Venture capitalists had infused $1.7 billion into the sector, the smallest amount in six quarters, according to Cleantech.

The implications of this reversal are truly profound.

Silicon Valley superstars have been touting green for the past two years. Boosters include Andy Grove, former CEO of Intel; Eric Schmidt, the CEO of Google; John Doerr, perhaps the leading venture capitalist in the world; and just about every other venture capitalist within spitting distance of the fabled Sand Hill Road.

Silicon Valley really hit the brakes hard after a frothy third quarter.

Venture capital investment in cleantech hit a record $4.6 billion in the first three quarters of 2008, according to Ernst & Young’s analysis of activity in the U.S., Europe, China and Israel. This is an increase of 82% compared with the same period in 2007 and represented 13% of all venture capital investment in the regions.

Now, despite President-elect Obama’s promise to spend $150 billion over the next decade to promote alternative energy, Silicon Valley is pulling the plug on green.

The move raises several important questions for investors looking to alternative energy for profits.

– Is this a temporary pull back due to the recession? If so, how long will it last?

– Why now, when President-elect Obama is promising to make the biggest government push into green in history?

– Or is alternative energy simply a bubble?

Our opinion is that Silicon Valley has come to realize that green energy is a decades-long proposition riddled with economic holes.

For example, large portions of the solar-energy market relied on subsidies from all levels of government. Today, governments are facing insolvency as a result of the recession.

The alternative-energy frenzy fed off the fear of $400 oil. Now oil is finally crawling toward $50.

And the hybrid-car craze is on the verge of fizzling as gas hits record low prices and consumers can’t afford the $5,000 premium tacked onto green automobiles.

Everywhere we turn these days, green seems to hemorrhage red for investors.

The pullback by Silicon Valley’s venture-capital elite is part of a complete overhaul of its investment criteria. The big surprise is that green investments are on the hit list along with other high-tech innovations — a reversal of the save-the-planet culture that has emerged in this Mecca of libertarian funding.

An article in today’s New York Times revealed that Silicon Valley VCs are now turning to shorter term opportunities versus the long-term returns that exemplify a healthy investment climate.

Alternative energy will get more critical assessment along with the Web 2.0 hype (think social networking), cell-phone advertising, massive enterprise software development and other long-term, big-ticket products.

Silicon Valley’s turn-around on green infrastructure comes at a time when the incoming Obama administration is pushing alternative energy as a means to create a new industry and reduce reliance on foreign oil.

Investors with an interest in alternative energy now have to pick sides. Our take on green energy is that it will eventually provide a profit, but the near-term prospects have always been questionable. In short, we always advised not to believe the media hype. Now it seems that the brains in Silicon Valley are in agreement.

Having personally worked in Silicon Valley for 15 years as a marketing professional, I know first hand that there’s probably no other investment community on the planet more attracted to hype. They create it, consume it and live and die by it.

Now, as Big Media jumps on Obama’s renewable energy bandwagon, Silicon Valley decides it’s time to get off. Why the change of heart? It has to do with two clashing trends.

For one thing, total investment in renewable energy in 2007 was $3.43 billion, up 50% over 2006, according to the Venture Power Report. Solar led with an immense $1.05 billion total.

At the same time, Silicon Valley produced just one IPO in 2008, the lowest number in more than two decades and down from an average of 28 IPOs a year since 1985.

The head-on collision of record-high alternative-energy investments and a single, crummy IPO means that Silicon Valley is not expecting to see a return on their green dollars any time soon.

The San Jose Mercury News, the bible of Silicon Valley, reported on Dec. 26, 2008, “The ugliest recession in decades is expected to keep the national IPO market frozen through at least the first half of 2009 and maybe longer, according to several venture capitalists and analysts.”

So despite President-elect Obama’s promise to spend $150 billion over the next decade to promote renewable energy, Silicon Valley is saying “Show me the money.”

Richard Nixon tried energy independence and failed. Jimmy Carter promoted synthetic fuels and failed. Bush promoted biofuels and failed.

Now President-elect Obama thinks he can succeed where his predecessors have stumbled badly. Maybe he will make it work. But it’s very possible that the libertarian culture in Silicon Valley has sobered up, realizing that the government really doesn’t have a great track record of picking winners for investors.

As always, if you’re into alternative energy for the long haul have yourself a ball. If you want to keep the lights on, put your money elsewhere.

The one thing you notice about Silicon Valley is the meetings. They multiply like a fungus. Once inside, you become intoxicated from the heady fumes of whiteboard markers, since the entire culture seems incapable of explaining anything without standing in front of the room to draw organizational charts. Ditto for PowerPoint.

And so the Myth of Empowerment came into being after years of sitting in conference rooms listening to these pretentious windbags. As the Myth of Empowerment goes: The more computing power you give to incompetent people, their incompetence rises commensurate with their reliance on that computing power.

Of course, now that computers are becoming more powerful more quickly, the rise to incompetence is meteoric in some organizations.

It seems that as an analytical tool, The Myth of Empowerment could have predicted why the bottom fell out of Yahoo’s stock price long before the current economic malaise.

Reporter Om Malik, writing for Fortune online, nailed the Yahoo culture in his piece of Nov. 17th. This excerpt could have come directly out of the text of The Myth of Empowerment.

“What hasn’t been discussed is that the company isn’t really facing up to the fact that its layers of management have resulted in a state of masterful inactivity, masked perhaps as a culture of consensus. This starts at the top – from the company’s board and senior management down to VP level where people are prone to organizing and attending twenty meetings before deciding the fate of a project. Some senior managers including the ones who are deserting the company are skillful players in this game of hiding ennui behind grandiose plans and a great future that never happens.”

Malik’s observation was part of a story he wrote regarding the resignation of current CEO and Yahoo Founder, Jerry Yang. This is the guy, along with his board, who fought off a bid by Microsoft earlier this year at $31 per share, because they believed the price undervalued the company. Today, Yahoo is at $11.67.

After he resigns as CEO, Yang will remain on the board and take on the title of Chief Yahoo (seriously) as the company seeks a replacement.

Given the current shortage of cash in the market, everyone now expects Microsoft to make another pass at Yahoo for the lack of other potential suitors. In fact, some wags conjecture that the #1 job of the new Yahoo CEO will be to broker a Microsoft deal.

The someone else part, however, gets real tricky. Private equity has just reached a stand-still. There may have been a Chinese taker earlier in the year, but that market is also under siege. And if the Yahoo board thinks that AOL is a bailout scenario, then more power to them.

A Google deal may have been possible at one point, but the Feds were already making noise that they would kill a prospective alignment with Yahoo as part of joint-marketing and technology-sharing agreement that got shelved in reaction to hostile Feds. And that wasn’t even a full-blown merger.

In the end, it all comes back to Microsoft. Over the past two days, Microsoft’s shares have slipped 9%. This is consistent with the long-term trend of the stock’s price surrounding a takeover of Yahoo.

Whether or not Microsoft approaches Yahoo again largely depends on Yang’s successor. Our expectation is that if Microsoft does manage to buy Yahoo, Microsoft shares will drop. If word leaks of a Microsoft-Yahoo merger, Microsoft will drop. And until the fate of Yahoo becomes definitive, Microsoft shares will continue to drop.

If you haven’t figured it out, I’m talking about green investing. And as gas prices rocket higher and higher, green technology will become even more widespread.

In the past two weeks, I have written about the subject. I’ve discussed that for the most part, the economics of becoming green don’t make sense. But thanks to higher gas prices, green energy is becoming more and more commonplace.

For example, the Financial Times estimates that by 2030, plug-in cars will make up 50% of all cars sold. According to the World Watch Institute, starting in 2010, China will spend over $236 billion each year on green investments.

That’s huge. But that’s not all…

In a recent Harper’s Magazine article, it was pointed out that to have a bubble you need three things:

1. Government incentives or deregulation
2. An irrational belief that drives the masses to buy
3. A sector which can spawn new ways to make money nearly instantly

Now think about it. The Internet bubble saw all three things.

The government decided not to collect taxes from online purchases. They also helped speed up adoption of broadband and granted various tax credits to companies that would deal in technology (Silicon Valley anyone?). So obviously, the government helped.

Second, most people believed the Internet was the future. They thought that it would be so huge that life itself would depend on it (they weren’t wrong, just early). Remember the Y2K bug scare? That was part of America’s obsession with technology.

To make matters worse, everyone thought that buying an Internet stock was a sure bet. Companies were spawning every day and they all thought they had a great idea. But the problem was that they were only ideas. I saw my best friend’s father make over $140,000 – and then lose almost all of it as the bubble burst.

Now let’s look at the real estate bubble.

Under Greenspan, financial regulation was a joke. He believed in a free market and so thought that any government regulation would result in more harm than good. Add in the super-low interest rates we had and you’ll see that banks had the green light to grow undeterred.

Mix all of this in with the belief most people had that real estate never goes down, and you’ve got yet another bubble recipe brewing. Heck, people who had never bought real estate were buying and flipping houses and speculative vacant lots in a matter of months.

Finally, when mortgage demand started drying up, banks started issuing subprime, interest only, and no-doc loans. Then they would pull mortgages off their balance sheet, wrap them up in a nifty little investment vehicle, and sell them to hedge funds, banks, and investors looking for the supposedly safer mortgage backed returns. These banks were essentially creating these investment vehicles out of thin air.

As you can see, the real estate market also fits the profile of a bubble.

So how about the green market?

Well, the government recently incentivized production of ethanol, biofuel, and solar technology. If a Democrat gets into office, these incentives should grow. Congress even pushed up the Corporate Average Fuel Economy (CAFÉ) guidelines for the first time since 1975. And the idea of carbon credits is beginning to gain traction in Congress.

So the government is helping fuel the creation of cleaner energy. Step one is complete.

What about step two?

If I talk to any of my friends and tell them I love the things oil does to the earth, they’ll slap me (yes, I know oil is bad for the earth). If I told them that I didn’t recycle, they’d yell at me (yes, I recycle). My friends are already convinced that the green movement is the way to go.

If you type in the word ‘green’ in Google, you’ll see thousands of new websites that all talk about how great it is to be green.

Look at corporate trends, and you see more commercials with companies talking about going green. Wal-Mart, IBM, Intel, Google, and even ExxonMobil is getting into the act. The idea of going green is spreading like wildfire. And it will only increase as gas prices move higher.

Ay, Caramba! If it’s not one thing it’s another with these pesky fossil fuels. At what point do we say “enough is enough”? It’s high time the world kicked its oil and gas habit… and the way things are going, we soon might not have a choice.

But where there is pain, there is profit. The free market is good at solving problems for that very reason. Whoever figures out how to wean the world off oil will get very rich indeed — and some farsighted companies are preparing to do just that. Sally Limantour has the details, and some big profits in hand to prove her case. Read on to find out more.

Warm Regards,

JL

Silicon Valley Titans Turn Oil Pain Into Billions

by Sally Limantour, Editor, Taipan

Crude oil trading above $130 a barrel has lots of folks tearing their hair out. But out west in Silicon Valley, the VC boys are grinning from ear to ear.

Why? Because they know that the world’s oil pain is their gain… to the tune of tens of billions in profits, or maybe even more.

Take John Doerr, for example. You may not have heard of this Silicon Valley titan, but in the world of venture capital he’s an investing legend. As a partner in one of the world’s top VC firms, Doerr amassed a huge fortune for himself with pre-IPO stakes in companies like Netscape, Amazon.com and Google.

Now Doerr is onto the next big thing: “cleantech,” which is shorthand for clean energy technology.

Doerr is convinced that opportunities in the cleantech space will be as lucrative as anything he’s seen before. (From the man who helped launch Netscape and Google, that’s really saying something.)

70% Gains for Starters

The good news is you don’t have to be an ultra-connected VC like Doerr to make a killing in cleantech. There are amazing opportunities here for regular investors like you and me.

Showing is better than telling, so just take a look at the following chart.

That’s the chart of a cleantech stock I recommended in the most recent issue of the Taipan newsletter. The company is a respected leader in a rapidly growing industry, with exciting technology and a $2 billion-plus market cap.

The pick was added to the Taipan portfolio as a patient investment buy. Little did we know that the very next earnings report would blow the roof off Wall Street’s expectations. Shortly after we got in, the stock soared by more than 70% in just weeks.

I’ll be advising my readers to take partial profits soon — that’s just good discipline when the profits come pouring in that quickly. But at the same time, this move is no flash in the pain. We’ll be holding at least half the position for major long-term gains, as this company and others like it show potential for 100%, 200% or even 500% to 1,000% returns over the next few years.