Thanks to some recent research and commentary by Lux and others (such as this article), the potential for a cleantech venture bubble has been getting a lot of attention. It's always a fascinating media topic: When does an investment sector get "too hot"? So expect even more attention will be paid to this topic in the future. Two vital facts to keep in mind (and which the general media coverage most often loses sight of, it seems): 1. There is a big difference between public market investment trends and venture capital investment trends. Yes, for obvious reasons the two markets are often somewhat linked. But the public market is open to many more retail investors, is focused on near-term (quarter to quarter) results, and operates within the context of benchmarks like the S&P 500 (8.2% average annual returns over the past 10 years). Whereas the venture capital market is open to a different pool of private investors, is a market of long-term (multi-year) investments, and operates within the context of high hurdle IRRs (~20% average annual returns over the past 10 years). Different returns requirements will drive different valuations. 2. There is no single "cleantech" sector. It is multiple sectors. A solar cell looks nothing like a fuel cell which looks nothing like a desalination unit, etc. "Cleantech" as a buzzword is often criticized as being too broadly defined. That breadth also means that the technologies covered by cleantech VCs aim for different markets, compete with different incumbent approaches/ commodities, are produced in entirely different ways, etc. In other words, Cleantech (a/k/a "greentech", "environmental tech", etc.) is actually a collection of numerous separate investment sectors, under a common investment thesis around looming natural resource scarcity. When taken together, the above two points bring out two key conclusions: 1. If one technology sector starts to see inflated values, it won't necessarily "infect" other cleantech sectors at the same time. The Lux Research report was actually very specific on this point:

The warning signs of a bubble are appearing in the energy segment, where IPO value rose from $1.6 billion in 2005 to $4.1 billion in 2006 and venture capital raised went from $623 million to $1.5 billion, primarily on solar and biofuel deals. At the same time, the air, water, and waste segments present hidden opportunities that are relatively starved for investment.

So... There's a danger of an energy tech bubble, but other cleantech sectors... not so much. Realistically, we have to evaluate over-investments for specific subsectors than simply looking at all energy tech as a whole. Thus, the most relevant question is: Are there bubbles in solar and biofuels? 2. If multiples among publicly-traded stocks seem high, that doesn't necessarily reflect venture investments, even in the same sectors. Anecdotally, it seems like there might be a supply/demand imbalance right now in the public equity markets, reflecting pent-up retail investor interest in high-profile sectors like corn-based ethanol and solar PV. Which is why these sectors have seen the most IPO activity. There are good arguments to be made on both sides of the "are publicly-traded solar share prices too high" or "are publicly-traded ethanol share prices too high" questions, and this site isn't the place for such a discussion (stock-picking is not a core skillset here). But it should always be kept in mind that these investment classes are very different from the kinds of investments venture capitalists are typically evaluating. Ethanol is a great example. Most of the publicly-traded stocks in ethanol are for companies using corn-based, well-understood processes. Whereas most of the current venture investor activity in the space (not counting "capacity" deals) is focused on finding alternatives to corn as a feedstock (such as waste-to-ethanol or cellulosic feedstocks), with breakthrough technologies. The economics, timeframes, and technical issues are completely different. There could be a "bubble" in ethanol venture investments at the same time as a "bubble" in publicly-traded ethanol share prices. But it's not necessarily the case. As we continue to track the bubble coverage in future posts, we'll delve into specific sectors and try to read the signs. But the above breakdown should establish some necessary context beyond the headlines, in advance of these discussions. One last note for today's column... The Lux Research report has provided a wealth of useful data and smart analysis, and looks to be pretty valuable. One statement I would quibble with, however, was from the press release:

"...There’s no way that more than a fraction of the 930 energy start-ups operating worldwide can possibly succeed."

Define "succeed"? And define "fraction"? Venture capital is necessarily investing at a risky stage where companies will fail. That's true of all VC sectors whether they are evidencing bubbles or not. Furthermore, "success" shouldn't be defined by high-profile Google-esque exits -- only about 10-20% of all venture-backed companies IPO, for example. The majority of successful venture exits are industry trade sales as part of ongoing sectoral consolidations, at reasonable valuations. When you consider the enormous magnitude of the energy market worldwide, and the many incumbent sectors that are ripe for creative destruction... It's not a stretch to argue that, yes, a significant share of the venture-backed portion of those startups (hopefully the VCs aren't picking a random sample from the overall pool of available investments) will grow and find successful exits in some form. And anyway, how does anyone know how many startups in a sector are too many? 930 (which I believe is a low count anyway)? 1,500? 15,000? This study claims that renewable energy will be a $200B market by 2015... There's a lot of available value to be created, somehow. But admittedly, technically-speaking, since even 99/100 is "a fraction", the statement isn't wrong per se. It's just more hyperbole...

• Tesla Motors today announced a $45mm Series D, led by Technology Partners and Elon Musk. TP's Ira Ehrenpreis will be joining the company's board. Capricorn Investment Group also participated, as did all previous investors (including Vantage Point Venture Partners, Draper Fisher Jurvetson, JP Morgan Bay Area Equity Fund, Valor Equity Partners and Compass Venture Partners). I'm ready for my test drive anytime, Ira...

• VentureWire reported today that MBA Polymers, which is developing plastics recycling facilities, has raised "at least" $20mm in financing from Benchmark Capital Europe, Doughty Hanson Technology Ventures, and existing investor AsiaWest.

• Also in VWire this week: Solar concentrator play Cool Earth Solar has apparently raised a $750k seed round of convertible notes. You can read more about the company here... And LumaSense, a venture-backed effort to roll up various sensor technologies, has apparently raised between $50-100mm in debt and equity (this press release suggests that at least $25.5mm was debt) to finance their continued acquisition activity. Oak Investment Partners and Element Venture Partners provided the equity, and Comerica provided most or all of the debt.

• In one of those "capacity deals" that's tough to classify as a venture investment, Shunda Holdings, a Chinese PV-silicon production company, has raised $82mm to finance expanded operations. Shunda provides silicon to Suntech. Actis provided $40mm of the financing, and local investors Jolmo and Waichun made up the rest.
  

• Other international dealflow, as highlighted by New Energy Finance: Israeli LED startup Oree raised a $7mm Series A, of which ~$6mm was provided by Belgium's GIMV, the remainder being provided by Genesis Partners... Also in Israel, CoreFlow -- which has developed "aeromechanical" approaches to the handling and transportation of substrates (such as for solar applications) -- raised a $3.2mm round of financing led by Ofer Hi-Tech and including Dagesh FK Ltd... Finally, Australian wave energy developer Oceanlinx raised a $12mm Series A, and "may look at an IPO next."
  

Other news and notes: A nice overview of a recent cleantech investor "what's hot/ what's not" panel... Finally, expect high gas prices again this summer.

Deals and news from the past week or so:

• Silicon production startup Solaicx announced a $27.1mm Series C. DE Shaw led, Mitsui Ventures also joined in, and existing investors Applied Ventures, Firsthand Capital Management, Big Sky Ventures, and Greenhouse Capital Partners participated as well. Jonathan Shieber at VentureWire reports that the company current has less than $5mm in revenues.
  

• New Energy Finance reported last week that PV thin-film and project developer Optisolar had taken in $10.2mm in "venture capital funding" from Gardiner Group Capital, Richardson Ventures, and four other private investors. Gardiner Group and Richardson Ventures each holds >10% of the company after the funding. The company was also in the news regarding a 40MW project development deal in Ontario.

• Two green chemistry deals to note: Marrone Organic Innovations closed a $3.75mm Series A round, led by Clean Pacific Ventures, in one of the cleantech-focused firm's first announced deals. One Earth Capital, Saffron Hill Ventures, Calvert Social Investment Fund, Wavepoint Ventures, and strategic and angel investors all also participated. Marrone develops organic alternatives to pesticides and weed management.
  

• The second deal in the category was Segetis, which is developing bio-based plastics, adhesives and solvents. Khosla Ventures is providing $15mm in funding in three tranches, with the first $5mm in Q1 this year. Fun quote: "Vinod is like a rock star in the venture capital world" (from a gushing Minneapolis growth forum leader).
  

• Other deals: Ethanol technology developer TMO Renewables has been taking in "pre-IPO" placements, such as the one described here... Swedish distribution transformer designer Hexaform announced they raised 30mm SEK (approximately $4.4mm) from InnovationsKapital... PEWW reported that telecom-focused backup power system manufacturer Purcell Systems has raised $7.23mm of a $10mm Series B-2, building on a $9.27mm Series B from 2005. Weston Presidio participated... VentureWire reported that hybrid drivetrain developer Hybra-Drive has raised $350k in seed and "pre-seed" financing, and is looking to raise a $10mm Series A... Finally, high-temp superconductor developer Zenergy raised a GBP 6mm PIPE (note: link opens a pdf).
  

Other news and notes: A good interview with Emerald's Scott MacDonald... A nice column on the challenges of being a female entrepreneur in the (very unfortunately, hopefully temporarily) male-dominated cleantech space... As we've been talking about for a while, the solar consolidation phase is getting underway... India needs more cleantech venture capital... The Lux Report really did talk about a lot more than the "bubble" media coverage would suggest to a casual reader -- here's a useful presentation of some of the data in the report (including a tally of $8.6B in cleantech IPOs and M&A last year)... NEF has some interesting news (note: site doesn't work in all browsers) on an uptick in cleantech IPO activity -- and here's one take on why one IPO didn't go so well... Some useful advice for cleantech entrepreneurs... An update on carbon market developments... Yet another take on the attractiveness of water tech... Finally, it's a better kind of "oil can": If you drink enough Foster's this summer when you throw some shrimp on the barbie, you just might power a house in Australia.

Today we are introducing a new regular feature on this site, "Five Questions", where we ask cleantech investors to share some of their perspectives firsthand. With so many different investment strategies out there in the cleantech space, readers may be interested to get a peek into the mindset of some of these leading VCs -- how they're seeing the market develop and what they're looking for...


To kick off the idea, Eric Emmons and Jay Fiske, Principals with the Massachusetts Green Energy Fund have generously offered to tell us a bit about their Bay State approach, and their perspectives on the sector in general:

1. Why don't you tell Cleantech Investing readers out there a bit about the Massachusetts Green Energy Fund.

The MGEF is a private early-stage fund started in June 2004 to invest in the renewable energy technology companies doing business in the Commonwealth. One of our biggest LPs is the Renewable Energy Trust, a state organization that promotes the development of Massachusetts’ cleantech industry.

As a smaller fund, our model is to spend time in the region’s leading labs, know all the early technologies coming out of the state’s public and private universities, and to do 2-3 good deals a year. Generally, our bite size is anywhere from $200K to $1M in the first round. We tend to lead the due diligence effort and once we’ve reached terms, we help to syndicate the deal to larger funds who might not have had the bandwidth to spend a lot of time with the company.

2. Generally speaking, what strikes you about current cleantech dealflow?

Dealflow is strong, but this is an industry in which it pays to do deep due diligence. Unlike the software, IT, and biotech sectors, cleantech and renewable energy are industries generally characterized by expensive assets that have to reliably generate a very cheap product for a very long time. Margins are usually thin in the out years. A good CEO should have a clear plan up front for achieving the requisite cost, reliability, and durability, and investors need be able to understand the key assumptions. If they are predicated upon a supply of cheap unobtainium or a dramatic shift in US consumer behavior, you have a problem.

Because these challenges are so significant, many of the more interesting opportunities actually lie outside the traditional energy profile (e.g., portable power and portable energy storage vs. large-scale energy generation)

There’s now a tailwind in cleantech coming from the public markets which was certainly not around 3 years ago when we started the fund. We generally think strong, sustainable cleantech companies are a good thing, and we hope the investment industry doesn’t take its eye off the ball re: forming companies with strong fundamentals.

3. Without getting into specifics...thinking about cleantech deals you’ve looked at closely before passing on, what made these opportunities challenging, and what lessons do you wish cleantech entrepreneurs would take away from such experiences?

As we mentioned before, we take a long hard look at the opportunities that we consider, and spend a lot of time working with the company to review the science, the customer demand, and the business model. Sometimes we end up passing on the deal because we can’t get comfortable with one of those components, but we hope that the entrepreneur benefited from the process. The best entrepreneurs will use the experience of raising capital to refine their plan and approach.

4. What was the most recent investment you made and what did you like about it?

We have recently led a Series A round in PoroGen Corporation, which is a Woburn, MA company developing polymeric membrane filters for gas and liquid separation / purification in those high temperature or corrosive environments in which conventional polymeric membranes can’t function. PoroGen’s technology pushes the envelope significantly as to where high performance membranes can be commercially used, and allows producers of several high value fuel products to replace commercial distillation and cryogenic separation processes.

What we liked about the deal was a) an expert team with 25 years of relationships in the field, b) a proprietary technology platform with a lot of market reach, and c) strategic investors willing to put in capital to accelerate the commercialization of a product they clearly want.

5. PV is attracting a lot of interest. What are you seeing in this area?

Like everyone else, we are seeing a lot of no- or low-silicon solar technologies using various band gap materials in different low-cost architectures. Generally, we think this R&D direction is exciting and that a couple of these are going to cross the $1/watt threshold.

However, before getting deep into the specific design and its benefits, we like to take a reality check and start with the estimated balance of materials and production process so as to calculate the materials and allocated capital equipment cost per square meter. That way, we have a yardstick with which to evaluate all subsequent information.

Conventional solar modules cost about ~$375/sq.meter to manufacture, and will likely reach $325 or so in the next couple of years. If the new process will cost ~$1000/sq.meter in full production, we will need to see a way to get to 3x current module efficiency (or a different addressable market.) It is all too easy to get wrapped up in the novel physics and forget that these new products will be competing against a multi-billion dollar polycrystalline industry that is steadily coming down the cost curve.