Paper to be presented at the

35th DRUID Celebration Conference 2013, Barcelona, Spain, June 17-19

Emergence of Cleantech as an Investment Category ? Public Discourse

and Venture Capital InvestmentMichael Migendt

EBS Business SchoolInnovation Management and Entrepreneurship

michael.migendt@ebs.edu

Florian A. TäubeEBS University for Business and Law

Strascheg Institute for Innovation and Entrepreneurship (SIIflorian.taeube@ebs.edu

Paschen von Flotow

Sustainable Business Institute (SBI)

flotow@instoec.de

Brett GilbertRutgers University

Management & Global Businessbagilbert@business.rutgers.edu

AbstractIn our paper we observe with an extensive database of press articles about venture capital the emergence and followingevolution of the topic clean technology investing. We match our software-based analysis of the press discourse withinvestment data and observe high synchronicity of the developments of the two datasets. We demonstrate that historicaltextual information holds as a viable proxy for analyzing circumstances with a lack of rich data. An industry life cyclemodel can be applied to the development of this investment category. Additionally we develop an understanding of therole of public discourse in the venture capital industry and look at consequences of tone and sentiment in the mediadata.

Jelcodes:G24,Q42

1

Emergence of Cleantech as an Investment Category – Public Discourse and Venture

Capital Investment

Abstract:

In our paper we observe with an extensive database of press articles about venture

capital the emergence and following evolution of the topic clean technology

investing. We match our software-based analysis of the press discourse with

investment data and observe high synchronicity of the developments of the two

datasets. We demonstrate that historical textual information holds as a viable

proxy for analyzing circumstances with a lack of rich data. An industry life cycle

model can be applied to the development of this investment category. Additionally

we develop an understanding of the role of public discourse in the venture capital

industry and look at consequences of tone and sentiment in the media data.

Keywords: Clean Technologies; Venture Capital; Sustainability Innovation;

Emergence; Co-Evolution; Industry Life Cycle; Public Discourse; Quantitative

Content Analysis; Sentiment

2

Emergence of Cleantech as an Investment Category – Public Discourse and Venture

Capital Investment

Abstract: In our paper we observe with an extensive database of press articles

about venture capital the emergence and following evolution of the topic clean

technology investing. We match our software-based analysis of the press discourse

with investment data and observe high synchronicity of the developments of the

two datasets. We demonstrate that historical textual information holds as a viable

proxy for analyzing circumstances with a lack of rich data. An industry life cycle

model can be applied to the development of this investment category. Additionally

we develop an understanding of the role of public discourse in the venture capital

industry and look at consequences of tone and sentiment in the media data.

Keywords: Clean Technologies; Venture Capital; Sustainability Innovation;

Emergence; Co-Evolution; Industry Life Cycle; Public Discourse; Quantitative

Content Analysis; Sentiment;

3

1 Introduction

Sustainability and cleantech seem to be common in everyone’s ears nowadays. But this has not

been like that in the past. Topics like renewable energy, energy efficiency and alternative

transportation have been technological inventions in the 1990s and earlier and developed to be

household knowledge and important business sectors until today. Venture capital has been rising

in importance as well in recent years. We are bringing these two topics together in order to

investigate the emergence of a new industry and new investment category.

Venture capital has been researched to be one of the major drivers of innovation and as well

commercialization of technology. (Bygrave & Timmons 1992; Samila & Sorenson 2010) The

venture capital industry is known for helping with the development of certain high technology

industries. It was a driver for growth in the semiconductor software, hardware and biotechnology

sector (Florida & Kenney 1988; Chen et al. 2009) and as well as a driver for different industries

in certain countries like Israel and Taiwan (Avnimelech et al. 2004; Avnimelech & Teubal 2006;

Dodgson et al. 2008).

The cleantech sector as a multi-industry sector has different characteristics than classical sectors

like software, information technology or internet. It encloses parts of these sectors but is in its

own definition a new sector. We observe the formation and emergence of the topic cleantech as

an investment category within the venture capital industry. The development of industry trends is

well connected with the financial support for these topics. The term cleantech itself has evolved

from the investment community and it is widely regarded as a description of a major investment

category or even asset class. Some describe different companies having a focus on green and

sustainable technologies as cleantech or part of a cleantech industry.

4

To analyze the historical events we use a quantitative content analysis of a database of press

articles about venture capital. We can observe important milestones of the evolution on a textual

base by analyzing the public discourse. We regard the media data as a good measure of

developments at certain points in time. The observation of the emergence of cleantech related

words, themes and connections within the media data is a key strength of our approach. It can be

observed which technologies, topics and themes have been dominant at certain stages of industry

development. This allows an analysis with high scrutiny and leads to thorough understanding of

influencing factors. This paper addresses the evolution of cleantech venture capital by studying

the emergence of this new investment category and patterns in the following expansion. We also

discuss the role of public discourse in the life cycle and show implications of sentiment in press

articles for investments in the venture capital industry.

Section 2 of the paper presents its theoretical background. Section 3 describes the research

methods used. Section 4 offers the results of the analysis of our media database matched with the

investment data. Section 5 examines the results and delivers our interpretation of the emergence

and evolution as well as interpretation of the public discourse and use of sentiment analysis. We

additionally come up with several prepositions and discuss the paper’s limitations, and suggest

some future research.

2 Theory

Cleantech Emergence & Evolution

The cleantech sector as a collection of several different industries has several interesting

characteristics which open a host of scholarly opportunities. Research in the field of investments

5

through venture capital in the field of cleantech or some of its niches is still rare. Works of

Diefendorf (2000) Sonntag-O’Brien & Usher (2003), O’Rourke (2004) Randjelovic et al. (2003)

Wüstenhagen et al. (2006) or Ghosh & Nanda (2010) show the characteristics and advantages of

green VC but also problems of certain sectors of cleantech to obtain financing as well as policy

preferences of VCs. Research on the emergence (Santos & Eisenhardt 2010; Woolley 2010) of

innovation and as well venture capital investment in this field suggests there has been an

evolutionary development (Nelson & Winter 1982; McGrath 1998) that is connected with the

entrepreneurial activity in the cleantech sector. We combine the emergence of cleantech

investment within the overall (venture capital) industry life cycle.

Venture capital is an important mean of funding for entrepreneurs and innovation. Big

technology firms have been funded by venture capitalists. Venture Capital has become well

researched topic in the entrepreneurship field. (Bygrave & Timmons 1992; Sapienza 1992;

Gompers & Lerner 1999; Kortum & Lerner 2000) It is recognized driver for growth in the several

high technology sectors (Florida & Kenney 1988; Chen et al. 2009) and as well in national

innovation systems (Avnimelech & Teubal 2006; Dodgson et al. 2008).

Categories are defined as sharing common features and having common identities. (Navis &

Glynn 2010; Khaire & Wadhwan 2010) The cleantech investment category in a very broad sense

includes investments in companies mitigating and adapting to climate change.

Avnimelech et al. (2004) developed a venture capital life cycle model we are building on to

describe the evolution of the investment category. The base for our research stems from

emergence and industry formation literature (Abernathy & Utterback 1978; Klepper 1996, 1997;

6

Malerba & Orsenigo 1996). In a nutshell, extant literature uses four phases to describe emergence

and evolution of industries.

Hypothesis 1: New investment categories emerge and evolve following a life cycle pattern.

Public Discourse on Venture Capital Investment

Utilizing discourse analysis we observe the media perception of socially constructed objects and

their positions within the investment category frame. The total attention towards terms can be

tracked for new technologies (Munir & Phillips 2005)

Hypothesis 2: Public discourse is a proxy for VC industry capital flows.

Sentiment Analysis

Using discourse methods and content analysis it is possible to analyze tone and sentiment in

texts. This method used has been introduced in financial literature. (Antweiler, Frank 2004;

Tetlock 2007; Tetlock et al. 2008) To approach the sentiment in texts with a financial background

standard dictionaries have been remodeled to show a more focused use of words in a negative

context. (Loughran & McDonald 2011). Commonly stock market developments are analyzed

using company publications or social media discourse but the use of sentiment dictionaries in

other fields especially connected to the financial markets is a possible approach. We see the

Venture Capital market as a field for testing.

7

Hypothesis 3: Sentiment analysis can be used in private (equity) markets.

3 Research methodology

A set of different methods is used for our study. We conduct a content analysis of press articles

and public discourse, a method which has found increasing prominence in organizational research

of late (Wuthnow 1989; Phillips & Hardy 2002; Ventresca & Mohr 2002). We therefore use the

press publications of several major international newspapers. Source of these articles is the Lexis

Nexis database with its records of important international press. Within the database we select the

subset of “Major World Newspapers” which comprise 79 major international newspapers. We

use all publications mentioning “Venture Capital” and related word patterns. Through this

selection of global articles we are able to observe the development of the venture capital sector

through press discourse. The regarded timeframe spans from January 1st 1995 to December 31st

2011. We have 17 years divided into 68 quarters. There are a total of 84,259 articles mentioning

“Venture Capital”. We can clearly observe the increasing public importance of venture capital in

the late 1990s. Starting in the first quarter of 1995 there were 491 articles published in the

newspapers. After a steady increase of numbers the articles published peak in the second quarter

of 2000 with a number of 3097. After that peak the number of articles drops to a range between

707 and 1035 in the years 2008 and 2011.

8

Figure 1 Historical Development of all Articles

Using the Wordstat 6.1 software package we can not only use verbal counts (Berelson 1952) but

also co-occurrence of words and several statistical methods (Neuendorf 2002; Krippendorff

2004). Through the use of computer processing it is possible to handle large data sets and do a

more detailed analysis. The approach of analyzing textual data has been used in psychology and

sociology and other disciplines. The method has been used to research the historic shifting

composition of actors and frames in corporate environmentalism (Hoffmann 1999) and the

construction of market categories in the computer workstation market (Kennedy 2005).

We combine the use of historical analysis of texts and the sentiment analysis on our sample of

press articles. For analyzing the emerging topics of cleantech industries within the venture capital

articles we developed a dictionary to apply within the Wordstat software. As a base for

structuring the cleantech sector we used the taxonomy developed by the Cleantech Group. The

Cleantech Group is one of the leading market intelligence companies in the field of clean

technologies and is widely seen as influencing for the establishment of the term “cleantech”. The

Cleantech Group’s definition of the sector spans over 13 categories encompassing several

different industries and technologies. We build our dictionary accordingly to these categories and

introduced two overview categories to test a global cleantech and a global ecology topic. These

0

500

1000

1500

2000

2500

3000

3500

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

9

15 different categories plus an additional combined category were applied to the quarterly

structured articles from the 17 years from 1995 to 2011.

Figure 2 Cleantech Dictionary

Additionally we applied an existing dictionary developed by finance scholars for analyzing the

sentiment in the articles. (Loughran, McDonald 2011) We used the dictionary not only on the

whole sample of our press articles but also in a second step on the selection of articles which the

cleantech dictionary has been recognized as including cleantech topics.

We match this data of the media discourse with information from the NVCA MoneyTree

database for the same time span. This information regarding investments in the VC industry is

entirely based on the US market. The venture capital industry in the USA is not only the most

mature but as well the biggest and best documented (sources). We are confident the NVCA data

is the best match available for the English textual media data.

10

Finally, we complement the press publication analysis and the financial data with interviews with

relevant market participants. These interviews have been conducted with US and European

experts from the field of cleantech VC who participated in the life-cycle of the industry over the

past decade. The interviews have been conducted in the period from October 2011 to May 2012.

This qualitative part of research leads to information missing from the pure analysis of press

articles. The multi method approach offers opportunities to triangulate the results from the

independent paths of research.

4 Results

Observing the results from our press analysis we can observe the development of the overall

venture capital industry from 1995 until 2011. This 17 year period is a relevant time frame to

study, even though the VC industry was formed much earlier [for a historical description see

Kenney 2011]. Matching the press articles with the investment data we can show that the number

of articles is a good proxy in regards to synchronous development. In the first quarter of 1995

there were 491 articles including “Venture Capital” published in the newspapers. In the same

quarter a sum of $1.578bn was invested in 504 deals. After an increase in as well the investments

and the articles published the number of investments and the amount peak in the first quarter

2000 with an amount invested of $27.140bn in 2.186 deals while 2.933 articles were published

The peak in published articles is one quarter lagged in the second quarter of 2000 with 3.097

articles increase of numbers the articles published peak in the second quarter of 2000 with a

number of 3097. After that peak the number of articles drops to a range between 707 and 1035 in

the years 2008 and 2011.

11

Figure 3 Articles vs. Investments

The results we received using the sentiment dictionary show a use of as negative classified words

in the range between 1.1% and 1.6%. Higher percentages are interpreted as a more negative

sentiment in the representative quarters. We see volatile results with frequent changes. Long term

steady developments or quick changes in the result range are a measure of change in the

sentiment towards the venture capital industry. In the 7 quarters between the first quarter of 1999

and the third quarter of 2000 there is just a change between 1.1% and 1.2%. After that we see a

continuous increase over two years to a peak in the third quarter of 2002 of 1.5%. After three

quarters at 1.5% we can observe a slow incline over 13 quarters to 1.1% in the second quarter

2006. After some volatility around 1.1% and 1.2% there is a sharp upswing from 1.1% in the

second quarter of 2008 to 1.6% in the fourth quarter of 2008. After a fall back down to 1.2%

there is a return to 1.5% negative words in the fourth quarter of 2011.

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12

Figure 4 Sentiment VC

The results of our analysis with our cleantech dictionary show a low beginning of cleantech

related articles in our database. There are steadily less than 3% of all articles related to cleantech

until the second quarter of 2004. We see an increase in the prominence of cleantech related

articles after that. We see a peak of the importance of cleantech in the fourth quarter of 2009

reaching 20.88% of all articles. We see a peak in the percentage of amount invested two quarters

lagged in the second quarter of 2010 with 21.05% invested. All in all we see a high synchronicity

of percentage of cleantech articles and amount invested in the cleantech sector but with certain

lag of the investments to the media attention.

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13

Figure 5 Cleantech % vs. Investments%

5 Discussion and Conclusion

The Venture Capital Life Cycle Model (Avnimelech et al. 2004) we apply to the development of

the cleantech investment category needs certain adjustments to fit to our model of the emergence

of a venture capital investment category.

The conditions for the development of the cleantech investment category are developing in the

first phase. (“background conditions phase”). We already have an established venture capital

market financing over 500 deals with a volume of $1.5 billion in 1995. After an immense

increase in venture capital funding during the dot-com boom we see the bubble burst in late 2001.

Immediately investors are looking for new industries to invest in and settle as one of the selected

14

in cleantech. In the years up to 2002 there are R&D initiatives and young companies in diverse

industries of the cleantech sector and single investments that qualify as cleantech companies. But

there is not a trend towards a thoughtful investing yet. Public discourse in the field is mostly

concerned about topics like emissions regulation and recycling. We classify the phase up to the

end of 2001 as background conditions phase. We see steadily less than 1.5% of the total deal

volume and less than 2.5% of media attention to cleantech related issues.

Growing early venture capital investments occur in the second phase (“pre-emergence phase”).

There is a thought basis for these investments. The foundation of prominent market observers as

for example the Cleantech Group fall in the beginning of this phase. Public discourse is picking

up topics like “other cleantech” fields and solar is getting some attention. The investments during

this phase are bringing companies to maturity for venture capital later round investments. As we

see an increasing trend of investments now the trend is as well observable in press articles. We

see roughly 2-3% of the total deal volume and 4 % of media attention to cleantech related issues.

In 2004 the green wave initiative of the state of California which led to programs of the public

pension funds CalPERS and CalSTERS was started. At the same time there is a substantial use of

especially cleantech related words in articles.

In the “emergence phase” the investment category develops an own understanding and grows to a

substantial size. Starting in early 2006 cleantech venture capital investments expand rapidly. By

the end of this phase the category has become defined.

Following the emergence phase we observe together with the financial crisis at the end of 2008

the start of the “crisis phase” after which following we currently see the “consolidation phase”.

15

Figure 6 Industry development within cleantech sector

The synchronicity of press articles in the field of cleantech and the investment data can be

observed in figure 5. Especially the amount invested is closely related to the amount of

publications. We see some time lag of the investment data and are planning to check this topic

quantitatively. We think that media does not only report about deals invested but does as well

influence some of the investment decisions. Public discourse can be used to get a deeper

understanding in field with a lack of rich data.

The sentiment analysis (see figure 4) which at this stage only is applied to the general VC article

database shows the sentiment following the trends in venture capital funding and world economy.

16

Two time frames described before seem obvious for a negative trend and show so in our data.

Firstly after the burst of the internet bubble in early 2000 we see a change of good sentiment to a

much worse sentiment over two years to a peak in negative tonality in the third quarter of 2002.

Following we can observe a change towards better sentiment in a long time span. The second

event which leads to a quick change in sentiment is the world financial crisis in the third quarter

of 2008 where in a time frame of two quarters the tonality in the VC articles changes dramatically

to the worse. We come to the conclusion that a dictionary for textual sentiment analysis can also

be used on press articles about the venture capital industry.

The research aims at analyzing the role of venture capital with respect to the development of and

within the cleantech sector as evolutionary influences of the early and expansion stages of the life

cycle of an investment category. We provide insights into the evolution of financing for the

renewable energy and environmental technology sector considering the importance for a

sustainable future. Our analysis of press publications and investment data with the background

information from our interviews with actors of the categories development can help

understanding historical turning points in the cleantech sector. Main factors like policy changes,

political shifts in direction, investment programs and global trends or phenomena have direct

influence on market growth and public perception. Deeper knowledge of the evolution of

investment categories is key to understanding the triggers of the development of its own and the

underlying industry. The understanding can support in the construction of public measures or

supporting frameworks to foster innovation and job creation in certain selected industries. The

results of our research can be used to identify success factors and barriers in the development of

17

investment categories, find future directions of asset allocation within the venture capital industry

and help to foster a sustainable environment for new innovative sectors.

We investigate the role of public sentiment in individual life cycle stages. The combination of the

analysis of sustainable technology innovations emergence and sustainable venture capital

emergence should be transferable to research of other industries and other investment categories.

Testing our findings in a more quantitative analysis could help to enrich the contribution and

strengthening the transferability.

18

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