Lessons from the clean energy bubble

I reread Peter Thiel’s Zero to One over the weekend and was struck by the chapter on the clean energy bubble. We often compare crypto to the dotcom era, but perhaps clean energy offers a closer comparison.

RENIXX world index over time (renewable energy industry index). This is the chart cited in Thiel’s book (to 2012, at the time of publishing).

The clean energy bubble in brief:

1. A cultural movement forms around the ethos of clean energy. Gore’s documentary, An Inconvenient Truth wins an Academy Award.
2. Decades of (largely unrecognized) prior work precede a frenzy. The first solar cell was created in 1954 at Bell Labs but discourse treated solar cells like novel breakthrough.
3. Investors declare “the next big thing” and facilitate massive capital formation (>$50B).
4. A reflexive demand loop pushed up prices. More capital led to more demand for solar panel makers which led to more demand for solar panel components which led to more demand for novel ways to make solar panels (to get around the high component prices) which led to more demand for capital and so on.
5. By and large, startups failed to achieve real traction with over forty solar makers going bankrupt in 2012 alone.

For more color, I highly recommend reading Zero to One (chapter 13) if you haven’t already and this 2012 take from wired.

One can describe the crypto bubble (if you will) in similar terms:

1. A cultural movement forms around the ethos of “decentralization”: self sovereignty, censorship resistance, privacy, disintermediation, what have you. I’ve written about crypto as a series of mass movements.
2. Decades of (largely unrecognized) prior work precede a frenzy. Cryptography started dozens of years ago. Internet money soon thereafter. Bitcoin just celebrated its tenth anniversary. But when you look at the language of new projects, you’d think they’d just invented something brand new.
3. Investors declare “the next big thing” and facilitate massive capital formation. In early 2018, the market cap of all liquid cryptoassets surpassed $800B alongside massive investment in the private markets.
4. A reflexive demand loop pushed up prices. More capital led to more demand for blockchains and blockchain developers which led to more demand for novel (more scalable, more efficient) blockchains leading to more demand for capital.
5. By and large, startups failed to achieve real traction with hundreds of zombie projects with little traction or failure to even ship product.

In both cases, excitement for the sector itself (clean energy then, blockchains now) got ahead of the practical value of the companies being built. As Thiel says:

The 1990s had one big idea: the internet is going to be big. But too many internet companies had exactly that same idea and no others. An entrepreneur can’t benefit from macro-scale insight unless his own plans begin at the micro-scale. Cleantech companies faced the same problem: no matter how much the world needs energy, only a firm that offers a superior solution for a specific energy problem can make money. No sector will ever be so important that merely participating in it will be enough to build a great company.

It’s worth repeating: no sector will ever be so important that merely participating in it will be enough to build a great company.

Still, great companies can be built. While the bubble led to losses for many involved, there were winners that emerged–notably, Tesla. Thiel explains:

Tesla’s success proves that there was nothing inherently wrong with cleantech. The biggest idea behind it is right: the world really will need new sources of energy.

And this is what we’ll see in crypto. Companies that deliver a “superior solution for a specific problem” can succeed. While most of the crypto companies started in 2017 and 2018 will end up like Solyndra, some of our peers are building Tesla.

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