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Debunking some of the myths around cleantech venture capital

Rob Day: June 30, 2008, 7:24 AM
The myths being thrown around about cleantech venture capital perhaps reached a new height of silliness this weekend, with a NYT article which suggested that cleantech venture capital is responsible for the lack of VC-backed IPOs in the last quarter (also mentioned in this Earth2Tech post). They reported that some VCs said that"the pipeline for public offerings has dried up in part because of the considerable shift in the industry’s interest in the last three years into 'green' technologies, which was taking time to bear fruit." That's just plain silly. It does, however, provide a nice opportunity to discuss a few of the myths (and half-truths) surrounding cleantech venture capital these days, because that silly statement about IPOs rests upon a few key assumptions worth looking into: Necessary assumption #1: Cleantech venture capital activity has reached such a point that it's "driving the bus" in the sector, so if there are no cleantech IPOs, then there are no VC-backed IPOs. Look, I know all the media wants to talk about is the excitement around cleantech/ greentech/ energytech these days, and not the "boring" other technology sectors [insert ironic tone here]. But it's not like the entire VC industry woke up three years ago and decided to abandon all other investments. Even by the most generous measures (and they're indeed generous, if you look at the details), cleantech remains less than a fifth of all VC dollars invested in the U.S. And most tallies put the proportion going into cleantech at much lower levels (less than 10%, according to Ernst & Young). In fact, as we noted before, health care still attracts significantly more venture dollars than cleantech. Not to mention software and IT, internet, etc. Especially when one considers the size of the market opportunity (and with some exceptions in specific sub-sectors, perhaps), cleantech remains a relatively underinvested sector. There are a lot of attractive places venture capital is going these days, and cleantech is only a small part of that. So how is cleantech possibly driving the overall venture capital asset class? Necessary assumption #2: Clean technologies take longer to mature. This falls into the category of "half-truth". Yes, when compared to a software or internet startup, a biofuels or solar startup will take longer to mature. It just makes sense. The process iterations take longer and require more capital, and the end product can't just be thrown out there into the market before being fully vetted and in some cases certified. Not problems that a Web 2.0 startup has to deal with, for example. But NO, when compared with many other venture-targeted sectors, and when the entirety of cleantech subsectors is taken into account, it's hard to argue that the entire universe of clean technologies takes longer to mature than the rest of the VC-backed markets. Since we've already mentioned health care, let's consider that as a contra-example. It's a regulatory-driven market that requires significant time to develop, iterate, and get approval for new technologies. As previously mentioned, it's much bigger as an investment category than cleantech. I'm not knocking that investment category, just asking: Why single out cleantech as being particularly long to mature? And let's consider the many efforts within cleantech that aren't solar and biofuels -- does energy efficiency software take longer to mature than other software plays? Do solar financing startups take longer to mature than other financial services startups? I'm willing to grant that there are many cleantech segments where the technologies will take a fair amount of time to mature, and that includes a few of the hottest segments in the sector -- but there are plenty of other segments where that's simply not true. This myth, that cleantech invariably takes longer to mature than other sectors, has been given some credence lately by several high-profile venture capitalists who make that argument publicly. But a) they're usually focused on the longer-gestating cleantechs like solar, biofuels and solid oxide fuel cells, and thus conflating the rest of the market into their narrow view of "cleantech"; and b) they're often referring to specific examples in their early experiences in the sector where they made a bet with overly optimistic expectations around time-to-market, and got burned. All of which is fair, and smarter investors may disagree with my point of view... but when you see a journalist (perhaps citing a VC) implying there's a consensus that cleantech always takes longer to mature than other tech types, know that they're over-generalizing greatly. Necessary assumption #3: A sector where the techs take longer to mature means a sector where the investments take longer to exit. Maybe if all VCs always invested at the same stage in a startup's development, this might hold true. But it's been clear for some time now that VCs have reacted to the longer gestation periods for solar and biofuels (where most of the capital has been deployed) by shifting later stage. According to the Cleantech Group, while the number of seed and "first round" cleantech venture capital investments actually fell from about 200 total in 2003 down to about 175 total in 2007, "follow on" rounds shot up steadily over that period from 150 in 2003 to 300 in 2007. Later stage venture capital has been driving the growth in venture capital spending in cleantech. Basically, if a technology takes 3, 5, 7 or 55 years to mature... but the investors don't get in until it's just a couple of years from commercialization... how does that affect the amount of time between writing the check and the exit? The longer gestation period may be a reason why some investors have been moving later-stage, but it shouldn't be a reason for any gap in exits, in other words. Now, what may have been happening is that even "follow on" rounds into cleantech companies have ended up being further from a point of exit than had been expected by the investors when they did the deal. But what that says is that the gestation period of clean technologies doesn't matter... the VCs' ability to ESTIMATE the gestation period of clean technologies is what matters. And as they've gotten smarter about making those estimations, many have gone later and later in their investments. To the point where now we see the emergence of very large cleantech funds being raised with the explicit expectation of shifting a bit more (as a proportion of dollars spent, at least) into "growth stage" investments. At my firm, we are early stage specialists in cleantech. But we're not seed stage investors. Because we know that in many sectors it can take longer than expected for the technologies to be developed, commercialized, and adopted by the market. It's just a strategic choice we've made. Other firms are making other strategic choices, and some have chosen to focus more on later-stage investments, especially during this period when exits have been forestalled. Still others (esp. including angels) continue to focus on seed stage investments, filling that pipeline referred to in the article. There's no single uniform timeframe venture investors are targeting, in other words, so the journalistic tendency to paint the entire category as some monolithic herd is a bit misguided. In any case, there's no inherent reason why, even though solar and biofuels have longer tech maturation periods, that should have any impact on exit timing for venture capital investments. It's not like VCs have been doing only early-stage cleantech investments over the past few years. Necessary assumption #4: Any of the above assumptions, whether right or wrong, would have any impact at all relative to the overall macroeconomic effects being felt right now. What makes the NYT article particularly silly is that it flies clearly in the face of available evidence that there are indeed numerous cleantech startups that are primed to IPO as soon as the overall window opens. In fact, as we've talked about before, 2008 was supposed to be the year of the first big wave of VC-backed cleantech IPOs, which are now only being held back by broader market conditions. Investment bankers are saying that cleantech will be the sector that leads the way when the IPO window re-opens. Retail investor interest in the sector doesn't appear to have waned much, as record oil prices continue to make the most visible argument (albeit far from the only one) that the underlying fundamentals are greatly in favor of strong growth in cleantech markets. So far from being blamed for the IPO "gap" this year, cleantech is being viewed as a potentially critical sector that will drive the next wave in exits. The simple fact is that the macroeconomic conditions, and the mood on Wall Street in general, is not conducive to IPOs of any color. So the argument that cleantech is a significant reason for the lack of VC-backed IPOs this quarter is just plain silly. ...although perhaps not as silly as bottled water economics. Finally, on a lighter note, this cartoon was kind of funny.

A big fat zero

Rob Day: June 26, 2008, 3:51 PM
That's the answer to the question:  "How many venture-backed IPOs are there going to be in the second quarter." That's a stat about all industries and sectors, not just cleantech. But it definitely does affect cleantech nonetheless.  As we've talked about on this site for some time now, 2008 was supposed to be the year of big exits in cleantech, particularly in solar but also in other hot sectors.  But with only 5 VC-backed IPOs across all sectors in the first half of the year, it's not looking like all of the backlogged IPO candidates are going to make it out the window whenever it finally re-opens.  There are a number of companies that have been burning through a significant amount of capital trying to ramp up production in advance of anticipated IPOs, but now they're short of cash and the public markets aren't available to replenish the coffers. So it's no surprise we're seeing so many growth capital financings in cleantech.  I spoke recently with one fellow cleantech investor whose firm had led a recent big financing, into a revenue-stage cleantech company that's been rumored for some time now to be gearing up for an IPO.  I asked him point-blank if the reason that financing opportunity had come up was because the IPO window was closed to the company, and to his credit, his one-word answer was "yes."  So when you see big "venture capital" funding announcements this year, into companies that may have been otherwise expected to IPO, know that that's going on. The thing is, that's not venture capital as classically defined.  To borrow a line from Seinfeld, "not that there's anything wrong with that."  Returns are returns.  But still, it's certainly not the early-stage venture capital approach that most people associate with the asset class. Nevertheless, as more cleantech venture firms raise big new funds and shift toward later stage, and as big new "growth stage" funds are raised, expect to see more of these types of financings.  Right now, it's open hunting season for these funds as the IPO window is closed and many big-name cleantech startups need capital (and their founders may be looking to cash out a bit).  But when the IPO window opens back up, will these private financings have to compete with public markets for these kinds of cleantech investments?  Time will tell... What's interesting is to juxtapose these trends in the sector with what VentureWire reported today about a discussion among limited partners at Dow Jones' recent LP Summit, on the topic of early-stage vs. later-stage venture capital.  According to the quoted LPs, they're committed to investing in early-stage venture capital, seen as producing the best returns over time -- even while "venture capital dollars have been flowing further downstream over the past few years."  Specialization, they reported, is also correlated with strong returns.  So as many of the better-known specialists shift their focus a bit toward later-stage in cleantech venture capital, what is an LP to do?  Clearly the shifts in the cleantech venture capital sector are part of a larger shift across the venture capital category. It wasn't a column about cleantech at all, but for those with access to VentureWire, today's write-up was worth checking out. Deals from the past week:
  • Make sure and check GTM's Funding Roundup columns when they come out (one of the benefits of bringing this amateur-hour column over to GTM is getting to lean on such professional resources).
  • Fotech, a UK-based company with optical fiber-based technology for the detection of leaks in oil and gas pipelines (among other applications), has raised a GBP 6.5mm round of financing from Scottish Equity Partners, Energy Ventures and Saudi Arabia-based Shoaibi Group.
  • Cleantech investors in the news:  Speaking of LPs, this column on Business Week's site points out that many university endowments aren't investing in the same kinds of green technologies that their campus operations and students espouse...  And here's more information on Todd S. Thomson's $1B Carbon Opportunities Fund.
Other news and notes:  It's impressive to see the intelligence agencies start lobbing in on the dangers of climate change...  Dan Primack on McCain's battery prize proposal...  For those looking to invest in publicly-traded cleantech stocks, look elsewhere for your tips -- here's a good blurb with some recommendations...  A nice overview on watertech investing...  A nice overview on nanotech markets...  Cleantech -- Bubble Schmubble...  Finally, Alberta smells better than Toronto!

The auto industry needs to engage the VC and innovator community

Rob Day: June 19, 2008, 2:09 PM
Had the pleasure of attending Ernst & Young's Cleantech Ignition Session earlier this week in NYC. An invite-only group of about 30-40 transportation industry participants, including representatives from government and inside the beltway, from transportation OEMs and suppliers, and from the investment community. The topic: "Leveraging cleantech to build a sustainable advantage in transportation." E&Y will be writing up a report on the session for later release, and until then, what was said in the room stays in the room. But there were a number of very good thoughts in the wide-ranging, open discussion, and some compelling ideas. I'll highlight one in particular, just because it was said by me, so no disclosure problems here (sorry, but you'll have to wait to read about all the more insightful comments made by other participants): It seems to me that the auto industry has a very intriguing opportunity right now to use all of the recent entrepreneurial and investment activity in clean transportation tech to their benefit. This opportunity could help them address the evident "gap" between highly innovative demonstration vehicle programs, and the historically slow pace of adoption of core innovations into mass-production models. It's no surprise that such a gap would exist. It's relatively inexpensive for such large organizations to spend money on onesy-twosey demonstration vehicle programs where the engineers can play around with new technologies to see what might work. But scale-driven economics means that, in order to get costs down, standardization and large production runs have to be the operational model. And it's a huge gamble to integrate a very core, and very different, technology into a large production run vehicle. So it's relatively easy to do something very unique at the demo level, it's almost impossible to get someone to take a potentially Career-Limiting Move of integrating new tech into a full-scale production vehicle, and there's no in-between. But now there's an in-between. Outside the OEMs themselves. But instead, in the entrepreneurial efforts out there. And during a time when auto R&D budgets are being slashed, the transportation industry is possibly being turned on its head, and public (and regulatory) pressure are mounting for greener options to be seriously pursued, it's time for the auto industry to more actively engage. Auto OEMs could be meeting with, challenging, investing in, and co-investing with the cleantech VC community. What the chemicals, forest products, and many other industries have found is that the venture community can be an important conduit for identifying and working on new innovations, large to small. And for getting a ring-side seat while those innovations are being tested in other early markets, proving themselves out. Likewise, the Auto OEMs could be collaborating or even partnering with some of the upstart OEMs being launched by entrepreneurs -- these small production volume plays will be a great early testing ground for innovations that then the incumbent OEMs could more confidently integrate into their own future products, but only if they get first-hand knowledge of what's working and what isn't. So it would have to be engineer-to-engineer collaborations, not just high-level PR events. There have been some early signs of the above shifts possibly starting to happen. But only starting to. It would be smart for Detroit to take on an even more deliberate commitment to engaging the venture and entrepreneurial communities around serious innovation efforts. Deals from the past few days:
  • Rubber recycler Lehigh Technologies raised an undisclosed (but "significant") amount of financing from Kleiner Perkins and Index Ventures, with the proceeds going to fund the building of a second plant next year (at a cost of $15mm) -- this, according to VentureWire. The company had previously raised more than $18mm from NGP Energy Technology Partners and others.
  • One deal where the amount WAS disclosed was Spectrawatt's $50mm round, led by Intel Capital, with participation by Goldman Sachs subsidiary Cogentrix Energy, PCG Clean Energy and Technology Fund, and German solar company Solon. The silicon-based PV manufacturer is a spin-out from Intel. Not to be outdone, IBM this week also announced plans to get into CIGS manufacturing via a JV with a Japanese partner. Interesting build vs. buy decisions evident in the solar industry right now...
Other news and notes: More on politics, since 'tis the season -- here's a recap on some recent developments out of the campaigns, related to cleantech... Cleantech cluster-building around the globe continues -- see The Nordic Green Network, and this interesting column tying climate change regulation in California to the growth in regional cleantech VC activity... Even Beaumont, TX is getting in on the action... "The anti-cluster-building" effort (in a good way) of the Virtual Energy Forum has finished for now, but you can still log on and view some of the happenings... Not sure I agree with all his sentiments (although I appreciated the kind blogger-to-blogger 'shout-out'), but Mark Modzelewski is certainly throwing down the gauntlet... Meanwhile the Cleantech Avenger wonders why we can't all just get along... EcoSearch donates your Google search generated ad revenue to green causes... Neal is looking for bloggers to join in with the HuffPo of cleantech... Finally, VentureBeat has word of a $3B cleantech private equity fund being raised.

“How do I break into cleantech?”

Rob Day: June 14, 2008, 3:38 AM
As the sector heats up, far more people than I can possibly help are approaching me with this consistent question. And while it's a bit frustrating not to be able to help out as much as I would like, it's certainly encouraging for the sector to see so much smart business talent seeking to get involved. Almost 3 years ago now I wrote up a post on breaking into the sector, and most of it still applies well. One major difference is that there are a lot more opportunities to get involved, given the sheer number of additional business efforts underway now. So take heart, job seekers! But also take to heart that the single most important thing to remember is that it's probably best to look to take what you already have been doing and figure out how to translate that into a cleantech context. If you're a sales and marketing professional, what industries have you been selling into, and what are their energy, water and materials needs? If you're an operations professional, what clean technologies require similar manufacturing approaches? Etc. Too often the individual job-seekers or entrepreneurs seem to be wanting to simultaneously change markets, skillsets, etc., in order to go after the "hot" market segments. But the great thing about cleantech for investors and job-seekers alike is how broad and varied clean technologies and cleantech markets are -- and how much they tend to resemble other, more traditional sectors one way or another. So find the place where you fit and are needed, don't just go after the sectors getting the headlines. Other ways to get involved: The California Clean Tech Open is soliciting entrants, but the deadline is TODAY, so sharpen your pencils and get to work on that business plan... And in a lighter-touch vein, REBN is working with The Economist on their Corporate Sustainability Debate, join in and have fun with it. Deals from the past week:
  • Cleantech investors in the news: Jim Matheson of Flagship Ventures has been writing up his experiences touring around the UK discussing cleantech -- check out his adventures here, here and here.
Other news and notes: Cleantech patent activity has been pretty flat over the last couple of years -- with some of the hotter sectors seeing some curious declines... Toyota puts PHEVs on a path for 2010 commercialization... More and more, the consensus seems to be that water is the next big thing... Finally, Earth2Tech did a nice FAQ on Obama's energy policy proposals.

A new record?

Rob Day: June 7, 2008, 3:33 PM
What's the largest single LP commitment to any single private equity fund in history? I have no data on the subject, but it would seem to me that if CalPERS does indeed make a $640mm commitment to Vinod's fund, that might set the new record.  Curious. And as another previously early-stage focused investor raises another huge fund, it really shows how these funds are looking to shift their strategies a bit. Especially coming after RockPort's announcement this week, it's even clearer that many cleantech venture firms are going to be putting more emphasis on putting more money into their deals.  And thus, that there has to be some kind of continued shift into later-stage investments in terms of portfolio mix. In other news, it was a quiet week in announced deals, but that should change soon -- we know of several deals that are being done right now that haven't quite made the "announcement stage" yet, so it's not like the sectoral activity is slowing down at all... That having been said, here are this week's deals:
  • VentureWire reported that natural insecticide developer EcoSmart has raised an additional $5mm as an extension on their $14mm (total) 2006-vintage Series C .  Existing investors Cordova Ventures, Delta Capital Management, Early Stage Partners, Element Partners and RockPort Capital Partners provided the capital.
  • Cleantech investors in the news:  Bucking the "go big and go late" trend among cleantech investors, Ventures West is targeting $200mm for their ninth fund, according to VentureWire.  The Canadian firm invests across a number of sectors including cleantech.  That would be down from their last fund, which was around $250mm.
Other news and notes:  $45 Trillion makes $10 Billion seem like a pittance, all of which puts $640mm into perspective...  A survey of VCs says that the U.S. is not necessarily the best place for cleantech these days... For  we econ-policy-carbon pricing wonks, this survey is pretty interesting -- seems like $4.00 per gallon of gas is a bit of an inflection point in terms of driving behavior...  Finally, and now for your voyeuristic pleasure, here's Matt Damon in a Tesla.

RockPort’s $453mm 3rd fund, and cleantech is not biotech

Rob Day: June 5, 2008, 2:37 AM
Jonathan Shieber has a very good column in this morning's VentureWire, reporting on RockPort's big announcement about the close of their third fund, at $453mm. The column uses RockPort's fund, as well as Element's $400mm ongoing fundraising, and NGEN's $500mm targeted fundraising, to describe how the cleantech venture market is "maturing." A few initial reactions, this morning, to some of the points in the coverage of this news: First of all, big congrats to RockPort -- and for everyone else, this kind of fundraising momentum continues to show that LPs now consider cleantech a legitimate investment sector. As Dave Prend of RockPort is quoted as saying, in the above-linked VentureBeat story, "In 5 years if you interview anyone from Rockport, we’ll just be another venture fund. The fact that we do cleantech won’t be notable." Amen! Secondly, this is another sign of how many of these investors are shifting away from early stage investing to target late stage investing. Daniel Englander of GTM reported yesterday that RockPort's new fund will have much more of a focus on later-stage investing. [6/6 update: While the new raise will enable the firm to target more later-stage activity, they are still actively investing early stage, they have told me]  The VentureBeat column adds in that the firm looks to invest in fewer firms with their new larger fund, than the 40 companies they invested in with their first two funds, which together totaled less than the new one. So clearly, larger checks than in the past, and thus it's implied they'll be doing more later-stage investing. Furthermore, as we discussed earlier, one Element LP has described that their new fund will only allocate 20% to early-stage investing. So as the VentureWire story today described, later stage is perhaps starting to look a bit crowded, but all this is actually pretty good news for those still focusing on early stage investing -- all these high-quality later stage investors will have to be follow-on investors at some point. Thirdly, and somewhat discouraging, it's notable to read in Shieber's story that part of what's motivating Element's bigger fund, and possibly RockPort's, is a desire to move away from syndicating deals. Michael Bevan of Element is quoted as saying, "We've had to syndicate transactions to appropriately capitalize companies, and we are targeting a larger fund so that we can avoid that on an ongoing basis." Syndication, in the opinion of many investors and entrepreneurs I speak with, has been critical to the early success of the cleantech investment category. Cleantech markets are so broad, so diverse, and so complex that no one investor can ever hope to be an expert on all the technologies, all the markets, and also have full geographic scope. Having more smart board members, each bringing their own set of skills and experiences and networks, is often critical to the success of cleantech startups. It's not just about having deep pockets. The collegial nature of cleantech venture capital has been a very important part of the sector's growth and, frankly, one of the key factors that make it fun to be a cleantech investor -- collaborating and sharing with other investors, knowing at some point it's likely you'll end up investing together. It's something I know our entrepreneur business partners have valued as well. So I hope this doesn't end up, in retrospect, being a watershed moment in the industry, the point where that synergistic dynamic broke down. I suspect it isn't, because cleantech investments work best when there's a strong syndicate of investors for the reasons given above. And fourth, and relatedly, there's the statements and implications in the VWire column that the investor community has concluded that cleantech is "going to be much more like biotech than it is going to be like IT," in terms of capital intensity and lengthy adoption cycles. Yes, for many cleantech sectors, notably the hyped up solar and biofuels sectors, some investors have been surprised at the level of capital intensity. But for every capital intensive, "we're going to need to build a refinery or power plant" business plan, there are capital efficient plays (in energy efficiency, for example) that in fact look very much like IT. And even when capital equipment is core to the opportunity, venture capital equity isn't the only possible source for that capital. As we discuss here all the time, it's near-impossible to make broad characterizations of cleantech venture investment profiles, across all these varied markets, technologies and sectors. A solar cell looks very different than a fuel cell, which looks very different than a D-cell battery, which looks very different than a desal unit. So in other words, this morning it's encouraging to see RockPort's successful close, congrats to the team. But it's also interesting to note that, based upon some of what's being written about the sector lately, it seems that investors are starting to gravitate toward some pretty divergent views on the market.

Big news with REBN

Rob Day: June 3, 2008, 3:02 AM
As some readers will know from earlier posts, and perhaps as participants at past events, I help organize the Renewable Energy Business Network, or REBN. Last night more than 400 clean energy professionals came out to an event we organized at the Cleantech 2008 conference, and co-hosted with the New England Clean Energy Council, the U.S. DOE's Energy Efficiency and Renewable Energy Program, and the American Council on Renewable Energy. A great indication of the level of interest in this industry right now, and of the desire those in the market have for being able to connect with each other. We used the event to announce some major changes for REBN, which has now been incorporated as a national non-profit organization dedicated to helping clean energy professionals make those connections, for learning, sharing and collaboration. REBN is also rolling out chapters nationwide, with chapters now up and running in Boston, San Francisco, Houston, Austin, Denver, Seattle and New York, and with others in formation in other places across the country. REBN will also be developing some cool web-based and event-based efforts down the road as well.  [Update:  see press release here] The REBN expansion story is really indicative of what's been going on in this market. REBN was originally started around seven years ago by a group of renewable energy professionals (such as Josie Gaillard Taylor and Dan Kalafatas, among others) in the San Francisco area. Their low-key, informal networking approach attracted others among their colleagues, and over time the group grew into a good regional effort. Last year, Andrew Friendly and I launched a REBN chapter here in the Boston area (I'd been helping to run REBN out in SF before moving east), to try to help bring people together in the same way. The response was immediate, as the group's informal, come-as-you-are approach seemed to resonate with the Boston cleantech community in the same way as it had in the SF community. And as we chatted with people in our broader networks about our experiences, others started approaching us about launching REBN chapters elsewhere, so that chapters were spontaneously starting up in places like Austin and Denver. At which point formalizing the organization and facilitating that organic expansion started to make a lot of sense. The organization now has nearly 2,000 members across these chapters, and with the national expansion that's already growing quickly. This overwhelming wave of interest, largely over the past year-plus, across the country, is really indicative of the overall level of business, researcher and entrepreneurial interest in cleantech right now. From an investor's perspective, that's a phenomenal sign. It says the industry has hit an inflection point, where great ideas are attracting great people with more great ideas. Perhaps the most telling anecdote last night was the conversation I had with one inventor with an energy-related startup effort. As he was telling me about his startup, I mentioned another similar effort I'd seen recently. This entrepreneur then pointed at another REBNer a few yards away, and explained that that entrepreneur ALSO was working on related technologies. They'd just met at the event that evening, and were already figuring out to work together to take their efforts to the next level, jointly. That's what REBN's all about.