Recent Posts:

Vinod’s hybrids vs. biofuels argument

Rob Day: January 28, 2008, 7:30 AM
If you haven't before seen or heard Vinod's arguments in favor of biofuels and against hybrids, it's well worth reading the three-part column he wrote in Grist earlier this month. (Part I, Part II, Part III) Three quick reactions: 1. This is a very well-done argument which really points out the strengths of Vinod's highly analytical, deep-dive investment style. 2. It's a bit strange that it's set up as an argument about hybrids vs. biofuels, since as even Vinod notes (buried in the third part) these techs are probably complementary instead of competitive. Flex-fuel hybrids, and hybrid diesels, are already being developed. And while he rightly points to the emergence of more efficient internal combustion engines and lighter cars, these are also going to be very complementary with hybrids. I'd be more interested in an analysis of future all-electric vehicles versus a biofueled serial hybrid with a nextgen ICE, and suspect there would be places for both in the market... 3. It's also a bit strange that it's set up (per the title, "Pragmatists vs. Environmentalists") to sound like he's having a fight with environmentalists. When in reality, reading the argument made, it really comes down to Vinod's analysis of the market adoption timing of one tech versus another, and per point #2 that's kind of moot anyway (we need all of the above, not one or the other)... And in addition, Vinod points out that he is himself investing on both sides anyway. I would hope that most readers would understand that there's not really a schism between the environmental community and the cleantech investor community on nearly all issues, and that in fact there's a lot of commonality and shared purpose. Let's hope this kind of eye-catching title doesn't end up picking an unnecessary fight. (for full disclosure, my firm also has investments that would support the development of markets for both hybrids and biofuels) 1/29 Update:  Astute readers have already pointed me to two other responses to Vinod's argument, one at the always-helpful AltEnergyStocks site, and a more pointed reply by Joe Romm.  More to follow, I'm sure...

What else happened last week

Rob Day: January 27, 2008, 1:24 PM
We deferred mentioning the deals and other news from last week to focus on discussions about the looming recession and the numbers from last year, but a lot happened during the week. One of the reasons for moving this column over to GreenTech Media was to take advantage of their reporting about deals, etc., so as always please bookmark the GTM home page and check there regularly for more timely updates! Deals from the past week:
  • Clean Technology Investor mentioned on Friday that coal giant Peabody Energy is putting an undisclosed amount of strategic investment into GreatPoint Energy.
  • VentureWire's Jonathan Shieber reported on Thursday that stealth-mode diesel engine developer Achates Power has taken in an undisclosed amount of financing from a syndicate including Sequoia Capital, RockPort Capital, Interwest Partners, and Madrone Capital Partners. The VWire story's been written up a few more places now -- see the column at CNet's Green Tech Blog, for example.
  • Renewable energy monitoring and reporting software vendor Fat Spaniel raised an $18mm Series B, led by Ignition Partners, and including participation by Pacific Corporate Group and Applied Ventures, as well as existing investors Element Partners and Chrysalix Energy.
  • CTI reported that W.R. Grace is planning on investing $3mm and "up to $5mm" total in concrete developer CeraTech.
  • Aquaculture (Kona Kampachi hatchery) company Kona BlueWater Farms has taken in a $2.6mm Series D, according to VWire. Investors in the company include Cornerstone Holdings; Garrett Gruener, co-founder and director of Alta Partners; and other undisclosed investors. The company now plans to raise a large Series E to expand into Mexico.
Cleantech investors in the news:
  • Very pleased to welcome back Todd Kimmel to the dark side! Todd's back at ATV after his successful effort to launch Coskata.
It's becoming clear that Project Better Place is going to be receiving a lot of PR-driven attention over the coming months in part just because it's a bold idea, and in part by design. The latest announcement with Nissan and Renault in Israel was big news this past week, although it was also notable to see in the CTI coverage that the car companies are going to continue their own ground-up EV development efforts anyway. Readers are invited to post or email their own thoughts and questions about this fascinating endeavor. I'll kick us off: "In a geographically small country where 90% of drivers travel less than 70 kilometers per day, why do they need to stop at re-charging centers instead of just plugging in their cars at home or at work?" Maybe the answer is that it's all on-street parking in Israel? Other news and notes: Florida is looking to bring in more cleantech venture dollars... Color me skeptical, but Neal thinks Climos may be for real... Interesting overview of CIGS markets and movers... The energy intelligence market consolidation wave is coming... Tesla's planning on their first shipment being 3/17... Finally, it's only tangentially related to cleantech investing, but what a great quote.

The health care venture bubble?

Rob Day: January 23, 2008, 5:58 PM
Now that we're almost a month into the new year, it's time to corral and sort out all the various cleantech VC tallies that have been put out there. So: Why isn't there more talk about the "health care tech bubble"? Check out the Dow Jones VentureSource annual roundup. By their count, cleantech investments in the U.S. totaled $2.5B over 187 investments, the dollar growth being 67% from 2006. Yes, significant growth. However, then note that the "health care" sector took in $10B over 671 investments. Yes, "only" a 17% growth in dollar amount over the $8.5B 2006 total, but that's an increase of $1.5B versus an increase of around $1B in their cleantech sector tally. And unlike in cleantech, where the popular consensus appears to be that the growth drivers won't go away soon, in health care policy discussions all the talk is about how to limit the growth in spending. Perhaps most notably, the median deal size in cleantech was about $7mm -- just about the same as that for all VC deals overall, and flat from 2006. But in health care the median deal size jumped up above $11mm, a 33% rise from 2006. I'm not at all trying to argue against the attractiveness of health care as an investment sector, I'm not informed enough to say anything like that. Nor am I trying to use this simplistic comparison to argue that there isn't a bubble in cleantech (I'll argue that in other ways, elsewhere). But I am indeed arguing that the business media seems far too willing to throw around the B-word in cleantech in comparison to the treatment given to other investment sectors. Why? 1. Probably because percentage growth is high -- allowing some to focus on relative rates in growth versus the absolutes. But remember how small a percentage cleantech has represented in venture spending up until recently. Health care is a huge market, but so are global markets for energy, water and materials, so sometimes it might be useful to take a step back and recognize just how early we are in the process of creative destruction of these huge industries. Potentially a lot of room left to run... 2. Another reason is that a few cleantech entrepreneurs and investors persist in making bold statements about how their ideas/ investments are going to re-make the world in the blink of an eye. Health care entrepreneurs and investors learned the hard way a few years back that claiming to have cancer cured is a sure-fired way to trigger a lot of skepticism and scrutiny by the press. The current generation of cleantech entrepreneurs and investors are only now learning that lesson (although one would think the lessons of 2000-2001 would be more vivid than they apparently are). Big, bold changes are indeed happening, it's an exciting time, but one can hardly blame the jaundiced business journalists for raising an eyebrow at some of the claims and mega-deals that are being made. 3. Finally, there's always confusion about publicly-traded stocks versus venture investments, in terms of thinking about valuations, etc. For good reason, we refrain on this site from getting into questions about appropriate valuations for publicly-traded cleantech stocks. It's not the author's purview, there are smarter people looking at it, and it's also only indirectly relevant what those companies are doing. It affects potential exits, but it doesn't necessarily impact what venture investors are doing. Certainly VCs will tend to follow the exits... but that doesn't mean that when journalists see solar stock prices rise and fall precipitously that the same volatility is felt by early stage investors making multi-year investments in privately-held companies. Again, not looking to revisit the "is there or isn't there" discussion here. And we probably shouldn't expect that mainstream business journalists will somehow back away from the whiff of controversy inherent in such discussions. But the juxtaposition of the sectoral data in the VentureSource release was pretty fascinating... The Cleantech Group also put out their annual total recently, as GTM wrote up a couple of days ago. As usual, they have the highest numbers among those counting, which is understandable given the group's central role in the industry and their inclusiveness. By their count, North American total cleantech venture investments were $3.95B, up 38% from 2006, and European cleantech venture investments totaled $1.23B, up 34% from the previous year. Interestingly, the number of deals in North America only increased 15%, to 268. This means, of course, that average deal size went up significantly -- but if you also believe the VentureSource data suggesting that median deal size stayed the same, then the conclusion must be that there were more mega-deals out of the bunch. And this is exactly what the Cleantech Group reports, pointing out not only that the number of $100mm+ deals increased from 2006, but that 8 of the top 10 solar financing rounds since 1999 took place last year. So we are left to conclude that valuation pressure isn't really impacting the sector for most deals... yet. But that certainly the pace of mega-deals doesn't appear to be slowing down. At least that's what this data would suggest, although shifts in the mix toward earlier stage (although we haven't seen anything like that, it's possible) would also hide valuation pressure as counted by median, and some VCs are sharing anecdotal evidence about some valuation pressure out there (mostly in solar deals, of course). We already talked about Eric Wesoff's first-cut tally (as well as yours truly's poor track record with annual predictions) earlier in the month. His VenturePower report, looking worldwide, totaled $3.4B for 222 deals. And rounding up the surveys, the MoneyTree/NVCA totals for the U.S. in the cleantech sector (note: link opens pdf) were $2.2B for 201 deals. It's helpful to see them aggregate cleantech deals from across several of their traditional categories, kudos -- and another good validation of interest in the sector. So as usual, big disparities in the counts. Which is understandable, reflecting the different levels of inclusiveness -- how do they define cleantech, what geographies are considered, how do they count project-finance type rounds. The difference in deal count between the VentureSource survey and the Cleantech Group survey, for example, was 81 deals. And most importantly, all the surveys pointed to very strong growth in the sector, both in terms of dollars and numbers of deals. So no matter how you're counting it, cleantech remains hot... just not as hot as health care tech.

What will a recession mean for cleantech venture investors and startups?

Rob Day: January 22, 2008, 7:15 AM
We'll talk more about 2007 dealflow numbers and recent deals tomorrow, but today the big news is macroeconomic. International markets are melting down, the Fed is stepping in with a big emergency rate cut, and everyone is talking about the R-word. So what would a recession mean to cleantech venture investors and startups? There are four potential scenarios being discussed by investors: 1. There are those who argue that, in a recession driven in part by high energy costs, alternative energy generation and energy/ water/ materials efficiency plays can look even more attractive. This argument suggests that cleantech markets can be somewhat counter-cyclical, and that government stimulus plans could provide a short-term boost to startups. Furthermore, the argument goes, the stark challenges facing incumbent energy and resource markets could prompt venture and project finance investors to turn even more to cleantech as they run away from other tech sectors more affected by a downturn. 2. A second scenario accepts many of the above factors, but weighs that against lessened spending by corporate customers, and generally more difficult financial markets, and balances it out to suggest a "business as usual" outcome for cleantech startups and their investors. 3. A third scenario is more negative, but tempered by the countercyclical factors from the first scenario. Those arguing for a slow-down in 2008 point out that exit windows for investors and startups will be much narrowed, if not closed. And that corporate customers, who continue to drive most of the markets for cleantech, would tighten their purse-strings. Cleantech might be a bit insulated from the magnitude of macroeconomic bad news because of some countercyclical features, they argue, but an ebbing tide lowers all ships regardless. 4. And the fourth scenario being (carefully) discussed is the gloom and doom scenario. Those fearful of this kind of outcome point to the market downturn of 2001+, when publicly-traded energy tech stocks lost most of their value, energy tech venture capital investments fell by more than half from their 2000 peaks, and much-anticipated market transformations (such as "a DG world" and visions of fuel cell cars all over the highways) were delayed indefinitely. Each of these scenarios could hold true, but we're thinking that the third seems most likely. Tough to maintain optimism in the face of everything going on with the economy. And while there are some mitigating factors that may help insulate cleantech markets from the worst of it, it seems likely that investors and customers will be forced to back off a bit if the economy really does stumble. And yet this time around, unlike in 2000, much of the venture activity in cleantech has focused on technologies that are more ready for prime time and on real market needs, which makes it tougher to believe the worst scenarios. So what would a 2008 like that third scenario look like? 1. Some sectors will be hit worse than others. Any startup dependent upon sales to or through new home builders, for example, could be pretty hard hit. Others, such as biofuels perhaps, where regulatory mandates now in place will continue to provide an impetus for further adoption, may be less hard hit. Startup management teams will be scrambling to control things as best as they can; investors will be paying even closer attention to the effects of macroeconomic conditions on particular end markets. It'll be company by company, but some sectoral trends will be visible as well. 2. Remember when we talked about how 2008 was going to be a critical year for cleantech investors in terms of the first real wave of exits? Uh oh. Exit windows just got a lot harder to squeeze through. Where this will really hurt will be the high profile, high-cash-burn startups that have been going all out to try to get to a quick IPO. Any company's expectation that an IPO in 2008 could provide necessary additional funding and an exit for investors just took a bit hit. For companies now in this precarious position, those making real operational progress will probably still be able to raise necessary funds to carry them through, but perhaps not at the hoped-for valuations. And others will be shaken out. Capital efficient startups whose management teams are focused on achieving cashflow breakeven, on the other hand, will be somewhat insulated by being able to wait out any temporarily unfriendly market conditions. 3. This time last year, I predicted that while cleantech venture deal numbers would go up in 2007, fewer mega-deals would mean that the overall dollar totals would remain pretty flat. "Never wrong, but often early," huh? That prediction may have been meant for 2008 instead of 2007. In fact, it wouldn't be surprising to see dealflow in terms of both dollars and deals take a hit. But I'm also not expecting a mass exodus of generalist VCs from the sector, and the specialists aren't going away, and the long-term market fundamentals remain as attractive as ever. So I would expect a pause/ slowdown, but not a screeching halt in cleantech venture activity. Nevertheless, in all likelihood, in some sectors where high-growth expectations have driven particularly high valuations and big round sizes lately, we might see some reconciliation there as investors become less willing to price upside returns potential out of their deals... All of this is much of a guess as ever, but there you go, for what it's worth... It'll be an interesting next few months, that's for sure. Fingers crossed...

Cleantech:  Increasingly a C-Suite priority

Rob Day: January 16, 2008, 8:03 AM
Apparently everyone got the memo that this was the week to announce the latest deals and other news...
  • General Motors announced an undisclosed amount of investment in cellulosic ethanol startup Coskata.  The company may take in additional strategic investor capital as well.  It's part of the company's Series B round, which is "nearly complete."  The big public bogey now is $1 per gallon ethanol...  Plenty of news and commentary on this one out there, given the high profile -- GTM had a nice summary.  This and the Morgan Stanley news below are just more signs of cleantech being elevated to the boardroom at the biggest companies around.  That's good news for the market in general, and good news for potential exits for venture investors.
  • News came out this week that Tesla Motors has cut some staff -- Jonathan Shieber at VWire revealed that the company is also "putting the finishing touches on a $40 million round of funding."
  • A large syndicate of investors signed on for NanoGram's newest financing round (we're guessing it's a Series D), which totaled $32mm.  The round will be used to develop the company's solar applications.  New investors include Global Cleantech Capital, Masdar Clean Tech Fund, Mitsui Ventures, Nagase & Co., Nanostart AG, TEL Venture Capital and Yasuda Enterprise Development.  Existing investors also participating in the round include ATA Ventures, Bay Partners, Harris & Harris, Institutional Venture Partners, Nth Power, RockPort Capital, SBV Venture Partners, and Technology Partners.
  • VentureWire also reported that Germany-based Fludicon has taken in a EUR3mm round of financing led by Munich Venture Partners, with Schneider Electric Ventures, Fraunhofer Gesellschaft, KfW Mittelstandsbank and TechnoStart also participating.  The company's components, based on electroreological fluids, can apparently provide energy efficiency and other performance benefits to a variety of devices.
Lots of cleantech investor news as well:
  • Clean Technology Investor is reporting that VantagePoint is raising a $400mm cleantech-focused fund.
Other news and notes:  SVB has formed a dedicated cleantech group...  Mr. Cleantech on the uptick in cleantech VC activity in the pacific northwest...  European venture investing is down -- but not in cleantech...  And finally, here in the U.S. venture capital fundraising was very high, and Spark Capital's Todd Dagres believes cleantech, social networking and Internet video are "frothy".

Why residential energy techs don’t get adopted

Rob Day: January 15, 2008, 8:17 PM
In the cleantech market there are a lot of very smart, worthy ideas for energy techs aimed at residential applications: energy efficiency plays, distributed generation and backup power plays, etc. It's important to remember that there are two very different markets for these kinds of applications -- new homes and retrofits. In sales to new homes, the key target customer is the builder. Installation issues are relatively lessened, costs are more easily bundled into the overall house value, and it's a single corporate sale rather than multiple individual homeowner sales. Nevertheless, the retrofit market is significantly larger and in many cases critical to the upside revenue potential for any new technology, product or service. So the retrofit market is the key. Unfortunately, in the retrofit market there are serious obstacles standing in the way of widespread adoption of even winning residential energy technologies. This fall, our family decided to switch our New England home from oil heat to natural gas heat. A low-tech decision. In this region (as well as many others), the cost of natural gas is currently less than half that of heating oil (on a $ per mmBtu basis, wholesale). And besides the economics, it also brought some benefits in terms of better heating and ability to use gas-fired appliances, etc. Someone tell Bob Catell (CEO of KeySpan Energy, our natural gas provider) to give me a call. Because just like my similar experience installing new insulation, the implementation of this change was far from easy. And that's hurting his business. First of all, the information for us to make an informed decision about our various choices wasn't there for us. We had some non-specific information self-searched from the internet, and a KeySpan-sponsored contractor who spun us with best-case economic scenarios, hadn't even heard of most of the newer innovations I asked him about, but assured us that "My guys are professionals. They're not kids. They're men." Alrighty then. And other potential contractors weren't helpful either. A chimney sweep helpfully informed us that the switch from oil to natural gas would require installing a new stainless steel chimney liner for the low price of a few thousand dollars, or suffer dire consequences. And then the KeySpan guy told us that the chimney sweep was blatantly lying, and we had to (hopefully) confirm it with other information after much additional web searching. Basically, homeowners don't have impartial, accurate, specifically useful information to turn to. Secondly, the economics were challenging. Even with some discounts from KeySpan (which also greatly limited our equipment choices), and the much lower fuel costs going forward, it was still several thousand dollars by the time all was said and done (even without a new stainless steel chimney liner) and that makes the payback period about 4 to 6 years or so. All up front cash, too. There may be financing options we could have used, but they weren't presented to us by the service providers. Thirdly, the cast of characters involved was quite long. KeySpan had to come hook up our house with gas. A contractor sold us on the job. He brought in a subcontractor ("Digger", a great guy) who actually did the installation of the new equipment and removed the old boiler. KeySpan had to then come back and hook up the pipe to the boiler. An inspector then came by and growled at Digger for a while. And then someone else had to come back and remove the oil tank. With so many players involved, planning suffered, and different perspectives meant re-directs midstream. Without ever talking to him directly, we were informed that the inspector said that we're going to have to get the chimney sweep to come clean out the boiler's flue, sign a piece of paper certifying that it's clean, fax that to the general contractor, have them cross out any disclaimers and take on liabilities that the sweep isn't willing to take on, and then get that back to the inspector. Yeesh. Finally, it was a royal pain during implementation. The research on the front end (including competitive pricing) took too much effort. Digger was here for three days, requiring one of us to be at home during the process. The whole chimney sweep issue has been frustrating to say the least. And now our home stinks of heating oil, as a result of the tank removal process. All of these problems can be pretty easily fixed. Massachusetts should be providing better incentives for this kind of retrofit -- it just makes economic sense for the state. KeySpan should be making it a lot less painful with better project management and by mandating better and more consistent processes (and really, this is a critical top-line business issue for them, they need to cannibalize the oil heat market as a first priority for growth, so it's pretty amazing it's managed this way). And some entrepreneur should be making the information and competitive pricing readily available for us to do this with a one-stop-shop approach -- and perhaps taking on even more of this challenges. But the challenges remain un-fixed. I find it hard to recommend this decision to my neighbors. And this was an example with a very well-understood technology choice with relatively well-understood economics (albeit challenging). Imagine taking on a new technology as part of this kind of process? Without any incentives in place? Without even the limited information we had available? You start to understand why energy and water techs aimed at residential applications, even those with a really compelling story to tell, face huge challenges in market adoption. And thus why it's a challenging market for venture investors to get into. The opportunity is worth investigating, but the challenges must be acknowledged, and addressed. [2/13/08 update: Wanted to make sure and include an update on the flue liner question... After the KeySpan guy said that the chimney sweep was lying, but the sweep insisted he wasn't, we spoke with a house inspector and got his take -- that indeed you do need a new liner if you're installing a high-efficiency gas-fired heater and pumping the flue gas out your old heating oil exhaust flue, because it does create acidity issues that will degrade the old liner. He said that if your new furnace is 85% or more efficient, it could be an issue. "Fortunately" it turns out that the "high-efficiency" furnace we got through KeySpan's rebate program is actually only 80% efficient. So we're supposedly safe. We will continue to monitor it, however. Also useful to note is that the inspector explained that we would be just fine with an aluminum liner, not a stainless steel or even a new clay liner, and that therefore it should only be "a few hundred bucks" and not the couple of thousand the sweep had told us. ...In all, just more fodder for the argument I made in this column at the time. rd]

Deeya, EnerTech Environmental, StreamControl, and investor news

Rob Day: January 9, 2008, 6:20 PM
  • Flow-battery (large-scale energy storage) developer Deeya Energy has raised a $15mm Series B round, led by NEA and including existing investors BlueRun, DFJ and DFJ Element.  Some fo the capital will be used to fund development of a factory in India.  VentureBeat and GTM also had write-ups.
  • EnerTech Environmental, which is developing plants to capture energy from wastewater sludge, has raised a $42mm second round, led by Citigroup and Masdar, and including Nimes Capital and CNM.
Other news and notes:  Here's a pretty good overview on carbon capture and sequestration (CCS)...  Measurement and verification -- critically important in the carbon offset business...   Nathanael is thinking BIG this year...  An update on biofuels...  An update on green electronics...  Pretty interesting tally (note: pdf) of the biggest R&D spenders in the corporate world (lots of them increasingly focused on cleantech)...  Finally, don't try this at home with your salt shaker.