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Friday folderol

Rob Day: October 30, 2009, 3:37 PM

Some random items, including some administrative housekeeping:


1.  If you haven't seen it, it's worth reading DOE Secretary Chu's op-ed on weatherization and all of the governmental support being thrown toward that part of energy efficiency.  Heady times for residential and commercial energy efficiency efforts.  Side note:  The Secretary of Energy is publishing his op-eds in the Huffington Post now?  Wow, this Internet thingy might actually be catching on.


2.  How the government "picks winners and losers" is a topic of much conversation these days, re: cleantech and otherwise.  It's especially a topic given the structure of some of the programs being used to accelerate commercialization and adoption of clean technologies -- such as the DOE loan guarantee program, etc.  See, for example, this interesting editorial in the Washington Post that a colleague pointed out to me today, and the very good discussion we had on the PE Hub panel on the topic here in Boston this week (note: link may disappear behind subscriber wall soon).  It's tough, though, to come up with strong alternative solutions to what's being done.  There are gaps that need to be specifically addressed, especially at the seed / very early stage (where ARPA-E is intended to aim) and at the "first of a kind" project finance stage (which is where the loan guarantee is intended to aim).  There isn't enough funding to support every deserving effort, nor would we necessarily want that (define "deserving"?).  I've seen proposals to do it more hands-off, by having the money go in some form to private sector investors who would make the decisions, perhaps as matching funds to provide leveraged returns for private LPs in the fund, to fix the risk v. reward imbalance that created the capital gap.  Some of these ideas have merit, but even then some government body needs to be determining which funds would receive the leveraging support and which wouldn't.    Broader market-based systems (including cap and trade, carbon taxes, ITCs, PTCs, etc.) are more diffuse in impact and harder to target at specific capital gaps.  And doing nothing is not an option.  So I'll let the debate go on, but my feeling is that you simply have to design the best policy you can, hope the DOE can attract the best decision-makers that they can (and I've seen some really smart people go into the DOE over the past year or so), and accept a necessarily imperfect process.  Easy to say, hard to stomach. 


3.  Speaking of policy issues, a few days back I wrote about a study which examined coal-fired generators in the U.S. and concluded that there could be a relatively low natural limit on carbon prices under a cap and trade scheme.  I mentioned a few gaps I saw in the analysis, and for you wonks out there like me, a reader wrote in and pointed out another important one:  Elasticity of demand means that some of the costs on the generators will be passed downstream, so that they would require higher carbon prices than indicated in the study before making the decision that shutting down is worth it.  Of course, generators would also be able to pass some of the costs upstream as well, in all likelihood.  It's still a very intriguing study conceptually, but between failure to address elasticities of demand in the electricity value chain, and the other factors I mentioned in the post, I'm not sure I would want to do any significant investment planning around the specific price limits they indicate.


4.  An administrative note:  Over the 4+ years of writing this column, I've attempted (not always successfully) to hew to the most rigorous of blogosphere rules regarding notification of self-interest, in that I've tried to note whenever I've mentioned a company in which I have some stake in their success.  But in my current position that's becoming impossible, due to the breadth of indirect investment activities involved.  I can't reveal self-interest in many cases without possibly revealing some fund's confidential information, and I can't mention some companies and not others because then the occasional obvious failure to mention a deal becomes an indicator by itself.  So my choices are either to never mention any companies at all ever again, or simply to ask you all to trust me that I won't too horribly pump up a company or fund where I have a significant self-interest, without noting that.  I may still mention self-interest sometimes if I can, but not always.  Is that okay?  Tough call, and I've wrestled with it for a while.  Flames, suggestions, etc. are all welcomed in the comments or via email.


5.  Another administrative note:  Yes, I know I'm horribly behind on listing deals that get announced in the sector.  Apologies, but still, no one seems to have complained yet.  Maybe I can stop that practice?  Or maybe a smart Sloan student reader wants to help me with it?

Great returns from cleantech

Rob Day: October 28, 2009, 3:11 PM

Did you see the Q2 venture returns report from Cambridge Associates and the NVCA (note: pdf)?  If so, you were probably as intrigued by the chart on page 7 as I was.

On that page is a chart of "US Venture Capital Dollar-Weighted Internal Rate of Return on Vintage Year Companies" broken out by sector.  They don't break out cleantech as a category, but they do break out Energy.  And the numbers are pretty noteworthy.

Energy category IRRs vs. All Companies IRRs

2002  Energy = 43.0%, All = 8.75%

2003  Energy = 46.0%, All = 12.3%

2004  Energy = 10.4%, All = 12.8%

2005  Energy = 33.5%, All = 9.66%

2006  Energy = 23.7%, All = 4.46%

2007  Energy = 20.1%, All = 0.65%

2008  Energy = 9.10%, All = (0.04)%


So what is this really saying?

On the surface, it looks like there have been great IRRs in Energy as compared to other sectors like IT, Software, Health Care / Biotech, etc.  In almost every year post-Internet Bubble, VC investments are producing pretty healthy returns in the Energy category, in all but one year beating the performance of the overall VC pool.  If energytech VCs are getting these kinds of IRRs, that looks good compared with current criticism of venture capital that it's been producing sub-par returns versus the risk level inherent to the category. 

But wait a minute, there's a big catch.

If you read the fine print in the methodology, some (and most likely, the predominant portion) of these IRRs have been calculated based upon NAVs (net asset value), not actual cash returns.  So, for example, if a company took in a Series A in 2002, and since then they've had significant up-rounds but no exit, the value of the company is pretty much* set at whatever was the valuation of the last round.  In the aggregate, 2002 vintage companies who took in money that year and later are looking at pretty significant up valuations versus where they were when the money went in.  At least in the numbers CA is tracking.

What this really reflects, therefore, is just what we've talked about here many times over.

1.  The aggregate dollar totals in cleantech venture capital have been dominated by a relatively small number of really huge late-stage deals.

2.  While overall economic conditions are definitely having an impact, many of those well-capitalized companies hadn't had to take in lower-valuation follow on capital through Q2 2008.  So on paper, they're still being carried at those previous high valuations.

In fact, in another part of the report they show that the actual cash distributions across all VC categories are just about nil from 2004 vintage funds onward, probably moreso in cleantech (I'm guessing).

So don't read this chart and get all excited.  These numbers will likely be revised downward in future such reports (but we can hope!).

The most important takeaway is probably that cleantech valuations have held up better than others, at least through Q2.

...Note I'm not at all criticizing the methodology used in this report.  It's great data and hard to do anything more than what CA's done with it.  Just pointing out what we can conclude from it.


(*it's really not nearly so simple, but let's not get too wrapped around the specifics here)



Rob Day: October 26, 2009, 9:44 AM

Okay, so maybe I jokingly tried to start an "ARPA-E" chant at Obama's MIT speech on Friday, simply because I thought it might be the only crowd ever wonky enough to get it.

But acronymical joking aside, it's a potentially valuable DOE program that could end up helping one of the major capital gaps that's emerging in cleantech venture capital:  Seed stage and early stage development of ideas that are promising but will take too long to commercialize than most VCs can handle.

So it's great to see the news release today with $151M of grants to 37 efforts.  Including:

  • Sadoway's liquid-metal batteries
  • Low-cost LED crystals
  • 1366's "mono-equivalent silicon" wafers
  • FloDesign's smaller-format wind turbines
  • Foro Energy's drilling technology
  • And several direct sunlight-to-fuels efforts

On a completely different note, I recently re-read an old 2000 article (I can't find a direct link, but you can access it through this site) from Environmental Finance back in April 2000, where the authors (Byron Swift and Aldyen Donnelly) argued that there's enough inefficient coal-fired generation out there in the U.S. that under a cap-and-trade system there will be a natural limit on CO2 credit prices at around $5-7/ton.  I'm interested in reader reactions, critiques, corrections, etc., please email or use the comments to share with alll...

Swift and Donnelly simply look at the implied financial worth of the generating assets of companies like AEP, Southern Company, and Cinergy (remember, this was from 2000), and then divide that by their CO2 emissions in terms of earnings per ton of CO2.  And therefore, they argue, if you're AEP and you can make more money by shutting down an inefficient plant and selling the avoided emissions, you would do so, and that would be triggered at around the $5-7/ton level.  They also looked at it from another perspective -- market capitalization for each of the companies, estimating how much of that was attributable to the fossil fuel generation fleet, and then dividing by emissions to get a value for perpetual stream of carbon allowances (discounted). Both methods came out with about the same value.

Now, what they don't account for, as far as I can tell, are three crucial additional factors:  1) the shut-down costs associated with mothballing a generation facility to sell off the avoided emissions; b) the incremental cost of replacing that generation capacity with something else with much lower carbon impact, such as gas-fired generation (although they acknowledge this as an open question); and c) short-term volatility as separate from long-term average prices -- it's tougher to shutter a generation plant because of temporarily-high carbon prices, so there could certainly be significant price spikes above the limits Swift and Donnelly indicate. 

But I find it a fascinating analysis, given the policy discussions going on right now (which include possible hard caps on carbon credit prices under a cap-and-trade plan), in that it suggests there may be a lower natural price limit than many expect.  There's definitely precedent from elsewhere in the electricity business for electricity customers to curtail their demand and sell the capacity back to the utility -- see EnerNOC, or in an early example, Kaiser Aluminum (note: pdf). Why couldn't some power plants shut down and re-sell their credits for greater profit?  Whether you love or hate the idea as an electricity consumer, it does open up a new business dimension for anyone in the powergen industry to consider...

Curious to get readers' thoughts.

Obama at MIT

Rob Day: October 23, 2009, 11:14 PM

Had the honor of being invited to Obama's speech at MIT today.  Thanks to the Clean Economy Network and the Renewable Energy Business Network, we were able to bring 50 local green businesspeople to the event (thanks, CEN!).  You can read the transcript here and some coverage here.

The President got a few demonstrations of technology MIT researchers are working on, before giving the speech, and then he spoke for 15 minutes or so to an auditorium full of 750 students, green entrepreneurs, researchers, cleantech investors, politicians, and other key stakeholders. 

A few points from his speech that particularly stuck out for me (paraphrasing):

  • Energy tech innovators and entrepreneurs are this generation's pioneers.  Pioneers made this country great -- they expanded our boundaries, took us to the skies and to the moon.  Now energy tech pioneers are expanding our horizons in a new direction.
  • There is a global race going on among countries vying to be the hubs of the next great energy technologies, and the country that wins this race will be the global economic giant of the 21st century.
  • Energy is a security issue as much as it's an environmental issue.  The Department of Defense has said that reliance upon foreign oil endangers American security.
  • We're going to need to use all domestic sources of energy we can find.  So we also need to find efficient ways of using our coal, oil and natural gas resources, not just solar and wind et al. 

I put up some pics on Flickr, for those interested.  It was great to see so many strong cleantech entrepreneurs and innovators in one place (fantastic networking, I might add).

Whether you're "fer" or "ag'in" the individual in your political persuasions, it was great to see someone in that high office have such a strong commitment to seeing cleantech continue to grow and thrive, and with a broad perspective on what cleantech means.

Why the story matters

Rob Day: October 23, 2009, 10:16 PM

Just stumbled upon this article in Wired with the blaring headline that EEStor is worth $1.5B!

The writer starts with Zenn Motor's market cap of $169M today, points out they own 10.7% of EEStor, and that Zenn isn't going to be selling their own vehicles anymore, and VOILA! If you give zero value to the rest of Zenn Motors, divide $169M by 10.7%, thus EEStor is worth an implied $1.5B!  Amazing!

Or, you know, the market could be valuing Zenn at $169M, and that stake in EEStor at $0. Because Zenn is still going to be selling things, just not fully manufactured cars, and it's unclear when or if EEStor is going to be producing profits.

Or anything in between.  So what we can tell by the math in the article is that the buyers of ZNN.V are valuing EEStor somewhere between zero and $1.5B.


Even if retail investors are truly valuing Zenn based solely upon their minority stake in a "secretive" (as in "telling everyone they can that they're secretive, while releasing a steady drumbeat of news about supposed milestones being achieved") startup, what does the vaguaries of pricing of a thinly-traded stock on the Canadian Venture Exchange really tell us?  Even proponents of efficient market theory have to admit that such prices might easily get a tad skewed by a few over-exuberant day traders...  Which I think is the point of the author, to give him his due, calling it a "questionable milestone".  Still, the headline loses that nuance.

This is after I just saw another article on EEStor (on the site Tonic, which for some reason seems to be infatuated with this one company) where the writer states "Many electrical engineers say it's not possible to make an ultracapacitor."  Uh... no.  Many electrical engineers say it's not possible to build a cost-effective ultracapacitor along the lines of what EEStor is trying to do.  But ultracapacitors are already a fairly big industry.  They're already in many products in your home.  They already exist, Tonic.

The writer of the Wired article is an EV vet who appears to be trying to poke some holes in the EEStor story.  The writer of the Tonic article is clearly infatuated with the possibilities if the EEStor story is true.  All of which is totally fair, albeit questionably edited.

But the problem is that when the headlines blare like they do, and the story about the story becomes so dominating, it really hinders the efforts of other entrepreneurs in that space.  There are numerous other ultracapacitor startup efforts out there.  Many of which hold great promise for improving the cost and performance of ultracaps so they can start to play a significant role in energy storage -- not necessarily obviating batteries, much less gasoline altogether, but in important roles nonetheless.  But many of you, gentle readers, won't have heard about those efforts.  Because of one company getting all the attention, positive and negative.  And that's not helpful.  Over-hype and controversy drives away investment, it doesn't bring it in.  It makes it more difficult for anyone in the sector, not just EEStor, to get government support or venture investment or corporate partnerships.  So we all miss out on innovations that should be commercialized, as the baby is thrown out with the bathwater.

EEStor is working hard to get their story out there, that's their right.  But I often wish reporters and editors would spend a bit more time rounding out their knowledge by talking with industry insiders before publishing breathless copy.

Okay, so it’s broken.  Now what?

Rob Day: October 22, 2009, 9:16 AM

I've been having a lot of conversations with cleantech investors lately, and it's clear there's an emerging "consensus" (as much as you can ever get true alignment in such an industry) that the traditional venture capital model applied to cleantech isn't working -- at least in how it's been applied to date. 

To recap, we have seen billions of dollars this decade put into venture capital and "venture capital" deals in energy tech in particular, but not only have there been relatively few exits, many VC-backed cleantech companies have been way behind in their promises regarding commercialization and adoption.  Cleantech VCs have been more effective at making headlines than at making returns.  And there continue to be clear capital gaps at crucial development stages, including seed stage and "first commercial-scale project" financings.

In talking with a wide range of investors over the past few months, it's clear that there is still lots of optimism that there will be strong returns from venture-type investments in this sector.  After all, these are phenomenally huge markets, and they have phenomenally huge unmet needs.  Significant change is expected, and VCs are supposed to profit from significant change.  Exits have clearly been held back at least in part by the overall macroeconomic situation, which nipped several IPOs in the bud through no fault of the companies or their investors.  And there's clear long-term govermental support putting wind into the sails of the industry.

All of which is great, but in talking with these investors they also acknowledge that no one's yet proven out a successful investment model for the sector.  And so, in true hive fashion (everyone thinks they've arrived at the thought independently, but we all are influenced by each other's thinking), I keep hearing that the model is "broken" and solutions need to be found.

Okay.  But what solutions?

Some say that the problem isn't with either cleantech or with the traditional venture capital model, but instead that they don't overlap as often as VCs would like to think.  So, they say, applying IT investment models to IT approaches in cleantech (automated building energy management, carbon accounting SaaS offerings, etc.) is the way to go, not putting hundreds of millions of dollars into capital-intensive renewable energy generation.  Limiting the scope of cleantech venture investing, in other words, to just a subset of the overall energy, water and materials market.  I've argued for this approach at times myself.  However, it does beg the question:  Then how DO we expect to see these renewable energy technologies get to market?  Are the investors putting money into those sectors wrong?  Perhaps VCs are unintentionally, as some have said, simply taking pension fund money and investing in these capital-intensive technologies for society's benefit, but without good overall likelihood of venture-type returns?  Or perhaps not, the exits just haven't happened yet but they will? But that's not an answer to the question, that's just a diagnosis and another set of questions.

Some say that the key is, given long gestation periods, being late-stage investors and coming in after significant technology and commercialization risk is taken out of the company.  Which is a very smart approach except: a) Everyone else is having the same idea, driving up prices for late-stage investments; b) Being only late-stage in capital-intensive development efforts starts to look more and more like some kind of project finance, not venture capital; c) We're seeing ample evidence that there's still plenty of execution, scale-up, and market risk even at these later stages; and d) If everyone's investing late-stage, who provides the funding to bring the companies to that stage of development?

Some, albeit fewer, argue that the way to play cleantech is instead to go quite early and really swing for the fences.  Acknowleding the long gestation period of truly breakthrough ideas in the sector, the idea is to adopt a longer investment horizon, but to raise the bar in terms of the returns potential an investment might have:  So to paraphrase, don't go for the traditional 10x in 5 years, go for 20x in 10 years.  But it's unclear how LPs will react to such an approach, and if you think accountability is low on investments done with 5 year horizons... Furthermore, what about the other 99% of good cleantech innovations that don't qualify as having such dramatic potential?  Not everything can be "the next Google", after all.

Some investors are implicitly pursuing a momentum approach -- backing high-profile startups in high-profile sectors, putting a lot of effort into P.R. activities to further raise the profile of the startup, using that to bring in corporate partnerships and government support, and thus creating seemingly unstoppable momentum toward an exit.  It's almost (note: I'm clearly using hyperbole here) as if the underlying startup's technology and economics don't really matter.  One big challenge for this approach is the ephemeral nature of P.R. and momentum-building, it's easy for journalists, pundits, etc. to get very skeptical very quickly and turn against a company that has been over-hyped.  And more damaging, in the pursuit of visible evidence of rapid progress, these investors often encourage the companies to take on a high cash-burn model.  Which, when (not if) things go a bit sideways at some point, can be deadly.

I'm also seeing some efforts to create more overt "hybrid" approaches, combining (or at least setting up in parallel) VC, project finance, and middle-market buyout strategies.  But these are as yet mostly ill-defined, and it's unclear at the end of the day what's different from what's already de facto being done today by big VC funds, aside from the additional clarity of returns and risk expectation.

And of course a lot of other intriguing new ideas as well, there is some innovative thinking being developed out there, sometimes in places you wouldn't expect.

But despite all the ideas, so far, few proven answers.

Stay tuned...