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The ones that get away

Rob Day: September 30, 2008, 5:58 AM
A quick side-note, because I've been remiss in mentioning it until now:  GTM's Green Light blog has become a must-read for me every day.  I don't mention their stuff as much as I should because I've assumed readers of one GTM-hosted blog are probably already aware of the other main GTM blog, but in case you haven't checked it out yet... Do so. -------------------------- I try not to let this blog go too much into navel-gazing territory, since that's not why people read these writings, and I'm also quite aware of how little I bring to the table when it comes to "deep thoughts"...  However, I thought it might be useful to entrepreneurs out there, thinking about VC funding, to get a bit of a concrete sense as to how VCs commonly miss doing great deals... and are okay with that fact. A personal example may help set the table (note: necessary self-promotion alert)...  The first time I was introduced to a small startup now called M2E Power, I dismissed it fairly quickly.  Because the person who mentioned it to me described it as being too early for my firm's investment approach, and also described it simply as a "vibration-harvesting" (ie: generating power from everyday motion, etc.) company.  Too early is too early, and I'd seen several vibration-harvesting plays before and been unimpressed, so two strikes was enough for me to move on.  Fortunately the opportunity came up again a couple of months later, the company had made some significant progress, and I dug into it enough to realize that I really hadn't understood the importance of the company's innovations. As it turned out, M2E Power's innovations are applicable in vibration harvesting, but that's not really the core of what they're all about.  The company's innovators had developed some fundamental breakthroughs in electromagnetic induction:  the way permanent magnets and wire coils are used to generate electricity.  The technology, developed at the Idaho National Laboratory, held the potential for significant performance gains across a wide range of scales... In other words, not just for portable power ("wouldn't it be great to charge up your cell phone while you jog?") applications, but also potentially for improving the efficiency of a wide range of larger-format permanent magnet motors and generators (wind turbines, for example).  The company didn't fit easily into a single investment category, but represented a set of pretty fundamental and exciting breakthroughs.  In fact, we now consider M2E Power to be as much about "Big Power" and transportation applications as portable power, although all three are compelling markets imho (not that we're biased or anything!). I'm not claiming that M2E Power is a success story yet (so far so good, but it's still early days for sure).  I just thought it was a good example I could share of how I had passed on a company that, upon a second look and now getting to know very well, I actually like a lot.  Every experienced VC has a favorite story of the deal they passed on, that ended up being a big winner (to their credit, Bessemer Venture Partners even highlights theirs on their website). Our team reviews hundreds of potential investment opportunities every year and we aim to do about one new deal per quarter, so you can get a sense of the filter.  Does that mean 99% of businesses we see are bad ideas?  Not at all.  It just means that we're looking for companies that fit our specific investment profile, where we feel we can add value, and where the deal dynamics are right.  It also means we have to make a lot of quick judgments.  Pattern recognition and heuristics play a big role, and that's why cleantech specialization and experience really helps us make better decisions.  But as the M2E Power example shows, we're far from infallible (some of us even more than others...). VCs have to reconcile themselves to the fact that they're going to miss out on some great deals.  That's okay.  But the key is making sure that the financial returns are great on the deals that they DO select.  It sets up a predisposition for saying "no" quickly and moving on to the next one. So entrepreneurs out there should expect this.  When a VC does reject your idea quickly, the most important thing is to get honest, brief feedback from them about why they didn't see a fit.  Was it just simply not a fit with the VC model at all?  Or was this just not the right VC or the right time in their investment cycle? A good VC will help you understand their decision at least to this level. You don't want to waste time going after VC financing if your great business idea and the overall VC investment model are just never going to match up well with each other (there are many other sources of financing than VC, after all).  But you also can't let one VC's particular investment filter discourage you too much, if that's all it is... ----------------------------- The next Boston-area Renewable Energy Business Network event: REBN-East / Young Professionals in Energy Networking Event October 7th, 6:30pm start time Flat Top Johnny’s One Kendall Square, Building 200 Cambridge, MA

Cleantech VC expected to continue to rise

Rob Day: September 28, 2008, 2:46 PM
According to a KPMG survey of VCs and related professionals, 91% said they expect cleantech to be an even bigger sector in 2009, and 67% believe that the sector's growth is sustainable and not over-investment.  Meanwhile, here's another good article on the subject, with an unfortunate picture... So, moving on... here are this week's deals:
  • Brammo, an electric motorcycle maker, has raised a $10mm Series A, with funding from Chrysalix, Best Buy Venture Capital, and others.
  • Ostara Nutrient Recovery Technologies, which recycles wastewater into commercial fertilizer, has raised a $10.5mm financing led by VantagePoint, and including Foursome Investments.
Other news and notes:  Gotta brag about my companies when they get awards -- intelligent demand response system vendor Powerit Solutions has been named Deloitte's "Rising Star" in Washington (note: link opens pdf) because of their 1,581% revenue growth over the last 3 years (obviously: mandatory self-promotion alert)...  GTM put out a list of the top 10 greentech venture fundings so far in 2008, and unsurprisingly it's 9 solar companies and Range Fuels...  Here's a pretty neat idea for a commercial bank offering...  Cleantech Q&A with Obama and McCain...  Here's a neat idea -- Yale's Sabin Environmental Venture Prize...  The U.N. identifies millions of potential jobs in cleantech...  And finally, these have got to be better than a FEMA trailer, huh?

Betting on the ponies

Rob Day: September 25, 2008, 1:20 PM
I was speaking with a member of the limited partner community today, and I mentioned an analogy I'd come up with to try to explain what's going on in the cleantech market right now. "There are four ways to try to make money at the race track," I explained. "The first way no investor will admit to, but sometimes does happen -- it's showing up and just walking up to the betting window and picking a horse because you like its name or that they're the favorite or the owner is your friend." "The second way is what a lot of bigger venture funds aim to do -- showing up, walking into the stables, checking out the horses with an experienced eye, talking with the jockeys, and making some informed bets.  But betting on a lot of different horses, and not expecting to spend a lot of time with any individual one, in order to maximize the chances of betting on an eventual winner.  It only works if you know your way around horses already, however." "The third way, and the one I happen to like personally, is to be the horse trainer, picking a few horses with good potential and helping them become champions.  It's more hands-on and takes more specific expertise, but again hopes to maximize the chances that the horse you've backed is an eventual winner.  It's a tough strategy for a newcomer to jump into, however." "The fourth and final way is a bit of a stretch, but the idea would be an investor watching and waiting until the race enters the final turn and then trying to bet on the leader then.  You'd have to pay a high price at that point, but at least you have a better chance of backing a winner." "It's this last approach that's been driving much of the money pouring into the cleantech sector recently, since it doesn't require being an expert at horseracing to be able to pick likely winners, and so it's become a crowded approach right now.  That may be one reason why some later-stage deals have been at such high valuations." The investor I was talking to listened patiently to my (admittedly pretty lame) analogy and then simply pointed out that there is a fifth way to make money:  Own the racetrack. Touche.

Last week’s news:  AEB, Sapphire, Powergenix, SolarReserve, etc.

Rob Day: September 20, 2008, 3:21 PM
In case you missed it, here was a cute little item in PE Week Wire on Friday:
Yesterday talked to a venture capitalist whose firm just raised a new fund (sorry, under embargo on the details). While explaining why Firm X doesn't do cleantech investing, he said: "We decided that we prefer capital efficiency over capital intensity."
Here's what else you may have missed last week while frantically checking the stock market:
  • Nickel-zinc battery developer Powergenix has raised a $30mm Series D, led by Bessemer Venture Partners and including existing investors Advent International, Angeleno Group, Braemar Energy Ventures, Granite Ventures, OnPoint Technologies and Technology Partners.
  • SolarReserve, which is deploying molten salts at large solar power facilities for dispatchable solar power, took in a $140mm Series B.  Citi's Sustainable Development Investments and Good Energies led the round, which also included participation by US Renewables Group, PCG Clean Energy & Technology Fund, Nimes Capital and Credit Suisse's Customized Fund Investment Group.
  • Green Energy Options, a UK-based company developing devices to make energy consumption visible, has raised GBP 800k, from Thames Valley Investment Network, Bank of Scotland, and angel investors.
  • Another water deal (the fourth one last week -- is the tide turning?) was Arvia Technology, which raised GBP 800k from MIT Partners, Alliance Fund Managers and angels.
Cleantech investors in the news:
  • VentureWire reported that Highland Capital Partners may put "as much as" $30mm into cleantech.
Other news and notes: The Cleantech Group is diving into policy issues, with the announcement of their partnership with the NVCA...  Maybe my sentiments last week about the cleantech sector being largely insulated from the current economic turbulence were a bit optimistic...  One hundred strong cleantech companies in Europe...  The venture scene in Boise (self-promotion alert, my firm is an investor in M2E)...  Finally, congrats to Tiger Optics (a former portfolio investment of mine) on being named one of Inc.'s 5000 fastest growing U.S. companies.

Macrotrends, pt 1:  The rise of cleantech P.R. wars

Rob Day: September 19, 2008, 12:43 PM
This ain't my day job, people. The reason (or at least ONE reason) these posts come so infrequently and at odd hours is because I try to squeeze in some quick news-reading and typing whenever I get a spare moment from being a full-time venture capital investor. It can be fun when worlds collide -- I'm often on the list to receive press releases, for example, and have even had a conference or two where I was granted "media room" status when I was really there to scout for deals and network.  So I get to see the ongoing cleantech P.R. wars from both sides of it. Some funny interactions can ensue.  Like the time I was called up by an investor at another firm who wanted to chat, so I'm thinking about what deals I'm working on that he might be interested in co-investing on, and expecting an update on a deal he's working on, or a market question he wants input on.  Instead, he passed the phone to one of his partners (and the only GP there I hadn't known well already) who proceeded to lecture me about one of my blog posts where I'd passed along some bad info about their firm.  Hey, no worries.  So anyway...  how's that deal going that we discussed a couple of weeks ago? Or this email I got from a P.R. firm recently:
Subject:  Who's Afraid of a Green Bubble? Hi Rob, While the current enthusiasm for clean tech is sure to yield some amazing new technologies, it’s also equally sure to lead to big losses for investors who are in over their heads. As you know, evaluating clean technology isn’t as simple as loving its mission. Venture Capitalists [Name omitted] and [Name omitted] of [Venture Capital Firm X] believe we are in the midst of a green bubble. They reviewed 1700 clean deals in the past 12 months and only invested in 7. The opportunity is great, but so is the risk. The companies that will succeed are those that can truly compete with petroleum and the grid in terms of price and availability. This requires more than a great technology-it takes an understanding of how to scale a company and how to partner with Big energy (the incumbent companies that control the industry today). Please let me know if I can introduce you to [Name omitted] or [Name omitted] to discuss the green bubble.
  • What entrepreneurs and investors need to know to be successful
  • Why most companies won’t make it past the test phase and into the marketplace
  • The keys to partnering with energy incumbents
  • Next generation fuels: why ethanol is better for martinis than cars
  • Which clean tech fields are over saturated and which show real opportunity
  • Why government subsidies can inflate the bubble
The partners have strong views on which technologies will make it and which won't survive the bubble. ... Most [Venture Capital Firm X] partners have a background in science, whether its emergency medicine or engineering. Please let me know if I can introduce you [to Name Omitted] or if you’d be interested in an introductory phone call or face-to-face meeting...
One of these days I'm going to take up one of those flacks' offers, just to enjoy the awkwardness of having my investor colleagues have to show up and answer some journalist-type questions from the amateurish likes of yours truly...  Such as: "How the heck does anyone really review 1,700 investment opportunities in one year???  Wouldn't that mean 'reviewing' one new startup every hour or so every single workday?"  Ah, the P.R. game. The rapid rise in P.R. activity is what I'm pointing to as the first "Macrotrend" among several I hope to write about over the coming weeks. Because it might be interesting to think about what's driving it, and what it hopes to accomplish. Besides the general upsurge in cleantech activity overall, what's driving the rise in P.R. activity is the entry of VC firms with a long history of playing the publicity game for the benefit of themselves and their startups. Because P.R. can be useful at times.  Creating "buzz" around a company can help it get traction with early customers and business partners, and can also be helpful in raising that next round of financing. Some bigger firms are especially good at playing the "stealth company" game:  They tell the CEO at their portfolio company, "You're now a stealth company -- take all useful info off your website, and refuse to talk to reporters."  Then the VC firm's GPs go out and do speaking events around the country where they happen to mention ("oops!") that they have a stealth company in that sector, one that they're super-excited about.  If reporters had gotten a P.R. firm's email about the startup, there's a good chance they wouldn't care or at least would bury the story, given the volume of such emails every day.  But a "so-and-so backed stealth startup"??  Now THERE'S a scoop to go find!  And so when the reporters do track down the company in question (which isn't hard), they write it up as a feature story and with all sorts of glowing conjecture about what might make the startup so exciting. Such efforts to use P.R. on behalf of portfolio companies can go a bit overboard, in my humble opinion...  If a company was really intended to be stealth, the investor wouldn't be dropping breadcrumbs like that, right?  Here's another example:  I was speaking with one investor about one really big deal announcement they did, a massive round of financing, when it wasn't clear to me why they needed so much capital at that time.  After some good-natured badgering he finally admitted to me that the P.R. value of announcing such a large deal was seen as having some important strategic value for the company, lending some instant credibility to the effort.  In other words, they were putting in tens of millions of dollars before it was actually needed, partly for the marketing benefit.  To which I jokingly replied, "Huh.  So how many sock puppets do you get for all that money?"  I kid, I kid... As more and more firms jump into the cleantech market, it's generally good things for the sector -- attracting strong interest from entrepreneurs and managers, and attention from large corporations (customers and future acquirers), not to mention the depth of venture capital expertise these generalists can often bring to the table.  But as we've discussed here before, the new entrants also understandably tend to gravitate into a few narrow sub-sectors (at least at first), which is one reason why portions of the market (like thin-film solar and ethanol and electric cars and late-stage in general) have gotten so much of the venture capital.  Which of course means those sub-sectors get crowded with lots of well-financed startups trying to get noticed.  Which leads to P.R. wars.  Which leads to silliness like large financing rounds for marketing reasons.  And those generalist investors also need to try to communicate to LPs, entrepreneurs, etc. that they're not really new to the sector, they're smart on cleantech already.  Which leads to even more P.R. wars. All of which overwhelms the journalists covering the sector. I now receive about 10 such P.R. emails a day, up from, say, zero a couple of years ago (of course, many of the emails have to do with a product launch announcement or conference or something non-VC related, not deals).  Not being a journalist, it's kind of fun to see them, and I've even used a couple of them in a column or two.  But I imagine those intrepid reporters at GTM, VentureWire, etc. must get even more than I do, and so I have huge respect for the challenges they must face in having to deal with deadlines and digging for scoops and not being "late to report the news," what with that constant drumbeat of P.R. activity every day. What inevitably happens is that the news coverage of the cleantech sector gets dominated by the various P.R. wars, and not by what's really going on.  There are deals you don't hear about.  There are great companies you don't hear much about.  There are entire subsectors within the cleantech market that you don't hear much about.  There are super-smart investors either already established or getting into this sector who don't get written up and profiled in glossy magazines, but who are building strong companies and helping to build a robust cleantech ecosystem that will drive years of future sector growth. The growing hype wars could easily create the idea that there's a bubble going on in cleantech.  Perhaps they are indeed a symptom of that, although I would disagree with any such overly broad generalizations.  But readers should bear in mind that the P.R. wars, and thus the media coverage, only marginally reflect what's going on throughout this sector right now.

There was one?

Rob Day: September 17, 2008, 1:06 AM
Pretty safe to say that most of the financial world isn't focused on cleantech venture capital this week. However, here in Washington, DC the 18th Cleantech Venture Forum is in full swing, with nearly 500 attendees from VC firms, startups, larger companies, and assorted other market participants.  I've already been asked by a couple of reporters about the impact of Lehman, et al, on cleantech venture capital, and the answer seems to be "we'll have to see."  There seems to be little direct impact, aside from perhaps a few companies re-evaluating their choice of i-bankers.  But the overall market conditions may impact the sector in less direct but still significant ways. Meanwhile, the first day of the CTVF was another good networking and learning experience.  Interestingly there's a relatively strong presence here of Scandanavian companies -- not sure what that means, but it's interesting. Perhaps the two highlights from the day were the water presentation by Dr. Peter Rogers of Harvard and the political roundtable discussion moderated by John Harris of Politico. Dr. Rogers spoke on the challenges facing our society when it comes to freshwater supplies, based on his article published in Scientific American back in July.  The talk was great not because it was full of new info (at least for those readers who already follow this issue), but because it was a terrific summary and crystalization of the challenge and the necessary solutions.  Dr. Rogers proposed a 6 point action plan: 1.  Price water closer to its real societal cost 2.  Conserve irrigation water, including the use of low-water plants (perhaps via implementation of GMOs) 3.  Invest in water infrastructure (which will require trillions of dollars worldwide) 4.  Adopt eco-sanitation -- reducing the use of water in sanitation and recovering what water is used 5.  Ship "virtual water" by rationalizing world food trade 6.  Utilizing advanced desalination technologies Later in the day, the political discussion featured Jason Grumet from the Obama campaign, Hank Habicht of Sail Ventures (representing the red team but not nec. the McCain campaign), Frances Beinecke of the NRDC, and Jeff Leonard of GEF, alongwith the aforementioned John Harris as moderator.  It was a good, rational discussion of energy and climate policy and likely shifts next year; but of course, during this good, rational discussion there was concurrent horse-trading going on just down the street as the House worked on a very politically-driven energy bill.  A bit of an awkward juxtaposition.  But it gives me the excuse to link to Politico, one of my favorite websites, so there's that at least.

En route to the Cleantech Venture Forum

Rob Day: September 15, 2008, 2:49 AM
Just a quick post today as most of the day will be spent in air travel getting to the Cleantech Venture Forum in Washington, D.C.  Looking forward to catching up with everyone there, make sure and say hi if you see me... News items from the past week: Other news and notes:  Here's a good article on the wave of people looking to get jobs in cleantech these days...  And finally, I believe this is the first mention I've seen (but probably not the last) of "The Cleantech Slide." Disciplined investing may soon come back into vogue, p'haps.