What’s Changed in Cleantech Investing? Two things: Economics and Returns

I’ve been investing in cleantech since 2001, founded a bunch of startups, and have a good stack of exits to my name across every cleantech investing wave. In fact my last 4 investments have all exited. Not sure I’ll ever be able to say that again. And renewable power is cheaper than fossil. It’s fun to be able to say that now with a straight face.

Reflecting back, while a lot has changed, much has stayed the same. What has fundamentally changed are improved economics, and massively increased sizes of capital, exits, and returns, besides the obvious climate and policy pushes behind the energy transition. What hasn’t, is mispricing of risk. But hey, that’s what being a venture investor is all about, right?


Unlike a dozen years ago, when investing in cleantech was all about policy and we called it alternative energy because renewables were fundamentally more expensive than fossil: today it’s cheaper to build a renewable power plant than it is to even run a fossil fuel power plant. Policy frameworks are less the driver than energy economics. A decade ago policy frameworks were still a crucial minimum condition. Lazard research has been reporting for a while that in the US the average cost of solar and wind was cheaper than just the marginal cost of coal and gas generation. And shows energy storage within striking distance of peaking power plants at scale. If you haven’t read the Lazard report, it’s a must read. And in a great article on emerging markets, long a hard place for renewables to outcompete cheap coal, Bloomberg just noted solar is cheaper than coal in India.  Collapsing costs primarily in batteries and solar, have fundamentally and likely permanently altered the underlying economics of the key technologies in favor of cleantech and energy transition companies. This isn’t going away even if you think the policy frameworks are. And yes, on an unsubsidized basis.

Venture Returns – Is anyone making money?

The other change is increased raw size of markets, exits and returns.  A decade ago, returns in cleantech for venture funds still looked dicey, and while money was being made, the exist smaller, successes were much narrower, especially for mainstream venture funds who struggled to port their investment models from IT to cleantech. And I actually know a few funds from the early days that literally returned zero. Not just zero profits like 1x capital. Like awfully close to absolute 0x capital.  And for much of the last decade the private company unicorn phenomenon that drove a huge chunk of venture returns largely skipped cleantech deals, with only a handful of unicorns (C3 Energy as a rare example one of the few on the unicorn list for quite a while). In fact most of the key IPO and M&A exits were well in the <$1 Bil level – and the valley investor’s funds largely struggled with the sector. And aftermarket performance of cleantech IPOs in the pre 2010 timeframe was also choppy, even a rockstar company like First Solar is still 75% off its 2008 high (even though it’s at $92/sh vs the 2006 IPO of $20).

The returns improved in the succeeding 5 years. I was asked by one of my colleagues at Shell in 2015 what the best cleantech venture backed exits were. At the time, it was the Tesla IPO ($226 mm raised /$1.6 Bil IPO 2010), 60% Acq of Sunpower/Total ($1.4 Bil 2011), and Nest/Google ($3.2 Bil 2014), with a couple of dozen solid return venture backed exits mainly in the $50mm to $500 mm range.  Including a few nice IPOs like Sunrun ($251 mm raised/$1.36 Bil IPO 2015), OPower ($116 mm raised/$1 Bil IPO 2014), Silver Spring ($81 mm raised/$750 mm IPO 2013) and a few others. There were good exits, and plenty of money getting made for disciplined investors, but soon crowded out by other venture markets. However capital returns in cleantech in the last decade have not looked back, with a fatter tail post exit for long term holders than often in the early exit, and recent dramatically rising exit values.

Turns out that was just the beginning.  My favorite example now when asked did VCs make money in cleantech in the first wave? That single 2004 vintage venture backed deal and 2010 IPO, Tesla Motors, currently at $675 Bil in Market Cap, has alone carried insane venture like returns even if calculated on all the capital invested by the entire cleantech venture capital sector over its entire history, ignoring every other exit. 


The latest exit trend du jour is of course SPAC heaven, and while we all know this is likely to end rather badly, they have driven significant venture exits and returns, perhaps at the risk of poor aftermarket performance. But all is not forlorn, many of even the early IPO wins like Tesla, Sunrun and Enphase have literally seen venture like multi X growth and returns post listing – were investors to hold on.  And that’s likely to happen again – for the good companies. I had a great chat with an old friend Ira Ehrenpreis, an early Tesla investor, the other day on this very topic of when to hold and when to sell. Ira put his money where his mouth was and held Tesla. In that case it was definitely the right call – and not one I would have made as I’d likely have taken those awesome profits at or around the IPO in his shoes. Holding would also have been the right call with Sunrun and Enphase, which didn’t hit their stride until well post IPO, but not Opower, which peaked near its IPO at just under a billion, and was acquired by Oracle for about half of that a bit later. Will it be for the army of cleantech SPAC deals that don’t yet have product or revenue?

But what about non tech assets? When we turn to the global asset scale the numbers get just even more mind numbingly large. Just consider the global wind and solar asset investments which have been averaging just under a $1 Trillion every 36 months, at a relentlessly increasing MW/$. The industry is now up to the entire annual GDP of Germany spent on renewables generation globally in aggregate, and adding at the rate of one Philippines or Pakistan GDP every year, or one Italy every 3 years. Put in energy $ terms, annual renewables investment is already at about 2/3rds of the world’s annual E&P investment in oil & gas, and total renewables assets are now equal to total assets in BP, Chevron, ExxonMobil, Shell, Total, plus the top 10 national oil companies combined, and adding at the rate of a new major oil company by assets about every 365 days. And see paragraph above, power from those renewables is cheaper per kwh than the power from those fossil assets. Put in Silicon Valley terms, global renewables power generation alone, not technology, or anything else in cleantech, is adding just in assets the equivalent to the aggregate market cap of 100 average new tech unicorns each year.

These investments and exits and returns are not just PPP (“Paris, Policy, and Prayer”). And they have driven new corporate and financial investors into the sector.  Amazon for $2 Bil here, Bill Gates for a Billion there, Chevron, Shell, Aramco, etc for a few hundred million each in venture, and finally you’re looking at real money. Check out the fun WSJ article SPAC Demand to Draw VCs to Cleantech, for another take.  While writing this, two more, Quanergy and Embark, just announced in the last week. The returns aren’t just SPAC fodder of course. Solar products and services company Shoals Technologies, a 2021 IPO, and the most recent clean energy unicorn Aurora Solar, providing software to the industry, highlight the growing strength outside of SPACs.

However, like in the 2005-2010 time frame, risk is again getting mispriced by investors on a grand scale. That time it was thin film solar and cellulosic biofuels, and this time again SPACs are our perfect whipping post. Cases in point include Lordstown Motors, following on the Nikola debacle. Here are my favorite Lordstown articles:

Lordstown Motors warns investors it may go out of business – CNN.

Lordstown president dumped his stock to reportedly expand his turkey hunting farm – Yahoo! Finance

Watch the CEO on Jim Cramer discussing all his “orders”, and then Squawkbox discussing the meltdown, Jim Cramer discussing “where’d the orders go and I can’t help you anymore“.

Does anyone really want to bet against a sea change in mobility? Probably not. But did anyone not see the Nikola and Lordstown implosion coming? Anyone? And yet they are still at $7 Bil and $2 Bil market caps. Which would rank somewhere pretty high on the list of the top cleantech exits of all time up until like 24 months ago. A quote from an investor friend, “I know we should short it, but who really wants to take that risk?” I’ll let you decide whether the risk in those two are still mispriced…

This also highlights that no one in cleantech talks about the valley of death in cleantech financing anymore. A huge topic at every conference a dozen years ago. Good, and even no so great companies have access to later stage, corporate, and public capital that wasn’t visible a decade ago. Opening of course, the need for someone to fund some early stage companies to grow up and sell to the rest of the SPACs, right?

But bottom line, this is not 2008. It’s 2021, and the hype may be back, but the things that really matter in cleantech investing are very, very different.

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.

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.

A Cleantech State of the Union

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

Chief Blogger’s Favorite Cleantech Blogs

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

What is Cleantech?  Always a good starting point:

or try, The Seminal List of Cleantech Definitions


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


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


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



Cleantech Venture Competitions

On March 1 in Chicago, I attended the Clean Energy Challenge, a business plan competition among energy tech ventures from the Midwest, convened by the Clean Energy Trust.

With $250,000 of prizes sponsored by the U.S. Department of Energy, the Challenge was the culmination of several weeks of screening and coaching of over 100 ventures from Illinois, Indiana, Michigan, Minnesota, Missouri and Ohio, organized in two flights of competition:  start-up companies and student-run spin-outs from universities. 

The winners from each of these two categories were Hyrax Energy (start-up company) and NuMat Technologies (spin-out from Northwestern University).  From my perspective, these were good choices by the judges — most of whom were from venture capital firms. 

Frankly, Hyrax was far and away the most compelling of the start-ups, whereas NuMat had much stronger competition from its student-led spin-out peers.  I’m still trying to decide whether the student team pitches were generally better because they were involved in more coaching, were more receptive to coaching, or were less encumbered by the still-to-be-discovered challenges of actually running as businesses.

Onwards and upwards:  the student portion of the Clean Energy Challenge is in essence a regional qualifier for a national tournament, the DOE’s National Clean Energy Business Plan Competition, to be held this summer.

Also being held this summer, and not just limited to clean energy ventures, is the Cleantech Open, another business plan tournament that involves bigger prizes and leads even to a global competition in the fall.  (The Cleantech Open currently appears to be lacking a Midwest region — something I hope to be a part of remedying for future years.)  If you want to get into this contest, entry applications are due May 8.

While the cash prizes involved in these contests won’t make or break a new venture, the credibility associated with winning is very valuable.  Even those that don’t win benefit from the exposure to investors and, maybe more to the point, from the discipline of running the gauntlet.

Let the games begin!

Cleantech Investing: A Primer on Risks

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

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

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

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

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

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

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

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

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

Technology Risk

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

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

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

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

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

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

Competitor Risk

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

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

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

Adoption Risk

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

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

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

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

Financing Risk

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

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

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

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

Policy Risk

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

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

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

Execution Risk

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

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

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

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

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

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

Seven cleantech companies Silicon Valley just learned about

As a reporter and analyst, I wrote about hundreds of cleantech companies. As a managing director of the Cleantech Group, I spent years listening to hundreds of pitches, coached companies on presenting to institutional investors and helped facilitate cleantech deals around the world. Just last month, I served on a committee at the request of the Canadian consulate in San Francisco to evaluate companies to present at a cleantech investor event.

So I’ve seen a lot of cleantech companies pitch well, and some not so well.

Last week, I had the privilege to help present seven strong cleantech companies actively seeking capital to investors in Palo Alto. And the two-dozen institutional cleantech investment firms in the room liked what they saw.

Read more

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.

Craton Barreling Ahead

by Richard T. Stuebi

Being a senior advisor to the firm, I attended last week’s annual meeting of Craton Equity Partners, a cleantech private equity fund manager based in Los Angeles.

While cleantech in its focus, Craton doesn’t take on much technology risk. Rather, Craton generally invests in companies that have largely proven their technologies – or frankly don’t rely much on proprietary technologies – and are already generating substantial revenues, requiring growth capital to build out their business models into sizable scale.

This was illustrated by the stories told by three of Craton’s portfolio companies:

  • Propel Fuels, which is developing a critical mass of biofuel retailing locations – by leasing space at existing gas stations, installing necessary equipment for biofuels, managing fuel delivery logistics, and retail marketing via co-branding – across California, with a view towards replicating this model in other geographic markets in the U.S.
  • Petra Solar, which has standardized a photovoltaic product for installation on power poles, thereby enabling utilities to meet renewable portfolio standard requirements while also improving the quality and management of power throughout their distribution grids.
  • GreenWave Reality, which is aiming to extend the smart-grid “beyond the meter” and into the home, via a centralized radio-broadcasting gateway at the service entrance and a variety of intelligence-enabled radio-controlled applications throughout the home to manage energy usage.

Along with these three presentations by portfolio company CEOs, the Craton senior partners provided their perspective on the state of the cleantech investment markets.

Of note, the Craton partners believe that the collapse of the credit markets over the past few years has yielded good opportunities for its fund to invest equity in companies – some of whom are generating tens of millions of dollars of revenues, and already profitable – that really ought to have been able to secure debt during more normal times, thereby generating attractive risk-return profiles upon which Craton could capitalize. Clearly, Craton was fortunate to have been focused on later-stage private equity opportunities, rather than earlier-stage venture capital opportunities, where the credit crunch has provided no such opening.

The recent addition of Kevin Wall to the Craton team, possessing significant high-level contacts around the world, reflects Craton’s view that many of the best growth and exit possibilities for cleantech in the coming years will occur internationally. This is a sad but entirely legitimate commentary on the state of the U.S. cleantech marketplace: if you want to really do well in cleantech investing in the next several years, you’re going to have to focus a lot of attention overseas.

Consistent with my personal experience, the Craton team noted that the key success factor for their portfolio companies continues to be management quality. Fortunately, they are seeing (as I am) an influx into cleantech of a greater quantity of better talent in the past few years. Of course, this is in part driven by deteriorating economic conditions and opportunities in other sectors of the economy. But, I also sense it’s because many capable people are increasingly drawn to cleantech for other intangible attractions. (I was recently on the phone with an old friend of mine who made a lot of money in real estate and didn’t find it challenging enough – so he’s moving into cleantech. Five years from now, I’m sure this friend of mine will not complain that making money in cleantech wasn’t sufficiently challenging!)

On the whole, it appears that Craton’s first fund is doing generally well, and the firm is beginning to prepare for raising its second fund. The question will be whether Craton’s good performance on paper (no liquidity events yet) will be able to overcome a very tough fund-raising environment. Given their strong relationships in the California marketplace – where cleantech has the most traction of anywhere in the U.S. – Craton’s progress in the coming 12-24 months will be a good barometer of the health of the cleantech investing thesis in the U.S.

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.

Cleantech Boosts Jobs in Specific Regions and Segments

By John Addison (10/7/10)

Energy efficiency, renewable energy, and information technology are all helping the U.S. overcome a severe recession and keep more people from losing their jobs. From our San Francisco roof deck, I am encouraged to see energy efficient homes, solar roofs, and electric buses gliding by. I am also discouraged to see massive ships from Asia sail into the harbor ladened with hundreds of rail cars full of Asian goods, then leave for distant customers with much lighter loads.

As trillion dollar industries are disrupted, he stakes are high for jobs and economies. The U.S. can win or lose in a future that includes energy efficient materials, LED lights, electric cars, high-speed rail, wind power, solar power, smart grids and smart apps.

Clean Tech Job Trends 2010 Details U.S. Growth

As the economy officially pulls out of The Great Recession, clean energy continues to fuel the plans of many cities, states, nations, investors, and companies as they look for the next wave of innovation and growth. In its second annual look at the state of clean-tech jobs in the U.S. and globally, Clean Edge published its Clean Tech Job Trends 2010. The report looks beyond green job evangelism to provide key insights and a sober analysis of the most important employment trends globally. I was particularly interested in my home state; cleantech is particularly important to California’s economic future. The Report states:

“Not surprisingly, the San Francisco Bay Area/Silicon Valley repeats as the top area for cleantech jobs, with Los Angeles second. Even in its challenging economic times, California continues to see fairly robust job activity in clean-tech startups and established players, with the state’s high-tech giants like Cisco, Intel, and Google aggressively expanding their smart-grid initiatives. San Diego (seventh) and Sacramento (15th) give California four cities in the Top 15, but the Golden State faces an uncertain clean-tech future if the state’s voters pass a November ballot measure, Proposition 23, that would suspend the state’s landmark greenhouse gas reduction laws.”

Tesla Motors provides a good example of job creation. In 2012, it plans to reopen a shuttered plant owned that was owned by a Toyota (TM) – General Motors JV. The plant will create about 1,000 jobs as two exciting new electric vehicles roll-out: the Tesla Model S (TSLA) premium sedan with a electric range that far exceeds the Nissan LEAF (NSANY) and Ford (F) Focus Electric; and the new Toyota RAV4 EV, long an SUV favorite of EV enthusiasts. In the new world of global “co-opetition,” Tesla is 2% owned by Toyota and 5% owned by Daimler. The two auto giants admire Tesla’s innovation, first to market speed, and battery-pack technology.

Northern California is also rich with smart grid leaders including Silver Spring Networks, Cisco (CSCO), and EPRI. Solar energy innovators abound including Bright Source, Sun Power (SPWRA), and MiaSole.

Southern California is rich innovators making gasoline and diesel not with petroleum, but with algae, waste, and cellulose. In San Diego’s biotech research center, surrounding the University of California at San Diego and the Salk Institute are over 40 companies working on biofuels from algae. Sapphire Energy and Synthetic Genomics both have received over $100 billion from private equity investors to expand their research and production of algal fuels.

These are a few examples from my home state of California. The Clean Edge report covers exciting opportunities nationwide, the dynamics of U.S. – China competition, and 3 million jobs globally in a variety of billion dollar cleantech sectors. Clean Tech Job Trends 2010 is recommended reading for everyone. The free report can be downloaded

By John Addison, Publisher of the Clean Fleet Report and conference speaker. The author has no positions in the stocks mentioned in this article.

Jeremy Grantham on Climate Change

Richard T. Stuebi

Jeremy Grantham is one of the world’s most successful investors, over a very long period of time. He founded Grantham Mayo Van Otterloo in 1977, which now manages $100 billion of capital for sophisticated investors from around the globe. He tends to take positions for his clients that anticipate the formation of bubbles and defend against their collapse. His quarterly newsletters are extremely well-written: thoughtful and deeply researched. In short, he’s someone who’s thoughts matter, and the thoughts of his readers also matter.

So it’s with extreme interest to me that Grantham devotes pages 7 and 8 of his most recent quarterly newsletter to the issue of climate change. It’s well worth reading. He breaks down the topic in a way reflecting the mind of a long-term strategist who is smart enough to understand risk-reward tradeoffs in a world of imperfect information. And, of someone who is deeply concerned about the environment — as reflected by his founding of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics.

His closing paragraph is both stunning in its sweep and unsettling to those of us in the cleantech capital markets: “Global warming will be the most important investment issue for the foreseeable future. But how to make money around this issue in the next few years is not yet clear to me. In a fast-moving field rife with treacherous politics, there will be many failures. Marketing a ‘climate’ fund would be much easier than outperforming with it.”

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.

More Greenbacks for Greentech

By John Addison – original post at Clean Fleet Report

Investments Grow for Electric Cars, Energy Storage, Smart Grid

More venture capital will be invested in innovative greentech firms and more IPOs will happen in 2010 predict some of the world’s smartest venture capitalists and investment bankers at the Venture Summit Silicon Valley. In most circles, greentech is called cleantech, but with the 2009 IPO of A123 leading to a billion dollar valuation, venture capitalists are seeing green.

Cleantech encompasses the growing array of technology, services, and corporations that provide for a future with lower greenhouse gas emissions: energy efficiency, renewable energy, electric cars, smart grids, pure water, and even next generation building materials.

Continued investment is needed to bring us the next generation of batteries, solid state lighting, smart grid components, electric cars, lighter and stronger materials, and solar power so efficient that it makes no sense to build another coal power plant. Greentech is now 25 percent of venture capital investment reported Eric Wesoff, Senior Analyst, Greentech Media. Greentech has become the third major area of investing for the venture capital community that has focused on information technology and life sciences.

2010 IPO and M&A Growth

Forty IPOs of venture-backed firms were predicted for 2010, up from less than ten in 2009. More importantly, 600 venture-backed firms are likely to be purchased in 2010 through mergers and acquisitions (M&A) by large companies eager to expand their total offerings. The AlwaysOn Venture Summit included top private equity executives from Google, Qualcomm, Motorola, and dozens of companies with a history of acquisition. Hallways and lunch tables overflowed with investors, entrepreneurs, and corporate giants pitching, listening, and networking.

The severity of the recent recession has left brilliant ideas unfunded, lithium battery plants delayed, and gigawatts of renewable energy plants without project financing. Innovators at early stages depend of private equity. Venture capitalist raise billions in funds from large university endowments and pension plans who in turn suffered lost billions in the stock market and real estate downturn. Successful 2010 IPOs plus M&A will generate cash for VCs and bring new endowment and pension funds.

Lithium battery maker A123 Systems (AONE) is a poster-child of cleantech IPO success. This year it raised $391 million with an IPO priced higher than expected. A123 has never made money, only had $68 million of revenue last year, and will have less than $90 million revenue this year. Its stock still trades above the offering price with over a billion in market capitalization, even though Chrysler cancelled electric vehicle plans that include A123 batteries. Investors continue to be optimistic about A123 in markets like power tools, grid storage, and automotive.

A123 CFO Mike Rubin explained that the IPO provided important credibility with the battery maker’s major customers. It also gives A123 a strong balance sheet and the ability to fund more R&D and weather difficulties.

Yes, government funding and loans are also critical to American leadership in cleantech. Headquartered in Massachusetts and founded in 2001, A123 was funded initially with a $100,000 grant from the U.S. Department of Energy.

In 2010, it may be IPO offerings like Tesla or Silver Springs Networks that get cleantech investors excited. Stay tuned.

John Addison publishes the Clean Fleet Report and speaks at conferences. He is the author of the new book – Save Gas, Save the Planet – now selling at Amazon and other booksellers.

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.

PowerShares Global Transportation

By John Addison (7/27/09). The transportation industry is beginning the biggest transformation since Henry Ford started making cars affordable for the mass market. Hybrids, plug-in hybrids, and electric vehicles point to a long-term transition from inefficient mechanical drive systems to efficient electrical systems. Engines powered by petroleum fuels are being replaced with electric motors powered by renewable energy. A growing amount of goods movement is by rail and moving people by high-speed rail.

A portfolio of companies that participate in these long-term trends comprise the portfolio of Invesco PowerShares Global Transportation (PTRP) – an electronically tradable fund (ETF). The fund is based on the Wilder NASDAQ OMX Global Energy Efficient Transport Index(sm). The Index includes global companies engaged in businesses that are likely to benefit from a transition toward using cleaner, less costly and more efficient means of transportation.

The fund attempts to rebalance quarterly with 25 percent holdings in each of four sectors which it defines: alternative vehicles, rail and subway systems, intermodal, and transportation innovation. The clean transportation companies are headquartered in many countries and participate in many sectors:

United States 37.10%
Japan 12.61%
United Kingdom 8.02%
Taiwan 7.99%
Italy 5.81%
France 5.55%
Germany 5.42%
Canada 4.80%
China 4.41%
Chile 2.91%
*as of 7/24/09

Top Holdings
BYD Co. Ltd. 4.41%
Giant Manufacturing Co. Ltd. 4.03%
Merida Industry Co. Ltd. 3.95%
GS Yuasa Corp. 3.85%
Shimano Inc. 3.74%
Maxwell Technologies Inc. 3.71%
Wabco Holdings Inc. 3.45%
Fuel Systems Solutions Inc. 3.29%
Alstom S.A. 3.16%
Piaggio & C.S.p.A. 3.05%

The fund is likely to gain from the growing success of high-speed rail which provides hundreds of millions of annual rides in Japan, France, and Spain, and is destined from major growth in other countries such as China and the United States. Holdings include Alstom, Kinki Sharyo, and Bombardier. Other holdings will benefit from the shift of goods movement from truck and plane to more efficient rail: CSX, Norfolk Southern, Union Pacific, Burlington Northern, and Canadian National Railway.

Over a billion people own bicycles or scooters – e-bikes and e-scooters are high-growth segments of this industry. The fund includes major players such as Giant, Piaggo, Merida, and Shimano.

Lithium batteries and ultracapacitors are integral to hybrids and electric vehicles. The fund includes BYD, GS Yuasa, Maxwell, Ener1, and Saft. Energy storage dominates the business models of these companies. Missing from the fund are electronic giants, where batteries are only part of their business such as Panasonic, Sanyo, Hitachi, NEC, and several others.

Disclosure: I own shares in this fund, as well as Alstom and Giant. Investing in this fund has a number of risks. It is concentrated. Most holdings are international. Illiquidity is a concern with few shares trading daily. Automobile manufacturers, except for BYD, are notably absent from the fund. Nevertheless, its 34 holdings provide some diversified global exposure into key players in the future of transportation.

Fidelity Select Automotive (FSAVX), representing a more traditional automotive portfolio, is up 86% year-to-date. iShares Dow Jones Transportation (IYT), with diversified goods movement and transportation services holdings, is up about 2% year-to-date. PowerShares Global Transportation (PRTP) is up about 27% year-to-date. As we transition to more efficient transportation with a smaller carbon footprint, PRTP may have long-term potential.

John Addison publishes the Clean Fleet Report. A number of his articles have also appeared in Cleantech Blog and Seeking Alpha. On August 22 he will present Cleantech ETF Investing at the SF Money Show.