New Optimism For a Cleantech Future

If you’ve not been paying much attention to cleantech in the last little while, it’s time to sit up and take notice.

Because post-Solyndra, cleantech has been quietly gaining momentum.

We had the chance to take a close look at the fundamentals of cleantech over the last two months in co-authoring a new (and free!) 38-page research report in conjunction with Oakland, Calif.-based advocacy group As You Sow and the Responsible Endowments Coalition of Brooklyn, New York.

Titled Cleantech Redefined: Why the next wave of cleantech infrastructure, technology and services will thrive in the twenty first century, the paper analyzes the most recent investment research available across a number of industries and major impact areas. It identifies key drivers and market size projections for various cleantech categories. It looks at examples of products and technologies currently on the market. Finally, it highlights a handful of large, mid and small cap firms and funds as possible points of entry for investors within each industry.

The paper does a good job of introducing cleantech and its significance (e.g. even only being a relatively new investment theme, cleantech is still—even today after a downturn—attracting nearly a quarter of global venture capital available.) It re-emphasizes cleantech’s multi-trillion dollar individual addressable markets of power, water, agriculture, transportation and others. And it restates the significance of cleantech’s drivers, and that they’re not going away any time soon.

But to me, one of the most interesting sections of the report compares the cleantech wave to other technology booms of the last 50 years, like the dot com boom, the networking craze, biotech, the PC and the microprocessor. We found a number of parallels and a number of reasons for optimism when you compare the cycles. After 20 years in technology, personally, the more I looked at the data, the more it felt like I’d seen this movie before.

For instance, the downturn in venture capital: Venture capital often spikes early in emerging categories, later to be replaced with more traditional levels of investment and other sources of capital as industries develop. It happened in the Internet era, and this transition has begun in cleantech as shown below; venture capital is playing less of a leading role in driving cutting edge technology, as it’s being being augmented by corporate investors and other sources of funds. More detail in our report.

Venture capital spikes in Internet and cleantech

Actual and estimated venture capital spending in Internet and cleantech. Source: Matthew Nordan

There’s another relevant curve, below, that looks a lot like the one above. We hypothesized in an analysis this summer that cleantech had bottomed out on the Gartner hype cycle. We make the more detailed case in our report that cleantech, as in every one of the previous waves I just mentioned, had experienced the same initial enthusiasm, the same frothiness, the same “irrational exuberance” as Alan Greenspan put it, that these other technologies did as expectations initially exceeded reality.

As the Gartner model below illustrates, in every one of these previous waves, there was a correction, and a gradual equalization of expectations and execution. Our analysis, detailed in our report, is that cleantech is now starting to climb out of what Gartner calls the “trough of disillusionment” and up the “slope of enlightenment” (how very Zen!)

Gartner hype cycle

Hype cycle of expectations over time related to cleantech. Source: Gartner

And cleantech IS climbing out. If you look at broad-based cleantech funds as a proxy for the cleantech theme, there’s been solid growth the last few months. Yes, cleantech returns have been generally poor for investors the last few years. But there HAVE been bright spots in certain sub-sectors such as clean energy generation, solar services and transportation. The lift from high cleantech fliers like SolarCity (NASDAQ: SCTY) and Tesla Motors (NASDAQ: TSA) is pulling up the rest of the category, as shown in the performance of the PowerShares Cleantech Portfolio fund, a mix of public stocks from across the cleantech definition.

Powershares PZD fund performance

PowerShares Cleantech Portfolio fund (PZD) performance, 2007 to 2013. Source: Google Finance

Another reason our report finds optimism for the cleantech space is in looking at cleantech’s various industries through the lens of the technology adoption lifecycle model, a curve popularized by the marketing strategy firm Regis McKenna in Palo Alto, California, where I served as a senior consultant in the mid 90s. I wrote in 2011 about the significance of this model to cleantech, and our new report echoes and expands on this analysis. If the vast majority of clean technologies, services and infrastructure plays have yet to cross the chasm, it means risk and expense getting there, but it also means massively larger market adoption on the other side.

In the widely accepted technology adoption lifecycle model, a market gap exists between early adopters of new technologies and the majority of consumers. This gap is especially treacherous for companies that develop disruptive technologies, as they force a significant change to the markets they target. Only companies nimble enough to transition from the early adopter market (consumers motivated by purchasing the latest technologies for competitive benefit) to the early majority of the vastly larger mainstream market (which prefers to buy established technology) are successful.

Chasm model

The technology adoption lifecycle and chasm model, Regis McKenna. Source: Joe M. Bohlen, George M. Beal and Everett M. Rogers

Different clean technologies have faced their mainstream adoption chasms at different times. For example, wind and solar energy power generation have already bridged the gap. They are now widely understood and increasingly deployed by renewable energy decision makers at power companies, and by individual businesses and homeowners. Algae fuel, for example, is on the far left side of the chart—exciting but yet to scale.

The adoption chasm of new technologies can differ substantially in magnitude. Many cleantech products have been quietly moving the needle on efficiency and waste reduction without fundamentally altering their markets. Lighting is a good example. The transition from incandescent to fluorescents to light emitting diodes (LED) happened without dramatic market disruption. Consumers had a small technology curve to overcome, but the lighting market still requires the purchase of light bulbs. We expect a significant segment of the cleantech transition will happen in this way, with cost and efficiency driving marginal, but resource-significant product changes.

So, in all, our new report finds that cleantech is here, today, now. It observes that efficiency, one of the central tenets of cleantech, is now a theme of almost everything now made, and of how it’s designed and manufactured. Cleantech is becoming ubiquitous—from cheaper, more efficient lighting to advanced metering software. Cleantech in all of its forms is poised for even more rapid expansion, especially now that the largest companies in the world have discovered the opportunity and imperative of cost savings… and now that individual technologies are beginning to cross the chasm to mainstream adoption.

As our report concludes, we’re just at the beginning of this phenomenon called cleantech. The best and most exciting investment opportunities are yet to come.

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

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

The Economics of Cleantech Investing

I drafted this memo in early 2003 for a venture capitalist friend of mine, well before the bubble in cleantech.  In light of the back and forth on the recent Solar City IPO, I thought it was worth revisiting.  Some of the points were pretty prescient, calling out many of the challenges cleantech investors and exits have faced,  nearly a decade before they faced them.


Risk Economics in Energy Technology Investing

We believe there is substantial economics to be made from venture capital investment in energy technology, especially focused on clean energy and high efficiency or environmentally friendly applications.

However, investors unfamiliar with the sector tend to under-price risk and overestimate stage in technology development and commercialization in energy technology.

Much of this miscalculation can be boiled down to the fact that adoption rates of new technology in the energy sector generally tend to be slower than more traditional venture capital industry sectors.  This tends to be true for a couple of reasons, and has a number of implications for venture capital investment in the sector.  We have tried to lay out a few thoughts for potential investors in the space, which though they by no means constitute an all-encompassing investment model, should be helpful in decision-making.

Integration / Customer Hurdle Issues – This is a sector that tends to be very risk averse in new product and technology acceptance, and does not tend to pay for technology before the product stage, with an attitude of “we as the customer are already taking a huge risk by simply changing our operating procedures or letting you have access to our mission critical, extremely expensive infrastructure, why would we pay you, too?”  This situation is often characterized by very entrenched channels and customers, with multiple levels capable of “saying no”, and a long process to “yes”.  As result the level of product testing is substantially longer than other sectors as well. One implication (also see “Cheap” Technology below) is that technology businesses that have access to customers or are in integration areas tend to be under-priced by investors relative to technology developers.  This under-pricing can be especially true if the business has a vision to acquire technology or IPRs from developers as a price of admission to a customer base.  This set of issues also raises a second set of implications in the engine industry, where the major engine manufacturers, while they are often under pressure for change, are not exactly adept at handling new technology adoption, in part since they sell almost entirely through low-tech dealer networks, and only partially touch the end customer themselves.  Another risk issue here is that investors in technology development have tended to underestimate the power of entrenchment in both customers and channels, and as discussed below, run a risk of being caught in a bind as a one-product wonder without the depth or breadth of solution to protect market share.

R&D vs. Product /Market Development Investments – Because of the slowness of adoption rates, the relative risk of R&D investment bets to product /market development investment bets tends to be substantially higher than in many other sectors.  The implication is that early stage investment (pre- purchase orders) should be done at lower valuations than the same stage in other sectors, while later stage (post purchase order) investment can potentially be done at higher valuations, while achieving the same risk adjusted IRR.  Another implication is that investors often should expect some level of public funding support for technology development as a prerequisite for investment, not as a driver of additional valuation.

“Eternal Pilots” – This industry tends to be under significant environmental and PR pressures and as a result companies in the space tend to make limited investment of resources and capital in numerous pilot programs and “evaluations” that do not have significant likelihood of moving forward in a major way, but may run for years.  This has been especially true of regulated utilities that could often in effect price through some of the cost, or were expecting to bear the cost anyway as part of a PR or ongoing market vision program, as well as major energy companies, who have huge margins, and tend to have massive and far-flung R&D programs.  This tends to obscure the vision of VC investors looking to bet on strategic relationship “traction” as a way to proxy potential product adoption.  In other words, one can easily overestimate “traction”, and investors often tend to overestimate the life cycle stage of a new technology.  The newer the technology, the higher the over-estimation risk would tend to be.

Political Process – This industry tends to be very politically sensitive.  And the entrenched leaders tend to be much better than the startups at managing this process.  One thing this means is that significant public/government backed or public/private capital is available to fund R&D in the area, and that government/military business can often be viewed as core customer base.  It also means that technology development requiring regulatory or legislative drivers can be much riskier than in other sectors.

“Cheap” Technology – Given the above, existing technology tends to be “cheap” on the venture capital scale, and contracted or visible business tends to be the driver of value. Part of this is because the technology is often developed with “cheap” public dollars. The other way to think about it is that if you have the market and access to customers, attractive, proven technology at the product development stage can often be acquired for essentially pure upside.  While this may not call into question a particular technology development investment program, it again does have implications for the value of that technology as opposed to the value of a going concern.

Make One Bet, Not Two – To follow on that point, one implication is that an effective investment strategy may be to accept either technology development risk, or market risk, but not both.  In that, an investment in technology development not be made unless there was a near certainty of obtaining public funding to offset substantial portions of the cost or customer purchase orders once product development is completed, or that investment in customer ramp or market development not be made unless the technology is proven and has extremely limited risk of failure.  Betting on early stage companies that neither have a “locked-in” customer or completed technology may tend to be an extremely risky bet, and should perhaps be done only at quite low valuations relative to other industries.

Gross Margin Ramp – Another area of typical miscalculation is in profitability of new technology.  The sector tends to be a bit more “custom” in its product demands than some industries, and one major bet that has caught investors is cost structure/timing of volume orders.  This is an area where it has proven extremely difficult for many companies to develop enough business to move gross margin positive, let alone operating profit.  A common mistake is to over build manufacturing capacity in an often desperate race to get a marginally cost effective technology to an acceptable cost point to achieve venture like growth projections, when a more effective strategy often might have been to build low volume, higher cost point premium solutions for a smaller market in order to maintain the business during the often long process of technology adoption.  Such a strategy, which tends to be ignored by venture backed startups until too late, can be a key element in reducing the timing risk in this sector.  Part of the issue also stems from technology companies misunderstanding the price point potential and impact on their net price to manufacturer from channel and integration costs, a particularly sore point now to many companies betting on distributed generation technology, as is the point below.

One Product Wonders – Unlike other sectors where large companies are quite adept at acquiring in new products and technology lines, this is a sector where major competitors tend to be more likely to make a build vs. buy decision.  This tends to be more true for high margin components of an overall solution, exactly where technology investors tend to play.  Often investors have found that their supposed channel is in fact their most successful competitor, even despite the fact that the channel may not very good at the solution.  The result is that investors often overestimate how far a single product company can go, and overestimate how badly a potential strategic partner or exit will view that they need a particular technology solution.

While none of these points are meant to invalidate particular investment strategies, they are meant to be points to consider when risk adjusting and developing pricing / valuation strategies for energy technology investments.  At the end of the day, we tend to feel that technology companies in this sector, when compared to many other venture capital investment sectors, should be priced much more closely on visible cashflows than value of technology or market potential, or by “stage”, where the risked economics may not be as easy for an investor to define.

Top 10 Cleantech Subsidies and Policies (and the Biggest Losers) – Ranked By Impact

We all know energy is global, and as much policy driven as technology driven.

We have a quote, in energy, there are no disruptive technologies, just disruptive policies and economic shocks that make some technologies look disruptive after the fact.  In reality, there is disruptive technology in energy, it just takes a long long time.  And a lot of policy help.

We’ve ranked what we consider the seminal programs, policies and subsidies globally in cleantech that did the helping.  The industry makers.  We gave points for anchoring industries and market leading companies, points for catalyzing impact, points for “return on investment”, points for current market share, and causing fundamental shifts in scale, points for anchoring key technology development, points for industries that succeeded, points for industries with the brightest futures.  It ends heavy on solar, heavy on wind, heavy on ethanol.  No surprise, as that’s where the money’s come in.

1.  German PV Feed-in Tariff – More than anything else, allowed the scaling of the solar industry, built a home market and a home manufacturing base, and basically created the technology leader, First Solar.

2. Japanese Solar Rebate Program – The first big thing in solar, created the solar industry in the mid 90s, and anchored both the Japanese market, as well as the first generation of solar manufacturers.

3. California RPS – The anchor and pioneer renewable portfolio standard in the US, major driver of the first large scale, utility grade  wind and solar markets.

4. US Investment Tax Credit for Solar – Combined with the state renewable portfolio standards, created true grid scale solar.

5. Brazilian ethanol program – Do we really need to say why? Decades of concerted long term support created an industry, kept tens of billions in dollars domestic.  One half of the global biofuels industry.  And the cost leader.

6. US Corn ethanol combination of MTBE shift, blender’s, and import tariffs – Anchored the second largest global biofuels market, catalyzed the multi-billion explosion in venture capital into biofuels, and tens of billions into ethanol plants.  Obliterated the need for farm subsidies.  A cheap subsidy on a per unit basis compared to its impact holding down retail prices at the pump, and diverted billions of dollars from OPEC into the American heartland.

7. 11th 5 Year Plan  – Leads to Chinese leadership in global wind power production and solar manufacturing.  All we can say is, wow!  If we viewed these policies as having created more global technology leaders, or if success in solar was not so dominated by exports to markets created by other policies, and if wind was more pioneering and less fast follower, this rank could be an easy #1, so watch this space.

8. US Production Tax Credit – Anchored the US wind sector, the first major wind power market, and still #2.

9. California Solar Rebate Program & New Jersey SREC program – Taken together with the RPS’, two bulwarks of the only real solar markets created in the US yet.

10. EU Emission Trading Scheme and Kyoto Protocol Clean Development Mechanisms – Anchored finance for the Chinese wind sector, and $10s of Billions in investment in clean energy.  If the succeeding COPs had extended it, this would be an easy #1 or 2, as it is, barely makes the cut.


Honorable mention

Combination of US gas deregulations 20 years ago and US mineral rights ownership policy – as the only country where the citizens own the mineral rights under their land, there’s a reason fracking/directional drilling technology driving shale gas started here.  And a reason after 100 years the oil & gas industry still comes to the US for technology.  Shale gas in the US pays more in taxes than the US solar industry has in revenues.  But as old policies and with more indirect than direct causal effects, these fall to honorable mention.

Texas Power Deregulation – A huge anchor to wind power growth in the US.  There’s a reason Texas has so much wind power.  But without having catalyzed change in power across the nation, only makes honorable mention.

US DOE Solar Programs – A myriad of programs over decades, some that worked, some that didn’t.  Taken in aggregate, solar PV exists because of US government R&D support.

US CAFE standards – Still the major driver of automotive energy use globally, but most the shifts occurred before the “clean tech area”.

US Clean Air Act – Still the major driver of the environmental sector in industry, but most the shifts occurred before the “clean tech area”.

California product energy efficiency standards – Catalyzed massive shifts in product globally, but most the shifts occurred before the “clean tech area”.

Global lighting standards /regulations – Hard for us to highlight one, but as a group, just barely missed the cut, in part because lighting is a smaller portion of the energy bill than transport fuel or generation.


Biggest Flops

US Hydrogen Highway and myriad associated fuel cell R&D programs.  c. $1 Bil/year  in government R&D subsidies for lots of years,  and 10 years later maybe $500 mm / year worth of global product sales, and no profitable companies.

Italian, Greek, and Spanish Feed in Tariffs – Expensive me too copycats, made a lot of German, US, Japanese and Chinese and bankers rich, did not make a lasting impact on anything.

California AB-32 Cap and Trade – Late, slow, small underwhelming, instead of a lighthouse, an outlier.

REGGI – See AB 32

US DOE Loan Guarantee Program – Billion dollar boondoggle.  If it was about focusing investment to creating market leading companies, it didn’t.  If it was about creating jobs, the price per job is, well, it’s horrendous.

US Nuclear Energy Policy/Program – Decades, massive chunks of the DOE budget and no real technology advances so far in my lifetime?  Come on people.  Underperforming since the Berlin Wall fell at the least!


David Anthony’s Last Question – Can We Power the US Solely off of Solar?

By Tao Zheng, with David Anthony, an active cleantech venture capitalist, who passed away in April 2012.

 The sun is the champion of all energy sources, in terms of capacity and environmental impact. The sun provides earth with 120,000 terawatt (TW) energy, compared to technical potential energy capacity of single digit TWs from other renewable sources, such as wind, geothermal, biomass and hydroelectric. More energy from the sun hits the earth in one hour than all of the energy consumed on our planet in entire year. In the last blog, we estimated that the technical potential of electricity generation from rooftop photovoltaics (PV) can take over 1/3 of U.S. electricity consumption demand. The next question is: can we power the U.S. solely by solar energy, technically? The answer will rely on development of utility-scale solar farms and energy storage solutions.

Assuming the rest 2/3 of U.S. electricity demand can be fulfilled by utility-scale PV solar farms, we can estimate how much land required to install such solar farm systems. The total U.S. electricity demand in 2009 was 3,953 TWh with 1% annual growth projection in next 25 years. Two third of U.S. electricity demand is about 2,635 TWh. The PV power density is calculated with a weight-averaged module efficiency using market share for the three most prevalent PV technologies today: crystalline silicon, cadmium telluride, and CIGS. The resulting PV power density is 13.7 MW/million ft2, assuming an average module efficiency of 18.5% in 2015. If we assume 10 hours/day and 200 days/year with sunshine, the annual available sunshine time is 2,000 hours. The total land required for solar farms to generate 2,635 TWh, can be calculated as:

Total Land Required = Total Energy Generated / PV power density / Annual available sunshine time

                                 = 2,635,000/13.7/2000 = 96.2 ×109 ft2 = 8,937 km2 @ 100 × 100 km

Therefore, to generate energy equivalent to 2/3 of U.S. electricity demand, we need to install solar panels in a tract of land with size of 100 by 100 km, the area about 0.1% of U.S. land. Technically, to provide electricity for entire U.S. demand, we only need to cover PV-accessible residential and commercial rooftop with solar panels and install solar farms in desert area equivalent to 0.1% U.S land. In addition to rooftop and desert, there are many opportunities for installing PV on underused real estate, such as parking structure, airports, and freeway margins. PV can virtually eliminate carbon emissions from the electric power sector.

In comparison, Nathan Lewis, professor at Caltech, predicted a solar farm with land size of 400 by 400 km to generate 3 TW energy to power entire America. The represented area is about 1.7% of U.S. land size, comparable to the land devoted to the nation’s numbered highways. As shown in Figure 1, the red square represents the amount of land need for a solar farm to match the 3 TW of power demand in the U.S. Of the 3 TW energy, only 10% represents electricity demand, and the rest represents other energy needs, such as heating and automobile. Thus, Lewis’ calculation is consistent with our estimation: 10,000 km2 solar farms can generate enough electricity to fulfill 2/3 U.S. demand.

Figure 1. Solar Land Area Requirement for 3 TW Solar Energy Capacity to Power Entire U.S. Energy Demand. (Source: Prof. Nathan Lewis group at Caltech).

One of big challenges using solar to power U.S. grid is intermittency of sunlight. Solar energy is not available at night, and the variable output of solar generation causes voltage and frequency fluctuations on power network. Energy storage technology can smooth the output to meet electricity demand pattern. There are many grid energy storage technologies, from stationary battery to mechanical storage methods. Pumped hydro technology is clearly a better choice for solar energy storage, due to its high energy capacity, low cost, and public safety assurance.

For solar to have a dominant role in the electric power generation mix, in addition to power storage infrastructure, upgrading America’s transmission grid is required. In contrast to traditional electricity generation, solar power collections are distributed across numerous rooftops or centralized in utility-scale farms. Distributed solar requires grid operators to install smart grid technology to monitor power supply and demand and balance thousands of individual generators with central power plants. The current century-old transmission grid needs to be upgraded with high-voltage lines to carry electricity from remote solar farms to consumers. The American Recovery and Reinvestment Act (ARRA), signed into law by President Obama in 2009, has directed $40 billion to accelerate the grid infrastructure transformation.

The U.S. photovoltaic market has been growing quickly in recent years. In 2010, the U.S. installed 887 megawatts (MW) of grid-connected PV, representing 104% growth over the 435 MW installed in 2009. Current trends indicate that a large number of utility-scale PV power plants are in the south and southwest areas, such as in the sunny deserts of California, Nevada and Arizona. For example, the Copper Mountain Solar Facility in Boulder City, Nevada, is one of the U.S. largest solar PV plants with 48 MW capacity, as shown in Figure 2.

Figure 2. One of the U.S. Largest Solar Plants, the Copper Mountain Solar Project with 48 MW photovoltaic in Boulder City, Nevada.

Historically, solar PV deployment has been limited by economic factors, since solar energy is too expensive to compete with traditional fossil fuels, due to lack of economies of scale. However, the cheapest solar cells are now being produced for as little as 70¢ per watt. They are selling for about $1.26 per watt, with prices expected to drop to $1.17 next year. Most anticipate the price of solar module, such as thin film, will hit 50¢ per watt within four or five years. First Solar, the world’s largest maker of thin-film solar panels, has told investors that production costs will range between 52¢ and 63¢ per watt by 2014. When companies can produce solar photovoltaic modules for less than 50¢ per watt, solar energy will reach grid parity. Grid parity refers to the point at which the cost of solar electricity rivals that of traditional energy sources, such as coal, oil, or nuclear. The solar module price drop is driven by cheaper manufacturing costs, lower costs for such crucial raw materials as silicon, and rapidly improving technology. A recent study even claims solar grid parity is already here today, based on a legitimate levelized cost of energy (LCOE), calculated the cost in $/kwh. The value of LCOE is determined by the choice of discount rate, average system price, financing method, average system lifetime and degradation of energy generation over the lifetime. Figure 3 illustrates the effect of initial installed cost and energy output on the LCOE value. For a PV system with production cost at $0.5/W, the initial installed system cost will be $1.5-$2/W, after considering labor cost and module margin. If we assume energy output is 1500 kWh/kW/yr, which is reasonable in south west area in the U.S., the LCOE value in Figure 3 will fall in the range between $0.06/kWh and $0.08/kWh, the lower side of grid parity value for the U.S. residential electricity rates range.

Figure 3. LCOE contours in $/kWh for solar PV systems for energy output versus initial cost of the system for a zero interest loan, discount rate of 4.5%, degradation rate of 0.5%/yr and 30 year lifetime (Courtesy of Prof. Joshua Pearce at Queen’s University)

Based on the analysis above, it is reasonable to believe we can power the U.S. electric grid solely by solar PV, technically and economically. Thomas Edison had a great quote on solar energy: “We are like tenant farmers chopping down the fence around our house for fuel when we should be using Natures inexhaustible sources of energy — sun, wind and tide. … I’d put my money on the sun and solar energy. What a source of power! I hope we don’t have to wait until oil and coal run out before we tackle that.”


David Anthony was the Managing Director 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 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. David passed away in April 2012. 

Tao Zheng is a material scientist in advanced materials and cleantech industry. He held 20+ patents and patent applications, and published many peer-reviewed papers in scientific journals. Tao Zheng received his B.S. degree in polymer materials sciences from Tsinghua University in China, and a Ph.D. degree in chemical engineering from University of Cincinnati. He obtained his MBA degree with distinction in finance and strategy from New York University, Stern School of Business, where he was designated as “Stern Scholar” and received “Harold Price Entrepreneurship Award”. 

A Tale of Venture Capital Wanted

by H Lee Rust

Not long ago I had a visit from my friend Al B. Rich. I had seen Al a year ago just after he completed the concept design for an Internet B2B portal for buyers of eye glass hinges and screws. I had explained then that the Internet bubble had already burst costing most investors I know a good portion of their funds. Now Al was back to relate his experiences in The Money Search.

His first stop had been the bookstore which cheerfully supplied 16 volumes on how to write a business plan, attract venture capital, and live a life of idle wealth. I glanced out the window and noticed that Al had traded his Porsche Boxster for a ‘97 GEO with a little rust under the door. As we talked, I turned to the marketing section of his two hundred page “Private Placement Offering Memorandum and Disclaimer”, the disclaimers added at great expense by his lawyer. As usual, “Marketing” started with the astounding statistic that there are 250 million people in the U.S. Once this population had been distilled down to the eye glass wearers, companies that supply them, and the 10% market share Al’s B2B exchange would attract, his projected third year sales were a conservative $78.6 million with a 16% after tax margin. I could easily see how everyone was going to get rich; instead I think most of them got Rich.

He had sent the Plan to 36 venture capital firms and 12 SBIC’s listed in the free state development office directory of money sources. That was the only item Al got for free. Nine of the VC’s responded that they were putting his Plan in their files pending further market developments. Four SBIC’s passed it on to people they knew in the industry for evaluation. Fifty follow-up calls later, Al found that these experts passed the Plan on to more specialized experts until they found one who knew enough to kill the idea.

But one venture capitalist wanted to talk. Never mind that he was not on the list or that his address was the South Bronx, Al gladly spent $1,789 for a first class (he might sit next to an investor) ticket to New York. Maybe he should have wondered when the meeting was at O’Mally’s Italian Diner and Al picked up the check, but this guy controlled millions. Most of the conversation, however, concerned the New Yorker’s search for distressed Florida hotels that could be bought for no money down with 100% financing. Al couldn’t help him, and he couldn’t help Al.

However, it wasn’t a wasted trip; Al stopped in to see Monnie Dodge, an old friend who had done tax shelters in the ‘80’s. Dodge still couldn’t believe the game was over. He could package Al’s deal as an intellectual property partnership. Al would still own 100% of his company and just pay royalties to the partners. Converting the Business Plan into the Partnership Offering only cost $5,000 up front to Dodge plus twenty grand to the lawyers and a minor $7,500 for new financial projections. Oh, Al also remembered the $5,634 tax opinion and the $678 for FedEx delivery, the only mailing service those lawyers knew existed. If Dodge didn’t know the tax shelter partnership game was over, he found out on Al’s deal. He joined his brother-in-law’s Roto-Rooter franchise.

A friend of Al’s knew a guy in Miami who controlled South American money. Forget that Gonzales Sneed had blond hair and an office in a three floor walk-up, the deal sounded enticing. His client would lend Al $50 million; Al would deposit $43 million in a Cayman Island bank and pay for the balance at 4-3/4% over prime, repayable in six months with roll-over privileges and convertibility if his company succeed. That exercise only cost Al $5,000 to Sneed, a bargain when you compare it to the partnership deal.

There was, however, a new venture incubation center opening right near Al’s home office. Everything a budding company could need was provided including a state development officer for consultant. For only $4,000 a month Al got an office, copy machine, secretarial service, phone, and free coffee between ten and two. He virtually lived there before he discovered that the new venture incubation center had everything except a source of development capital, the one item a new venture needs before all others.

The development officer did, however, introduce Al to four venture capital clubs and got his Plan accepted for a high-tech enterprise forum where capitalists and entrepreneurs meet to exchange money for stock. Al made presentations to the clubs in front of accountants, deal packagers, other hopefuls, and office supply salesmen but no investors. The only difference at the enterprise forum was it took four days instead of four hours, and Al didn’t win the beauty contest.

At this point, he was getting desperate so he finally visited the High-Tech Pawnbroker and Financing Authority in Coral Gables. “Welcome”, said the man behind the counter, “so you want to start a high-tech company; I’ve got the money, but it ain’t cheap.”

“Right,” responded Al, “for just a million I’ll give you 10% and a seat on the board.”

“Just a minute, I’m the guy with the money; I’ll set the terms. I’ll give you $50,000 now for 40% and two board seats. If it works and I approve your business plan, you get another $100,000; I get another 30%, two more seats, and meanwhile I drive your Porsche. That’s a generous deal.”

“But that’s not enough,” said Al quietly. “How about my house; it’s gotta be worth $250,000.”

The man, who happened to be a real estate broker on the side, was quick to answer, “Hundred grand, my best offer, and how about your watch. I pay top dollar for Rolexes.”

Is there a better way? I tried to tell Al about market research and management teams, structuring the financing for the target investor, and using an expert’s knowledge of the capital markets. “But wait,” said Al, “I’ve scrapped the Internet portal idea and developed a new video game that plays automatically everytime your cell phone rings…”


H. Lee Rust has been a corporate finance consultant for the past 27 years helping small companies accelerate their growth with acquisitions and mergers and developing strategic plans to target and control that growth. He is the author of Let’s Buy a Company – How to Accelerate Growth Through Acquisition. Mr. Rust directs his entire corporate finance practice to those small companies who aren’t usually of interest to large investment banks, but uses big bank acquisition techniques tailored to his client base and their individual situations. He lives with his wife in Apopka, an Orlando, Florida suburb.


Where Be the Debt in Cleantech?

A large portion of the energy and ag sectors cleantech targets are strongly backed by liquid and well developed debt markets and lending practices.  But in cleantech, basic nuts and bolts debt has been scarce or weird.

  • We have cleantech companies, venture capitalists and pundits babbling self servingly about a “gap in the capital markets” that we need project finance to fill.  (Why because since it’s a bad deal for you it’s a great one for a lender?)
  • We have government loan guarantees in the US crowding out venture capital.
  • We have cheap loans in China creating accusations of “venture capital dumping” in cleantech causing analysts to ask how a US firm can compete.
  • We have project financing, which began with tax equity crowding out project debt in US.
  • We have debt structures behind FITs in Europe.

But where is the basic stuff?  Term debt, mezzanine debt, credit facilities?  For example I know of no significant mezzanine lenders with a focus in cleantech.

Is it scarce because it’s been crowded out?  Have the capital markets failed, despite being awash in cash and yield hungry?  Are lenders just too wary still post GTC – an argument I just don’t buy?  Do the companies and their venture capital sponsors not understand it? 

Perhaps the good lending deals aren’t so good.  Perhaps cashflows are too weak, and projects too early and risky.  Perhaps the policy risks are higher than we believe.

It’s not a simple question, but one worth exploring without jumping to the knee jerk reaction that the lending markets don’t get it and have failed.  They generally get risk very well.  And the fact that venture markets have such a high percentage of capital allocated to such capital intensive industries, yet the debt markets have yet to follow – suggests that risk is getting mispriced on at least one side of the equation.  And that spells danger and opportunity.

Brightsource, Fisker and Solyndra – Soul Crushingly Bad Numbers Make up 17% of Near Record 1Q11 Venture Investment

GreentechMedia and Cleantech Group this quarter reported near record levels of cleantech venture capital investment. Nearly $2.6 Billion in deals.  No, quantitative easing hasn’t made the dollar slide that much yet, the numbers are real – mainly as the solar and transport  deals vintage 2004-07 are getting deep into their capital intensive cycles.  But a near record $2.6 billion, so everybody’s happy, right?

Personally, a quick scan of Greentech Media’s summary of the top deals sent cold shivers up my spine. The deals may be getting done, but are we sure investors are making money?  Let’s take three of the big ones and the only ones where Greentech Media quoted valuation numbers:  BrightSource, Fisker, and Solyndra.  Between the three of them that’s 17% of the announced Q1 deal total by dollars.

BrightSource Energy (Oakland, Calif.) raised a $201 million Round E for its concentrated solar power (CSP) technology and deployment, bringing its total funding to more than $530 million in private equity. That funding is in addition to a federal loan guarantee of $1.3 billion. The investors include Alstom, a French power plant player, as well as the usual suspects — Vantage Point Venture Partners, Alstom, CalSTRS, DFJ, DBL Investors, Chevron Technology Ventures, and BP Technology Ventures, together with new investors with assistance from Advanced Equities.  VentureWire reports that the latest round values the company in excess of $700 million.

Brightsource has been a darling for a long, long time.  It is easily the farthest along, most experienced and most ambitious of the solar thermal developers.  So what about the numbers?   Well it’s announced 2.6 GigaWatts of PPAs with SoCal Edison and PG&E.  And they’ve started construction on the first phases of the 392 MW Ivanpah development in the Mojave desert.  That’s the good news.

Here’s the bad news: $700 mm pre-money valuation + $201 mm in round 5 means only a 1.7x TOTAL valuation for investors on the $530 mm that has gone in.  Or the previous round investors are now in aggregate up 2.1x on their money for a 7 year old company after the 5th equity round is in.  Not sure who, but a few of those rounds got rocked, and not in a good way, or else we just did four wonderfully exciting 15% uptick rounds in a row.  But it gets worse.

This first plant, the one they’re headed IPO on, still hasn’t come on line let alone finished phase I.  DOE has committed $1.37 Billion in debt to it, and NRG $300 mm in equity, with more equity capital needed.  So once completed, the venture investors after their meager 2.1x uptick in the first 7 years, are between 3-8 years in on their venture investments and now own part of a heavily leveraged state of the art $2 Bil+ highest cost in the market power plant throwing off revenues of say $125 mm/year.  Perhaps $140-$150 mm at the high end (estimates have varied on capacity factor and price).  Right sounds almost passable.  But now let’s build the cashflow statement.  Add in Brightsource’s estimated direct labor at $10-$15 mm/year ($400 mm over 30 years from their website), plus maintenance/repairs at 0.5% of assets per year of another $10 mm (and hope to God it can stay that low – that would be a tremendous success in and of itself), then add on debt service on $1.37 billion assuming an only available by government guarantee 30 year amortization at 5%, and we eat another $80-$90 mm per year.  So we’re at $100 to $120 mm in annual costs, and $125 to $140 mm in annual revenues.  And we haven’t included gas, water, or any contribution to overhead, which are all non trivial. And don’t forget we’re building this out in 3 phases over several years.

So after all that, if it works, and if it works well, those investors MAY see a net of $20 mm-$40 mm /year in cashflow from that plant by 2014/2015 or so that they can use to cover plant overhead, fuel bills, the remainder which is then split between them and NRG to cover corporate overhead and then pay taxes on; or they may be losing money every month.  But we’ll make it up in volume, right?


But there is hope:

#1  pray for lots and lots of ITC (30% on the $600 mm in non subsidized capital would shave almost a whole 10% off the total cost!)

#2 pray for an IPO (and think VeraSun, sell fast).

#3 pray for a utility who overpays for the development pipeline

Two good articles with some more history from Greentech Media here and here.


Fisker Automotive (Irvine, California), an electric vehicle maker, raised $150 million at a $600 million pre-money valuation (according to VentureWire), from New Enterprise Associates and Kleiner Perkins Caufield & Byers. The firm previously raised $350 million in VC, as well as a $528 million loan from the DOE.

Terrific, another high flyer.  Same analysis, this one’s younger, only 4 years old, and only on investment round 4, which is good, since they’ve now apparently got a total valuation of only 1.5x investors money, or 1.7x total uptick for the prior 3 rounds of  investors.  But since they’re only in so far for 1-4 years not 3-8 like in Brightsource, they’re ahead of the game ;).  But once they take down their $528 mm in DOE debt (which this last tranche was supposed to be the matching funds for), they’ll be at a soul crushing 110% Debt/Equity.  Oh, and did I mention that the real way to calculate Debt/Equity assumes equity is net book value?  And since with these startups we’re using contributed capital, once should think of our debt to equity ratios as very very very very artificially low – but I didn’t want to scare you too much.

But look on the bright side:

#1 If they really hit their 15,000 car per year at $95K/car and typical 5%-10% automotive operating margins, they could be at solidly into junk bond land at 4-7x debt to EBIT!  (Assuming of course you believe they build a $1.5 billion/year automotive company with no more cash).  Of course, they apparently have a whole 3,000 orders placed for the c. $95K car, and are currently planning closer to 1,000 shipments for year 1.  Compare that to the Nissan Leaf and Chevy Volt, which cost closer to $30K each.  Chevy has been planning on shipping 10,000 Volts in 2011, and 45,000 in 2012.  Nissan has targeted first year Leaf production at c. 20,000, and apparently had more than that many orders before they started shipping.

#2 pray for an IPO

#3 Buy Nissan stock


Solyndra (Fremont, California), a manufacturer of cylindrical solar PV systems for industrial and commercial rooftops, closed $75 million of a secured credit facility underwritten by existing investors. Solyndra had annual revenues exceeding $140 million in 2010 and has shipped almost 100 megawatts of panels for more than 1,000 installations in 20 countries, according to the CEO.

I’m certainly not the first or only one to cry over Solyndra.  And I’m pretty certain I won’t be the last.

Founded in 2005, with a cool billion in equity venture capital into it now, I believe they were on F series before the IPO was canceled last year? With this $75 mm Q1 deal (in secured debt, of course, their investors are learning) they’ve announced another $250 mm in shareholder loans since the IPO cancellation, and the early round investors have been already been pounded into crumbly little bits.  But it’s worse.

If I followed correctly, the original IPO was to have raised $300 mm, plus pulling down the $535 mm in DOE debt.  Here less than 9 months after that process canceled (could that be right?), they’ve now raised 80% of the cash the IPO was planning, except all in debt, and grown revenues nearly double since starting that process.  My only response to this was OMG.  So they’re at a 26% Debt/Equity Ratio for a money losing company, where debt exceeds revenues by a factor.  Pro Forma for the DOE loan fully drawn they’re at 44%, and something like 6x debt to revenue.  These are crushing numbers for healthy profitable companies.  It gets worse.

Go read their IPO prospectus.  Teasing out who invested how much in each round from each fund, and the size of those investors’ announced funds, plus the number of funds that “crossed-over” and did their follow-ons from a newer fund, and you quickly realize there are several venture funds that literally tapped out on Solyndra, likely either hitting house or contractual maximum commitments to a single deal.  The concentration risk in Solyndra is possibly enough to severely pound multiple fund managers, not just Solyndra.


Please somebody please tell me I’ve got the numbers all wrong.


How to know when a venture capitalist may really be your friend

Live from the Cleantech Forum, the largest investor conference for energy and environmental technologies, our take on how to tell if the venture capital investor you are talking to really may be your friend. Only partly tongue in cheek.

1) when you ask how things are going, he moans about all of his portfolio companies who are suffering; and doesn’t tell how all of them are getting traction.

2) when you ask whether they’re actually investing this year, he tells you no, their fund is full but he refers you to an investor who has just raised a fund (and doesn’t tell you, “oh yes; we’ve still got one or two deals left to do and we’re exploring raising our next fund” – VC code for I’m out of money.

3) when you ask for advice, he actually tells you the terms of the last couple of deals they’ve done.

4) in your due diligence, he shows you the business plan of one of his portfolio companies who competes with you – instead of handing yours to them.

5) he starts offering to meet at YOUR office and then picks up the tab for lunch.

6) he gets your kid an internship at one of his companies.

And, the final way you know the VC you are talking to may really be your friend:

7) he hands you his resume.

In Defense of the Venture Capital Herd Mentality

Every few conversations about venture capital, someone laments the “herd mentality” of the venture capital sector.  That is, the tendency of venture capital investors to invest in similar areas.  It’s a favorite topic of cleantech afficianados as well, both before cleantech got hot, and since then.  I’d like to ask though, are we sure the herd is a bad thing?

I’ve personally invested in and raised money for companies in hot areas, in passe sectors fallen well out of favor, and in sectors way before their time.  And while part of me would love if all investors always liked my deal, and all companies wanted to sell to me cheaply because no one else was interested, the other part respects that the herd mentality probably exists for very good reasons.  Maybe it’s just a form of better managing risk and creating value.

A couple of reasons why a herd of venture capitalists may not be bad:

  1. Supply chain / ecosystem development – It’s always rough for a new technology company to have to develop everything itself.  The herd or trend investing typically means if you are investing in or building a company in a hot area, there are more resources available to help.  More suppliers.  More partners.  More customers.  (Even more bankers and lawyers and accountants that don’t look at you funny when you use jargon.)  More innovation.  More collaboration.  More of all of them investing in parallel.  Better predictability in planning.  Better predictability in exits.
  2. Capital accumulation – The whole concept of the joint stock company helped advance the entire idea of capitalism, and the industrial revolution, buy creating a way to accumulate capital of an appropriate level at an appropriate pace for the next ventures.  Venture capital syndicates provide the same type of value, enabling pooling of resources, sharing of risk, and staging of capital and risk, in a predictable, long run, sustainable way.  Let’s give them credit.  The herd might be just a symptom of a sophisticated capital accumulation system working well, as opposed to a cause of a malaise.
  3. Scale matters / changing the world matters – Let’s assume part of the point here is for innovation to change the world and make it a better place (I’d like to believe that).  In cleantech for example, the underlying sectors are so massive that a few investors and a few companies are unlikely to make a dent before I retire.  They’re going to need billions, and build things that make skyscapers look small.  Maybe it takes a herd.  In this view, once an area of game changing innovation is identified, don’t we want to see it fly and scale? Like, now?  If we think we’ve got the next big thing in our sights, how about making sure the whole world focuses on it?  Oh wait, that would be the herd.
  4. De-risk future fund raisings / recruiting – One of the big risks for both investors and startups is recruiting top talent and raising the next round, ie not running out of money just when you’ve figured out what to do.  When was the last time you tried to do either of those in a sector that didn’t have dozens of funds hot after it?  That really sucks.  The herd mentality has a hugely positive impact on derisking a startup launch and derisking the staging of capital needs for both founders, investors, and customers.  Think of the valley of death concept- the other favorite complaint of all startups.  Good herd management means a bridge over the valley of death (albeit often a creaky one!)

In the cattle business, cows by themselves away from the herd are a double edged sword they mean 1) you’re about to have a calf, or 2) you’re about to have a problem.  I think we should remember herds aren’t all bad, they generally exist to protect and nurture.  That’s why lion prides out compete cheetahs, and why wildebeests survive the Serengetti migration, right?  Yes, that creates trade-offs, and there are plenty of approaches where the herd is the enemy of the innovation.  But don’t ding the herd out of hand.  Respect the power of the herd.

A Cleantech Energy Funding Adventure

by Jason Barkeloo, CEO of Pilus Energy

My business partners and I discovered an innovative way to unlock energy stored in carbon compounds. After a little back-slapping and “atta-boys,” we sought to raise the capital to launch a pilot. This led to another discovery; the destructive impact the economic crisis is having upon the capital markets. This means innovation, which requires capital, does not have the fast movement opportunity to market that capital provides.

It is a long way from the days when a business plan with a dot com name could attract large amounts of capital. Many funders are accustomed to the software funding model. It is very different from funding a cleantech energy company. Cleantech energy producing firms may have software, but they may also have hardware, which requires manufacturing. Most funders do not like manufacturing. They prefer software. The funding requirements for energy production are substantially different because they require more time and capital. More time means the return on investment (ROI) will take longer. Consequently, their capital will be tied up longer. More time and capital mean more risk. Investors seek to reduce or avoid risk.

Cleantech innovations for distributed production remind me of the evolution from centralized servers and node computing models to the distributed Internet. As personal computer functionality increased, the computing power of the server was distributed to the edge of the network. Similarly, energy production will distribute as new innovative technologies develop. This is an opportunity for investors. If you did not recognize the transition from centralized computing to distributed computing, this is the opportunity to realize the distribution of energy production.

Before we get to a distributed-centric model, we will have a hybrid model. This will be an intermediate position before distributed becomes the norm.

Funding Structure Changes: The Vacuum
Generally speaking, Limited Partners (LPs) are significantly disappointed with the returns their venture capitalist (VC) money managers have provided. As a result, less capital is flowing into VCs. The vacancies along Sand Hill Lane in Menlo Park, CA attest to this. The seeming capital availability growth in China also provides insight into the changing VC landscape in America.

The population of VCs that remain is smaller. As one of my entrepreneurial colleagues told me last week, “It is one thing to kiss a lot of frogs to find a funding prince, but it’s a whole lot harder finding them when they are vanishing.” It struck me that amphibians in the natural world are also becoming extinct. Now, before we try to get VCs on the Endangered Species list, it is important to mention that their industry is evolving. In the interim though, there is a vacuum.

Our firm attracted enough pre-Seed funding to find and protect an important discovery. The amount of pre-Seed funding we needed for our cleantech discovery was significantly more than a friends-and-family round a software firm would raise. However, when our Company scales, our visionary investors will be rewarded handsomely, as well they should be.

The Company’s next milestone is revenues from a pilot. We must do this with our breakthrough technology as a minimum viable product. We will need more funding than most traditional angels will risk. If we could find a VC that would partner with a pre-revenue cleantech energy producing firm, the amount needed would be too low. As we are pre-revenue, going straight to a Series A with a VC is about as probable as getting Republicans and Democrats to [fill in the blank].

The funny thing is, governments are starting to fill the due diligence and risk reduction activities that angels need. No experienced angel is going to make a significant investment if there is no VC to fund the next level of a Company’s growth. Therefore, angels are starting to look to government for the nod and wink as to who are the winners and losers. I do not make a habit of saying things about an endorser’s expertise to conduct endorsement activities. Suffice it for me, if an angel is comfortable, then I am comfortable.

As part of the evolution of the capital landscape, I see an enhanced role for corporate joint ventures (JV). This may require a bit more “corporate” flexibility of the entrepreneur than s/he is accustomed. However, the corporation likely has resources and expertise than can assist the company’s growth. Of course the corporation gets the first right of refusal for licensing, product distribution, marketing, sales, and even liquidity. Since I am presently in such discussions it is best to shut my thoughts (aka, my mouth).

Back to the governmental funding role for a moment. Tax-payer funded programs like the small business innovative research program (SBIR), and similar programs, can be a very slow road to growth. We are fortunate. Our research team is well versed in grant writing. Surviving in academia requires the ability to pursue and manage grants. We were luckier still to get a top-notch writer who can do science, technical writing, and journal authorship. As a grant-writing company we accept, begrudgingly, that our deployment timeline is painfully lengthened by this funding strategy. We estimate an added twelve to eighteen months over angel funding to get a pilot completed. Speed is critical to capture markets. Hopefully, our competitors are experiencing the same slog.

The other downside is that grant requests for proposals (RFPs) serve as the starting point for grants. Those RFPs are usually not issued for breakthrough technologies. It is a breakthrough because no one else thought of it; hence no RFPs are issued in advance. Being ahead with innovation can slow down the startup even further. Securing a grant for an innovation will require political help expanding unsolicited RFP Programs and reducing the timelines.

The danger with this phase of capital market evolution is the vacuum left by vanishing VCs and angels who feed deals to VCs. Filling the vacuum requires time and experience. The time lost filling the vacuum results in less innovation to help grow the economy. Innovation keeps our economy healthy (or regain its health). Innovation begins with education and free markets. Funding innovation should not have government competing against the market. Perhaps government can participate in the innovation market?

As it turns out, the government is already participating in the market. Starting with innovation incubators like the Department of Defense (DoD) Defense Advanced Research Projects Agency (DARPA) and its two year old Department of Energy (DoE) twin, the Advanced Research Projects Agency for Energy (ARPA-E), to development stage programs like SBIR, to its own VCs like In-Q-Tel. What is needed now is to reduce the timelines for awards. Providing ROI mechanisms for tax payers beyond the promise of jobs may help streamline the process.

Additionally, government can encourage large firms sitting on capital to invest in startup innovations. Startup entrepreneurs can also encourage corporations to invest.

The longer it takes to fill the funding vacuum, the further American innovation will lag. Capital does not respect human borders. It will flow where it can grow. Entrepreneurs have a responsibility to their investors to follow the money. Therefore, innovation will follow the money too.

America is at risk of losing its cleantech innovation advantage. While America waits for the void of innovation funders to be filled, other countries are moving forward. American Federal and State governments might consider fast-tracking their cleantech funding programs. The United States Patent Office (USPTO) offers a fast-track cleantech energy patenting process. However, most of us understand the dangers associated with a fast-tracked patent when it comes to defending it, particularly for re-examination. However, the USPTO is commended for taking a leadership role in trying to maintain the innovation pipeline. The thinking is that a company with an issued patent is more fundable than one without.

Lastly, the American governments might also encourage established firms to take risks with innovative startups. If existing corporations can fill the funding vacuum, innovations might come to market more quickly. Such a strategy might also rapidly increase American economic health. How do you think Federal and State governments can incentivize cash-rich corporations to take investment partnership risks with startups?

Cleantech Blog Power 5 – Top Investors in Cleantech

It’s been a long year and a half or so since we published our last Cleantech Blog Power 5 on the top investors in cleantech.  Time for round two.

As usual the criteria for inclusion.

  • Investor made a significant contribution to the cleantech investment sector
  • More smart looking investments than stupid looking investments
  • On balance, I’d like to have your portfolio.
  • I actually might like you.

And the middle two criteria have some wiggle room.

So our Power 5 this year:

  1. CMEA Capital – A long time player, with a slice of venture capital in last year’s top cleantech IPO, A123, one of this year’s top cleantech IPOs, Codexis, and this decade’s biggest cleantech gamble, Solyndra, real hard to leave them off the list.  They come in at number 1.  Hopefully Solyndra doesn’t take back all those profits when it’s solar cattle-guard finally gets caught out.
  2. CalPERS – Despite somewhat skeptical on the performance to date, CalPERS has certainly played its part, and really anchored the explosion of venture money in cleantech.  And it continues to support it with another $500 mm commitment this fall.
  3. Bayard Capital – Makes the list for 1 deal, that is all their deals in one company.  This is the Australian firm who turned their capital fund into Landis + Gyr through a series of acquisitions before anyone in the US had heard of smart grid.
  4. Us – I mean the US DOE – Single-handedly carrying the the entire cleantech venture sector on its back?  Wow.
  5. Foundation Capital – Makes it because despite a couple of deals in their portfolio that make me cringe, they’ve gotten a lot of kudos in California for sticking it out with Silver Spring in the early days, and with one of the better cleantech exits behind them in EnerNOC and multiple bets in both solar power development and financing, and smart grid, I have to like the strategy.

And the 5 for the Royal Questioner to Question:

  1. Advanced Equities – If I need to explain why, you shouldn’t be in investing.  Do your google search.  I’m not even going to give you some links to point to this time.
  2. Every single cellulosic biofuels investor – Hey you guys, start reading our blog and stop playing the “watch my magically shrinking cellulosic biofuels forecast and my oh so please don’t notice the bait and switch to bio-anything but fuels business plan”.  Let alone the, “we can be cheaper than gasoline” or “this process has solved the oh so tricky problems and it’s just a little engineering scale-up”.  And for the record, we think the Cello Energy debacle is hilarious.
  3. Kleiner Perkins – EEStor, Bloom Energy, I turn green 1/3rd of the way down their list.  They’re the originators of the fundamentally flawed “stealth in cleantech investing strategy.”  And they make me look humble (which is hard to do).  Even making a few dollars in Amyris, doesn’t come close to making it up.  Of course, maybe the latest news articles are right, and they’re pulling out of cleantech?
  4. The American Taxpayer/ errrrr, I mean US Department of Energy – Hmmmmmmh.  Who’s the genius who signed off on massive low interest loan guarantees to Solyndra, Tesla, Beacon, and friends?  But just wait until the conditional commitments in big project dollars get spent, I’m sure that will fix it.  But for the record, it’s not generally a good sign when the government brags about out investing the private sector.  How about you guys invest my share of the total in a real chief credit officer.  I’d apply for the job, but only if you term it chief workout officer.
  5. Ok, we’re stopping, now, my stomach is still churning after number 4.

Note to all:  This list is waaaaaaaaaaaaaaaaaaaay too US centric.  I’m feeling very parochial.  More international suggestions please?

Predictions for cleantech in 2011

It’s December, and time for an annual reading of the green [tech industry] tea leaves. What will the new year have in store for cleantech?

From our standpoint at Kachan & Co., 2011 could be a strong year for the global clean technology sector. Seemingly, the markets have been correcting themselves in 2010; valuations are returning to rational P/E multiples, price signals are emerging again after massive government investment in cleantech, early stage deals seem to be returning, corporate investment is flowing, new funds are being announced everywhere. Outside the U.S., which is having an increasingly hard time supporting the sector, cleantech is alive and well, even in exits… albeit mostly in China.

While we’re calling a positive 2011 for the industry, the largest risk, to cleantech and every sector in 2011, will continue to be the spectre of another global economic slide: another massive economic “stair-step” downwards prompted by the continued and growing mismatch between global energy supply and demand, food supply and demand, ever-increasing debt and trade deficits, currency revaluation or political/military developments. Any one, or combination of these, could result in another 2008-scale financial crisis, or worse.

Yet, if none of the above make themselves felt, 2011 could be a solid year for worldwide cleantech. Here’s why, in our analysis.

Sustained worldwide VC investment in cleantech in 2011
Predictions of cleantech’s death, or bubble, are exaggerated, we believe. Kleiner Perkins may be looking to scale back its cleantech investing. But that doesn’t mean cleantech companies won’t be getting funded, or that the sector is on the downside of a bubble, as some have called it. The big drivers of cleantech remain: resource scarcity and the drive for greater efficiencies, the desire for energy independence, and (dare we say it?) climate change—the latter of which has taken a back seat of late. We predict these drivers—particularly the real or perceived scarcity around oil, rare earth elements and other commodities—will be felt even more acutely in 2011, especially as the Chinese middle class expands, further cementing the demand for and the market validity of clean technologies.

Much media attention was given to a downturn in cleantech investing in the third quarter of this year, in particular North America’s share of it. But doomsayers missed that there was still a fourth quarter in 2010 to report. And that worldwide, cleantech investment hasn’t fared that poorly in 2010. Indeed, as tracked below, 2010 venture investment in cleantech, even simply up to and including 3Q10, has already exceeded that of all of 2009.

Cleantech Investment 2010 YTD

Venture investment in cleantech in 2010, up to and including 3Q10, already exceeded that of all of 2009. The full 2010 total will be at least $1B higher when fully tallied and reported in 2011. That'll make it the second best year on record—hardly a bubble that's burst. Source: Cleantech Group

We believe venture investors will continue to chase opportunities in cleantech in 2011, investing robust amounts from record-level funds raised recently around the planet. Make no mistake: there’s plenty of capital being allocated for cleantech in 2011. Another $500 million has just been announced from the California Public Employees Retirement System (CalPERS). Hony Capital in China is closing in on a new 10 billion RMB ($1.5 billion) fund, and there’s a new €9b ($12.4b) NER300 fund for cleantech in the EU. And that’s just three of dozens announced in the last month.

Yes, there are concerns about exits and long time horizons in cleantech, but 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.

Venture capital will continue to cede importance to corporate and non-institutional capital
As important as venture numbers are, they are no longer the single barometer of the state of worldwide cleantech investment. They don’t factor in most angel, project finance, private equity, sovereign and other sources of capital that are now making an impact in cleantech worldwide.

One of the most important sources to watch is corporate venture funding. Look for large companies to invest billions in cleantech in 2011. In recent weeks, Suez Environnement, affiliated with GDF Suez, created a venture capital fund called Blue Orange to invest primarily in waste management. GE invested $200 million+ in a handful of cleantech companies under the auspices of a competition. Corporations continue to form corporate venturing arms, driven not just by returns, but by associated corporate social responsibility (CSR) benefits.

Also anticipate an increase in corporate-led cleantech M&A activity in 2011, which reached record levels in 2010. Expect cash-laden firms to pick off even more leading technologies and concepts, as in recent transactions like Constellation buying CPower, and Sharp’s purchase of Recurrent Energy.

A return to early stage venture investments
We predict a return to early stage venture capital investing in cleantech in 2011. Already, in the last few months of 2010, data shows the pendulum has begun to swing back to early stage deals. In the third quarter of 2010, 46 percent of all cleantech deals worldwide were early stage deals, according to latest data.

Why? Investors are no longer piggybacking on U.S. government grants and loan guarantees, which had skewed investment into more mature cleantech companies. Government stimulus funds earmarked for cleantech by the U.S. and other countries globally are now largely allocated. In 2011, venture investment in cleantech will return to what it does best: seeking out emerging early stage technologies and teams that promise good multiples, and will be less influenced by governments putting large amounts of capital to work themselves. Funds are still being raised. And those funds will need to be invested.

Energy efficiency emerges as the clear rock star of cleantech
Yes, we have a broader definition of energy efficiency than others (see our cleantech taxonomy here). But efficiency—including smart grid, where we expect continued massive investment and corporate activity—really just got underway in 2010, so expect big things in 2011. To wit: GE’s huge announcements, investments and acquisitions in the third quarter of 2010. And just over a month ago, Russia unveiled a massive energy efficiency plan, given that the country apparently wastes as much energy in a year as the French economy consumes.

There were some calendar quarters in 2010 where more venture investment went into solar than efficiency, but in 2011, look for efficiency to become the clear dominant investment theme as investors continue to seek less capital intensive efficiency plays and eschew solar, where company valuations have been swinging wildly in 2010 from continued supply/demand and international subsidy havoc.

Anticipate a Darwinian winnowing of efficiency companies in 2011—partially because of concerns about differentiation, and partly because of the long sales cycles of utilities that are only starting to become appreciated to some startups. There will be failures in 2011 in certain advanced metering companies and other firms engaged in death-by-trials with utilities, and some winners among favorite brands like OPower, EnergyHub, Tendril, Silver Spring, eMeter, AlertMe, Energate. The deep-pocketed stand the best chance of surviving.

Biofuel investment could reach former highs
If economic growth continues in 2011, oil prices will rise, making renewables more cost competitive. And after several years of relatively inexpensive oil, we predict an upswing in biofuels investment in 2011, specifically, that will catch some unaware; investors still smarting from crop-based ethanol and biodiesel, cellulosic ethanol and algal oil disappointments may not see adrop-in biofuels revolution at hand.

The excitement will not be over cellulosic ethanol, which we saw disappear from headlines in 2010. Cellulosic ethanol may even disappear from investors’ portfolios altogether in 2011, if the U.S. EPA lowers its cellulosic ethanol mandates yet again. We believe the recent jump in the share price of Amyris (NASDAQ:AMRS) is representative of a larger awakening to the transportation, storage, energy balance and fungibility benefits of drop-in biofuels, i.e. chemically similar diesel, jet fuel, butanol, bio natural gas and others.

In biofuels in 2011, as elsewhere in cleantech, look for biology to trump chemistry. And for the likes of Amyris, Codexis (NADAQ:CDXS) and Gevo to make more commercial progress than cellulosic companies Range Fuels, Coskata and Mascoma.

Nuclear surprises, but not in U.S.
Expect to hear about more and more nuclear innovation in 2011, as the industry begins cautiously testing new science after decades of relative inactivity. However, don’t expect the U.S. to lead in either the science, the trials or the adoption: watch Asia, Europe and Canada as centers of innovation and where trials of new nuclear tech will be performed in 2011. Companies to watch include Thorenco (new reactor designs based on thorium fuel), Thorium One (thorium fuel for existing reactors, trials scheduled to start in existing reactors in 2011), Kurion (glass encasing of nuclear waste), General Fusion and others. Nuclear development will remain stalled in the U.S. in 2011 in regulatory and public opinion purgatory while the rest of the world passes it by.

Recycling and mining will attract more investment
Rising commodity prices have been quietly making the economics of recycling and recovery of trace materials more commercially viable. Silver almost tripled in price in 2010. Gold doubled. Companies that recover and reprocess materials, such as scrap metal, used lithium batteries or mining tailings, will be companies to watch in 2011. BacTech Mining (CVE:BM), Simbol Materials, Buss & Buss Spezialmetalle, DeMetai Technologies, MBA Polymers and GFL Waste & Recycling (which just got a$100m private equity infusion) are examples of companies that could benefit from commodity prices that will continue to rise in 2011. That’s barring a macro-economic downturn that, like everything else, whacks the price of commodities (gold bugs note: metals are not immune to market gyrations! Gold fell substantially in the 2008 global downturn).

Natural gas emerges to threaten solar and wind for utility renewable power generation
Renewable natural gas? Today it’s fossil-based. But what if chemically identical natural gas (not just messy syngas) could be made inexpensively from practically free feedstock? Such gas, if indistinguishable from petro-based natural gas, could be transported in existing pipelines and sold at a premium to industrial customers like power utilities anxious for a cheaper renewable source than solar and wind. And, if burned in existing IGCC / NGCC plants, such power could be baseload 24/7 renewable energy. Look for scientific innovation in natural gas in 2011, increased political support for it as a transitional “cleaner” fuel, a folding in of it into renewable energy standards and general cleantech industry buzz over it being an important new wagon to hitch to.

China becomes the most important market for cleantech: if you’re not selling in China, you won’t matter
Expect the leading cleantech IPOs of 2011 to continue to be on the Shenzhen and Hong Kong exchanges, as they were in 2010. Central government support of Chinese clean technology companies on Chinese exchanges will continue to give the country’s solar, wind and other vendors advantage in access to capital, growth and, therefore, ability to scale and conquer worldwide.

Kachan & Co. made a case this past August that China had assumed the worldwide leadership position as a cleantech market and supplier. This week, Ernst and Young asserted the same thing. So it’s time to underscore it again: if you’re not selling into China in 2011, you’re missing the biggest market for your clean technology product or service.

in 2011, the leadership of cleantech vendors and service providers will be determined by the extent of their traction in China. It’s the largest and the fastest growing market for clean technologies, and to ignore it out of concern for intellectual property or other costs of doing business will be to watch most of one’s addressable worldwide market disappear to competitors that willshoulder the costs of business in China.

We’d welcome rhetoric in 2011 being less about how countries could or should compete with China’s cleantech leadership, and more focus on how to simply get on with capitalizing on the commercial opportunity that Chinese growth represents. While there’s still a worldwide financial system to profit from.

[Reposted by permission from]

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. Its 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

New Models For Clean Technology Incubation and Commercialization

By Sanford Selman

We live in an age of intense global competition for more sustainable ways of providing food, water, energy and transportation to a growing population against a backdrop of diminishing and deteriorating natural resources. And thus, the race is on to create the next generation of technologies, business models and companies to provide these essential services and commodities. At stake are new, high quality jobs, export earnings, reduced dependence on imported energy, improved quality of life and host of other positive impacts. Investing in R&D would seem a no-brainer.

And invest we do. According to the National Science Foundation, public and private sector R&D investment in the US was $369 billion in 2008 – over twice that of Japan (No. 2 at $148 billion) and over 3.5 times that of China (No. 3 at $102 billion).

According to the National Business Incubator Association, the US has over 1100 business incubators as compared to roughly half that number in China. In cleantech, however, the US is losing the race to China in important areas such as solar photovoltaics and batteries where the technology traces its roots to the US and Europe.

Why, then, does the US, with its much larger pool of venture capital funds, lag in moving clean technology from lab to market, especially compared to a relative latecomer to cleantech such as China? Both countries have first rate university systems and enjoy a culture of entrepreneurship. But there are stark differences which give China a distinct edge, especially in cleantech, including:

  • A more stable policy environment that unambiguously supports cleaner forms of energy supply and energy use.
  • More diffuse boundaries between government, academia and industry which allows for greater pooling of resources – commercial, financial and technical.
  • Lower costs of de-risking technology, due to the lower cost of highly qualified technical talent, and manufacturing.
  • Huge, state-controlled infrastructure markets (e.g. power generation, water/wastewater, hydrocarbons, etc.) where the playing field can be tilted in favor of domestic suppliers.

In today’s highly disrupted capital market, early-stage venture investment has dropped precipitously and this is especially true for cleantech – a sector which has struggled to demonstrate strong, broad-based financial returns. Additionally, scaling and deploying clean technologies often involves significant capital investment while venture funds are trying to do just the opposite – invest as little as possible to get to positive cash flow. This focus on “capital efficiency” also means early-stage companies are out of favor. Hence, the gap between the early-stage cleantech companies found in incubators and what venture investors are buying has widened while countries such as China plow ahead with their national priorities.

A new incubator model

One of the main roles of an incubator is to prepare their clients for presentation to outside investors and to help facilitate those introductions. But their clients often have little progress to show in technology scale-up or customer acquisition. Frequently, their business model has not been vetted, key members of the management team are not on board and a helpful, engaged Board is not in place. Another approach is needed to close the widening gap between incubator clients and the venture community.

By acting more like a seed-stage fund itself, an incubator can add the value required to make its clients marketable to outside investors. In this model, the incubator’s advisory board must be sufficiently qualified and engaged to undertake preliminary vetting of applicants so that only the most technically and commercially promising businesses are admitted. Once admitted, the incubator should “smother” the client with resources, including missing commercial and technical talent, access to strategic partners, access to prospective customers and the seed-stage capital necessary to pull the plan together. A more resource-intensive approach focused on fewer clients stands a better chance of achieving the longer-term goal of graduating more successful businesses out of the incubator, creating jobs and enhancing the opportunity for the seed capital to earn a return.

A new strategic partner engagement model
Early-stage companies need to conserve cash by leveraging relationships with strategic partners and suppliers who can help grow their businesses. Risk sharing or the more appealing term, “gain sharing”, is becoming more popular. Two examples are worth noting.

Autodesk, a leading global vendor of engineering and design software, launched the Autodesk Clean Tech Partner Program ( to support early-stage clean technology companies by providing up to $150,000 worth of software for a nominal fee. Autodesk’s long-term objective is to build brand loyalty by giving participants with design tools they wouldn’t otherwise be able to afford, and thus help them become successful more rapidly.

PLUSHnyc ( is a Manhattan-based post production audio/video company whose clients include some the biggest names in media, advertising and retailing. PLUSHnyc offers their excess design and production capacity to early-stage, venture-backed companies at a nominal rate and, in return, receives equity in proportion to the market value of their services. Similar to Autodesk, PLUSHnyc affords access to world class services their clients could not otherwise afford.

In order to maximize the effectiveness of US R&D spending, innovative business models must be called upon to more effectively that tap the vast talents and resources of the private sector and accelerate the commercialization of US-developed technology by American companies.

Sanford J. Selman is Managing Director of Asia West LLC in Oyster Bay, NY. Mr. Selman founded and managed the Asia West Environment Fund, an early-stage cleantech venture fund that invested in North America and Europe with proprietary technologies that are commercially and environmentally relevant to China and/or India. Mr. Selman has 30 years of experience developing and financing of energy and environmental infrastructure and technology globally. Mr. Selman holds a BS in Mechanical Engineering (with Distinction) from Worcester Polytechnic Institute and a MBA in Finance and Investments from The George Washington University.

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.

The Carbon Industry Is the Unsung Hero in the Cleantech M&A

Voices from the cleantech venture sector whine at least once a quarter about lack of M&A activity.  In carbon that hasn’t been the case this year (though only a handful of US venture capitalists could stomach that “obscene” foreign policy risk in carbon, and so largely non traditional investors made the bucks).  Despite the carbon sector getting hammered somewhere between 50-80% from its highs, depending on what metric you use, once prices fell, smart money started buying.  So despite the massive uncertainty hanging over the sector, the last year has seen upwards of $1.5 Bil in M&A. 

Of course, the whiners will complain that it’s all policy driven and European and that’s not our market.  And I’d respond, yes, and sort of.  Of course it’s policy driven you nimwit – energy, environment and cleantech is always policy driven.  And the cleantech market is global whether you like it or not.  So what exactly makes EU policy risk more risky than handicapping the California PUC?  Silicon Valley itself is close to irrevelant in cleantech, except for the pools of venture capital collected there.  Get global people.

Or the whiners would complain you can’t spend a billion dollars to see exits at a $1.5 Billion.  And I’d respond, yes, I can do math, too, if you had to spend a billion dollars maybe it wasn’t so good an idea.  Maybe you should follow my Rules in Cleantech Investing.  And then I’d add, and these carbon M&A exits are at bargain basement prices, down two thirds to 80% in some cases from their public market highs, and are by and large a hell of a lot better than the M&A exits in other sectors.  To which the whiners would reply, yes but some of those highs were in damn foreign currencies, or worse AIM listed stocks.  And we don’t understand AIM because it’s foreign therefore it must not be real, and since it has less liquidity than a company 10x that size on Nasdaq, we should hate it (not withstanding that AIM stocks liquidity is like 500 hundred bejillion times the liquidity as a private venture backed company).  To which I’d respond right, but if the check clears, and it’s measured in 7 or 8 or 9 figures, or real Tier 1 buyers buy companies listed on AIM, maybe it IS real after all.  But then I never went to Stanford, Berkeley, MBA school, or even a private university, so what would I know. 😉

Anyway, while that may explain the unsung part for carbon M&A, the reality of who bought what is pretty interesting.  A few threads to chew on:
  • Primo assets are getting sold, often first movers founded years before the carbon boom
  • At bargain basement prices
  • Some real money is getting made and a few founders can retire
  • It’s tier one acquirors doing the buying
  • It’s very global
  • It’s not very technology focused
A few of the key deals, which just don’t seem to stop coming:

The latest announcement is the NYSE tying up a JV merging its carbon trading assets with voluntary markets registry operator APX. APX is a holdover startup from California’s botched power deregulation days, which got into RECs, and later carbon now running most of the major voluntary carbon registries.  Most recent investors included Goldman Sachs.

Probably at least in partial reaction to earlier to the announcement earlier this year of the $600 mm acquisition of Climate Exchange Plc by Intercontinental Exchange (NYSE: ICE). 

In May Barclays announced the acquisition of Tricorona, one of the larger independent CDM carbon developers (and one of our pilots) for 100 mm pounds.

Ostensibly to match JP Morgan’s acquisition of EcoSecurities for $200 mm late last year.  Mission Point was one of the original backers here.
And this last quarter French energy giant EDF announced it was acquiring Chinese CDM developer Energy Systems International.  EDF was the losing bidder to JP Morgan for EcoSecurities.  A 37.5 mm ton CER consolation prize.

And in the media and data analytics end of carbon Reuters acquired long time front runner Point Carbon for a rumored nearly US$200 mm, ostensibly to match the acquisition of Point Carbon’s largest competitor, New Energy Finance by Bloomberg.  Oak Investments is the rumored big investor beneficiary.

Numerous smaller deals have been done over the last two years, as well.  SAP acquiring Clear Standards and IHS acquiring ESS in the software space, energy giant AES acquiring the bankrupt assets of early CDM leader AgCert, and JP Morgan’s 2007 acquisition of Climate Care, and in consulting, Point Carbon’s acquisition of Perspectives GmbH, Lloyd’s Register acquiring Ryerson Master & Associates, et al.

Of note, Reuters, Barclays, NYSE and ICE announced their deals in 2010 after the Copenhagen political debacle.

As I said, carbon appears to be the unsung M&A hero in cleantech markets.  Not bad for a sector virtually ignored or written off by US VCs, pummeled by the winds of global policy fortune, and barely understood by a soul in the American media.

Neal Dikeman is the Chairman and cofounder of Carbonflow, cofounder of Zenergy Power (AIM: ZEN) and a founding partner of cleantech merchant bank Jane Capital Partners.  He is chief blogger of

Kleiner Perkins on Biomass

by Richard T. Stuebi

I was recently forwarded an article by Amol Desphande, partner of the renowned venture capital firm Kleiner Perkins, entitled “Investing in the Biomass Industry”, which appeared in the September 2009 issue of BioCycle magazine.

No doubt seeking to contrast Kleiner Perkins from its peers, Deshpande questions the prudence of investing in large-scale biorefining operations — whether first- or second-generation — and instead characterizes the attributes of biomass technologies that make for more appealing investment candidates:

  • Scales down and can operate in a distributed manner
  • Produces a product that is supply chain compatible (e.g., grid connection, pipeline access points)
  • Uses a feedstock that already has a supply chain
  • Has a beneficial reuse and is free of harmful contaminants or odors
  • Uses available feedstocks of low value and that require minimal pretreatment
  • Costs less than $5 million to demonstrate at semi-commercial scale
  • Consumes minimal water and parasitic energy
  • Has one step for its primary energy conversion (i.e., one primary unit operation, like an anaerobic digester)
  • Takes less than six months to build a commercial plan from “shovel in ground”

Apparently, Kleiner Perkins has seen a number of venture opportunities possessing most of the above characteristics, having invested in Amyris, Harvest, Mascoma, and Sundrop Fuels.

Deshpande closes passionately with the following call to action:

“This is the greatest time in history for entepreneurs in the biomass industry. Rising energy prices, public awareness, technology breakthroughs and carbon credits will make the next 10 years a great time to innovate…Distributed biomass power technologies are available and should be deployed in the short-term. Over the long-term, we probably need to change the way we grow our food. These changes present opportunities for entrepreneurs willing to take the challenge to innovate and transform biomass in a more efficient way.”

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.

The Cleantech LP Conundrum

Cleantech limited partners have a big conundrum. It’s called unrealized gains.

After years of struggling, cleantech investors are now quietly but optimistically beginning to talk about impressive gains in their funds. Unfortunately, the elephant behind them that LPs are beginning to talk about is the prevalence of massive unrealized gains from the behemoth solar, biofuels and automotive startups in the portfolios.

The question is simple, and much debated. Are the unrealized gains real, or unreal?

The naysayer argument runs something like this:

  • Many of the companies are pre-revenue, certainly pre-profit, and tons of them are scary early stage when it comes to actually proving the technology OR the business at scale.
  • There’s still not much in the way of IPO market or M&A market backing up the levels of these valuations (one vicious example is the massive downround valuation smash A123 took in its last round, once you dig into the the prospectus).
  • The energy business doesn’t tend to pay huge tech multiples for exits, and even business successes may get crushed (think Aventine and Verasun at the end of the day).
  • The amount of capital many of the key companies in the portfolios will still need, and the limited GP funds raised in the last couple of quarters, may put a lot of downward pressure on price for the more capital intensive deals.
  • There is a sneaking suspicion among some LPs that if you looked at it from a concentration risk perspective, a quite small web of large deals has been bid up among venture capitalists, causing a bit of a valuation bubble in the portfolios.

The cleantech is finally coming into its own argument, runs like this:

  • The combo of policies around the world is now a heavyweight, from Stimulus to FIT to Climate Change to PTC et al, and those dollars are starting to tell.
  • The consumer and business shift to things green, and the rebounce in oil prices (though not gas or electricity) is underpinning the future growth to justify the valuations.
  • The valuations are based off of big successes like First Solar’s IPO, and are legitimately derived.
  • Some of the early big deals in key areas like thin film solar and automotive are finally beginning to deliver production, and will walk the walk, deserving the kinds of multiples that First Solar got, and underpinning valuations in an IPO market.
  • GPs are increasingly raising later stage funds, and that money has got to go somewhere.

Which argument you buy on the subject may frankly make or break you as an investor. If you believe the naysayers, and a couple of these deals realize out and make half a dozen or a dozen funds, you may be on the short end of the fundraising / returns bragging rights stick for years. If they don’t come through, anyone not in the “Big Bad Bets” (taking that “Bad” either as a pejorative or as BadA**, depending on your perspective), may look like a braniac. And regardless, if some of these big returns do realize, LPs will have plenty to debate about the “quality” of those earnings. Were they good, or just lucky? And how do you tell?

Neal Dikeman is a partner at Jane Capital Partners, and has cofounded, run, invested in, or served as a director of multiple startups in cleantech and technology, and has advised a number of large energy companies on venture investing. He is Chairman of Carbonflow and, and a Texas Aggie.

The Rules in Cleantech

I’ve now been asked enough times, that at the risk of destroying what little edge Jane Capital may have in cleantech, I finally got around to blogging our “Rules” in cleantech investing and business in general. Hopefully it will stimulate some good debate.

One of the things that makes cleantech different from other investing areas, is the best practice rules are the opposite of what the best investors have grown up with. Maybe that’s because cleantech IS energy and energy IS different.

Here is our version of the Rules:

  1. Energy is slow and big – Energy technology R&D and commercialization time frames are longer and costs higher
  2. Technology is “cheap”, the scale up is where all the risk is
  3. There is no disruptive technology in energy, only disruptive policies and resource shocks that make certain technologies look disruptive after the fact – aka, “it’s the policies (and subsidies), stupid”
  4. At scale, there is no capital efficient investing in energy
  5. Commodity prices and policy tend to be more important variables than technology and management
  6. Energy is at heart a resource play, the price you pay matters more than what you do with the resource

As a result we’ve worked out a strategic playbook:

  1. Look for mature technologies – if it’s not 10 year old technology, don’t touch it.
    Limit scale up risk and look for technology with few dependencies for scale
  2. Embrace policy – solid policy frameworks are much better bets than great technologies. In fact, most of the serious money in cleantech has been made by being in the right place when the policies or subsidies hit critical mass, not by developing technologies after the fact.
  3. Expect lower exit multiples, and target lower burn rates over a longer commercialization time as a result
  4. Discipline wins. Think Stage Gate and SPC instead of venture style “massively parallel” R&D commercialization strategies
  5. Don’t be afraid to play a diversified investment strategy
  6. Don’t ignore Acquisition & Development as a viable growth strategy
  7. Don’t be afraid of good low tech deals, that’s where many the cleantech hits have been (if we haven’t heard “that’s not a venture bet” 3 times, we tend to stay away.)
  8. “Powder dry approach” – deploy limited capital early on for larger stakes and focus on returning capital quickly, not rapidly deploying capital
  9. Secure vastly superior market intelligence before moving – stealth is pretty much a worthless strategy, you’re too likely to miss key things that way.

And I thought I’d share a few paraphrased quotes told to me over the years that have helped bring these thoughts home:

A former boss, now an executive at a major utility – “the only thing that matters to the bottom line of the company are the rate cases in front of us. Nothing else we can do with customers, finance, or technology will make a difference if those don’t go well.”

A former head of oil company venture fund on why it takes so long to get technology into the energy sector – “we figure we are taking enough risk just letting a vendor touch our $1 billion platform.”

My father in law, a long time refinery engineer and manager on what small scale means in energy – “let me take you on a refinery tour during a turnaround sometime and show you what half a billion looks like lying on the ground.” Corollary, “you can’t do anything serious at a refinery for less than $100 mm.”

Electrochemist and long time fuel cell researcher on the challenges of making a FC last – “if you could perfectly control humidity and temperature, a PEMFC will run forever.” He was pointing out that it’s much easier said than done.

Energy company technology head – “I don’t want to see the business plan, just show me the energy balance and the engineering behind it, and the data backing it up.”

I’d welcome other people’s thoughts on investing in cleantech and energy technology. So comment away.

Neal Dikeman is a partner at Jane Capital Partners, and has cofounded, run, invested in, or served as a director of multiple startups in cleantech and technology. He is Chairman of Carbonflow and, and Texas Aggie.