By Brian Dumaine, senior editor-at-large
FORTUNE -- In the world of venture capital they call it the valley of death. Scores of promising start-ups armed with innovative green technology end up stranded in the desert for lack of capital. Energy, it turns out, is not like launching a software company. You need a lot more than a few brilliant geeks in a garage. Energy operates on a huge scale and can require billions in investment capital.
It's little surprise then that investment in clean tech startups is shrinking. According to the latest numbers from the research firm the Cleantech Group, venture capital firms globally invested $6.5 billion in clean tech companies in 2012 -- down 33% from the previous year.
What's going on? Photovoltaic solar manufacturers have been hard hit by cheap natural gas as well as the Chinese flooding the market with inexpensive systems. Brightsource, the promising startup building a massive solar thermal plant in the Mojave desert, delayed its IPO. Even the VC firm Vantage Point partners, for years in the vanguard of clean tech investing and one of the most Silicon Valley's aggressive players, recently announced that it has stopped raising its $1.25 billion clean tech fund. Vantage Point, which invested in electric car maker Tesla (TSLA) as well as Brightsource, has found that many institutional investors are losing their appetite for long-shot green energy bets.
As the VCs are retreating, a small group of well-heeled notables including Wal-Mart (WMT) Chairman Rob Walton, Gap (GPS) Chairman Bob Fisher, and Tom Steyer, the founder of the multi-billion Farallon fund, are experimenting with a new clean-tech investing approach. They are backing a firm called EFW (for Energy, Food, Water) and instead of focusing only on energy startups, it is making long-term bets all along the value chain from small private firms with promising technology to large-scale projects.
EFW focuses on investments in those resources -- energy, food, and water -- that are bound to grow more in demand as global population levels rise and millions more in the developing world achieve middle-class lifestyles. The prices of these resources are likely to become more volatile as well. Says Scott Jacobs, a co-founder and partner at EFW and a former consultant at McKinsey: "We tell pension funds looking to invest how exposed to risk they are from climate change and the fact that natural resources are becoming increasingly scarce. It's a theme that cuts across all the investment silos and hasn't been managed well."
The firm has invested in startups such as solar financer Sungevity and the algae-based chemical company Solazyme. At the same time it will invest in big projects related to energy, water and food. Says Jacobs: "We're more flexible than other investors -- we're long-term investors who can put money anywhere in the sectors and anywhere in the world and anywhere in the life cycle of a company." The smart money, it seems, is betting that long term, flexibility will pay.
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