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2009: The Year of the Carbon Market

Rob Day: December 31, 2008, 2:51 AM
Happy new year, everyone! A big thank you to the few thousand of you who regularly read this column, and thanks for the kind words many of you have sent my way over the past few years.  I hope these rambling writings continue to be useful for you... Everyone probably already has a lot of resolutions already in mind for the new year, but allow me to suggest a few additional ones (these are mostly easy, so you can quickly increase your "success rate" if you add them to your list):
  • Spend 5 minutes at the EERE's Alternative Fueling Station Locator...  And ponder why, with the billions upon billions spent on producing biofuels, it's so tough to find a convenient retail option near you where you can actually purchase the stuff for your vehicle -- and even when you do find such fuels, how can you know how sustainably (or not) they were produced?
  • Spend 5 minutes flipping through the early release ppt of the DOE's 2009 Annual Energy Outlook... And ponder how we're going to possibly address our looming climate change and energy supply challenges if fossil fuels are really going to remain 79% of the U.S.'s energy supply mix by 2030.  Major systematic changes are clearly needed...
That's it!  Just 30 minutes' worth of to-dos over the holiday weekend, and you can cross 8 new year's resolutions off of your list.  Best wishes for a safe and peaceful and prosperous 2009 all around...

    Some quantifiable predictions; and more reader feedback

    Rob Day: December 22, 2008, 8:15 AM
    'Tis the season for VC predictions, and the NVCA says that VCs still think the world of cleantech, so what kind of cleantech VC blogger would I be if I didn't have a few predictions of my own... But let's break with VC tradition and make some predictions with teeth.  And then let's break with tradition further and let readers vote on them.  No more VC "predictions" like "government will play a bigger role in cleantech" or other so-safe-its-useless bromides -- here are some predictions where I'm setting a quantified "over/under" and then readers are invited to click here to participate in a very brief survey to place your bets on whether I was high or low. 1.  As Michael Kanellos already wrote about, I think it's likely that US cleantech venture dollar amounts could fall significantly in 1H09.  That's because if you look at the Cleantech Group's totals over the past few quarters, the top 5 mega-deals have made up rougly 35-40% of the total.  If those mega-deals and similar large late-stage deals are going to be particularly tough to come by (because VCs and others aren't able to count on near-term exits, etc.), then the dollar amounts could fall significantly even if deal volumes don't fall that much. Just a simple shift back toward more early stage investing would by itself drive the dollar amounts down significantly. Thus, I told Michael I wouldn't be surprised to see the U.S. dollar totals fall 40%.  But I've set the over/under at a 33% drop.  What do you think? 2.  I do think there will be a contraction in deals, but to a much lesser extent than the contraction in dollar amounts, for the reasons described above.  Many investors have put on the brakes, but many still have dollars to spend, and early stage in particular seems to still be "okay". For the U.S., I've set the over/under on the reduction in the number of cleantech venture deals from 1H08 to 1H09 at 20%.  What do you think? 3.  In regions other than the U.S., it will be interesting to see how things play out.  Europe, for example, I expect to look like the U.S. in terms of drops in dealflow and dollars.  But in the still-growing (albeit more slowly) economies of China and India, I think many generalists and even cleantech specialists may find a place to put down some bets where the natural resource shortage thesis still holds true and the underlying economic growth story looks better. So for China, I've set the over/under on the growth in cleantech VC dollars (1H08 vs. 1H09) at 25%.  What do you think? 4.  All I have to go on is anecdotal evidence from my conversations with fellow investors, but it seems like VCs I speak with are now nodding their heads a lot more vigorously when I say that I think there's no way solar will continue to be 40% of cleantech VC dollars like it has been so far in 2008.  There seems to be more interest in broadening into more of the cleantech market, and in particular more investors say they're looking at energy efficiency these days. So I think the "hot" sector (as unfortunately, but necessarily defined by some loose combination of growth in deals and growth in headlines and VC quotes in stories) will be energy efficiency.  What do you think? 5.  Finally, I think that while it won't be at all unhealthy for the sector to see solar venture dollars decline significantly, overall dollar and deal tallies fall, it won't be reported that way.  Journalists don't deserve the abuse they get from everyone (and mea culpa, guys... happy holidays to you, too), but still, they're incented to find controversial stories to write about, and the finer nuances of dollar amounts vs. deal amounts, etc., don't often make it past the editor. So I think the defining headline of 1H09 will be "cleantech venture bubble bursts".  What do you think? Take the survey to add in your thoughts, and we'll take a look back at it once we get into the new year to see how these predictions worked out! ----------------------------------------------- Readers have continued to provide great feedback on the "What's wrong with cleantech VC?" presentation from @Ventures that I posted a couple of weeks ago. Reader P.S. of Massachusetts (who's been raising a Series B) writes:
    I have found that most of the money is interested in early stage deals and not mid to late stage deals, which is different than the data you presented.  One possible explanation is sector, that the vast majority of clean tech deals are solar-related so there is a lot of late stage activity there.  In our sector (biochemicals), most of the companies are still in early stage (we're among the first to commercialize a product – already generating revenue).  So my question, is your data solar-skewed?
    Sure, if the overall industry is solar-skewed then the data will probably reflect that on all more general topics as well.  But I don't think if you removed solar from the picture, the follow-on vs. early/seed stage picture would flip.  Follow-on deals would probably still significantly outnumber the earlier stage deals.  Does that mean early stage is dead?  Of course not.  So P.S.'s comment is a good reminder that these trends are only indicative of overall patterns, they're not absolutes.  Early stage companies can definitely still find interested investors. But I keep coming back to the numbers, which tell their own story.  And also to the fact that the very large funds that have recently been raised "locks in" a late-stage focus almost by necessity -- if you have to deploy $400mm across a small number of partners, either you need to be writing large checks (which then steers you toward later stage deals), or each partner needs to be juggling a dozen board seats.  Will there be a shift back toward earlier stage investments, esp. in 1H09?  Probably.  But it'll be tough for some of the bigger pools of capital to make that happen in any major way... Reader M.J. of California writes:
    Nice work Rob. I think many agree w/ you, but as you mentioned don’t talk about it publicly. Today it’s trendy and cool to do late stage cleantech investing…how the hell you get to that w/o early stage investing is the question – especially when it’s only been a category in earnest for the last 3-5 years and that’s being generous.
    There've been some interesting comments on the original post as well, check them out. More comments, reactions and feedback are definitely welcomed.  Supportive or not!  It's great to get a dialogue going on these things. Either post your comments, or email me -- I'll continue to post interesting ones I get. It's also fascinating to see how the presentation points out five trends, but really everyone seems zeroed in only on the stage (late vs. early) one... . . . .

    A good interview with David Lincoln of Element

    Rob Day: December 17, 2008, 2:45 AM
    If you get a chance today and can check out this interview with David Lincoln of Element Partners before PE Hub pulls it back into the subscriber-only archives, do so. It's a good discussion of some of the trends identified in the @Ventures presentation from last week, from the perspective of a later-stage investor.  Smart thoughts from David, who's one of the most experienced cleantech investors around.  A good interview by Connie Loizos. One small clarification:  Loizos did make one small but important misinterpretation of one bulletpoint in the presentation, when she suggests that 80% of cleantech VCs are moving to late or balanced stage.  I don't know whether or not that would be true (I suspect it's not), but the 80% was referring instead to what "balanced" might hypothetically mean, in terms of a fund's dollar allocation between late stage and early stage investing -- effectively, mostly a late-stage fund... Of course, according to the Cleantech Group's Q1-Q3 2008 tallies, about 70% of North American cleantech deals were in "follow-on" (versus seed and first round) investments.  The dollar amounts, of course, were even more lopsided.  So the deal activity speaks for itself.

    The revolution will not be publicized

    Rob Day: December 15, 2008, 3:59 PM
    The end of last week was probably a terrible time for @Ventures to have put out a presentation challenging recent trends in cleantech venture capital, given what's been going on in the news cycle...  There were meaty discussions by Michael Kanellos at GreenTech Media (I'll discuss that column a bit more in another post) and Katie Fehrenbacher at Earth2Tech, but otherwise financial reporters were too busy throwing shoes at ponzi-scheme hedge fund owners.  Some I spoke with blamed the failed auto bailout or the Obama energy and environment team rumors as among several bigger stories that needed to be covered.  One reporter I spoke with explained that he'd just gotten fired.  Tough times in the media industry right now, hard to argue with anyone's choices about which stories to cover. Still waiting to hear Dan Primack's take, however, since he's been particularly critical of the sector as being too capital-intensive. But the amazing thing was how many people engaged in the discussion even without much press coverage.  In the first 24 hours after we posted the presentation, it was viewed by around 1,000 people and downloaded nearly 100 times.  And the emails and comments I've been getting are pretty interesting.  Mostly positive reviews, and some engaging questions and pushback. Here's hoping that the news continues to get out, because the investment trends discussed in the presentation should be the topic of a lot more conversations in the cleantech VC and limited partner communities... In the spirit of continuing the dialogue, here are some selected (and unattributed) comments I've gotten over the past couple of days since posting the presentation:
    "A question I have for you is, why is there such a late-stage mentality?  You made great points--that clean tech isn't going to have the rapid returns of Web 2.0 (what industry could?) and that the timeframe for commercialization for most clean tech companies is not longer (and probably shorter, in many cases) than biotech.  Is it simply the herd mentality driving the late-stage focus ("everyone's moving to late-stage investing to get more rapid returns")?  Or is a fundamental lack of understanding of the dynamics of the markets for clean tech products; in other words, many VCs and other investors don't understand the fundamental structural characteristics of development of such technologies, and so they have unreasonable expectations of timeframes for returns?" "Saw your post yesterday on 'what's wrong with cleantech venture capital' and flipped through the PowerPoint - I thought you were right on - like you, we have been looking at this developing landscape trying to figure out the best places and stages to play in..." "It’s interesting, the perspective one takes on the conclusion on your last slide wholly depends on what point of view you’re arriving at it from. If you’re an existing VC investor with money that you must spend and LPs beyond the 'getting interested' state of energy/environment, I’d agree with you – except that if too many people pursue the same strategy it’s going to be tough to make money. If you’re coming from outside it and looking at how to set up an optimal financing vehicle for energy/environment, I’d be 180 degrees in the other direction." "You stole my pitch!" -- early stage cleantech VC
    More comments and reactions are welcomed, as I think this will be a topic on this site for some time to come. . . . .

    A quick deal catch-up

    Rob Day: December 15, 2008, 3:22 PM
    Deals from the past couple of weeks:
    • SensorTran, a developer of fiber optic based sensors (and full disclosure: a former portfolio company of mine) raised a $3.5mm insider Series C.  Advantage Capital Partners, Expansion Capital Partners, WHEB Ventures and Stonehenge Capital participated in the round.
    • VentureWire reported that biodiesel producer Innovation Fuels raised a $10mm insider round.
    • VWire also reported that Xtreme Power has raised $15mm including a recent round from Sail Venture Partner and Texas' Emerging Technology Fund.
    • PE Week Wire reported that Mariah Power raised an undisclosed amount of Series B from Noventi, Greenhouse Capital, BigSky Partners and Sierra Angels.
    Other news and notes:  GreenTech Media has launched a new Solar Research Service...  Behind the scenes at the Cleantech Forum in Shanghai...  Finally, the new Obama energy/ climate/ environment team is a really big boost for the cleantech industry, good to see. . . .

    What’s wrong with cleantech venture capital

    Rob Day: December 11, 2008, 2:09 PM
    The cleantech venture capital model isn't broken, but some investors sure are stretching it as hard as they can... In the three and a half years that I have been writing on this website, it's fascinating (at least to me) to go back and see how things have changed in the industry, and in the messages in my writings. At first, I started writing about a small niche in venture capital that no one else was even reporting on, so the purpose of the blog was to simply compile the news and some views in one place since that was lacking, and since friends and family had no idea what this "cleantech" thing was that I kept talking about. Then, as the sector started getting more and more interest, it was great to see all the influx of new investors (both generalist and specialist) in the sector, which brought along entrepreneur and innovator interest, LP interest, etc.  The writings on this site reflected a wave of excitement about the sector. The wave of new capital entry then naturally spawned journalists' questions about "bubbles" in the sector, and so the writings on this site started to explore more of the ins-and-outs of what is really going on behind the high profile deals and sectors, getting past the headlines to break down the numbers, etc. I still believe that there is not an overall bubble in cleantech venture capital, this investment sector has so much room to grow and the other market fundamentals are so healthy that cleantech/greentech will remain an attractive investment area for many years to come.  And I still believe that the entry of experienced investors into the sector is a very good thing.  Not only does it help build out the ecosystem in very healthy ways, it also means more smart minds and deep pockets and valuable networks around the boardroom table.  Having co-invested with specialists and generalists alike has only reinforced my conviction that cleantech investors should be welcoming new entrants with open arms and continuing to work together, because of the special conditions and specific factors at work in this sector. When I joined @Ventures two years ago, one of the major reasons I chose this firm was the senior investment team, who had not only been investing in cleantech as specialists since 2004, but also had a deep background in venture capital going back to 1995 (hence the "@" in the firm's name, a legacy feature).  And what they brought from that experience were some valuable (and at times, painfully learned) lessons about what venture capital needs to look like in order to produce the outsized returns limited partners expect to see when they put money into venture capital, given the high risk nature of the category. So there's a very deep set of experiences around the team in both cleantech and venture capital.  And what we at @Ventures have started to see in the cleantech venture capital sector are some unhealthy and likely unsustainable trends.  Not undermining the overall cleantech VC investment thesis, mind you, but some specific trends within that opportunity that bear watching closely:
    1. The shift to larger and larger funds.
    2. The related shift to later-stage investing.
    3. The related shift into capital-intensive subsectors and business models within cleantech.
    4. The mismatch of investment concentration with the geographic dispersion of cleantech innovations and innovators.
    5. The concentration of venture capital investments into just a few subsectors, while the lion's share of subsectors receive much less attention (much less dollars) from investors.
    In preparing for an upcoming, small limited partner event I'm speaking at, and after several months of team discussions on what we're seeing in the industry, we pulled together a slide deck bringing this all together. The conclusions we draw aren't conventional wisdom right now, so this presentation may be a bit controversial.  And certainly not everyone will appreciate our thoughts, given how we're clearly not fans of the direction most of the industry is currently headed in. Frankly, there are some money-losing trends in the industry right now, and not everyone will enjoy having someone publicly say that.  But the data speaks for itself. So I thought readers might enjoy taking a look at the presentation and drawing their own conclusions. To be clear, as a former late-stage investor myself, it's not that I'm skeptical of the very concept of growth stage investing in cleantech, which plays an important role and will see some successes.  And believe me, I'd love to be able to drive to a board meeting here in the Boston area rather than take my monthly trips to board meetings in more out of the way places like I do.  But the magnitude of the shifts we're seeing aren't healthy in the aggregate. We've seen this movie before, and it doesn't end well. So I hope this starts a dialogue.  Comments, questions and flames are all welcomed. Leave comments below, or email me. . . . . .