Cleantech by any other name

How relevant is the term cleantech today? Has it had its day in the sun?

It’s a heretical question for someone who’s spent much of the last 10 years of his career furthering the cleantech meme globally. A former Managing Director of an organization that gets much of the credit for coining the phrase to begin with, I’ve been a big proponent of the term, to the intentional subordination of others.

But having just returned from a week of meetings with Silicon Valley investors, lawyers and others, I find myself facing the reality that intelligentsia in the sector are distancing themselves from the phrase.

In five days last week, I met face-to-face with two private equity investors, four venture capitalists, two lawyers, an entrepreneur and one of the heads of innovation for a global multinational—all with name-brand firms, all power players associated with some of the biggest deals cleantech has seen. I asked them each about the topic. And while all were quick to affirm their belief in strong future demand for what we think of as clean or green technologies, the term cleantech has undeniably fallen from favor, they said. Why?

  • Cleantech has become built into every sector, with clean/green propositions in many technology verticals, from industry to IT to water to energy to agriculture; “cleantech no longer means anything new anymore,” one said
  • Cleantech is simultaneously “too broad” (i.e. somatic shorthand for too many vertical industries) and “too narrow” (i.e. become too closely associated with renewable energy to those who don’t recognize the intended breadth as defined by Kachan & Co. and others) to be useful any longer, another said
  • But the biggest reason—that we’ve written about for some time herehere and here—is that venture funds’ Limited Partner investors have been underwhelmed (some used the term “burned”) by cleantech too much for too long, and the term is now poisonous for some venture partners; some are distancing themselves from it. Some have let go of their teams. So while there may still be relatively wide general industry momentum for the term cleantech, because lexicons don’t change overnight, those at the very center of the space that we’ve thought of as cleantech are quietly starting to use other phrases. Deloitte, for instance, rebranded its annual invitation-only Napa Valley cleantech event last week as Energy Tech. Is it just a matter of time until others start picking similar monikers?

Virtually all I met with agreed that what we’ve thought of as cleantech to date is still an investable thesis: There’s still resource scarcity. Governments are still seeking energy independence. Climate change is accelerating, not abating. Large corporations continue to have an appetite for clean technologies for cost savings, differentiation vs. competitors and as high margin product offerings. So the markets for clean and green technologies are expected to be sustaining and long-term. But will there continue to be a unified name for the sector? Will the term cleantech rebound in popularity? Cleantech, at the time of this writing, appears to be in what IT analyst company Gartner calls the “trough of disillusionment” in its widely-referenced “hype cycle” model:

Cleantech & the Gartner hype cycle

Cleantech is arguably suffering a correction from hyperbole that also characterized the early PC, Internet, networking and other technology sectors—all of which recovered in some form as expectations mapped more realistically to execution. Will cleantech as a term do the same? Source: Gartner.

So the question appears to be: Will cleantech as a meme emerge on the other side of this trough, regaining market momentum and credibility much like PCs, the Internet, networking and Internet applications did when they went through the trough themselves? As another datapoint, if cleantech is indeed in a trough, it’s been slipping into it for a while, now. A historical look at Google search data for the term cleantech, current up to the time of this writing:

Cleantech term Google search history

Google search history of term “cleantech” over time. Interest in the term peaked in late 2009 and has been declining since. What does this mean for companies positioning around the term? Will it recover or not? What would YOU bet? Source: Google.

Will cleantech re-emerge, regain in popularity and follow the Gartner curve back up? Or has its usefulness as a distinction ended? If the term is no longer fashionable, what should this space be called? What would you advise entrepreneurs in this sector to position around? We’re very interested in your thoughts here at Kachan & Co., where we work exclusively with cleantech companies… or what we used to call cleantech companies! Leave a comment on the original version of this article on our website.

This article is reprinted by permission and was originally published here.

Crowdfunding Coming Of Age In Cleantech

With early stage capital for cleantech innovation becoming increasingly scarce, crowdfunding sites like KickstarterIndiegogo and a new crop of clean/green ones are beginning to emerge as significant sources of funding for selected next-gen clean technologies.

Hurdles remain, particularly for investors seeking returns, but I’m more optimistic about these sites’ usefulness to cleantech entrepreneurs than I used to be.

Asked a year ago by a publication about how significant crowdfunding was likely to become in fostering disruptive cleantech innovation, I wasn’t exactly effusive. As GE’s Ecomagination Magazine wrote, “’When it comes to the tens and hundreds of millions of dollars needed for new breakthrough science, that still best comes from institutional investors,’ says Kachan. Kachan says big investors like to get seats on a company’s board and hope to get a sizable chunk of profits. Clearly, someone who plunks down a small pledge on Kickstarter has different motivations.”

Today, a year later, a lot has changed. Cleantech venture investment worldwide in 2012 was two thirds of what it was the year previous, with early stage funding particularly hard hit. And now with good, relevant success stories like Adapteva and BioLite, at least some startups are starting to find today’s crowdfunding options emerging as a source for the equivalent of friends & family seed capital. While it’s unlikely to ever produce the millions that institutional or corporate deep pockets will continue to provide, it may—just may—serve entrepreneurs seeking early stage money in a time when early stage money has become harder to come by than ever.

And then there’s new, fledgling policy support. In America, today is coincidentally the one-year anniversary of House passage of a bill known as the JOBS Act, which is intended to make it easier for companies to raise money through crowdfunding. Charities have used crowdfunding for years to raise money. The new bill is to streamline the process of companies raising up to $1 million a year in equity, not the simple donations as in today’s crowdfunding, but U.S. Securities and Exchange Commission (SEC) regulations to govern the process are still forthcoming as of this writing. Today, small businesses wanting to raise money from more than 500 investors have to go through a long and often expensive process of registering documents with the SEC.

Barriers to equity investors aside, it’s clear that crowdfunding activity has been ramping up in cleantech. A random smattering of latest developments:

  • This week, a startup called Velkess launched a Kickstarter campaign looking for $54,000 to build a large prototype of a new type of less expensive flywheel for energy storage. The company seeks to build a large 750-pound prototype of its fiberglass flywheel. The company’s founder has bootstrapped the company to date, but says he needs more money to buy larger magnets needed by the new prototype.
  • Lucid Energy, which produces power from gravity-fed water pipelines, received undetermined financing this week from Israeli venture platform OurCrowd. The Portland, Oregon-based company has commercial traction in Israel, and plans to use the capital to launch a wider roll-out of its technology. OurCrowd is a combined venture capital firm and crowdfunding platform. Lucid was formed in 2007 and has invented an in-pipe turbine that captures energy from fast-moving liquid inside water pipelines without affecting operations.
  • It only has a few weeks to go and is far short of its target, but Potential Difference of Las Vegas is seeking $50,000 through an Indiegogo campaign to produce a first run of fast chargers for consumer electronics devices such as cell phones and tablets. The company’s patented power management algorithms, licensed from Georgia Tech and with applicability to EVs and plug-in hybrids, it says, aim to reduce the charge time of lithium ion battery packs from 30 minutes to 12 minutes.

Entrepreneurs and project developers of all walks are being increasingly drawn to crowdfunding sites. Especially those without a university education, who don’t have government backing, or, for whatever reason, choose not to go traditional venture or debt routes.

And, for clean technology startups, there are now no shortage of sites to cater to them. In addition to Kickstarter, Indiegogo and their general ilk like RocketHub, Seedmatch and Crowdfunder, Greenfunder is a crowdfunding platform for green, sustainable and related projects. Germany-based SunnyCrowd launched late in 2012 to support (mostly) local German renewable energy projects. On its heels, Mosaic has launched its solar crowdfunding site, and within 24 hours, its first four projects sold out. More than 400 investors put up amounts ranging from $25 to $30,000 (the average was nearly $700), for a total investment of more than $313,000. Similarly, SunFunder has introduced a “crowdfunding platform to connect individual investors with quality, vetted, high impact solar businesses working on the ground in Africa, Asia, Latin America and the Caribbean.” Next week at the South by Southwest (SxSW) conference in Austin, social enterprise CarbonStory, based in Singapore, is to formally introduce its crowdfunding platform, where participants are to contribute as little as a few dollars a month to sponsor green projects that have been selected by CarbonStory.

The final remaining barrier, however, is reconciling returns on investment and crowdfunding. There’s more of a provision for, and expectation of, returns for investors in the more-established microlending mechanisms pioneered by Kiva and others than there is in crowdfunding as it’s known today.

Because crowdfunding today is essentially a metaphor for “donation,” establishing a mechanism for investor returns as is being attempted via the JOBS Act, and blurring the lines with what we currently know and think of separately as microfinance, will be critical to unlock the vast amounts of private capital waiting to be applied to innovative cleantech innovation and products by you, me, our rich uncles and other private investors seeking returns on our hard-earned money. Only then will crowdfunding really get its day in the clean/green tech sun.

This was originally published here and is republished by permission. Agree? Disagree? Weigh in on our original article.


A former managing director of the Cleantech Group, Dallas Kachan is now managing partner of Kachan & Co., a cleantech research and advisory firm that does business worldwide from San Francisco, Toronto and Vancouver. Kachan & Co. staff have been covering, publishing about and helping propel clean technology since 2006. Kachan & Co. offers cleantech research reports, consulting and other services that help accelerate its clients’ success in clean technology. Details at

A Crystal Ball for 2013

Happy new year everyone.  As we reflect upon the year now past us, it’s also that time of year to look ahead.

For the cleantech sector, Dallas Kachan from Kachan & Co. recently put his neck on the line with his “Predictions for Cleantech in 2013”.  It’s a good read, well-reasoned.  The sound-bite version:

  • Cleantech venture capital may never again reach the heights (at least in terms of dollars invested) of 2011.  As Kachan notes, and I concur, that’s not necessarily a bad thing.  It just means that capital-inefficient deals that used to attract VC dollars won’t so much in the future.  And, it means that a lot of ineffective cleantech VCs will be washed out of the sector.  Moreover, other sources of private finance – especially corporates, but also family offices and sovereign wealth funds – will step in.
  • The solar and wind sectors face increasing challenges because grid-scale energy storage technologies aren’t coming to the fore as expected.  Dispatchable power sources with lower emissions will gain ground.  This is especially the case for natural gas, but Kachan controversially also sees a growing role for new nuclear technologies.
  • Clean-coal technologies become less oxymoronic.  Great quote here:  “No, clean coal doesn’t exist today.  But that doesn’t mean it shouldn’t.”  Kachan claims to have visibility on some promising new technologies in this realm.  Personally, I’m a little skeptical – I’ve heard such things many times before – but I’d be glad to be wrong.
  • Significant improvements are afoot for internal combustion engines, further stifling the advent of electric vehicles (EVs).  I agree with Kachan that a lot is being undertaken to improve the old piston engine.  Those innovations being pursued by tier one auto suppliers have a fair chance of quick adoption.  However, a lot of the potential breakthroughs I’ve heard about are being explored by venture-backed start-ups or garage-tinkerers, and I am less optimistic than Kachan appears to be that these companies can make large inroads into the incredibly demanding automotive supply chains within a year.
  • Mining and agriculture will become more important segments of the cleantech sector.  Especially with respect to agriculture, I agree with Kachan wholeheartedly, as increased corporate venture activity is beginning to burble in such stalwarts as Monsanto (NYSE: MON), Syngenta (NYSE: SYT), and Cargill.

Though I haven’t gone back to review his track record, Kachan claims a good history of prognostication from recent years.  I think many of his views for the near-future are justified and hence likely (if not for 2013 then more generally for the next couple of years), but he’s thrown in enough unconventional wisdom to make things interesting.

Let’s make 2013 a good one, shall we?

Cleantech Venture Investing: On the Deathbed or Merely Resting?

Two weeks ago, I sat on a panel of eminent (that is, other than myself) cleantech venture capitalists at the New England Venture Summit to discuss our sector as we approach the end of 2012.

The basic theme being explored was whether we should be optimistic or pessimistic about the current state of affairs for cleantech investing.

As I noted in my opening quip:  “I have friends on both sides of this issue, and on this issue, I’m with my friends.”

Seriously, it’s easy to understand being pessimistic.  While the data on cleantech venture capital investing activity has been mixed and erratic over the past few years, the qualitative indicators have led to a plethora of articles during 2012 suggesting a cleantech “bust”.  True, the litany of woes is substantial.

  • Several high-profile venture capital firms have retreated from or at least strongly de-emphasized cleantech investing, and other cleantech venture firms are widely thought to be in challenging positions likely precluding a next fund for ongoing viability.
  • Valuations on cleantech investment rounds have experienced significant downward pressure.
  • While early-stage deals can get done, the trend is towards focusing on later-stage deals, and ventures with long histories but only limited customer traction and modest revenues (less than breakeven) will find it difficult to obtain the next round of capital at favorable terms.
  • The Solyndra debacle has been an excruciating black eye for venture-backed cleantech deals in general.
  • Very low natural gas prices from the shale bonanza make it difficult for many energy-related cleantech firms to compete economically with their products.
  • The Republican party has successfully made cleantech a political litmus test, which in turn means that roughly 50% of the U.S. population views the sector with a general sense of skepticism or disdain.

When you sum this up, it’s pretty tough to be a cleantech venture investor these days.   But, there’s also a strong case to be made for cautious optimism, too.

Taking the long view – which I can to a fair degree, since I’ve been playing in this sandbox in various capacities for nearly 15 years, far longer than most observers – the situation we face today is not as discouraging as it was in the late 1990s (when only ventures called could get funded) or in the 2002-2005 era (post-9/11, post dot-com meltdown, post-Enron, still-cheap oil).

A much-needed cleansing of the sector is going on, a case of Schumpeterian “creative destruction”.  I suspected then, and am pretty convinced now, that a significant cleantech venture investment bubble occurred in the 2006-2008 timeframe.  The confluence of rapidly rising oil and natural gas prices plus greater political consensus about climate change (recall that 2008 GOP Presidential candidate John McCain supported carbon-mitigation policies) drew in not only too-much capital, but also investment professionals that – in my opinion – weren’t applying a prudent set of commercial perspectives when making bets in the uniquely challenging cleantech space.

Simply put, venture capitalists drawn into cleantech from other sectors – either software or healthcare – because it was the “new new thing” employed many of the tricks they used (often successfully) in the past, but which don’t necessarily work so well in cleantech.  Combined with ever-increasing sizes of venture funds, which need bigger investments to “move the needle” (i.e., generate returns upon exit sizable enough to be noticeable), excessive quantities of capital were thrown at a number of cleantech ventures before they were ready to make productive use of such resources.

Using a pricelessly-wise idiom that I first heard from legendary venture capitalist David Morgenthaler:  “Getting nine women pregnant won’t get you a baby in one month.”

Not surprisingly, too many capital-intensive cleantech deals got funded, focused on a too-narrow set of investment theses, including thin-film solar, lithium-ion batteries, electric vehicles, and second generation biofuels.

Clearly, there will be a shakeout in cleantech investing.  More ventures will go bust.  More cleantech venture capitalists, and venture capital firms active in cleantech, will withdraw from the space.  Only the strongest will survive.

Yet, those that survive will almost certainly be better prepared to prosper in the next uptick in cleantech venture investing.  And, the deals will be more attractive:  valuations will be lower, business plans and models will be sounder, and leadership teams will be more seasoned.

Yes, there will be a rebound in cleantech.  I’m not going to predict exactly when it will become fully evident, but it must happen.  After all, the overall fundamentals in support of the cleantech thesis still remain:  growing populations and increasing standards of living worldwide who are demanding greater environmental protection while simultaneously competing for finite (in many cases, dwindling) essential resources such as energy, water and food.

The members of the panel on which I sat generally reiterated the same basic themes:  capital-efficiency of scale-up, clear technological differentiation and economic superiority, greater involvement of corporate venture capital as funders, working early with strategic partners (future acquirers) to accelerate market penetration, improved teams with relevant entrepreneurial experience from prior cleantech ventures.

Paraphrasing Mark Twain, the death of cleantech venture investing has been greatly exaggerated.  Although it may be “stunned”,  it’s not “just resting” or “pining for the fjords”, either.

The cleantech venture capitalists who will be successful in the future are today still working hard on their portfolio companies.  Most will not be noteworthy exits.  Some will need to be terminated, others “worked out” through turnarounds and restructurings, with a few winners coming out at the end of the process.  Not all the winners need to be “the next Google” or even “home runs”, but rather solid companies producing good (if not outrageous) rates of return to investors.

This restructuring of the cleantech venture sector will take time and be painful for pretty much everyone involved.  But it’s the price to be paid to stay in the game, and will surely separate those who are truly committed and capable from the “wanna-bes”.

I intend to remain engaged for the rest of my career, and will be working diligently to continue to earn the right to do so.

Cleantech to “Backtrack” in 2013?

Our firm, Kachan & Co., has just published its latest annual set of predictions for the cleantech sector for the year ahead.

To our analysis, 2013 is shaping up to be something of a year of backtracking for the cleantech industry, a year that calls into question some of its traditional leading indicators of health, and one that surfaces long term risk to such cleantech stalwarts as solar, wind and electric vehicles.

Do we think cleantech is finished? Not at all. But much like young Skywalker learned in Episode V, cleantech is about to find out that the Empire sometimes gets its revenge.

In brief, (click here for long version) our predictions include:

Cleantech venture investment to decline –  Expect worldwide cleantech venture capital investment in 2013 to decline even further than it did in 2012, never to return to the previous highs it achieved before the financial crisis of 2007-2008, we believe. Among the factors: the departure of many venture investors from the sector because of disappointing returns, poor policy support worldwide and a lag time in the pullback of equity and debt investment.

But this doesn’t mean the sky is falling in cleantech. Family offices, sovereign wealth and corporate capital are now having more significant roles, filling gaps where traditional VC has played in recent years. It’s a sign the sector has matured, we believe. Fewer VC cooks in the kitchen may indeed impede innovation, but deep pocketed corporate capital should help clean technologies that are already de-risked reach more meaningful levels of scale.

Long term risk emerges for solar and wind – The solar and wind markets suffer today from margin erosion, allegations of corruption, international trade impropriety and other challenges. In 2013, we think poor progress in grid-scale power storage technology will also start to put downward pressure on solar and wind growth figures. Prices per kilowatt hour are falling, yes, but the cost of flow batteries, molten salt, compressed air, pumped hydro, moving mass or other storage technology needs to be factored in to make intermittent clean energies reliable and available 24/7. When also considering continued progress in cleaner baseload power from new, emerging nuclear technologies, natural gas and cleaner coal power, the growth rates for solar and wind appear increasingly at risk.

Clean coal technologies gain respect – We predict 2013 will be the year a new set of technologies will emerge aimed at capturing particulate and CO2 emissions from coal fired power plants and help clean coal technologies begin to overcome their negative positioning. The barrier to capturing coal emissions has been cost and power plant output penalties. Our research has identified encouraging new technologies without such drawbacks, and we think the world will begin to see them in 2013. China is expected to target domination of the clean coal equipment market, like it does already in many other cleantech equipment categories.

The internal combustion engine strikes back, putting EVs at risk – Important innovations quietly taking place in internal combustion engines (ICE) could further delay the timing of an all-electric vehicle future, we think. In 2013, unheard-of fuel economy innovations in ICEs will enter the market, including novel new natural gas conversion and heat exchange retrofits of existing engines aimed at dramatically lessening fuel needs. Some of these technologies, when combined, claim to be able to reduce fuel costs by 90%. That could push out the timing of EV adoption.

Cleantech adoption in mining – Notoriously conservative mining companies and their shareholders are starting to realize that the capital expenses of new clean technologies can be offset by reduced operating costs and the potential for new revenues. In 2013, we predict more adoption of cleantech innovation in mining, in areas such as tailings remediation, membrane-based water purification, sensors and telematics, route optimization software intended to lower fuel and equipment maintenance costs, and low water and power hydrometallurgical and other novel processes for mineral separation.

Big ag steps up and cleans up – We estimate that 2013 will be the year the world’s leading agricultural companies embrace new innovation in significant ways. Expect accelerated corporate investment, strategic partnership and agricultural M&A in 2013, as agricultural leaders race to meet consumer demand for cleaner, greener ways of producing food, having weathered intense consumer GMO-related and other backlash.

Want more rationale & data? Read our predictions for cleantech/greentech in 2013 in their entirety.

Agree? Disagree? Weigh in on our original article here.

Cleantech VC Etiquette

Being a venture capitalist is not easy.  Being a cleantech venture capitalist is especially not easy.

I remember Ira Ehrenpreis of Technology Partners, one of the deans of the cleantech VC community, commenting archly several years ago at one of the too-many cleantech investment conferences:  “We need a poster child for cleantech venture capital success.”  Well, generally speaking, we’re still waiting.

There aren’t that many cleantech venture capitalists.  You know who you are.  I know, or know of, most of you.  We need to work together, to help each other, achieve some good successes in cleantech venture financing, so as to improve the well-being of our sector.  This will be to our collective benefit.

So, I write a simple plea to my fellow cleantech VC practicioners:  can you at least respond to emails?

I’ve worked on both sides of the cleantech venture finance table — both in trying to raise capital for ventures, and in making investments in ventures — for nearly 15 years.  And, I submit that the courtesy of most investors in the cleantech space is pretty appalling.

Too frequently, when I send an email to an investor claiming to be interested in cleantech deals, inquiring if they potentially would consider looking seriously at one of the deals with which I’m involved, I encounter deafening radio silence.  Nothing.  Not a peep.  As if my message went into a black hole.

Of course, most of these investors probably want to say “No, thank you,” and don’t want to take the time to respond or the effort to come up with a gentle gracious turn-down.  But, really, how hard is it to reply?  I would appreciate some kind of an indication to my emails, to at least ensure that you received the email (i.e., I’ve got the right address), and maybe get some useful feedback.

Not to pat myself on the back inordinately, but I try damn hard to be responsive and make useful suggestions to anyone who sends an email to me seeking financing, in the aim of building goodwill and helping the sector as a whole.  You might even call it trying to foster good karma.

Look, I’ll make it easy for you:  here’s a generic email response that you may feel free to use.


Dear Richard,

Thanks for your email regarding [venture name].  I appreciate you thinking of us.  Unfortunately, we are not in a position to consider an investment, because [choose one or more of the following]:

a)  It’s too small

b)  It’s too big

c)  It’s too early

d)  It’s too late

e)  It’s geographically inconvenient for us

f)  We have a competing investment in this space

g)  We’ve had a similar investment before that didn’t work out well and thus are not attracted to this space

h)  We’re in-between funds and don’t have capital to deploy at present (bonus points for candor!)

You might consider contacting [insert cleantech VC name/firm here], as he/she/they might find this opportunity to fit nicely into their sweet-spot.  Good luck!


See, that wasn’t that hard, was it?

A Cleantech State of the Union

With October now upon us, data providers are beginning to issue their preliminary analyses of cleantech investment in the third quarter of 2012 that just closed. This quarter, the Clean Energy pipeline service of London’s VBResearch is the first to weigh in, counting cleantech venture capital & private equity investment (excluding buyouts) as approximately $1.7 billion.

Data from other providers, like Dow Jones VentureSourceBloomberg New Energy FinancePwC/NVCA MoneyTree, and Cleantech Group will follow in the coming days. No two providers’ numbers will be the same, given differences in how they define cleantech and what exactly they track.

Based on latest quantitative and qualitative data we at Kachan & Co. have access to, here’s our own analysis of the state of the union in the global cleantech market, and why.

Consider the following a snapshot of the current health of the cleantech sector, informed by—but not simply an analysis of—the third quarter numbers.

3Q12 investment is expected to be approximately the same as the one previous. Venture investment in cleantech is going to be down overall this year over last.
The second quarters of the year in cleantech are usually down, if you look at historical data—so a relatively poor 2Q12 was no surprise—but third quarters are historically usually the best quarter of the year for global cleantech investment. Based on deals we’ve seen, we’re expecting about $2b in venture investment in global cleantech in the third quarter of this year once all the data is in, and that sometimes takes a few month after the quarter closes. $2b is not great, as compared to previous years on record, but it’s okay. It’s not as if cleantech investment has halted. Cleantech is still one of the world’s dominant investment themes.

For interest, some of the largest deals of the quarter:

  • $200m to China Auto Rental, efficiency/collaborative consumption, Beijing
  • $136m to, efficiency/smart grid, Virginia
  • $104 to Elevance Renewable Sciences, biochemistry, Illinois
  • $104 to Fiskar Automotive, transportation, Irvine CA
  • $93M to Element Materials Technology, advanced materials, the Netherlands

Venture #s aren’t just down because of natural gas.
Last year, we predicted global venture and investment into cleantech to fall. Not dramatically. But we expected cleantech venture in 2012 to show its first decline following the recovery from the financial crash of 2008. Why? Three big reasons: the lag time of negative investor sentiment towards cleantech that started in 2011, waning policy support for cleantech in the developed world and an overall maturation of the sector that’s making it arguably less dependent on venture capital as corporations take a more significant role.

When you the continued low price of natural gas undermining clean energy innovation and project deployment, it should be no surprise that cleantech metrics are down.

But while the price of natural gas is one of the reasons cleantech is depressed, it doesn’t mean the end of the line for the whole of the space. Natural gas is eroding the compellingness of clean energy, but cleantech is more than just energy. Cleantech, as defined, is much broader, and includes transportation, agriculture and other categories that may actually see benefit from lower natural gas prices.

Plus, there are natural gas innovations that could be key to the success of future renewable energy. Renewable natural gas—gas from non-fossil-based sources—could end up the most important form of renewable energy, because it could be distributed in today’s transmission infrastructure, and help utilities generate baseload renewable power without solar or wind, or expensive renewable energy storage. Kachan & Co. has published a report in conjunction with a gas company that profiles seven firms at the forefront of generating large quantities of pipeline-grade renewable natural gas from biomass, based in Germany, the Netherlands, Norway, Switzerland, the U.S. and Canada.

With venture down, pay attention to the increasingly important role of corporations in cleantech. Large global multinationals are increasingly participating as clean technology investors, incubators and acquirers. With the largest companies worldwide sitting on trillions in cash, the climate is right for increased corporate multinational M&A, investment in and purchases from cleantech companies. Corporations have become the source of cleantech capital to pay closest attention to going forward.

Investors are worried about returns in cleantech; some are distancing themselves from the sector. Will that leave governments and large corporations to help companies through the valley of commercialization death?
Not all cleantech investments have worked out as planned. Investors are still waiting for their cleantech portfolios to produce expected returns. Why? Many cleantech investments are still sitting in managers’ portfolios waiting for an exit.

The cleantech exit environment is indeed suffering. The North American and European IPO markets remain shut, while public exits are alive and well in China. There were 9 clean technology IPOs raising a total of $1.79 billion in 2Q12, the last quarter for which data is publicly available at this writing, and ALL of them took place in China. We first raised alarms about this trend a couple of years ago. It’s the major area of concern for investors currently. And cleantech mergers and acquisitions are still depressed. Global cleantech M&A activity totaled $16.3 billion in 3Q12, according to VBResearch. That’s a 68% increase on the $9.7 billion in 2Q12 but a 30% decrease on the $23.2 billion recorded in the same period last year.

Of the capital that is being deployed, less of it is going to early stage deals. Venture investment in early stage cleantech rounds fell to a mere $382 million in 3Q12, the lowest quarterly volume since 2009, by today’s Clean Energy pipeline numbers. The large year-on-year decrease was caused by an absence of large solar deals, according to the company.

Limited partners (LPs), the institutions that fund venture capital firms, are less enthusiastic about cleantech today. Why? Mixed returns. The 5-year old CalPERS Clean Energy and Technology Fund, a fund-of-funds-type program, had a net internal rate of return since inception of -10% on $331.7 million invested as of Dec. 31, 2011, the last period for which data is available, according to data obtained by Pensions & Investments. Contrast that with the performance of Riverstone/Carlyle Renewable and Alternative Energy II. While only some $172 million of its $300 million commitment in September 2008 has actually been invested, the pension fund has seen a 12% net IRR from the investment as of Dec. 31, 2011. CalPERS’ $25 million commitment to VantagePoint CleanTech Partners LP, made in 2006, has earned a 12.4% net IRR—again, according to Pensions & Investments.

Most cleantech investors will have heard of Moore’s Law. Now some are learning, if they hadn’t known of it by name previously, of Sturgeon’s Law, that ‘90% of everything is cr*p.’ Which, unfortunately, but clearly, also applies to cleantech investments.

It begs the question: If venture investing is down and large corporations are taking more of a role in fostering cleantech innovation, can they and governments (which we argue should get out of the business of funding cleantech companies) be trusted to support emerging cleantech innovation as it struggles to reach meaningful commercial scale and availability? Increasingly, venture investors are proving reluctant to play this role in cleantech, given the large sums required.

What will propel cleantech’s success.
While much has been written about how global policy support has waned in cleantech, a silver lining is to be found in Japan. Japan’s new feed-in tariffs are among the most impressive the planet has yet seen, even more so than Germany’s former solar support. Japan is showing signs of helping breathe life back into the solar sector in an important way (download this free report that details Japan’s newfound commitment to cleantech.)

Say what you will about the murkiness of the future of clean energy, the fundamental drivers of the wider cleantech market persist. The sheer sizes of the addressable markets many cleantech companies target, and the possibilities for massive associated returns, will continue to spur innovation and support for the sector. Why? The world is still running out of the raw materials it needs. Some countries value their energy independence. More than ever, economies need to do more with less. Oh, and there’s that climate thing.

Cleantech is the future, undeniably. It can’t NOT be. We need to reinvent every major infrastructure system on the planet, from energy to agriculture to water to transportation and more. And we have to live more efficiently to accommodate more people than ever. Large corporations see record opportunity for profits in doing this—and that’s what’s going to be the biggest driver of clean technology, we believe, institutional investment hiccups aside.

Don’t focus too much on quarterly ups and downs.
Finally, note that quarterly numbers are a good leading indicator of transitions. But there’s a danger in reading too much into quarterly figures, and lumpiness of individual quarters, which are easily skewed by large individual deals.

This article was originally published here and was reposted with permission.


A former managing director of the Cleantech Group, Dallas Kachan is now managing partner of Kachan & Co., a cleantech research and advisory firm that does business worldwide from San Francisco, Toronto and Vancouver. Kachan & Co. staff have been covering, publishing about and helping propel clean technology since 2006. Kachan & Co. offers cleantech research reports, consulting and other services that help accelerate its clients’ success in clean technology. Details at

Chief Blogger’s Favorite Cleantech Blogs

I’ve personally written hundreds of articles over the years.  I selected a few I thought were pretty timeless or prescient, and worth rereading:

What is Cleantech?  Always a good starting point:

or try, The Seminal List of Cleantech Definitions


The “Rules” in Cleantech Investing – Rereading this one after the cleantech exits study we just did, wow, was I on the money!


VeraSun IPO analysis – Read this carefully, I predicted exactly what would happen, and try the later version Beware the Allure of Ethanol Investing


Cleantech Venture Capitalists Beware, What You Don’t Know about Energy CAN Kill you – The title says it all.



Cleantech Venture Backed M&A Exits? Well, Yes, Sort of . . .

When people ask me, are investors making money in cleantech, I tell them yes, but not by whom or in what you thought they were.

Most of the analyses of cleantech exits do not differentiate for venture backed companies.  So we conducted our own study.

In the last 10 years,’s Cleantech Venture Backed M&A Exit Study shows a grand total of 27 venture backed cleantech deals > $50 mm.

All in all, very tough returns.   A number of 8 to 10 figure fortunes made, just laregly not by the investors spending the 9 and 10 figure investments.

19 where we had data on both exit values and venture capital invested, 8 where we had revenue estimates.

We found a 2.78x Median Exit Value Multiple on Venture Capital Invested

– Those exit numbers include the founders and management’s shares, so average returns to investors would be somewhat lower.

We found a 2.2x Median Exit Value Multiple on Revenues.

$13 Billion in total M&A exit value.  Not bad, until you realize that’s over 10 years where cleantech has seen tens of billions in investment, and we used a pretty broad definition of “venture backed”.  To get there we included Toshiba’s Landys+Gyr, Total’s Sunpower, EDP’s Horizon and ABB’s Ventyx deals.  Those are the top 5 deals by value, and represent 60% of the $13 Billion.  None were backed by investors you would normally think of as cleantech venture capital powerhouses (Bayard Capital, Cypress Semiconductor, Zilkha and Goldman Sachs, Vista Energy).  Three of them included prior acquisitions themselves.

Excluding those and looking at only the transactions where we had both valuation and exit data we found and even weaker $3.8 Billion on $1.8 Billion in venture capital, 2.1x.

Most surprising, if you looked at the list of investors in these Nifty 27 exits, you’d have heard of very few of them.  This is truly not your father’s venture capital sector.

The exits have a surprisingly low tech flavor, and were carried by renewable energy project developers, ESCOs, and smart grid, and solar balance of system manufacturers.

If we had limited this to Silicon Valley venture investors in high tech deals, well, you’d have wondered if M&A were a four letter word.

Interesting, isn’t it?  Contact me at with any questions or if you’ve got deal data you’d like to see included.

CleanWeb: The Intersection of IT and CleanTech

For many observers, the bloom is off cleantech venture investing.  The challenges are numerous and increasingly well-known:  capital requirements are too large, the non-market (i.e., regulatory/political) forces are too influential, the incumbents are too strong, the sales cycles among risk-averse customers are too long, the technological issues are too profound. 

As reported in this posting, this negative view of cleantech venture capital is held especially strongly by Peter Thiel, one of the early principals of PayPal and a highly-influential voice within the capital markets and financial community — especially in Silicon Valley.

Oh, for the glory days of venture investing!  Where in cleantech is the next Google, Yahoo, Facebook, Microsoft, LinkedIn, Amazon?  Anyone, anyone?  Bueller?  Bueller?

A nascent movement is growing in response to this queasy inquiry.  At the center of this movement is “CleanWeb”, which focuses on the ability to harness the ever-expanding powers of intelligence for greater efficiency in physical resource management.  At the center of the CleanWeb phenomenon is Sunil Paul, the founder of Spring Ventures and a co-founder of the IT company Brightmail, which was eventually acquired by Symantec for the tidy sum of $370 million.

As Sunil and his Spring Ventures partner Nick Allen argue in this article from a recent issue of Technology Review, many of the enabling physical sciences discoveries to significantly change for the better our energy production and consumption have already been achieved.  “What hampers [them] now is poor sales channels, complex financing and incentives, and a failure to communicate with customers.  That makes them ripe for disruption by the application of IT, which will drive the next phase of cost reduction and implementation.”

More good news:  as Stanford Professor Jonathan Koomey argues in another article in the same issue of Technology Review, there’s a lot of remaining untapped upside potential in the CleanWeb.  Koomey writes that, according to some calculations by the crazy-genius physicist Richard Feynman, the energy efficiency of computing theoretically could improve by at least four more orders of magnitude from today’s levels, and it appears that the trajectory of improvement is a factor of 100 every decade.  So, we’ve got a long way to go. 

Or, put another way, as Koomey does:  today, the world’s most powerful computer (the 10.5 petaflop Fujitsu K) consumes a whopping 12.7 megawatts — an entire town’s worth of power — but a similarly capable machine two decades from now would consume as much electricity as a standard household toaster.  If you doubt that this degree of improvement can be achieved in 20 years, Koomey notes that today’s MacBook Air — if operated at the efficiency of 1991 computers — would fully discharge its battery in merely 2.5 seconds.

Sunil, Nick and their confederates have been organizing a series of regional CleanWeb Hackathons, bringing together information technology professionals to develop new code for “optimizing resource use and accelerating cleantech development.”  The first hackathon in (you guessed it) San Francisco last September was said in this article by GigaOM to have drawn 100 participants and resulted in 14 cleanweb applications.

The space of CleanWeb is pretty broad.  In our venture capital firm, Early Stage Partners, we’re seeing an increasing number of software-based business plans that – whether directly or tangentially – result in lower consumption of energy, and correspondingly lower emissions.  You could call any of these “CleanWeb”. 

One of ESP’s portfolio companies — Cleveland-based LineStream Technologies, spun-out from Cleveland State University by licensing the control systems innovations developed by Professor Zhiqiang Gao — clearly fits the CleanWeb category, as its proprietary algorithms enable much better management of both industrial and consumer applications.  This improved management usually results in lower energy consumption, and the reduction in energy consumption translates to lower costs, which is virtually always a good thing for prospective users.  The environmental benefits of lower energy consumption are nice, but incidental.

These CleanWeb business models often aren’t subject to the litany of challenges listed at the outset of this posting:  capital-intensity, regulatory impediments, incumbent opposition, long sales-cycles, or challenging physical innovations.  Accordingly, they may be relatively well-suited to venture capital investment approaches – more so than pushing for the next breakthrough in batteries, solar energy, fuel cells, wind, biofuels, nuclear or other cleantech sector involving a physical discipline.

A complaint leveled by some observers — such as in the closing paragraphs of this report by one of my favorite cleantech writers, Eric Wesoff of GreenTechMedia, on Thiel’s diatribe against cleantech venture capital — implies that CleanWeb investors are too wimpy.  The thinking seems to go that venture capital practices developed from investing in software start-ups just can’t handle the big/tough but necessary challenges of cleantech.  The CleanWeb innovations on which such investors are focusing, while nice, may be just “cherry-picking”, and not truly transformative.

Perhaps.  However, I would argue that the primary role of private capital is to make good returns, period.  Most investors don’t place their money in the hands of others (i.e., venture capital firms) to effectuate social change, no matter how desirable such change might be.  Venture capitalists can’t afford to break their picks fighting fights that they can’t win, or would have to spend inordinate amounts of capital in order to win.

Those battles need to be fought not by investors but rather by participants in the arenas of politics and laws.  Those battles set the rules of the game, within which investors and competitive market actors subsequently play.  

In my view, the rules of the game are in many ways stacked against those of us active in cleantech, and it is entirely appropriate to seek — in a fair and just manner — to change those rules.  But, it is unreasonable to expect professional investors to deploy capital imprudently, flying in the face of unfavorable rules. 

And, it is unreasonable to expect professional investors to be able to dedicate more than a modest portion of their time or effort in the public debates.  Their investments, and their investors, properly demand the majority of their attention.

In contrast to many investment opportunities in energy supply or storage technologies, CleanWeb faces minimal headwinds.  It may well be lamentable that renewable energy faces stiff headwinds, some of which may stem from outdated or inequitable rules, but that sentiment doesn’t change the harsh realities.

Virtuality does have its virtues.

Venturing Into The Future

Last week, I attended a breakfast hosted by the Michigan Venture Capital Association, at which the President of the National Venture Capital Association, Mark Heesen, made some comments and fielded Q&A about the state of the U.S. venture capital sector.

Mark presented a mixed picture.  On the one hand, the VC industry is clearly contracting:  about half of the firms that existed at the peak in the early 2000s have withered away.  Moreover, distressingly, venture capital investment outflow has exceeded capital raised by venture capital firms each year for the past several.  As Mark noted, “this is clearly not sustainable.”

According to Mark, it appears that the venture capital industry is coalescing around two models:  (1) mega-firms with >$500 million funds, multiple offices/geographies, and spanning most vertical segments and stages, or (2) niche firms with <$100 million funds that specialize either in geography, stage, or vertical markets.  The firms that fall between these extremes are the ones that are vanishing, presumably unsuccessful. 

Turning to the cleantech sector specifically, Mark noted that – contrary to what is sometimes alleged by naysayers – cleantech VC activity is holding its own, accounting for roughly 15-20% of all U.S. VC investments.  However, what is changing is the nature of cleantech investments:  whereas big/bold bets in game-changers to save the world were the rage a few years ago, it has become abundantly clear that such possibilities are extremely capital-intensive and subject to very long maturation cycles.  Accordingly, rather than investing in the next electric vehicle, battery, biofuel or photovoltaic technology, cleantech VCs have ratcheted down their aspirations somewhat and are seeking more modest incremental  or enabling technology improvements.

Another trend in VC highlighted by Mark, one that is critically important for cleantech, is the re-emergence of corporate venture groups.  Corporate VC activity seems to come in and out of vogue every few years, and at least for the moment, it’s back on the rise again.  Notably, it is increasingly common for (1) corporates to invest in a technology without having the view of being the eventual acquirer, (2) corporate venture investors to take Board seats, and (3) multiple corporate venture groups to be in the same deal. 

I just reviewed the portfolio of one of the most significant cleantech venture capital firms in the U.S., from which I culled the following roster of corporate co-investors:  GE (NYSE: GE), Intel (NASDAQ: INTC), General Motors (NYSE: GM), DuPont (NYSE: DD), ConocoPhillips (NYSE: COP), Dow (NYSE: DOW), Waste Management (NYSE: WM), Valero (NYSE: VLO)Bunge (NYSE: BG).  And, it’s not just American giants:  also MitsuiUnilever (NYSE: UN), Cenovus (NYSE: CVE).

Consistent with the main message of a recent article in Technology Review called “Can Energy Startups Be Saved?”, it’s becoming apparent that partnering with corporations to gain access to their financial, technical and marketplace heft is virtually essential for cleantech venture success.  Or, put another way, traditional venture capital may be necessary but alone may not be sufficient to build a great cleantech venture.

Interacting with companies that are literally many thousands of times larger than a start-up company can accurately be called “dancing with elephants”:  one must be creative to capture the attention of the big beasts, strong enough to harness their power, and yet deft enough to avoid getting squashed.  It’s pretty clear that this is an important skill to cultivate in the cleantech sector — VC and entrepreneur alike.

The State of Cleantech Venture Capital

I generally like creating my own content, riffing off other newsy material I find in the print or electronic press, but sometimes someone writes such good stuff that it’s really hard to improve on it.  This is one of those times.

Also, sometimes I’m just too busy to come up with original material or do the requisite secondary work to make a broader set of points.  This is also one of those times.

Last week, Matthew Nordan of the venture capital firm Venrock penned (well, OK, typed) an excellent four-part series entitled “The State of Cleantech Venture Capital”.

Part One focuses on the amount of venture capital into cleantech.  Looking at capital flows over the past several years and projecting forward, Nordan concludes that a record amount of cleantech venture capital will be required over the next few years to bring deals from recent years across the goal line to exit — but expresses the concern that “there may be insufficient Seed/Series A capital available to fund new cleantech enterprises.”  This is a worry to me, as well.

Part Two aims to analyze the returns that cleantech venture investors have been able to generate.  Nordon notes that the conventional wisdom — that cleantech venture capital must have much worse returns than venture capital overall — is patently incorrect.  “Relative to its level of funding, cleantech has actually overdelivered on exits…[venture-backed cleantech start-ups] take less time [to exit than companies in other sectors]…[and] cleantech-only VC funds have about the same valuation metrics as VC funds overall.”  Of course, Nordson does not emphasize that the venture capital sector as a whole has performed poorly over the past decade, but at least cleantech VC doesn’t trail a field that is sucking wind.

Part Three profiles 24 cleantech firms that have undertaken or filed for an initial public offering (IPO) since 2000.  Nordon’s analysis indicates that half of the seemingly-successful companies — these are only the ones that IPO’ed, after all — “stumbled” somewhere along the way towards their exit.  By Nordon’s definition, “stumbled” means receiving investment at a too-high valuation at some point, and then suffering when the valuation falls in a subsequent round of investment.  Such “down-rounds” are inevitably very painful.  As Nordon advises entrepreneurs at the end of his piece, “the share price that really matters is the one at the end.”

Part Four offers some brief concluding remarks, among which are “It’s still really early [in cleantech venture capital}”, and “The optimal investment vehicle [to finance cleantech start-ups] remains to be figured out.” 

Nordon and his firm Venrock are eager to play in this cleantech venture capital game, rough-and-tumble though it may be.  I am too.

Predictions For Cleantech In 2012

It’s December again (how did that happen!?) and our annual time for reflection here at Kachan & Co. So as we close out 2011, let’s look towards what the new year may have in store for cleantech.

There are eggshells across the sector for 2012. Global economic uncertainty in particular is leaving some skeptical about the chances for emerging clean technologies. And those who watch quarterly investment data, or who look only in a single geography (e.g. North America) may have seen troubling trends brewing this past year. But the true story, and the global outlook for the year ahead, is—as it always is—more complicated.

As you’ll read below, we predict a decline in worldwide cleantech venture capital investing in 2012. But as you’ll also read below, we believe the gap will be more than made up by infusions of corporate capital. And the exit environment, depending on who you are and where you list, still looks robust in 2012 for cleantech (it may not have felt so, but it was actually surprisingly robust in 2011, according to the data. See below.) All in all, if you’re a cleantech entrepreneur seeking capital, our advice is brush up that PowerPoint and work the system now… while there’s still a system to work.

Because, as we detail below, the largest risk, to cleantech and every sector in 2012 we believe, is the specter of precipitous global economic decline and the systemic changes it might bring. Details below.

Here are our predictions for cleantech in 2012:

Cleantech venture investment to decline
In the face of naysayers then forecasting a cleantech collapse, in our predictions this time last year, we called an increase in global cleantech venture investment in 2011. We were right. At this writing, total investment for the first three quarters of 2011 is already $6.876 billion, with the fourth quarter to report early in 2012. Given historical patterns (fourth quarters are almost always down from third quarters), we expect 2011 to close out at a total of ~$8.8 billion in venture capital invested into cleantech globally. That’d be the highest total in three years, and second only to the highest year on record: 2008.

cleantech 2012 predictions venture investment
Total 2011 investment is expected to show growth from 2009’s figures once the fourth quarter (dashed lines, estimated) is added. However Kachan predicts total venture investment in 2012 to decline from 2011’s total. Data: Cleantech Group

Yet in 2012, we expect global venture and investment into cleantech to fall. Not dramatically. But we expect cleantech venture in 2012 as measured by the data providers (i.e. companies like Dow Jones VentureSourceBloomberg New Energy Finance,PwC/NVCA MoneyTree, and Cleantech Group) to show its first decline in 2012 following the recovery from the financial crash of 2008. Our reasoning? There are factors we expect will continue to contribute to the health of the cleantech sector, but they feel outweighed by factors that concern us. Both sets below:

On one hand: What we expect to contribute to growth in cleantech investment in 2012

  • China gets a hold on its economic turbulence – For five years now in our annual predictions, both here at Kachan and when I was a managing director of the Cleantech Group, we foretold the rise of China as cleantech juggernaut. Yet, now with China having become the largest market for and leading vendor of cleantech products and services by all metrics that matter, and now receiving a larger percentage of global cleantech venture capital than at any point in history, there have been recent warning signs. New data just in (for instance, falling Chinese property prices and sluggish export growth because of faltering first world economies, not to mention the first decline in clean energy project financing in China since 2010 as wind project financing declined 14% in the third quarter of 2011 on fears of over-expansion) suggests the Chinese economic engine is slowing. On the face of it, that might look bad for cleantech. But we put a lot of faith in China’s central government and the seriousness with which it views this sector as strategic. Even now, the country has just gone on the record forecasting creating 9 million new green jobs in the next 5 years. Nine million! And China has a good track record in executing its 5-year plans.
  • Rise in oil prices – Cleantech is a much wider category than energy. But for many, renewable energy is its cornerstone. And while there’s no question about the long-term markets for renewables, the biggest factor affecting their short-term commercial viability is the price of fossil-based energy. The good news: indications are that oil prices are headed upwards in 2012, which should be expected to help make renewables more economic. Naysayers maintain that a poor global economy will destroy demand for energy, keeping the price of oil artificially low. For much of 2011, the price of oil was relatively low. But we argue the price per barrel will continue its inexorable rise in 2012 given continued growth in the size of the global market for oil, driven by market expansion in the developing world. Further adding to the expected oil price increase is a little-known fact: there’s been a decline in the quality of oil the world is seeing on average. And the poorer the quality of the oil, the more it costs to refine it into the products we require. Oil prices are headed up.
  • Corporations’ even stronger leadership role – Corporate venturing was up in 2011, possibly setting new record highs, according to the data providers (4Q data not in yet.) Cleantech corporate mergers and acquisitions globally were up in 2011, again possibly setting new record highs, according to the data. The world’s largest companies assumed the leadership we and others predicted they would last year at this time—and indications are they will continue to do so in 2012, with balance sheets still strong.
  • Solar innovation as a perennial driver – Investment into good old solar innovation and projects is still strong, and has remained so for years, while other clean technologies have risen and fallen in and out of investment fashion. And that’s despitemost solar companies being in the red and having billions of dollars in market capitalization disappear over the last year. As some solar companies will continue to close up shop in 2012, look for investment into solar innovation to remain strong in 2012 as the quest for lower costs and higher efficiencies continues.
  • Persistence of the fundamental drivers of cleantech – The sheer sizes of the addressable markets many cleantech companies target, and the possibilities for massive associated returns, will continue to draw investors to the sector. Why? The world is still running out of the raw materials it needs. Some countries value their energy independence. More than ever, economies need to do more with less. Oh, and there’s that climate thing.

On the other hand: What worries us about the prospects for growth in cleantech investment in 2012

  • Investor fundraising climate tightening – Today, limited partners (i.e. “LPs” – the organizations and/or wealthy individuals that fund venture capital companies) are still bankrolling cleantech worldwide; in its 3Q 2011 Investment Monitor for clients, the Cleantech Group details 34 dedicated cleantech and sustainability-focused funds receiving billions in capital commitments internationally in the third quarter of 2011 alone. But we expect a slowdown in venture fundraising in 2012. Blame Solyndra for negative American LP sentiment. Or blame the lack of rock star returns in cleantech of late. But there are more indications than ever that some LPs are becoming increasingly reluctant to fund cleantech. They’ve been grousing about cleantech for years. But the politicizing of the Solyndra bankruptcy has amped the rhetoric higher than ever, and will foster a self-fulfilling prophesy in 2012, particularly in America, we believe.
  • Waning policy support in the developed world – Expected conflicting government policy signals to continue in 2012. Don’t expect cleantech-friendly U.S. policy leadership in 2012, an election year. We wouldn’t be surprised if the ghost of Solyndra and other U.S. Department of Energy stimulus grants and loan guarantees continued to haunt American cleantech through the whole of 2012, making any overt U.S. government support of clean or green industry unlikely. While cleantech is far from solely an American phenomenon, there’s no mistaking that the (now expired) American national loan guarantee program helped loosen private cleantech capital in an immediately post-2008 shell-shocked economy. However, continued uncertainty over the future of the U.S. Treasury grants program and production tax credits is holding the U.S. back. Policy support suffers elsewhere in the developed world. For instance, in the UK, investor confidence was recently dealt a blow by a dramatic drop in solar feed-in-tariff (FIT) rates, and the erosion of renewable policy support in Germany and Spain is well known.
  • Lag time of negative sentiment – Even if the sky indeed started falling in cleantech (and we don’t believe it yet has), it would take a few quarters to show in venture or project investment numbers. Remember, deals can take quarters to consummate. Transactions being counted now may have been initiated a year ago. Fear takes several quarters to manifest. Which is why we believe today’s uncertainty will start to show in 2012’s performance.
  • VCs still circling their wagons – In 2007, before the financial crash, the percentage of early stage venture investments into new cleantech companies was roughly the same as later-stage venture investments into established companies. Since the crash of 2008, deals have remained skewed—both by number and size of deals—towards later stage companies, illustrating investors’ preference to keep existing investments alive than take risks on new companies. While the exact ratio varies quarter to quarter, and from data provider to data provider, there have been generally fewer early stage companies getting funded. That’s hampering cleantech innovation. We expect the trend to continue into 2012.
  • Perennial concern about exits and IRR – Despite the size of its massive addressable markets and near-record amounts of capital entering the space today, on the whole, cleantech investors are still seeking the returns that many of their web and social media tech brethren enjoy. Even now, 10 years into this theme that we started calling cleantech in 2002. That’s not for lack of exits; 2010 saw the largest number of cleantech IPOs on record (93 companies raised a combined $16.3 billion) and 2011 has already had 35 without the last quarter reporting. And cleantech M&A activity in 2011 was strong and significantly higher than last year. No, the concern is for lack of multiples. For instance, 8 of the 14 IPOs of the third quarter of 2011 were trading below their offering price as of the publication of the Cleantech Group’s 3Q 2011 Investment Monitor. Don’t let anyone tell you exits aren’t happening in cleantech. They’re just underwhelming. And/or they’re happening in China.
  • Macro-economic turbulence, collapse, or at least, reform – They’re the elephants in the room: The Occupy movement. Arab Spring. Peak Oil. The continued and growing mismatch between overall global energy supply and demand and food supply and demand. Ever-increasing debt and trade deficits. Currency revaluation or political/military developments. Any or all of these could spur another massive global economic “stair-step” downwards of the scale we saw in 2008, or worse. Concern about all of these points and the impact they’d have on the cleantech sector weighs heavy on us here.

Venture dip made up for by rise in corporate involvement
The world’s largest corporations woke up to opportunities in cleantech in 2011, making for record levels of M&A, corporate venturing and strategic investments. General Electric bought lighting and smart grid companies. Schneider Electric bought some 10 companies across the cleantech spectrum. Corporate venturing activity was high, as were minority-stake investments. In just the third quarter alone, ZF Friedrichshafen invested $187 million in wind turbine gearbox and component maker Hansen Transmissions of Belgium, Stemcor invested $137 million into waste company CMA in Australia, and BP invested $71 million into biofuel company Tropical BioEnergia in Brazil. And there were dozens more minority stake transactions like these throughout the year.

Look for even more cash-laden companies to continue to buy their way into clean technology markets in 2012, supplementing the role of traditional private equity and evidencing a maturation of the cleantech sector.

Storage investment to retreat
Significant capital has gone into energy storage in recent quarters. In 3Q11, storage received $514 million in 19 venture deals worldwide, more than any other cleantech category. Will storage remain a leading cleantech investment theme in 2012? We’re betting no. Here’s why.

Storage recently made headlines as the subsector that received the most global cleantech venture investment in the third quarter of 2011, the last quarter for which numbers are available. An analysis of the numbers, however, shows the quarter was artificially inflated by large investments into stationary fuel cell makers Bloom Energy and ClearEdge Power. Do we at Kachan expect more investments of that magnitude into competing companies? No. Why? Even if you believe analysts that assert that stationary fuel cells for combined heat and power are actually ramping up to serious volumes (oldtimers have seen this market perpetually five years away for 15 years, now), just look how crowded the space currently is. Bloom and ClearEdge are competing with UTC Power, FuelCell Energy, Altergy, Relion, Idatech, Panasonic, Ceramic Fuel Cells and Ceres Power … just some of the better-known 60 or so companies vying for this tiny market today. And many are still selling at zero or negative gross margins.

But the main reason we’re not bullish on storage: Smoothing the intermittency of renewable solar and wind power might turn out to be less important soon. Sure, nary a week goes by without announcements of promising new storage tech breakthroughs or new public support for grid storage (e.g. see these three latest grid storage projects just announced in the U.S., detailed halfway down the page.) But we believe that utility-scale renewable power storage might be obviated if utilities embrace other ways to generate clean baseload power.

In 2012 or soon thereafter, we expect those clean baseload options will start to include new safer forms of nuclear power (don’t believe us? Read Kachan’s report Emerging Nuclear Innovations—U.S. readers, don’t worry: nuclear innovation won’t apply to you.) Or NCSS/IGCC turbines powered by renewable natural gas delivered through today’s gas distribution pipelines (see The Bio Natural Gas Opportunity). Or even geothermal (gasp!) or marine power (see below). All of these promise to be less expensive than solar and wind when you factor in the expense of storage systems required—incl. electrochemical, compressed air, hydrogen, flywheel, pumped water, thermal, vehicle-to-grid or other—if solar and wind are to be relied on 24/7.

Marine energy to begin coming of age
I’m a closet fan of marine energy, despite today’s extraordinarily high cost per kilowatt hour. We started covering wave, tidal and ocean thermal energy conversion equipment makers in 2006. Anyone who’s heard me talk publicly on the subject has had to suffer through hearing how I’d much prefer invisible kit beneath the waves than have to gaze upon solar and wind farms taking land out of commission.

In 2006, the lifetime of equipment from then-noteworthy companies like Verdant Power and Finavera (which since exited marine power after a failed test with California’s PG&E) in the harsh marine environment could sometimes be measured in days. The designs just didn’t hold up. Even Ocean Power Delivery, now Pelamis Wave Power, with its huge, snakelike Pelamis device, had hiccups in early onshore grid testing. Back then, the industry clearly had a long way to go.

Today, six years later, we think it’s time to start taking marine energy seriously. A high profile tidal project is now underway in Eastern Canada’s Bay of Fundy. Several weeks ago, Siemens raised its stake in UK-based tidal energy developer Marine Current Turbines from less than 10% to 45%, because it liked the predictability of ocean energy, and Voith Hydro Wavegen handed over its first commercial wave project to Spain. And last week, Dutch company Bluewater Energy became the latest vendor to secure a demo berth at the European Marine Energy Centre at Orkney, Scotland—the most important global R&D center for marine energy. Things are going on in marine power. Still, its major hurdle is the large variation in designs and absence of consensus on what prevailing technologies will look like.

2012 won’t be the year marine power becomes cost-competitive with coal, or even nearly. But you’ll hear more about marine power in 2012, and see more private and corporate funding, we predict.

Increased water and agricultural sector activity
Look for increased venture investment, M&A and public exits in water and agriculture in 2012.

At one point, only cleantech industry insiders championed water tech as an investment category (and, frankly, at only a few hundred million dollars per year on average, it still remains only a small percentage of the overall average $7B annual cleantech venture investment.) Industrial wastewater is driving growth in today’s water investment, with two of the top three VC deals of the last quarter for which data is available promoting solutions for produced water from the oil and gas industry, and the largest M&A deal also focused on an oil and gas water solution. Regulations aimed at making hydraulic fracturing less environmentally disruptive to will spur continued innovation and related water investments in 2012.

Where water was a few years ago, agriculture investment appears to be today. There was more chatter on agricultural investment than ever before at cleantech conferences I attended around the world this past year. Expect it to reach a higher pitch in 2012, because of:

Investing in farmland is even resurfacing, in these uncertain times, as a private equity theme.

Remember the food crisis three years ago, when sharply rising food prices in 2006 and 2007, because of rising oil prices, led to panics and stockpiling in early 2008? Brazil and India stopped exporting rice. Riots broke out from Burkina Faso to Somalia. U.S. President George W. Bush asked the American Congress to approve $770 million for international food aid. Those days could return, and they represent opportunity for micro-irrigation, sustainable fertilizer and other water and agriculture innovation.

And so concludes our predictions for 2012. What do you agree with? What do you disagree with? Leave a comment on the original post of these predictions on our site.

This article was originally published here. Reposted by permission.

Cleantech Investing: A Primer on Risks

I sense that many in the cleantech world generally hold a negative view of venture investors.  Although rarely worded as such, I can almost hear the pleas:  “Why don’t you invest more in cleantech?  Why don’t you do more cleantech deals?”

Well, as a venture capitalist, I can tell you plainly that our capital is very scarce.  I wish we had a lot more money to work with.  Not rolling in dough, we have to be very picky about the deals in which we invest.

I’ve been looking at early-stage cleantech opportunities for over a dozen years now, starting well before the word “cleantech” had been coined.  Good news:  the quality of entrepreneurs and their ideas in the cleantech space has improved dramatically.

And yet, many inventors still lack a basic grasp of what makes a start-up a potentially investible prospect.  So, it is with this posting that I aim to provide a bit of guidance for those that want to create a successful cleantech company, especially if they want to get it funded by investors.

For the most part, venture capital investors are managing other people’s money.  VCs are compelled to provide good returns to their investors, or else they will be out of business when they try to raise their next fund. 

Like most money managers, VCs aim to assess the potential risks of an investment against the potential rewards.  In early-stage companies, there are many risks, so the rewards have to be quite high.

Usually, entrepreneurs have little problem in touting the upsides of their deals.  In many cases, the potential is overestimated or naively broached.  “The energy sector is a $6 trillion annual industry — all we have to do is capture 1% of it and we’ll be a $60 billion business!” 

Yes…but…securing that 1% is really damn hard, as the companies selling in the market aren’t going to roll over, and customers will be demanding and slow to change.  And, oh by the way:  your addressable market is only a small portion of that $6 trillion, unless your idea can somehow fuel any vehicle, generate electricity anywhere at all times, and also provide heat.

As naive as they can be in describing the potential rewards,  it’s on the risk side that many inventors fail to think through their business opportunity with sufficient depth and insight.  There are many elements of risk in all ventures, but several of these are especially pronounced in cleantech ventures:

Technology Risk

This is one area in which most inventors at least have a bit of a clue how to approach.  Most know that they have to show that their gizmo will actually work — even if all they’ve done so far is conceptual analysis, and have not established “proof-of-concept” with a real working prototype.  But, what so many entrepreneurs fail to appreciate is that actual operability — and also reliability — is only half the battle.  Just as important, maybe more important, is that the widget has to be manufacturable at a cost level that enables a profitable sale at a price point that will be competitive in the marketplace so that customers will actually want to buy it.

To illustrate, I spoke last week with perhaps the 100th person I’ve encountered in the past decade that’s trying to commercialize a new wind turbine design for on-site application.  When asked about the economics of the design, the leader of the team praised its advantages in manufacturability — an important enabler of cost-competitiveness, but by no means the whole story.  Then, the entrepreneur mentioned a cost level, in $/watt installed, that should be achieveable.  There followed a pause, as if this should be a compelling answer. 

However, the important pricing level for any electricity-generating device is not $/watt installed, but cents/kilowatt-hour over the life of the equipment.  No-one cares if they spend $10,000 on a wind turbine:  they want to know whether they’ll save money relative to other options available to them — specifically, in this case, power bought from the grid at maybe 15 cents/kilowatt-hour in certain locations where electricity is not cheap. 

Translating $/watt to cents/kilowatt-hour means figuring out how many kilowatt-hours the turbine will generate, and also adding the occasional maintenance and replacement costs after installation.  Doing these calculations in a back-of-the-envelope manner, we arrived at an estimated 22 cents/kilowatt-hour.  The entrepreneur was non-plussed, but I was very plussed:  22 cents/kilowatt-hour isn’t close to being competitive for the electric generating sector except in the very highest cost islands in the middle of oceans. 

At best, then, this is a niche play, although the entrepreneur had been pitching the technology as a ubiquitous world-beater.  I needed to hear a cost number that was no higher than 10 cents/kilowatt-hour — just because eager inventors are virtually always too optimistic about their technology, and will thus tend to underestimate costs — for me to retain any interest in this opportunity.

While this person’s wind turbine may well actually work, it’s commercially irrelevant if it can’t generate electricity at a cost level anywhere close to other sources of electricity generation.  It’s more likely that cost reductions will bottom out at 30 cents/kilowatt-hour than they will reach 18 cents/kilowatt-hour — much less the 12 cents/kilowatt-hour it would need to be to offer a sufficient competitive advantage to grid power to make customers in most parts of the world adopt.  So, I can’t imagine spending any more time on this one — as much as anything, because the entrepreneur did not have a well-informed view of the market requirements of his proposed product.

Competitor Risk

Of course, we live in a market-based society, and a new cleantech product will have to beat out other alternatives.  While it’s relatively easy to assess the current competitive landscape, that’s hardly all that’s important to scope out.  If you’re developing a new product, one that will take a couple of years to fully mature and introduce, you’re aiming for a moving target.  What will the competitive alternatives be at that time?  This is much, much harder to assess.

It’s especially hard to assess in a dynamic and stealthy segment of cleantech adoption.  I’m always troubled when an entrpreneur says that they have a unique solution, perhaps even patented, in a market space that has attracted lots of investment capital.  What are all those ventures doing with all the capital they’ve raised?  And, what about the companies you don’t even know about?  Is the distinctiveness of your technology all it’s really cracked up to be, given what everyone else is doing?

A side note about patents:  overrated!  First of all, anything can be patented; just because something is patented doesn’t mean it’s commercially interesting.  More importantly, I’ve heard intellectual property attorneys say that patents are only a ticket to a lawsuit, and my limited experience in this is that those lawsuits are both very expensive and hard to win.  This is doubly so when you vie against some really deep-pocketed large corporation that can easily afford to outspend a venture on legal fees by a ratio of 10-to-1 or more.  Patents may be necessary to establish a competitive advantage, but they are usually insufficient.  Best is a combination of patents and trade secrets — proprietary know-how (i.e., “secret sauce”) that is difficult to reverse engineer and that is not published, as patents are.

Adoption Risk

Just about every entrepreneur thinks they have developed a better mousetrap.  Of course; they have to.  Let’s assume they’re right and they have made a true innovation with commercial relevance.  Entrepreneurs are also prone to believing that customers will be dying to buy their baby once it’s on the market.  Not so fast, my friend.

For the most part, customers have become very accustomed to what they buy today.  Even when their current purchases aren’t fully satisfactory, customers generally believe that it’s the least of all evils, that the other alternatives in the marketplace are somehow inferior to what they currently obtain.  And, they have made accomodations in their businesses or in their lives to the less-than-optimal aspects of what they buy now.

In contrast, a new purchase entails a whole host of risks.  Will it really work as promised?  Will it really cost what is promised?  Will it really deliver the benefits that are promised?  Ultimately, these are questions of trust.  In the case of cleantech, most of the purchasing decisions are capital-intensive and have significant associated time horizons and serious consequences of failure, so the buyer is going to have to trust the product — and its supplier — for a long, long time.

Thus, it’s often safer for customers to keep with the status quo, even when presented with something that at least superficially looks better.  Between the trust issues and the hassle factor of doing/learning something new, customer inertia of “do nothing” is frequently the easiest path forward.  With the exception of perhaps the Tesla (NASDAQ: TSLA), cleantech goods are generally not trendy, so it’s not like buying the newest consumer gadget, in which edginess or coolness matters and people may buy on a whim.

Financing Risk

Of course, ventures burn through capital.  That’s why venture capitalists exist.  But, it’s one thing to burn through a few million dollars of capital raised in a couple of rounds of financing, than to require hundreds of millions of dollars of capital raised over 5, 6, or more rounds of financing.

The former typifies many ventures in the information technology space.  It’s not that expensive to hire a few programmers and develop a commercial solution that can start generating revenues.  Once a company gets to breakeven, the entrepreneur can consider raising boatloads of cash to accelerate growth, at pretty favorable terms, because the business concept has been validated:  the appeal of the value proposition, the go-to-market strategy, and the profitability of delivering on the promise to customers. 

Alas, the latter typifies many ventures in the cleantech arena.  Whether you’re developing a new solar technology, a new biofuels concept, a new vehicle, or a new battery — each of these requires a lot of technical equipment and engineering/scientific staff to prove out the physical aspects of the technology.  (Physical stuff is a lot more expensive than virtual stuff!)  Also, once it’s proven in concept, then — because of the risk-averseness of the customer base — the technology often either (1) needs to be proven at large-scale before it will be bought commercially, or (2) requires major manufacturing scale-up investments required to achieve economies of scale to reach price points that will be viable in the marketplace.

Raising tens of millions of dollars over multiple rounds of financing brings a huge element of risk into play:  when your next round of capital is required, what will be the condition of the financial markets at that time?  Notoriously volatile, if the capital markets are bearish, it will be damn hard to raise big bucks at attractive terms — no matter how well you’ve held up your end of the bargain as an inventor/entrepreneur.  The investors who came along for the ride in the early days will be squashed alongside of you, and avoiding this fate is why many early-stage VCs (like me) are attracted to investment opportunities that don’t require a lot of additional capital to be raised in later rounds.

Policy Risk

This is arguably the biggest risk factor in the cleantech universe.  As I’ve discussed many times in previous posts, cleantech is largely shaped by regulations and legislation:  environmental laws, utility regulations, tax incentives, permitting rules, and on and on and on.  These issues dramatically affect the economics, the market potential and in fact even the applicability of cleantech technologies.  This is arguably much more so the case than for any other segment of venture investing (with the possible exception of health care and life sciences).

The entrepreneur must understand that this issue is so scary to potential investors because the rules of the game that may make a cleantech opportunity favorable can be changed essentially by whim to make an opportunity unfavorable.  A solar entrepreneur can tout his/her business model based on a feed-in tariff in Germany — but if that feed-in tariff is wiped away by some political or budgetary force, the business model becomes unviable, the venture dies, and the investor loses his/her capital.

Thus, it takes a particular kind of venture capitalist, one who can assess the degree by which a particular set of laws or regulations are stable, to participate in the cleantech realm.  Some policies are much more stable than others.  If a cleantech venture requires a particular policy to work, that policy better be very stout across the political spectrum, and not strenuously opposed by a phalanx of powerful (read, wealthy and willing-to-spend) incumbent companies, if the entrepreneur wants to raise any significant amount of capital from institutional investors beyond the “three f’s” of friends, family and fools.

Execution Risk

Even if you’ve got all the conceptual risks boxed in and managed effectively, the company still has to perform.  This is as true in cleantech as it is in any other sector.  The sales force has to close sales.  The production side still has to deliver at the costs and quality that were promised to the customers. 

This is not nearly as easy as people think.  It requires a dedicated team, led by disciplined and principled entrepreneurs who can artfully dance around obstacles that are encountered many times every single day.  Ultimately, venture-building is all about people.  And, venture investors spend a lot of time considering the key team members in each deal — both when evaluating a potential investment, and even more so after an investment has been made by seeking to fill out the team with critical skills that may be deficient.

In the cleantech world, there are relatively few accomplished entrepreneurs — though, thankfully, this is definitely changing for the better, as the cleantech sector attracts talent from other realms of technology, due both to the size of the opportunity and its importance to the world.

I liken the game of venture-building to walking the length of a football field strewn with land mines:  you might negotiate 95 yards successfully and be within 5 yards of the end-zone…and then blow up.  Any one of these risks can kill or seriously damage a venture, and they can arise at almost any time.  There’s lots of risks for any venture, and maybe a bit more or a bit more acute for cleantech ventures than for other sectors of the economy.  As a result, few big winners have yet to emerge in cleantech venturing.  For every cleantech company that has IPO’ed — most recently, Solazyme (NASDAQ: SZYM) — there are probably twenty that have crashed-and-burned ignominiously or are sputtering along in zombie-land.  And, even many of the ones that have IPO’ed have withered in the glare of Wall Street.

My nominee for most successful cleantech venture would have to be First Solar (NASDAQ: FSLR), which is now a dominant player in the solar photovoltaics marketplace.  With a current market capitalization of over $10 billion, it’s clearly a big-time winner since its IPO in late 2006.  So it seems like it should be a poster-child for cleantech VC success — until one considers that it was formed in 1999, as a restart of a prior venture called McMaster Energy that spun out of the University of Toledo in the late 1980s, and had the hardest time in raising any capital for years.  In other words, it was about 20 years from the time of true technological origin to commercial success for First Solar — not to mention, a lot of washed-out investors along the way.

A good venture capitalist has to be either a highly-skeptical optimist or a very open-minded pessimist to survive and be able to hold in mind simultaneously the great rewards and the large number of risks associated with a promising cleantech investment opportunity.  Entrepreneurs must also juggle both perspectives, but at least in the “selling” of their ideas to prospective funders, most tend to focus solely on the upsides.  We venture capitalists cannot afford that luxury.  As a result, I like an entrepreneur who has thought through all the risks,and rather than tip-toes around them to avoid mention, proactively speaks clearly as to how the risks will be addressed.

Billion Dollar Opportunities in Cleantech

by David Anthony

It’s true. Cleantech investment hasn’t worked out exactly how people dreamt it would back in the overly-optimistic days of the last decade. One of the main obstacles deterring venture capital investors from the sector is the frequently lengthy time lag between investment and commercialization. More importantly, the number of successful cleantech exits remains few — often because either the technology is not as disruptive as competing solutions or it is simply taking longer to adopt it.

The other fly in the ointment is the large-scale capital expenditures required to develop the technology in the first place. Clean technologies can be incredibly capital-intensive in the developmental and commercialization stages.  The level of investment required can and have discouraged further investors from committing to later and larger rounds of capital raises. When this problem is compounded with that of actually getting to commercialization it is not hard to see why many venture capital funds are decidedly more cautious about investment in cleantech than they were just a few years ago.

And these are not the only snags. The downturn in the world economy has drastically reduced the political appetite for renewable energy, especially in the US; the untimely death of President Obama’s cap-and-trade bill is testament to that. So although Feed-in-Tariffs continue to provide incentives for new developments, the fact that there is no price on carbon production and no penalties for over-producing it in the US mean that alternative energy remains a less attractive alternative than fossil-fuel.

But despite this doom and gloom, there are still very good reasons for investors to stay the course and persevere with the cleantech sector. The primary reason for this is the still-gigantic potential in a number of key markets which, when successfully exploited, are going to reap huge dividends for those who crack them and invested in the achievement.

Look, for example, at utility-scale energy storage. Lack of energy storage means that wind and solar energy is less viable at the moment than it could be.  Because energy from these sources is often produced at times which do not correlate with peak energy demand and because a viable utility scale storage solution has yet to emerge, renewable energy has been unable to achieve grid parity. In West Texas, some wind power generators have had to pay the state grid operator to take the energy off their hands in order to continue qualifying for federal tax credits. These costs are inevitably passed on to the consumer, so a breakthrough in large-scale energy storage will have an enormous impact on the profitability of renewables such as wind and solar. Whoever manages to solve this problem and develop an affordable method of energy storage is going to be able to sell it to every alternative energy generator in the world, and the returns on their investments will be huge.

Another massive potential market is the development of a viable system for carbon capture and sequestration. The two largest economies in the world, the U.S. and China, possess the world’s largest and third-largest coal reserves respectively, and it is highly unlikely that they will completely ignore such a cheap and abundant source of energy. But the environmental effects of burning coal have extremely heavy long-term costs, so the development of efficient, zero-emissions coal plants will revolutionize the energy market. It is a simply inescapable fact that the rewards for anyone who has the vision and staying power to invest in developing this technology will match the size of the gigantic market for clean coal-derived energy.

Low-cost desalination is going to be yet another definite winner in the near future. Climate change is creating new and unforeseen changes in global weather patterns. For example, there are fears that the south Asian monsoons will weaken and become less consistent. Given that the monsoon accounts for 80 percent of India’s total rainfall, a serious change in this weather pattern would without a shadow of a doubt need to be redressed with alternative sources of clean water. Benjamin Franklin was wrong; it’s not just death and taxes that are certain in this world, the market for clean water is too because we simply cannot live without it. Low cost desalination will be developed; the only question is who will have had the foresight to invest.

Vertical (or protected) farming could be another huge future market. The rising middle class in the two most populous nations on earth, China and India, is increasing global demand for food. If this new emerging middle class population’s shopping patterns mirror the US middle class’s grocery trends – where the number one grocery item is bagged leafy greens, for example – there is sure to be a sharp increase in demands for greater availability and variety of produce. To sustain the world’s ever increasing demand for food, new farming methods will have to be developed to feed today’s seven billion hungry mouths and the nine billion of 2050. Low-cost protected farming, using hydroponic and aeroponic farming methods within large urban structures, could provide one of the answers to the conundrum of feeding an ever-growing world population. It would also improve food freshness, cut down on carbon emissions caused by food refrigeration and transportation and halt soil degradation caused by pesticide and herbicide usage. Like the issue of fresh water, this is a riddle that will be solved because it has to be solved. And, once it is solved, everyone will be buying.

And the world’s most abundant energy source must not be forgotten either. The photovoltaic cells that convert solar energy into electricity currently lack the efficiency to achieve grid parity, making solar energy and PV systems a viable, long-term prospect for replacing fossil fuels. But improved efficiency of 30 to 40 percent will make solar power a much more competitive energy source. The development of light-trapping photovoltaic cells, and the adaptation of manufacturing lines to accommodate the new technology, could deliver the required increase in efficiency. Once this is achieved, harnessing the output of the gargantuan energy factory we call the Sun will become competitive and another enormous market will have been created.

What is most needed at the present time, though, is an ability to look beyond the current obstacles to the rewards that renewed investment and perseverance will reap for those who commit and stay the course. The cut-and-run trend witnessed of late in the cleantech sector is exceedingly myopic as the development of clean and green technologies is a necessity the world cannot do without. Climate change, the growing unpredictability of global weather patterns, urbanization, a mushrooming middle class within the emerging economies and depletion of fossil fuels are all global problems that need to be rapidly addressed. Necessity is the mother of invention and these issues will be solved one way or another. The only question is, who will have the prescience and perspicacity to be part of the future?

David Anthony is the Managing Partner of 21Ventures, LLC, a VC management firm that has provided seed, growth, and bridge capital to over 40 technology ventures across the globe, mainly in the cleantech arena. David Anthony is also Adjunct Professor at the New York Academy of Sciences (NYAS) and the NYU Stern School of Business where he began teaching technology entrepreneurship in 2009.

David received his MBA from The Tuck School of Business at Dartmouth College in 1989 and a BA in economics from George Washington University in 1982. He is an entrepreneurship mentor at the Land Center for Entrepreneurship at Columbia University Graduate School of Business. In 2002, David was awarded the Distinguished Mentor of the Year Award from Columbia University.

David blogs at David Anthony VC

Israel Awakening to Cleantech

by Richard T. Stuebi

In early November, I  participated in a week-long delegation concerning energy in Israel, at the invitation of Project Interchange, an educational program of the American Jewish Committee

In addition to learning a tremendous amount about Israel’s history, culture and political situation, my fellow travelers and I were fortunate to talk with many leaders active in various aspects of Israel’s cleantech sector.  From a cleantech standpoint, the key takeaways I gained from our tour were:

Even with a population of only 7 million people, Israel can nevertheless be an important force in cleantech, given that Jews have consistently played a disproportionately influential role in scientific and social advancement of the human race throughout history.

Global Cleantech 100

by Richard T. Stuebi

This past week in New York, at its annual East Coast investor forum, the Cleantech Group released its 2010 Global Cleantech 100, profiling the private cleantech companies that a set of panelists thinks has the most promise for large long-term impact.

Some highlights from the list and the report:

  1. In the panel’s eyes, the most promising company is Silver Springs Networks, followed by Zipcar, Opower, Bridgelux, and BrightSource Energy. Of course, the panel isn’t infallible: one of the 2009 Cleantech 100, Imara, flamed out even before 2009 ended.
  2. Energy efficiency displaced solar as the subsegment of cleantech with the most firms on the list, with 15. Solar and biofuels each account for 14 companies on the list. As big and active as the segment is, only one company in wind energy made the list.
  3. The U.S. remains the dominant geographic region for cleantech (55), with California far and away the leading state (33), and no other state with more than 8 (Massachusetts). However, Asia-Pacific (especially China) is fast on the rise.
  4. VantagePoint is the venture firm with the most companies on the list (14), one more than Kleiner Perkins.
  5. Corporate strategic partners and investors are increasing their cleantech activities. Google (NASDAQ: GOOG), IBM (NYSE: IBM), Siemens (XETRA: SIE), PG&E (NYSE: PCG), Landis & Gyr (a large global private company that itself is on the Cleantech 100) and General Electric (NYSE: GE) are at the top of the heap in engaging with companies on the list.

Richard T. Stuebi is a founding principal of NorTech Energy Enterprise, the advanced energy initiative at NorTech, where he is on loan from The Cleveland Foundation as its Fellow of Energy and Environmental Advancement. He is also a Managing Director in charge of cleantech investment activities at Early Stage Partners, a Cleveland-based venture capital firm.

Why Smaller Venture Funds Do Better

Guest Blog – Max Branzburg, Clean Pacific Ventures

Despite cries to the contrary, the venture capital industry is not broken. The poor performance over the past decade leading critics to write VC off as “fun while it lasted” has been driven by an isolated segment of the industry: large funds. The red flags are ubiquitous, but LPs today insist on investing in underperforming, oversized funds. Small VC funds – as they have throughout the industry’s existence – continue to deliver superior returns to their investors. The successful small-fund model has been readopted by some VCs, but too many LPs, VCs, and entrepreneurs remain unaware of its historically exceptional performance and its present advantages.

Today’s best-known top tier VCs – Kleiner Perkins, Accel, Sequoia, Venrock – began their careers with double- and single-digit fund sizes (Gupta, Done Deals). Limited partners – impressed by those funds’ returns – sought to invest more in the asset class, and fund sizes grew. The average venture fund grew from $54M in the 1980s to $95M in the 1990s and to $180 in the 2000s. Today, there are more than 400 funds of $250M or more (Thomson Reuters). Limited partners – perhaps ignorant of discrepancies in fund performances – have driven up demand for large funds, and VCs have happily complied, earning hefty management fees on excessively large pools of capital.

Excluding Internet bubble-effected funds, the historical increase in fund size has been accompanied by a highly correlated decline in returns.

Figure 1: Historical VC performance as a function of fund size (funds raised in 1990s excluded)

While exogenous factors may have played a role in the asset class’s decaying performance, a closer look reveals that a shifting dynamic within the VC industry towards large funds is a leading culprit.

By recognizing the important differences between small-fund ($50M – $150M) and large-fund (>$150M) investment patterns, we can better discern which segment of the venture industry is broken. As it turns out, only 7% of the large funds raised between 1981 and 2003 achieved returns for their investors at or greater than 3x. By contrast, 24% of the small funds raised during that time achieved >3x returns. More than three times as many small funds as large funds achieved those successful multiples. Four times as many small funds as large funds achieved multiples at or greater than 5x (Preqin, as reported by SVB Capital). The portion of returns achieved by each fund size from 1981 to 2003 is shown below:

Figure 2: Distribution of VC performance by fund size (data from Preqin, as reported by SVB Capital; chart by author)

As large funds become more common, the advantages of the small-fund model become more overt. Smaller funds – like those upon which the industry was initially built – are inherently better positioned to achieve superior returns. Some reasons why:

1. Smaller exits can return the fund

The smallest “large fund” ($150M) that owns 10% of its portfolio companies and charges 20% carry must generate $5.4B of market cap to achieve a 3x fund-level net return.

If that portfolio includes 10 companies, each company must generate, on average, $540M. Consider that from 2000 to 2008, 83% of the venture-backed exits were M&As, at an average valuation of $110M (the 17% of exits that were IPOs averaged $407.1M). Every portfolio would need to be populated by a handful of YouTubes and Facebooks to make the math work.

Smaller funds make more capital efficient deals, own larger equity stakes, and are able to return their funds with more modest exits.

2. GPs profit by performing

A typical $500M fund charging 2% management fees earns $10M/year before making a single deal. Carry from a couple of successful exits might sweeten the pot, but management fees already do significantly more than just keep the lights on for large funds.

Smaller funds cannot survive on 2% management fees; their livelihood depends upon making good deals and taking a piece of what is returned to the investor. Their incentives are better aligned with those of their LPs, and exceptional performance is the mutual goal.

3. Specialized sector knowledge

Smaller funds tend to focus on particular industry sectors. A small cleantech fund might have 3 GPs with expertise in 6 different cleantech segments. A larger fund is less likely to have multiple GPs with similar or overlapping specialties and, consequently, more likely to make bad deals. Small, sector-focused funds can make better investment decisions and add more value as board members.

4. Flexible follow-on financing

Large funds like to control the financing of the companies they invest in. One way to attain control is to seed a company alone, essentially taking that company off the market for future financing rounds. Large funds may also make small (proportionate to the fund) investments in the seed round within a syndicate led by another firm, and – as a company matures – add much more capital, thus taking a much larger equity stake. By getting involved early, they essentially buy an option to load up on equity later. LPs can consult historical performance data to discover that this strategy has not given large funds an advantage over small funds.

Small funds are happy (and well-positioned) to lead deals, but they tend to invest alongside other funds, and they offer market valuations. The ensuing flexibility is highly desirable by entrepreneurs. Capital efficient companies can avoid the “load up” problem; by requiring less capital, they are less susceptible to large funds’ equity-grab.

The recent increase in fund sizes is likely attributable to an information lag in the wake of the Internet bubble, and we should expect funds to downsize as historical performance discrepancies become evident. While the advantages of the small-fund model seem especially applicable to the clean technology sector (in which too many companies are capital inefficient), a dearth of realized returns leaves LPs unsure of how to allocate their funds. Many of the most visible clean technologies require significant capital to reach profitability and do not fit into the venture model; those technologies will play an important role in our future, but they will not offer high quality venture performance. It seems clear that small cleantech funds are better situated to deliver exceptional returns to their investors.

Max Branzburg is an Analyst at Clean Pacific Ventures, a pure play venture capital fund focused on capital efficient cleantech companies.

A Few Conversations on the State of Cleantech

I’ve had a number of conversations in the past couple of weeks about the state of cleantech and the various sectors that make it up.

No real answers, just food for discussion.

The IPO market – a few threads that keep perking up.  A need for the IPO market in cleantech to get healthy.  A general sesne of relief that Solyndra did not get out.  Massive skepticism over Tesla’s prospects.  All hopes pinned to Silver Spring.

Carbon / Climate change – determination that the oil spill shall not go in vain, so to speak.  Jaded lack of awareness about cap and trade and carbon globally replacing the pre-Copenhagen hype, despite that the underlying policies are getting more an more rational, and more and more real work and debate is occuring.  Bifurcated Over $1 Billion in smart money acquisitions in carbon in the last 9 months (JP Morgan, Barclays, Reuters, ICE, Bloomberg), the summer solider and sunshine patriots have bailed for now.

Venture capital – growing unease that the 2 and 20 managed money model is broken, and especially broken in cleantech.  Growing disbelief at the “picking winners” strategy and the massive hundreds of millions per company from the DOE in its loan guarantee program – inflation comes to cleantech?

A strengthening sense that like CNG was crowded out of the transport discussion by PHEV and ethanol a few years ago, EV and PHEVs are crowding out a market very jaded with the always over the horizon promise of biofuels to replace corn and sugar cane ethanol.

More discussions on water use and technology than I have had in years.  But still no answers.

A sense from those who know, that the US shale gas and the BP Horizon spill have the potential to shift the whole debate.

Or maybe it’s just me projecting my feelings on everyone I talk to, or ignoring those saying stupid things!  Since I didn’t do a real poll, the world will never now.

Neal Dikeman is a partner at Jane Capital Partners LLC, and the Chairman of Carbonflow.  He is the longtime chief blogger of

Clean Technology Venture Investment Increases 65 Percent in First Half of 2010

Matches 2008 Investment Record

The Cleantech Group and Deloitte released preliminary 2Q 2010 results for clean technology venture investments in North America, Europe, China and India, totaling $2.02 billion across 140 companies.

Cleantech venture investment was up 43 percent from the same period a year ago. The number of deals recorded in 2Q10 was down from a record high of 192 in 1Q10, but still represents a strong quarter by historic standards. This completes 1H10, up 65 percent on 1H09.

Corporate activity around cleantech innovation has continued to play an important role in maintaining the levels of investment activity. Corporations are becoming key participants in many of the largest venture and growth capital investment rounds. Strong corporate involvement was evident again in the quarter’s top ten deals: Intel Capital, GE Capital, Shell, Votorantim, Alstom, and Cargill Ventures all contributed, the latter two making their first publicly disclosed venture-stage investments in cleantech.

Corporations have multi-faceted roles in cleantech. Any single utility or multi-national could play any or all of the following roles – investor, partner, customer, acquirer, or competitor. As such, their activity levels are a key indicator of the health and growth of the broader market for clean technology products. The strengthening of corporate commitment to renewable energy and broader cleantech are evident in the strong growth of multi-national corporate and U.S. utility investment for the first half of 2010 :

1H10, total announced capacity additions by U.S. utilities increased 197 percent compared to 2H09, from 1,393MW to 4,134MW, primarily driven by wind and solar. Power purchase agreements (PPAs) rose 148 percent in 1H10, compared to 2H09, from 621MW to 1,539MW, likely due to the pressure of meeting Renewable Portfolio Standards in many U.S. states. Corporate investment announcements from the global corporates tracked reached a new high of $5.1 billion in 1H10, a 325 percent increase from the same period last year.

“The significant strengthening of corporate and utility investment into the cleantech sector, relative to 2009, is very encouraging, given the key role they will play in enabling broader adoption of clean technologies at scale,” said Scott Smith, partner, Deloitte & Touche LLP and Deloitte’s clean tech leader in the United States. “Major U.S. utilities are increasing direct investments in wind and solar due to improving cost scenarios, favorable tax credits and incentives, and evolving pressure to meet Renewable Portfolio Standards. Meanwhile, the largest global companies are seeing the business case for operational cleantech integration, leading to record corporate investment. This uptick was driven by companies looking to improve energy efficiency and reduce carbon emissions in order to reduce operational costs, mitigate energy price volatility risk, drive sustainable growth, and comply with existing and pending regulations around carbon and climate change risk disclosure.”


The leading sector in the quarter by amount invested was solar ($811 million), followed by biofuels ($302 million) and smart grid ($256 million). Energy efficiency was the most popular sector measured by number of deals, with 31 funding rounds, ahead of solar (26 deals) and biofuels (13 deals). The largest transactions in these sectors were:

SOLAR – $811 million in 26 deals

Solyndra, a California-based thin film company raised $175 million from existing investors instead of following through with its planned IPO. BrightSource Energy, a California-based developer of utility-scale solar thermal power plants, raised $150 million in Series D funding from new investors Alstom and the California State Teachers Retirement System (CalSTRS) as well as existing investors; the deal followed a conditional commitment from the U.S. Department of Energy for $1.37 billion in loan guarantees that was made in February and Amonix, a California-based developer of concentrated photovoltaic (CPV) solar power systems, raised $129.4 million in a Series B round led by Kleiner, Perkins, Caufield & Byers.

BIOFUELS – $302 million in 13 deals

Amyris Biotechnologies, a California-based developer of technology for the production of renewable fuels and chemicals, closed the final tranche of a $61 million Series C round and also raised a further $47.8 million from Temasek Holdings; Virent Energy Systems, a Wisconsin-based developer of a catalytic bio-refinery platform, raised $46 million from Shell and Cargill Ventures; and Kior, a Texas-based developer of a catalytic cracking technology for turning biomass into bio-crude, raised $40 million.

SMART GRID – $256 million in 11 deals

Landis+Gyr, a Switzerland-based smart metering company, raised an additional $165 million from Credit Suisse to add to the $100 million it raised in mid-2009, while OpenPeak, a Florida-based developer of home energy management products, raised $52 million from Intel Capital and existing investors, and GreenWave Reality a Denmark-based developer of home energy management products, raised $11 million from Craton Equity Partners and other undisclosed investors.

ENERGY EFFICIENCY – $147 million in 31 deals

Nualight, an Ireland-based developer of LED illumination products for refrigerated displays in food retail, raised $11.4 million from Climate Change Capital Private Equity, 4th Level Ventures and ESB Novus Modus. This was the largest deal in the energy efficiency category after OpenPeak ($52million, as above).


North America accounted for 72 percent of the total, while Europe and Israel accounted for 24 percent, India 3 percent, and China for 2 percent.

NORTH AMERICA: North American companies raised USD $1.46 billion, down 11 percent from 1Q10 but up 47 percent from 2Q09. The total of 76 disclosed rounds was high by historic standards, but down by 41 percent from the record 128 in 1Q10. As the most significant region for VC investment, the sector trends broadly match those described globally. The largest deals were for Solyndra ($175 million), a California-based thin film solar company, BrightSource Energy ($150 million), a California-based developer of utility-scale solar thermal power plants, and Amonix ($129.4 million), a California-based developer of concentrated photovoltaic (CPV) solar power systems. California led the way, with $980 million (67 percent total share) in investment, followed by Massachusetts ($124 million, 8 percent).

EUROPE/ISRAEL: European and Israeli companies raised USD $476 million in 54 disclosed rounds, up 48 percent (by amount) from 1Q10 and up 100 percent from 2Q09. The largest deals were for Swiss smart grid company Landis+Gyr ($165 million) and French solar plant developer Fonroche ($66.1 million). The large growth capital deal for Landis+Gyr places Switzerland ($165 million, 1 deal) at the top of the country league table, followed by France ($82 million, 11 deals), and Norway ($59 million, 4 deals). The UK had the most deals (17) with investment totaling $59 million.

CHINA: Chinese companies raised USD $30 million in 5 disclosed rounds. The largest deal was for Prudent Energy, a developer of flow batteries, which raised $10 million from JAFCO Investment Asia, Mitsui Ventures and CEL Partners.
INDIA: Indian companies raised USD $59 million in 4 disclosed rounds. The largest deal was for Krishidhan Seeds, a producer and distributor of hybrid seeds for the farming industry, which raised $30 million from Summit Partners.


There were 19 clean technology IPOs during the quarter, totaling $2.31 billion, up slightly from 18 IPOs in 4Q09, also totaling $2.31 billion. China accounted for the majority of transactions, with 12 offerings, which raised a combined $1.73 billion (75 percent of the overall total). There were three North American cleantech IPOs in 1Q 2010, which raised a total of $304 million, the lion share netted by the high-profile $226m IPO of Tesla Motors on June 29, 2010.
However, the largest global cleantech IPO recorded during the quarter was Origin Water, a China-based developer of membrane filtration systems for municipal and industrial sewage treatment and recycling, which raised $370 million from an offering on the Shenzhen Stock Exchange. The company’s share price more than doubled during the first day of trading, valuing the company at about $3.3 billion.

Clean technology M&A totaled an estimated 160 transactions in 2Q10, of which totals were disclosed for 45 transactions totaling $6 billion. Two of the most significant deals were in smart grid: Swiss engineering company ABB acquired U.S.-based software maker Ventyx for more than $1 billion to provide it with broader access to the utility enterprise management market; and Maxim Integrated Products acquired U.S.-based smart meter semiconductor company Teridian Semiconductor for about $315 million in cash.


2Q10 Most Active Cleantech Venture Investors (# investments)
Carbon Trust Investment Partners 6 = Helveta, Green Biologics, Intamac Systems, ACAL Energy, Arieso, Concurrent Thinking,
Kleiner Perkins Caufield & Byers 4 = Amonix, Amyris Biotechnologies, Fisker Automotive, EdeniQ
Angeleno Group 3 = Amonix, Coda Automotive, EdeniQ
Draper Fisher Jurvetson 3 = BrightSource Energy, EdeniQ, Scientific Conservation
Khosla Ventures 3 = Coskata, Amyris Biotechnologies, Sakti3

The Cleantech GroupT, providers of leading global market research, events and advisory services for the cleantech industry, along with Deloitte, which provides audit, tax, consulting and financial advisory services to cleantech companies, released these preliminary 2Q 2010 results for clean technology venture investments in North America, Europe, China and India, totaling $2.02 billion across 140 companies.