Ethanol isn't a magic word

One of the biggest lessons comes from the ethanol experience. Smart venture capitalists saw the promise and potential of this corn-based fuel early, and they invested shrewdly and successfully.

But success in ethanol has become a two-edged sword. Strong valuations and the prospect of robust returns--yes, for sure; but also big demand for corn and a commodity price run-up that has made it economically difficult for more players to enter the ethanol market and more deals to get done--especially with guaranteed back-end output contracts on the horizon.

There's an important takeaway here for investors; the moral of the sustainable-energy story, if you will. Simply put, before we do clean-technology deals, it's essential that we gain reasonable access to supply inputs and lock-in prices.

Another insight from the ethanol experience is that we need to start broadening our thinking when it comes to alternative-energy inputs.

Feed stocks like corn have multiple outputs and are, therefore, price-sensitive--as we've learned. But garbage or sewage, for example, are plentiful, must be disposed of and have limited economic outputs. The bottom line is that they may prove to be less risky investments than corn-based ethanol. Algae, which can be grown quickly and more cost-effectively than corn, palm or canola, might also offer less risk.

There are several companies that already understand this.

GreenFuel Technologies, for example, is a pioneer in the development of algae bioreactor technology that converts the carbon dioxide in smokestack gases into clean, renewable biofuels.

GreenShift uses proprietary technologies--including innovative desiccation, process intensification, gasification, catalytic and carbon capture--to enable the refining of many forms of biomass into clean fuels.

A third company worth considering is XL Renewables, which is developing a $260 million biorefinery on 2,700 acres about 100 miles west of Phoenix. The biorefinery will efficiently and cost-effectively produce high-grade ethanol, biodiesel, milk and dairy products, as well as animal feed. XL Renewables has also developed proprietary technology to produce large quantities of algae biomass for use as a feedstock for ethanol and biodiesel production.

I'm convinced that when the history of the clean-technology revolution is ultimately written, the investing heroes--the players who made money and a difference--will be the ones who controlled the raw materials on a sustained basis. Let me say it another way: in real estate, the linchpin for financial success is location, location, location; in sustainable energy, it's inputs, inputs, inputs.