to be a Wall Street sharpie to notice that the cultural and financial stars seem to be aligning around alternative energy much as they did around the Internet. And we all know how that ended for investors.
So how come nobody is waving a red flag? The short answer: distance. In 2001, it was easy to declare the whole dot-com era a failure. But with the passage of time, another picture has emerged. In a process that has repeated itself throughout history -- with the railroad and telegraph, for example -- investment bubbles frequently kick-start new industries and leave behind innovations that others can use. The fiber-optic cable and dot-com business infrastructure created in the 1990s wasn't simply abandoned. It has been used to great effect by second-generation entrepreneurs and companies. The excessive investment in infrastructure may have set off ruinous price wars. But it also led to the swift rollout of broadband, and sharply reduced prices for Web hosting and data transmission. Google as well as MySpace, Flickr, YouTube and iTunes -- all these highly successful, quality-of-life-improving businesses were built on the wreckage of the dot-com era.
A similar process may be unfolding now in the alternative-energy space. Many of these venture-backed alternative-energy firms will fail, and some of the publicly held ethanol stocks will turn out to be turkeys. But fierce competition will lead to price reductions of energy-saving equipment. The vast sums being plowed into research may lead to incremental improvements or revolutionary breakthroughs. And as more giant companies such as Wal-Mart go green, the industry will gain scale -- a development that usually leads to price reductions for all consumers.
So is it possible that some of the same folks who brought us the dot-com bubble are blowing a new one in alternative energy? Let's hope so.
Daniel Gross writes about business and finance for Slate, the online magazine at www.slate.com.