Summary: Cleantech describes a category of companies defined by products that tread more lightly on the planet than alternatives. This grouping is more like Socially Responsible Investing (SRI) than it is like “market categories” in the startup world. This matters a lot because categories provide context to entering talent, entrepreneurs, investors, LPs, analysts, and media, for example around the space of future career moves and around focus areas in a portfolio.
Everyday we throw around words like sector, industry, space, and so to describe some category of companies or products or market segments that we have in mind. Most of the time, precise definitions don’t matter because people get what we’re trying to say. But in certain contexts, these categories become important—for example, when they help talent define and signal themselves as “enterprise” or “consumer” or when they help investors define and signal focus areas in their portfolio.
For lack of a better term, I’ll call these special categories “market categories.”
Defining Market Category
So what’s a market category anyways and why does it matter? Here are a couple of ways I think about market categories, one more intuitive within the tech startup world and another formal in the public markets.
A market category in the tech startup world is a grouping of companies that people use as shorthand for a shared set of qualities either on the customer side or the product side. On the customer side, these are segments & value propositions and a shared business talent pool. On the product side, these are the underlying technologies & processes and a shared engineering talent pool.
Market categories defined by the customer side include global ones like enterprise and consumer or vertical ones like ed-tech, health-tech, and fin-tech. Market categories defined by the product side include things like analytics, collaboration, marketing automation, and so on.
Companies within a market category share more with each other than with those outside the category. As a result, within a market category there are common patterns that arise around business models, risk profiles, and exposure to macro trends.
In the public markets, there are more formalized categories around similar principles. The most commonly used in the financial investment and advisory space are the Industry Classification Benchmark, the Global Industry Classification Standard, the Thomson Reuters Business Classification, and the Morningstar Global Equity Classification Structure.
Each of these is a market-based classification—rather than a production activity based one like NAICS used by the Federal government. To quote a Cornell study comparing GICS with NAICS and SIC: “Our results show that GICS classifications are significantly better at explaining stock return co-movements, as well as cross-sectional variations in valuation-multiples, forecasted and realized growth rates, R&D expenditures, and various key financial ratios.”
Cleantech as a whole shares neither customer side qualities nor product side qualities. In general, customers do not usually seek out “clean” as the primarily value proposition nor is “clean” usually a defining quality about the underlying technologies and processes. For example, enterprise energy management companies like Vigilent or FirstFuel or C3 Energy probably have more in common with enterprise software companies like Salesforce or Workday than they do with say FloDesign (wind turbines) or Project Frog (prefab construction). Tesla has more in common with luxury automotive and manufacturing, than with any of the above. The exception here might be a narrower eco-tech category that is primarily about products for eco-conscious consumers or for sustainability / EHS compliance in the enterprise.
It’s possible these may be obvious examples to experienced entrepreneurs and investors. But it doesn’t seem to be reflected in how the industry is covered in the press—traditional or startup. And based on many recent conversations, it doesn’t come across to new talent and entrepreneurs exploring the space. As more great folks driven by mission seek to make a difference, it’s important for them to be well-informed to make strategic career and startup and investment choices. Being clear about these things helps make sure one understands the implications of working there and the expertise to look for when gauging the likelihood of success.
Actually, looking at the same companies and problems with fresh eyes for actual market categories may suggest broader opportunities. There are likely other opportunities in software around “buildings-tech” or in industrials around lighting or in consumer goods & services around home appliances and transportation services.
So if cleantech is not a market category, what might it be? Cleantech is still a valuable grouping in the same way as Socially Responsible and many others. It groups companies whose products tread lightly on the planet and which cut across market categories—ranging from consumer goods & services to industrials to energy and basic materials.
In fact, Advanced Energy Economy, which I helped build over the last couple of years is also founded on a different and valuable grouping around “advanced energy.” In founding AEE, we had a couple of significant observations. The value chains around energy services from electricity to transportation were regulated at multiple levels, often by similar policy winds and underlying public sentiments. They had a long history of lack of openness to and investment in innovation to improve cost, reliability / security, and environmental performance. And these shared interests were the basis for a business relationship and industry consortium. These are reflected in AEE’s mission to “influence public policy, foster advanced energy innovation and business growth, and provide a unified voice for a strong U.S. advanced energy industry.”
Cleantech may be an important grouping of companies but it is not a market category as commonly used either in the startup world or in the public markets. Talent, entrepreneurs, and investors should all be clear about this when exploring cleantech and when defining themselves as cleantech.
Do you agree, disagree, or think it doesn’t matter? Fire away in the comments!