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The return of solar mega-deals

Rob Day: August 28, 2008, 8:27 AM
It's been amazing, as a long-time follower of energy policy and politics, to see just how central energy tech has been in the convention out in Denver. If you weren't watching C-Span, you likely didn't get to see it (the cable news networks seem to prefer showing us their own hired analysts instead of the speeches they're supposedly there to cover), but on Tuesday for example there were speeches by several governors specifically on energy policy issues, a "town hall" panel on the same topic, and even a speech from a cleantech VC, Nancy Floyd of Nth Power. Most Americans may not have gotten to see much of that thanks to the blathering bloviators in the studios, but it was clear that cleantech-related issues are very central right now in the political discourse. We'll see if the same emphasis is made at next week's event, but even if not it's still a bit of a watershed event for cleantech to be so front-and-center... So yours truly needed to step away from work and extracurriculars like this blog for a while, and it looks like I picked the wrong week to quit sniffing glue.  There's been a huge number of deal announcements, especially for a time of year that's traditionally pretty slow. Deals that came out this week include:
  • Ho, hum...  Another week, another massive solar financing deal being announced or sought.  This week it's $300mm into Nanosolar from back in March, with the financing provided by AES, EDF, Riverstone Partners, Lone Pine Capital, the Skoll Foundation, the Omidyar Network, GLG Partners, Beck Energy, Grazia Equity, and others.  Not a lot of VC firms in the round, pointing out once again how these types of financings may not be classically what we would consider venture capital.  Oh, and today came word of AVA Solar's $104mm round of financing, led by DCM and also including Technology Partners, GLG Partners, Bohemian Companies and Invus.  This, of course, follows news from the last couple of weeks that Solyndra is also looking to raise a big round of financing...
  • Drinking water treatment company MIOX has raised a $19mm Series C led by DCM.  Existing investors Sierra Ventures and Flywheel Ventures also participated in the round.
  • Algal biofuel effort Solazyme has raised a $45.4mm Series C including $6.4mm in convertible securities.  New backers Braemar and Lightspeed joined existing investors The Roda Group and Harris & Harris.
And in the interest of completeness, here are other deals that came out before this week that I didn't get a chance to post:
  • Here's a nominee for best quote of the year:  "Five [million dollars] is not a round," according to Segway CFO Brian Cohen, in discussing the company's recent unannounced $5mm Series D investment from an unnamed strategic investor.  VentureWire had the details on Monday the 18th...
  • Geothermal tech startup AltaRock has raised a $26.25mm Series B, led by existing investors Kleiner Perkins and Khosla Ventures, alongside new investors ATV, Vulcan Ventures, and also put $4mm into Potter Drilling recently.
  • Trilliant Incorporated, an AMR systems provider, raised $40mm from MissionPoint and zouk.
  • Environmental Operating Solutions (EOS) has drawn down the first tranche of a $2.5mm round of financing led by Stuart Mill Venture Partners.
Some cleantech investor news:  VentureWire reported that CMEA is thinking about raising yet another big "growth stage" cleantech fund, this one at $400-500mm...  Here's a nice profile of the CalCEF Clean Energy Angel Fund...  VC is down in Europe but cleantech had its biggest quarter ever. Also, here's Neal on "cleantech" vs "greentech"...  And finally, forget liquid fuels or electricity, maybe it's time to bring back steam-powered transportation.

Few acquirers in cleantech?

Rob Day: August 22, 2008, 1:52 PM

Apologies to everyone for the lack of posts for the past couple of weeks. At least I have a good excuse (see pic)...

So what did we miss over the past week-plus? Not much. A few deals (and we'll do a bit of an update on those next week), Google putting money into geothermal, and a coming free-fall in silicon prices. Frankly, my news alerts have been filled with much more generic fluff/ hagiography about "big name VCs are jumping into cleantech, and say it's the next big thing!" than any real news items on the subject.

There was also a brief two-part discussion from Dan Primack of PE Week Wire on the cleantech wave. Dan always takes a good critical eye to any emerging trends, pushing past the fluff to get to real issues, so it's worth checking out his thoughts (here and then here). I find myself largely in agreement regarding Dan's "on the one hand, but on the other hand" take on the sector right now, for reasons regular readers of this column will already find familiar...

One question for Dan, however -- what's the justification for saying that there is "a relative lack of potential acquirers?" Energy, water, and materials significantly touch so many major markets, and so much of the Fortune 500, that it's a very surprising comment. If anything, one thing that has excited long-time investors in the sector is the deep pool of potential acquirers. Heck, if even Google and Bank of America -- which don't make any physical products -- think energy tech is a strategic priority, I'm challenged to think of any industries for which looming natural resource constraints WON'T lead to opportunistic acquisition thoughts. Don't believe me? See the track record even before the latest hype cycle, in this somewhat-dated presentation from the Cleantech Group (note: link opens PPT file). So, Dan, why are there relatively few acquirers for cleantech companies?

A must-attend event in San Francisco on Wednesday

Rob Day: August 11, 2008, 8:18 AM
For those who can make it, the Marines' Memorial Association (in association with the Renewable Energy Business Network) will be holding what should be a fascinating forum on Wed. evening. As the campaigning season ramps up into full swing, try as you might to avoid it, you can't help getting wrapped up in presidential politics if you care about clean technologies and energy policy.  Energy policy is now front-and-center in the political debate at the national and at most state levels.  Many people are expecting pretty big shifts come 1/20/09, but there are a lot of unanswered questions about what these shifts might look like. On Wednesday evening, the Marines' Memorial Association will be hosting a debate between high-level advisors from each of the campaigns, moderated by Jim Sweeney of Stanford.  You need to register to be able to get into the event, so do so immediately if you want to attend. And hurry, space is limited and it sounds like it will be pretty full.  Click Here to register.

What we can learn from A123

Rob Day: August 11, 2008, 8:04 AM
The big news over the last few days has been the IPO filing of lithium ion battery innovator A123, who's looking to go public on NASDAQ sometime soon. Much will be written elsewhere about the prospects for the company's IPO, by those who follow the public markets more closely (and to reiterate the disclaimers, don't get your investment advice from this column, it would be the blind following the blind and we take no responsibility for your investment decisions, good or bad). But there's also a lot of information in the company's S-1... I thought it might be good to go through some of this info as a means of illustrating what a "successful" (still to be proven, but so far so good) cleantech venture investment of a certain type (energy storage, using a capital-intensive "build them ourselves" business model) might look like. Funding history (note: all of the below are extrapolations and over-simplifications which are intended to be illustrative, but in fact may be quite wrong): 2001 - Founded out of MIT. Unclear what seed capital may have been provided. 2001-2004 Raised $12.7mm in Series A ($1/sh) and Series A-1 ($1.50/sh) funding. June 2004 Raised $20mm in Series B ($2.08/sh) [note: this was widely erroneously reported as a "$30mm Series B" since the company reported their aggregate raises at about the same time], pre-money approx. $58mm. Feb 2006 Raised $30mm in Series C ($3.37/sh), pre-money approx. $125mm. Aug 2007 Raised $70mm in Series D ($6.56/sh), pre-money approx. $300mm. Feb 2008 Raised $16.5mm in common ($7.22/sh), pre-money approx. $400mm. Jun 2008 Raised $102.1mm in Series E (16.59/sh), pre-money approx. $1B. The above valuations are really rough estimates, but still provide a bit of insight into the investment path on the way to an IPO for a company of this business model. The amount of Series A, especially given the dynamics of 2002-2003 energy tech VC, show that the early investors were pretty excited about this one right from the beginning, and probably paid a high single digit million pre-money valuation, likely higher in the teens or low twenties as a pre-money. That's higher than many Series A stage valuations that we see even in today's market. The progression of valuations shows a steady march upward, practically doubling or tripling each year. That's more of an exception than a rule in any VC category, naturally, since we're looking retrospectively at a company that looks like they'll be a success of some kind. However, given that the company mentioned earlier this year that they were planning to IPO, the valuations on the GE-bought common round in Feb and particularly on the Series E are indicative of a high confidence in that IPO taking place. Notably, the Series E appears to have mostly been from new investors, since GE ($30mm of the $102mm round) was the only participant in that round who is now a 5% stockholder. So it's a bit of an illustration that these "venture capital" late-stage, pre-IPO rounds are often mostly done out of the pockets of non-VCs, and thus it's misleading to include these kinds of rounds in the quarterly venture capital surveys that are put out there. Nevertheless, most of the surveys continue to do so, and that's one reason why we continue to see a few megadeals dominating the dollar totals each quarter. Business model and capital needs I described the company's model above as "capital intensive, build-them-ourselves". There are a lot of paths a company can take with the development of innovations that will eventually go into devices (be they batteries or turbines or solar panels, etc.). The spectrum of capital intensity roughly goes from simple licensing to someone else who is manufacturing product, to building subassemblies to be integrated into other OEM's devices, up to developing/acquiring manufacturing capacity and building the entire device yourself. There are reasons to like and dislike all the choices. A123 has chosen mostly the latter route, having acquired significant China and Korea based manufacturing facilities and employing nearly 1,000 people now in manufacturing. This choice means higher revenue but it's also meant bigger capital needs along the way. They invested approximately $28mm in 2007, for example, in capex and acquisitions to build out manufacturing capacity. And in Q1 2008 they burned through $13.5mm in cash (not counting financing inflows) even while at a revenue run rate near $40mm/yr. They raised an aggregate $235mm [8/11 update: corrected previous bad math] in preferred equity along the way, not counting the common equity raised earlier this year or any other common shares sold along the way, nor the relatively smallish debt the company raised during the growth path. Not a game for those with thin wallets or for the faint of heart... Fun with Fair Market Value On pp 52-53 of the S-1, there's an interesting progression of the FMV on common stock as decreed over time. What's interesting is to see how the exit scenarios progressed over a short amount of time: March 2007: 25% chance of IPO, 25% chance of sale at or below liquidation preferences, 50% chance of continuing as-is. At this point, importantly, the company already had significant revenue and was in the process of raising their Series D. August 2007: 40% chance of IPO, 40% chance of sale at or below liquidation preferences, 20% chance of continuing as-is. Clearly, there were pretty high liquidation preferences at play... July 2008: 75% chance of IPO, 25% chance of sale above the liquidation preference, chances of a sale below the preference or continuing as-is were zero. Reading between the lines, looks like the company had received a potentially attractive acquisition offer and that it was clear there was going to be an exit soon one way or another. But that's purely speculation on my part... The odyssey of an early investor One name that comes up repeatedly in the document is North Bridge. It's clear that they were fairly early investors in the company, purchasing something like 4.93mm pre-Series C shares, 1.6mm Series C, and 1.3mm Series D. Unclear whether they participated in the Series A/A-1 or not from the publicly-available info, but it's probably a safe assumption. Over the holding period, even while the company seems to have consistently progressed in product development and market development, from North Bridge's perspective it must have felt like there were some significant shifts along the way. Looking at the Series B investors, we see names like Motorola, Qualcomm, and OnPoint. This indicates a market vision in devices. When they came out of stealth mode, the story was big on power tools. But with the recent upswing in hybrid vehicles and now the partnership with Chevy around the Volt, A123 is as much as anything else a "next generation transportation" play. The latest vision as articulated in the S-1 is grid-scale storage. Perhaps North Bridge's investment team saw this from the beginning, and it's all rolled out exactly according to plan. But my guess is that the original pitch was heavy on the device market and light on the vehicle and grid storage markets, and that the vision of the company has significantly shifted over time. It's so tough to know so many years ahead of time what's going to be the real success driver for a company, and investors have to make the decisions they can with the info available at the time, and encourage the management team to balance focus with opportunism along the way as markets shift and emerge. It would be great to see A123 succeed in general, but for North Bridge in particular they have to be pretty happy with the results so far. Based on the most recent Series E price, their holdings are worth approx. $130mm on paper, and their investment was probably something near to $20mm. And, with any luck, the price per share after IPO and expiration of lockup could be significantly higher than the Series E price. Not too shabby. Of course, weigh these happy results against the odds facing the company 5 or 6 years ago when North Bridge likely first got involved in the company. Not a slam dunk, that's why they call it "venture capital", but probably a smart bet in retrospect to get in that early... In conclusion A123 is a good illustration of one kind of cleantech venture capital investment, the kind that's been talked about a lot recently thanks to various investors deciding to go later and bigger -- the capital-intensive, go-for-broke model that we've seen in sectors like solar, biofuels and energy storage. It shouldn't be taken as an illustration of MOST cleantech venture capital, since so much of cleantech VC is in more capital-efficient, M&A-the-likely-exit type plays. EnerNOC, for example, had raised only $27mm and had been in business only 6 years when they IPO'd. But for all the naysayers out there who argue that there aren't good exits to be made in cleantech, A123 will be a test case. The time since founding, at around 7 years, isn't atypical for IPOs. The aggregate amount of venture financing, at $235mm [8/11 update: corrected previous bad math] (plus seed and common), is high but not shockingly high for a manufacturing-oriented business model like this. So A123 either represents a typical or slower/capital intensive example of a cleantech VC investment, all things considered. And if North Bridge and their co-investors can see terrific returns even on this kind of play at the most challenging end of the cleantech spectrum, that should help settle exit concerns out there, among those who somehow think cleantech is not yet proven as an attractive investment area. We'll have to watch and see how this plays out over the next few months...

Ausra, Blackstone, and Fotowatio

Rob Day: August 9, 2008, 3:36 AM
In the last post, we examined how solar and later-stage investments are really driving the cleantech venture sector these days.  Nice of everyone to prove our point with the various deal and fund announcements this past week -- thanks, guys!
  • Cyrium Technologies, a developer of high-efficiency solar cells for use in concentrator systems, announced a $15mm Series B led by The Quercus Trust, and including existing investors BDC Venture Capital, Chrysalix, and Pangaea Ventures.  It's unclear how this relates to their insider round from December, whether that was an extension of the A or a bridge that rolled into this B.
  • Hydrogen sensor company H2Scan announced a $4mm fourth round (Series D?) of financing from new investor TGB Partners and existing investors Chrysalix, H5 Capital, Tri-Strip Associates, Ravinia Venture Fund, and members of the Tech Coast and Pasadena Angels groups.
  • VentureWire confirmed this week that Rive Technologies has raised a $14mm round of financing led by Nth Power, with participation from existing investors ATV and Charles River Ventures.
Cleantech investors in the news:
  • With the recent shift to later-stage investing, there's been increasing angst about the seed capital gap in cleantech (we discussed it a while back).  More thoughts on the subject here and here.
Other news and notes:  Speaking of solar, Mark Modzelewski shares his blunt thoughts on the topic...  Here's a useful comparison of the recent cleantech "boom" and the internet bubble from the late 1990s... Martin LaMonica writes about Obama's cleantech-heavy energy plan...  As cleantech firms like A123, First Wind, and others line up to lead the charge in re-opening the IPO window, it's worth looking back on the NYT's assertion that VC activity in cleantech was one of the major reasons for the lack of IPO activity in the first half of the year (oops)...  Finally, here's a pretty funny column by GTM's Michael Kanellos.

Parsing the E&Y Q2 numbers

Rob Day: August 9, 2008, 2:36 AM
We talked about Q2 numbers a while back, but Ernst & Young's Q2 release this past week is particularly useful to look through because of the depth of data they released -- a great breakdown by stage, category, etc. with historical data.  Inclusive not only of energy, but also other cleantech sectors often ignored.  The E&Y data was worth the wait... The headline which you've probably already seen is that it was a record quarter for U.S. cleantech venture capital, at $962mm, way up from Q1 and the biggest quarter since 2002 (barely beating out Q3 2007). Of course, that's on a dollar basis.  The NUMBER of deals was big, yes, at 41, but that only puts the quarter at the 3rd most active quarter E&Y tracked since 2002.  Not fewer deals, really, but certainly bigger deals. What's driving this?  Two big trends are clear in looking through the data: 1.  Solar continues to bring in the dollars.  $487mm, or more than 50% of the quarterly total.  But only 14 out of 41 deals.  In terms of dollars, this was only the 4th biggest quarter since 2002 for non-solar cleantech deals.  It's all solar, all the time these days. 2.  Overall deal size is up.  Because E&Y very helpfully breaks out deals by stage in their analysis, we can see that "First Round" deals averaged $12mm in size, up from an average of $10mm last year...  But "Second Round" deals averaged $37mm for the second quarter in a row, hugely up from 2007's average size of $23mm.  There's evidence of deal size inflation at all stages, but it's most strongly felt in second round deals. It would be easy to look at the second point above and conclude that valuations are up.  It's only indicative, but generally speaking bigger round sizes will mean a bigger valuation. But it's unclear how much deal size inflation is being felt across the non-solar portions of the sector.  Let's compare to 2007 totals. 1.  The average deal size for a solar deal (note: inclusive of all round stages, unfortunately even E&Y doesn't break out the full crosstabs) was $35mm in Q2.  That's 45% higher than 2007's average solar deal size of $24mm. 2.  The average deal size for a non-solar deal was $17.6mm, 25% higher than 2007's average non-solar deal size of $14mm. 3.  In 1H08, 61% of cleantech deals were "Second Round" or "Later Stage", up from an already high 46% for 2007. So it's hard to argue that deal sizes are up across the rest of the sector.  While non-solar deal sizes are up, it's unclear how much of that is driven by the general shift toward later-stage investing. Solar and later-stage investing are driving the bus right now, and showing no signs of slowing down. What does the data tell us in terms of "what's next"?  Notably, energy efficiency deals and deal sizes are up in a big way.  Other than that, other sectors looked down or flat for the most part.