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A quick question about smart grid…

Rob Day: January 26, 2009, 3:53 PM
...What is it? Now that the subsector of "smart grid" is getting more popular and thus getting talked about more and more, it seems a good time to point out a couple of quick things about the concept: 1.  "Grid automation" would be a better term for the category. Applying IT and communications to the electricity transmission and distribution system, for the purpose of automating functions like notifications, meter reading, and eventually automated demand response, energy efficiency and grid balancing. 2.  It doesn't end at the meter. Calling it "smart grid" makes it sound like it's really all about the transmission and distribution system only.  But given the list of applications from above, it's pretty clear that any full smart grid perspective must include the systems on customer premises that allow for the curtailment of consumption when the utility needs to free up capacity. 3.  It doesn't have to be capital-intensive. I've spoken to a few people recently who have the natural, initial impression that smart grid projects are necessarily massive in terms of scale and capital requirements.  Re-wiring long transmission lines, putting new smart meters on every home in a town, that kind of thing.  But a lot of what falls into the category is more software-related in nature.  Even when it's a hardware/ software system that's being deployed, it doesn't have to be super-expensive, thanks to advancements in computing power and communications technologies. That's at least how one investor views "smart grid," for what it's worth. Deals from the past couple of weeks:
  • Zinc-air battery developer Revolt Technologies AS has taken in a $13.1 round of funding including $7.35mm from RWE Innogy, as well as undisclosed amounts from NorthZone Ventures (Sweden), SINTEF (Norway), Sofinnova Partners (France), TVM Capital (Germany), Verdane Capital (Norway) and Viking Venture (Norway).  The company had last year reported aiming for a $30mm raise in 2009, so but this appears to just be a second tranche of a Series B that VentureWire reported on last year.
  • Investors in the news:  VentureWire reports that Citi Sustainable Development Investments is looking to spin out from Citigroup...
Other news and notes:  More talk than deals right now, and a lot of that talk is about how investors are getting more conservative and hunkering down in this environment...  Meanwhile, McKinsey concludes that the climate problem isn't getting any easier...   As promised, here starts the wave of "cleantech bubble has burst" headlines...   An update on Masdar...  An update on GE and cleantech...  An update on cleantech policy...  An update on Eric Wesoff's list of solar startups...  An update on that canard about carbon emissions and Google searchers...  Finally, hey wait a minute, Martin LaMonica stole my literary reference -- but I guess it was a pretty obvious one to begin with. . . .

In defense of Vinod

Rob Day: January 25, 2009, 12:43 PM
During several discussions I've had with industry observers and fellow venture investors over the past few weeks, the topic of biofuels have come up, and those I've spoken with have mentioned "Vinod's bad bet" on ethanol.  Their point being that Khosla Ventures and Vinod Khosla himself placed a number of different ethanol bets and then publicly backed that sector, which is now seen as being somewhat out of favor. But that conclusion is probably off-base, in my opinion. First of all, most of Khosla Ventures' biofuels investments haven't been first-generation (ie: corn- and sugar-based) ethanol, which is the specific subsector that is out of favor right now.  The jury is still out on cellulosic ethanol -- people have strongly-held views both ways on the technology, but in the meantime most startups in the cellulosic space are still waiting to find out if they'll have a good path to market and exit, they haven't had to put up or shut up yet.  And many of the other biofuels bets in the Khosla Ventures portfolio, like LS9 and Gevo, are even further out in terms of tech and market development.  So it's a bit unfair to point at just the corn-based ethanol and other first-gen bets in that portfolio and say that the verdict on their biofuels strategy is in. And it's also not quite clear that even the first-gen biofuels bets by Khosla Ventures haven't been smart ones, from a strategic perspective.  Regardless of what the individual investments themselves look like, it's important to recognize that Khosla Ventures has taken a different strategic approach to their investment thesis around biofuels than most venture firms take.  Khosla's been happy to place multiple bets across a single sector, whereas many firms prefer to only place a couple of bets in any given sector.  Why be different?  Because of the special advantages Khosla has.  He's writing his own checks, not having to report to an investment committee.  He has been actively leveraging his own personal brand equity and political access to bring government dollars and private sector attention to the ethanol story. Most venture firms don't want to end up having their portfolio companies compete against each other.  But by taking more of a concentrated approach to ethanol, Khosla Ventures appears to be betting that they can take advantage of a rising tide raising all boats, when they own half the fleet in the harbor (I overstate, but you get the point), and being able to combine those efforts when opportune.  And also betting that they can make the tide rise faster than it would have otherwise.  It's a very specialized strategy that only works when a very quick and flexible investor with a lot of political access and brand equity can identify an investment thesis ahead of the crowd and take a strong early position in that sector.  And then, as Vinod does, speak anywhere and everywhere, and visit D.C. regularly, to make the case for the sector.  Hard work, but something many other venture investors couldn't duplicate. Such an investment/political/PR strategy also only works, however, if there are near-term jobs and revenues to tout.  Politicians need to see jobs creation opportunities in order to do their part of this kind of sectoral strategy.  Revenues and exits need to be seen in the near term by the press and the private sector before they'll play their roles in the development of the sector.  So to effectively pursue this strategy, it becomes necessary to make some investments in first-gen players that are relatively close to market.  These first-gen players then become key examples to point to.  And even more importantly, perhaps, they can provide an eventual platform for the second-generation technologies that end up working the best, accelerating the paths to market for cellulosic players that would otherwise have to build capacity that would potentially be redundant to whatever first-gen players were already in the market by that time. Long story short, you don't need to believe in sugar- and corn-based ethanol as a long-term story in order to want to make a couple of bets on such companies, if you're Khosla Ventures.  You just have to believe that the first-gen bets you're making will be a good bridge for your second-gen bets. The problem?  The market turned against first-gen ethanol much quicker than anyone expected.  A controversy about food and energy balances arising at almost the same time that oil prices drop precipitously and corn markets go out of whack.  Many people predicted some or all of these things would come to pass eventually.  I don't know anyone who thought all that would happen in 2008. Does that mean it was a bad strategy?  Nope.  And by the way, as per the first point above, their overall biofuels strategy may still end up making great returns anyway.  Political support and incentives for biofuels don't seem to be going away.  And the sector continues to develop even as first-gen players fall out. Vinod and Khosla Ventures certainly don't need the likes of me to defend their biofuels strategy.  Plus, I've probably gotten it all wrong from their perspective, I haven't discussed the above with anyone on that team, so I'm likely guilty of projecting my own views more than reflecting theirs.  But I thought this might be a useful case study to point out a few unique things about the cleantech venture sector, and put down my two cents' worth.

New Hickory?

Rob Day: January 20, 2009, 3:46 AM
What a historic day! Most pundits seem intent upon comparing Obama's likely presidential role to that of past presidents like Kennedy, FDR, and Lincoln. My guess, however, it that it will be much more like that of Andrew Jackson -- in form, at least, if not in terms of specific policies.  Jackson was really the first president to effectively use the powerful tool of public opinion (as confirmed by the voters) to lend critical support to policies of his that were unpopular in the Senate.  He also was pragmatic about shifting allegiances with legislative leaders to get whatever results he thought were necessary for the country.  It is in these two ways in particular that I expect an Obama administration will aspire to be Jacksonian. What does this mean for cleantech and climate change policies? I think 2009 is going to see a lot of appeals to the public, rallying support for getting something -- anything -- done.  Anyone looking at the makeup of the senate and the geographical realities involved in climate change politics (ie: getting southern and midwestern senators of either party on board) will recognize that any effort to put in place climate change regulation will need to overcome a lot of resistance in the Senate in particular.  If a serious effort is going to be made to get something done in 2009 (which is the plan I hear from people who should know something about it), it will require a moral high ground of having marshalled strong, vocal public support in favor of achieving significant outcomes. I look at the amazing sea of faces on the Mall today and I do believe Obama has a mandate to selectively target at least a few major issues for this kind of treatment.  So far climate change seems to be on the short list of such issues.  Here's hoping! Secondly, I expect that -- while the goal of doing something "significant" will be held true -- the approach will be very pragmatic in terms of what the specific policies are and how the political effort is pursued.  In other words, expect to see a "purple" effort if climate change policy is pursued as a key initiative.  And expect to see a lot of effort to give southern and midwestern senators reasons to feel okay getting on board.  Carve-outs for energy efficiency-sourced carbon offsets, for example, would go a long way to making cap-and-trade seem less punitive to southern states.  Carve-outs for agriculturally-sourced offsets would help similarly in the midwest.  And even such "givens" as a cap-and-trade system instead of a carbon tax remain open questions -- we don't know what the final form of the climate change policy will look like because we don't know who on the Hill will be tapped as champions (for me, I suspect McCain will play a crucial role, but that's just a guess). We already see the example of this in the economic stimulus bill and what it includes for green collar jobs creation:  Everything and the kitchen sink.  All good ideas welcomed, and whatever gets key support gets thrown in. This will continue to be the pattern, I expect.  And that generally means good things for getting SOMETHING done, but also means we can't plan on what that something will specifically be... On a day when 2 million people gather to witness history -- and on a day when Chrysler sells a third of themselves to Fiat because they need Fiat's help in learning how to make smaller cars -- there are a lot of good reasons to believe that major change is coming.  But with a lot left to be determined as well... Enjoy the day, everyone! . . .

Cleantech Investing First Blog Post

Matthew Weinberg: January 19, 2009, 4:00 AM

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The view from the Valley

Rob Day: January 14, 2009, 6:37 PM
Spent the entire day driving up and down Sand Hill Road today, catching up with west coast investors I hadn't seen in quite a while, and it was a pretty informative (and extremely long and tiring) day. I'd been told by Brian Fan, the Senior Director of Research at the Cleantech Group (he pulls together all their deal tallies), that "the starting point on valuation right now is 50% of the valuation of the last round."  Provocative stuff.  However, I suspect that says more about the "Valley Valuation" inflation that had been happening in '07-'08 in a couple of high profile sectors, rather than a dramatic valuation reset across the board.  Basically, that may be true in solar, and after all, solar is 40% of the dollars that went into cleantech in 2008, so it's easy (but probably wrong) to paint the entire sector with that brush. That having been said, a 61 cents per dollar secondaries discount level is a sobering valuation statistic, even if it has selection bias. But regardless of valuation, it's clear everyone expects to see a lot more high-profile startups that are completely resetting.  In other words, doing a restart, raising a small round and considering it a Series A, crushing down the previous ownership (and often, tens of millions of dollars previously invested in the company), repositioning the company toward some kind of "Plan B".  This will mean some good buying opportunities, but also is going to be a serious hiccup in the market, when even relatively healthy startups can't raise the money to keep moving forward and have to abandon their plans. It was also clear that the downturn is affecting different investors in very different ways.  Some were having to take a breather, just pulling back on their cleantech efforts (albeit unofficially, of course).  Others are hungry and active and seeing lots of buying opportunities. 1H09 is starting to feel like quite a crucible period for the cleantech venture community and their investments. Also notable:  Everyone is now interested in some flavor of energy efficiency/ smart grid.  And no one told me (as I'd occasionally been told before) that they were actively looking for more capital intensive opportunities. Deal announcements since the last update:
  • Ze-Gen raised a $20mm Series B led by Oman-based Omaz Zawawi Establishment and including existing investors Flagship, VantagePoint and the Massachusetts Technology Development Corp.
  • Boston Power raised a $55mm Series D led by Foundation Asset Management and including existing investors Oak Investment Partners, Venrock, GGV Capital and Gabriel Venture Partners.
  • Zeachem raised a $34mm Series B co-led by Globespan Capital Partners and PrairieGold Venture Partners, with follow-on investments by MDV, Firelake and Valero Energy Corp.
Other news and notes: Freakonomics on cleantech...  Doerr and Friedman on U.S. cleantech competitiveness...  Meanwhile Obama calls for doubling renewable energy in three years...  And UK conservatives are bidding for regional leadership as well...  Earth2Tech puts up 10 predictions -- and Neal tears them down...  Neal also is down on solar...  78 percent spike in land-use applications for solar projects...  More cleantech layoffs -- here and here...  Finally, I thought this was amusing, and it gives me the excuse to type 'Wollongong'.

Not quite a screeching halt…

Rob Day: January 8, 2009, 6:10 AM
...but a pretty big drop-off nonetheless. As we've discussed ad nauseam here on this site, every tracker has a different tally for cleantech venture capital dollars and deals, for a wide range of geographic, definitional, and methodological reasons.  But it's still really useful to be able to be able to compare one tracker's quarterly tallies against their own earlier results, to get a good sense of overall market trajectories. The Cleantech Group released preliminary Q4 figures this week, which are largely consistent with Eric Wesoff's tally that came out a few days back.  Here's the key part: Q3:  158 deals totaling $2.7B. Q4:  99 deals totaling $1.7B. The Cleantech Group puts a positive spin on it, but that's a heck of a drop-off, both in deals and dollars.  Still, given how heated things were in Q2 and Q3, it's probably a very healthy thing to see the industry take a bit of a breather -- and hey, it's not like 99 deals isn't still a lot of activity.  Less healthy? 40% of the cleantech VC dollars in 2008 went into solar alone. Yikes. Some other news and notes: . . . .

An article you should read

Rob Day: January 6, 2009, 2:29 PM
One of the things that's so powerful about the energy and water and resource challenges we face are that they touch everyone's lives on many levels:  As individuals, as communities, as countries, and as a world.  And another powerful fact about these challenges is that we have been now wrestling with them for some time, without making good progress. In energy in particular, I am constantly hearing about (and learning from) the experiences of those who have been thinking about these issues for a long time.  So many good ideas yet to be executed on.  So much debate recycled from previous debates, without drawing the lessons from what had worked before and what had not.  And so many unfortunate assumptions about what can be accomplished (politically, technically, etc.). I had lunch today with an investor who pointed me to this article from a long-time veteran of energy and finance.  Theodore W. Noon, Jr. was an oil wildcatter in the 1940s, a petroleum geologist and engineer for 60 years, and an energy investor for several decades.  He was also a bronze star and distinguished service cross recipient, receiving five purple hearts for his service in World War II. T.W. Noon died last year, but in the final months of his life he wrote two articles full of thoughts and insights on two subjects on which he had a lot of experience -- our economic challenges, and our energy challenges. He wrote them while in hospice; he knew they would be his last chance to share the lessons he had learned along the way, and he hoped people would read them. So please read them.  Some of what he has to say may surprise you.  He doesn't pull punches, and doesn't go with the flow.  An oil wildcatter and investor proposing a phased-in energy tax?  Regular readers may recognize that that kind of thinking strikes a chord with me... I never met T.W. Noon, but I wish I had.  I would have enjoyed the conversations greatly.  I'd like to think he would have been as excited as I am by some of what I'm seeing in the entrepreneurial and policy worlds these days.  But I sure hope we don't let the opportunity slip by yet again... . . . .