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All you need is… R&D?

Rob Day: August 31, 2010, 10:45 PM

I'm not much of a web guy, but I'm terrifically impressed with Twitter these days.

For one thing, after I posted a pretty critical take today on a book I'd just read, it was a new experience to have the author (Vinnie Mirchandani, "The New Polymath") pretty immediately reach out to me to ask why I felt that way.  That launched a good online dialog between the two of us.  We agreed that cross-disciplinary innovation is huge for cleantech in particular.  We agreed on the need for significantly more resources to be put behind it, and to be put into the sector in general.  We disagreed on the level of demonstrated effectiveness shown by IT entrepreneurs and investors crossing over into cleantech (at least so far)... In any case, I enjoyed "virtually meeting" Vinnie and appreciated that we had the opportunity to connect.

And today Twitter also delivered to me this message, from Vinod Khosla:

"Lomborg: $100b/yr needed to fight climate change. Wrong before & wrong again! Brute force won't work. Need R&D not huge $."

Which I found very interesting.  Vinod is a smart observer and thought-leader in the sector.  The above message is illustrative of a line of thinking I've been seeing lately from several such very smart thinkers, which basically makes the argument that what's really needed is bold innovation.  That we need to be thinking very much "out of the box" and coming up with new technologies that will out-compete incumbent technologies, even with all the advantages incumbent technologies hold in the marketplace, and even with all of the market inertia to overcome.  As Vinod puts it, we "need R&D not huge $."

And yet I've been looking over the available evidence and reaching an entirely opposite conclusion.  Making a significant impact on climate change, I think, is indeed going to need some huge dollars, and not on the R&D side of things.

Certainly I believe we always need more innovation, and the appeal of doing more to promote disruptive technology development is obvious.  Yes to R&D spending!

But it's not enough.  

Let's look at the evidence:

1. There's a lot of innovation already out there.  

At one point last year, Eric Wesoff of Greentech Media had counted up over 200 venture-backed solar startups.  Many, perhaps a majority, of these were backed by investors who believed they were potential breakthrough innovations.  Just focusing on solar for a second, let me ask one basic question:  At this point, is an additional solar R&D effort going to by itself significantly accelerate the pace of adoption of solar technology?  As one solar CEO put it to me last week, "it's not about innovation now, we're totally focused on manufacturing."

Solar's an interesting example because it IS growing quickly.  But from a climate change perspective, it's not growing nearly quickly enough, its impact remains miniscule as a portion of the overall global power generation mix.  And that industry growth that we've seen has been largely NOT from breakthrough innovations at the panel level -- in fact, it remains a challenge for second generation thin film players to gain acceptance from a market that prefers to go it safe with tried-and-true poly-si panels.

Not to mention the fact that the rapid growth of the solar industry has been predominantly a result of the significant incentives being provided by various governments' policies.  Significant incentives, which basically means "huge $"... Essentially, an investment being made by these governments to help the industry scale up and drive down the cost curve.  I'll return to that point later.

2. In many areas of cleantech, markets have been highly resistant to adopting new technologies even when they make compelling economic sense.

Whether it's efficient lighting, or residential energy efficiency retrofits, or lower-cost solar panels, or recycled materials, or alternative fuels, there's a long history in cleantech of compelling value propositions failing to achieve the market potential that would be expected by looking just at supply and demand curves.

In many cases, it's just the customer's lack of adequate information about the available options.  They don't want to purchase the new product, even if it promises compelling paybacks, because they haven't tried it and haven't seen others try it before, and they can't guarantee it will work as promised.  Or maybe it's just basic lack of awareness.  Or simply the confusing morass of competing and obfuscatory claims made in many of these marketplaces by all the vendors pitching their product or system as the very best one to get.  

In many other cases, it's a structural issue that makes it difficult for even "winning technologies" to make strong headway in the market.  For example: Anyone attempting to sell energy efficient products into the office building market quickly learns that the owner-tenant relationship is a huge complication that means even compelling cost savings don't necessarily translate into compelling payback periods for the purchaser.  Another example is the slow utility adoption cycle driven by multi-year public utility commission rate case cycles.  

Or it might be that the customer would find a 4-year payback period attractive but they don't have the capital budget to support making any investment with more than a 2-year payback period.  And regulatory incentive programs often push people into sub-optimal purchasing decisions (investment tax credits and cost-based rebates, for example, reduce the delta between an older more expensive solar panel and cheaper, newer options).  And project or equipment financing lenders often require going with very proven technologies, not new entrants.

In other words, just having a superior innovation doesn't guarantee market success in cleantech markets.  And in fact, the more disruptive the innovation, the more the market will be reticent to adopt it quickly.

3.  Incumbent commodity prices are low... and can go lower if necessary.

Even when -- as appears to be happening now -- new solar technologies become cost-competitive, all things being equal, with current grid provided electricity prices, coal-fired power generation remains much more heavily subsidized in aggregate than any subsidies the adopters of solar are getting.  Ditto in vehicle fuels.  Not only does this mean that nascent clean technologies would have to be INCREDIBLY low-cost in order to provide compelling differentiation versus the status quo... it also means that those incumbent fuels have a lot of margin they could sacrifice to compete at even lower prices versus any new offering.  

I see startups all the time in the fuels space who make the argument that "we're cost-competitive with oil at $x per barrel market price, and everyone expects oil prices to remain up at $y per barrel for some time to come."  Which is fair enough.  But to truly make an impact on climate change will require such alternative fuels to achieve a strong enough market penetration rate that they start affecting market pricing, they're not just price-takers anymore.  And as the chart in this column shows, major oil production areas have a lot of room between current market prices and current production costs.  Not to say we won't see costs increase as the lower-cost resources get tapped out.  But alleviating supply challenges by introducing significant new supplies of alternatives would also likely somewhat mitigate those effects.  In the long run, fossil fuel prices must rise, unless demand for them goes down significantly.  But of course, "in the long run we are all dead."

An appropriate price for carbon, of course, would address this point well.  But the other two points would still stand.


So what exactly is being talked about when a luminary like a Vinod or a Bill Gates declares that what's needed first and foremost is truly disruptive additional innovation, as a higher priority than putting significant resources into other activities?  I suppose the hope is that we can uncover something so TRULY disruptive that it sells itself.  That, even in the face of all of the above obstacles, the customer value proposition is so stupendously compelling that everything kind of sorts itself out.  That would be wonderful.

But it ain't gonna happen anytime soon.  I would be quite pleased to be wrong about this, but from what I've seen the cleantech R&D deus ex machina is largely a myth.

If I've learned anything from investing in this sector for the past six years, and having worked with large companies on these issues well before that, it's that even "no-brainer" innovations and customer value propositions are still hard sells into these markets.  The obstacles I describe above create so much market inertia that I've seen it feel like pulling teeth to get some customers to agree to buy things that provide 1 year paybacks and less.  And the ever-increasing number of technology options, thanks in part to so much increased R&D in the sector over the past decade, only further slows down market adoption as customers have even more trouble figuring out their choices, and become even more wary of purchasing a 20-year product only to discover it's obsolete in a year.

So let's go back to that solar market.  What has that taught us?  That if you provide the money to drive implementation, people will indeed implement.  

There are deep, deep needs for capital elsewhere in cleantech than just in the R&D lab.  So-called "first projects", the first production facilities for a new product, are infamously difficult to finance.  Elsewhere, customers may balk at a 3-year payback period but would gladly take on the cost-saving product if it was offered as a lease (thus saving money from day one), but that requires the vendor to provide the financing.  Services -- the businesses that would actually be doing the installation of the hoped-for disruptive innovations -- remain very difficult to raise capital for.

And because of these gaps... because of the challenges in the marketplace... no matter how compelling an innovation you can create, it will have very little real-world impact without additional impetus on the implementation side of things.  

It can be government-provided demand creation via subsidies for installations.  It can be additional project financing for clean energy and energy efficiency, in a format that perhaps we haven't seen yet.  Or it can even be venture capital financing into the innovating companies at very expensive prices, with such corporate equity being then directed into implementation activities (cleantech VCs tried that; it hasn't worked out so well so far).  

I understand the PR and political calculus:  Saying governments need to spend a hundred billion dollars per year on anything, no matter how important, is politically unpalatable right now.  So there's a need to provide an alternative.  And if that alternative ends up being more directly supportive of the advocate's day job, well, so much the better.

But sooner or later it comes down to this:  Especially in the absence of an appropriate pricing for carbon, in order for cleantech to make a significant impact on climate change, we will need to see significantly more dollars being put into implementation than into R&D (and in fact, we already are).  At very least it would be good to put significant implementation dollars into the existing technology innovations we already have that would make compelling economic sense at scale.  "Brute force" or not, implementation is just as critical as innovation, and takes significantly more capital to do.  It just doesn't fit very well with venture capital as currently structured.  Which, perhaps, is why some VCs in the sector make a point of putting R&D on a pedestal.  Tech development is what VCs do.  Implementation, generally speaking, isn't.  


It's worth re-emphasizing that I'm definitely in favor of more resources devoted to innovation, and that I'm constantly energized by the entrepreneurs and inventors I meet who are striving hard to make "crazy dreams" become a reality.  The above thoughts are intended to drive pragmatic attempts at disruption, not an abandonment of big thinking.  The need for big, massive change is why I chose this area we now call "cleantech" as my career way back when.  I'm excited whenever I see thought leaders like Bill Gates and Vinod and others turn their attentions to these really big problems and conclude that something really big can be done.  But it has to be done right, or it won't be done at all.  I just think it's a mistake to take a faith in the power of innovation so far as to imply that implementation will take care of itself.  I suspect there are very few people making such statements who would truly profess, if pressed, that energy and water are markets where "Build It And They Will Come" holds true.

But hey, comments and flames welcomed at @cleantechvc! After all, Twitter is proof that SOME big market shifts really can happen pretty quickly... 

It’s not the information, it’s what you DO with the information that matters

Rob Day: August 25, 2010, 10:01 AM

Now that energy efficiency is all the rage in cleantech venture circles (note to cleantech VCs: don't pitch LPs on your firm being "differentiated" because you target capital efficient businesses...), investors have been particularly attracted to the energy efficiency plays that appear to be at the intersection of energy efficiency and information technology.  The hope being that these investments would scale like an IT play, but be accessing the large market opportunity in energy efficiency.

The majority of such investments I get approached on, however, are simply information gathering and presentation tools.  A dashboard, either for the home or for a larger building, showing the user how much energy is being used and at what cost.  The idea being that the user, armed with the information, will better manage their energy use and generate savings that pay for the information tool and then some.

There's plenty of evidence that this does work.  I've talked with everyone from homeowners to big real estate managers who have used such systems and recommend them to their peers.  There's some body of studies which show that such information does result in real energy savings, on average.  But not much.  O-Power, for example, talks about 3.5% savings.  Not knocking that -- aggregated, that adds up to a nice amount of saved energy.  

But the problem for investors is that each customer is only willing to spend a very little amount to get those meager savings.  Aggregated, it might be a big deal.  But for each individual customer, even for large buildings, it's just not that much.  Alex Taussig has a nice recent post which includes some useful stats on typical office buildings, where he calculates that a 15,000 square foot US office building would on average spend around $30k per year on electricity.  That's a pretty small building, even if it's "typical", so let's look at the per square foot average electricity spend as around $1/yr.  So for a 20 story, 400k sqft downtown office building you're looking at around $400k per year in electricity spending.  Applying that O-Power metric of 3.5% savings means an annual savings of only $14k.  For a very large building -- that same building would consume about the same electricity as over 500 homes.

And how much of that $14k can an information services provider capture from that customer?  Probably well less than half.  So the vendor has to put a lot of sales effort into winning a very large building over to their information service, all to get less than $10,000 per year in revenue.  Not to mention the fact that the most likely customers to be interested in a service like this are also the ones most likely to already be running an efficient building, so the potential savings are probably less for the otherwise early adopters.  And don't forget there's a very sizable portion of the market that just won't care, either because they have tenants who pay the energy bills, or because they simply can't be bothered.  Alex preaches in his post that the vendor must bring their costs down in order to make their margins at that level.  But even if the margins as a percentage of sales are nice, how difficult will it be to add them up to something attractive in the aggregate?

Don't get me wrong, that commercial building energy information service (CBEIS) can be a very good business to own, and a useful tool for the building owner.  But from the venture investor's perspective, it's going to take a long time to scale up a business like that to something that would generate compelling returns, if that's the only service and customer benefit the system offers.  Plus, how defensible will it be when other companies increasingly offer the same thing?  I talked to one customer who's thinking about dropping one of these CBEIS vendors in favor of a pretty similar interface his utility is now offering for free...

For these reasons I increasingly think about building energy information as being an unimpressive investment opportunity by itself.  But I also think of it as being a critical enabler for significant additional services and products that can be then offered to the building owner, made possible thanks to the availability of the information.  I'm not that interested (as an investor, at least) in one of the cool-looking "home energy displays" that are being offered out there.  But if it was a loss leader to pull people into a social networking/ online shopping play based around communities of energy-conscious consumers, that might be potentially interesting.  And I bet Comverge and EnerNOC would be very interested in a residential energy information company that offered such a display but ALSO cost-effectively enabled the homeowner to participate more easily and effectively in a demand response program, via integrated controls and an easy integration into as many enabled devices as possible inside the home. 

And turning the information into action is really the key.  Automation is what will drive savings in these fragmented building energy efficiency markets.  And it's also what's going to make new energy efficient equipment be more attractive to customers, because automation will be what allows the customer to take full advantage of the efficiency-generating features of the new equipment.  A challenge for new types of equipment is that customers aren't used to doing the new activities they can do with it, but that are what drive the efficiency gains.  Automation solves that. 

A great example is news that came out today about Digital Lumens, one of our portfolio companies.  They released a story about one of the initial customers for their intelligent lighting systems that has saved 87% on their lighting bill as a result.  About 1.7M kWh per year, or enough to power 200 homes.  Some of that savings is because LEDs are an efficient lighting source in general.  But a large part of the savings results from DL's automated controls system that makes sure the lights are being used only when and where needed, taking full advantage of the unique features of LED lighting.  DL's CEO Tom Pincince wrote up a nice column about it, check it out.  

Obviously that's a specific story I'm more than happy to share.  But I hope it serves as a good illustration of my bigger point.  If all Digital Lumens was doing was gathering information about lighting and sharing that information with the building owner, would these savings result?  No.  But with the embedded intelligence and automation included in the system, such information allows the building owner to set up the settings for the system and drive some really serious savings.  

THAT'S an energy efficiency story that's scalable.  So for energy efficiency entrepreneurs, the lesson is this:  Don't just show your customers what their energy situation is.  And don't just show them what they could do to improve their energy situation.  Actually do it for them, in as automated and low-cost a way as possible.  Yes, that's incredibly more difficult to pull off.  But that's what it will take to start having some dramatic market impact.


Anxiety and optimism

Rob Day: August 13, 2010, 2:55 PM

Wondering what the general emotion of the cleantech venture sector is right now?

The three posts I put up today (here, here and here) should paint the picture pretty well.

Things are happening.  Deals are getting done.  Startups are making progress, moving into production and revenue phases.  Some exits are taking place.  Emotion: Cautious optimism.

But funding remains tight.  And companies are having to take inside-led rounds to get by.  Moving into production phases makes that challenge even more acute.  Investors are backing their companies through a few months hoping they'll be able to unlock additional funding quickly, from one source or another.  But economic jitters continue, while a large number of cleantech venture investors are out of dry powder and already or soon to be out raising money from somewhat skeptical LPs.  So the funding spigot seems unlikely to open back up really soon.  Plus, the US Senate pulled the rug out from under everyone, stealing critical momentum.  Emotion: Anxious.

For many cleantech companies, particularly those involved in production of solar, biofuels, vehicles and batteries, it really feels like a pressure period right now.

A look at how bad 2009 was for solar companies

Rob Day: August 13, 2010, 2:36 PM

At Canaccord Genuity's very good sustainability dinner in Boston this week, I had an enjoyable conversation with CG's Marc Marano, a leader on their cleantech team.  He told me about some pretty interesting data they'd pulled together on the solar industry.

We're all familiar already with what a down year 2009 was for financings, but perhaps no sector was harder hit than solar panel manufacturers.  Marc's team had pulled together a list of all the financings in the solar sector for the five quarters Q1 2009 through Q1 2010.  And looking over their tally, I see 18 follow-on rounds during that period to solar panel manufacturers or their suppliers.

Twelve of those rounds were insider rounds, often bridge financings.  And two of the remaining ones were led by a corporate investor not an institutional investor.

Basically, during those five quarters almost no VCs were writing big new checks to follow-on rounds.  They were backing their existing solar panel plays, and making small Series A investments.  Marc notes that things have been better since then (including a couple of deals his group helped), but still... 

It's a wonder we haven't seen even more of a shakeout than is already going on in that sector.  I suspect we'll soon start being able to tell eventual winners from losers with a little more clarity... 

Learnings from the Gevo S-1

Rob Day: August 13, 2010, 12:29 PM

S-1s are great.  You can't learn everything about a company from them, but you can learn a heck of a lot.  And when the company is pretty indicative of an entire subsector, you can use that company's data to help illustrate trends across a market.

Gevo's S-1 is well worth reading through.  Because the company is, I think, fairly illustrative of what many venture-backed "2nd generation biofuels" stories have looked like.  I don't have any insider knowledge of Gevo, so it's also a good one for me to talk about simply from what's in the S-1 and available to all...

Here are some interesting (to me, at least) tidbits:

1. The funding path [caveat - this is all as estimated and perhaps miscalculated from the info available in the S-1, treat accordingly]

Gevo was founded in 2005, as cleantech was heating up, by some CalTech researchers.  It was seeded along the way (it appears to be in several different Series A rounds or tranches) by Khosla Ventures.  

In 2007, the company raised a $3M Series B, from Virgin Fuels.  Around that time they started ramping up R&D expenses.  So it appears that the company had met some lab-scale indicative technical milestones and raised some money to hire researchers to figure out how to scale the technology to the pilot stage.  Apparently there was a lot of optimism around what these early indicative results looked like, because from what the S-1 implies (piecing together share amounts, price per share, etc.) the Series B was done at a $22.5M pre-money.  Also at the same time, additional Series A-4 capital was raised -- Khosla Ventures putting in one final tranche at a slight discount to the Series B?  Unclear.

In 2008, the company raised a $17M Series C, with new investors Burrill and Malaysia Life Sciences Capital Fund alongside existing investors.  This round saw a pretty big step-up in valuation, to a $48M implied pre-money.  It appears that much of that step-up is attributed to having licensed a key piece of the IP from UCLA.

In 2009 they raised a $33M Series D, at a pre-money greater than $80M, with oil company Total as the new money.  By now the company had opened up that pilot facility, had begun construction on their first demo-scale plant, moved to Colorado, formed a partnership with a key commercial/production partner, and started ramping up the G&A spend.  Undoubtedly, much of that round was intended to finance the construction of that plant.

Earlier this year they raised another $33M in a Series D-1.  At a very big step up in valuation, to an implied current post-money of $314M.  But there are some interesting features to this valuation.  If the company IPOs this year, those shares get re-valued to 75% of the IPO price.  If the company IPOs instead next year, those shares get re-valued to 60% of the IPO price.  If the company doesn't IPO by the end of next year, the price per share of the D-1 is effectively cut in half retroactively.  So the management team is pretty motivated to make this IPO happen.

Gevo isn't the most capital-intensive biofuels play I've seen, but it's still typical of this type of play in terms of the amounts that have been raised along the way.  And you can see how the investors have guided the company through that, with the step-ups at what look to be pretty typical biofuels company proof points, and the inclusion of strategically-minded investors to provide those step-ups.  Good benchmarks for other companies to keep in mind.


2. What project developers?

Gevo, like other 2nd gen biofuels players, is clearly wrestling with the challenges of both 1st time project finance, and then the overall drying up of project financing for biofuels altogether (not exactly en vogue at the moment).  They're not expecting to have commercial revenues until 2012 (!) but they're already having to plan around this significant problem.

For capital efficiency's sake, they're looking to do retrofits of moribund ethanol projects, and have partnered up with ICM (an ethanol plant engineering firm) to identify and build out the first such plant.  

And they've formed their own subsidiary which will be funding the projects, at least during the development stage.  So not dependent upon 3rd party project developers, but doing it themselves.  TriplePoint provided some debt financing to enable the first such project.

It's an interesting illustration of the difficulties of go-to-market for new techs of this type, and also some interestingly creative thinking and partnership-making around it.


3. What customers?

You can't go public without revenues... er, at least you can't go public without customers, right?  So Gevo has several big customers lined up for 2012 when they start commercial production, including: LANXESS, Total, Toray, United Air Lines, and CDTECH.

Of course, since that's out in 2012, those customers aren't going to lock themselves into any unbreakable commitments in 2010.  So those are non-binding letters of intent.

**fingers crossed**

That having been said, there is indeed an existing market for isobutanol, so it's not a complete gamble that they'll be able to sell out initial production.  As long as they can sell at market prices... 


4. The venture / project finance IPO

The company has about as much cash as capital that they took in from the Series D-1.  Their cashflow statement suggests they're burning about $5M/qtr in cash, and they've committed to buying an ethanol facility for around $20M (including retrofit costs).

This is in many ways a venture capital / project finance fundraising.  Not your classic IPO liquidity event... Is that a bad thing?  Not necessarily, there's plenty of examples of companies that appropriately tapped into the public markets to finance energy projects, even for more unproven plays like wildcatting.  But this IPO should be viewed by reporters and cleantech GPs/LPs through that lens.

Why THESE companies are IPOing

Rob Day: August 13, 2010, 10:07 AM

As an active investor in the cleantech market I'm definitely hoping we can start to see some successful exits.  I, like others, am pining for a few successful IPOs with stellar returns that can be good beacons of hope for the rest of the sector's bets.  When there were practically zero venture-backed IPOs across all sectors, you knew there was a backlog of cleantech companies that were lining up to IPO and couldn't.  And of course now that the IPO window is re-opened slightly, it's not surprising to see venture-backed cleantech startups jumping in and filing to go public.

But why are THESE the ones that are doing so?  A123, Codexis, Tesla, Amyris, PetroAlgae, Gevo... Several with no or little revenue, really looking to 2012 or beyond for their significant revenue growth. Not all bad companies, that's certainly not my point, some on this list may end up being very successful.  But certainly not the exact same short list one would have come up with a year ago when guessing which companies would be READY (note: not WANTING) to IPO as soon as the IPO window reopened.  And certainly a couple of stories with some real hair on them.

So why these companies?  I'm increasingly believing that these companies aren't IPOing as a result of the same reasons dotcom startups were IPOing in 1999.  It's not that there's overexuberance, and investors and management are eager to put companies out into the market too early simply because they know they can get great returns from an overly optimistic stock market eager to get a piece of the Next Big Thing.  

No, these companies are IPOing because they pretty much have to.  The current investors are fatigued, new venture funders are hard to find, the companies are burning cash very quickly, and with the IPO window open getting another venture financing round from the stock market seems the best solution.  Even if the IPO isn't primed to "pop" and be a great IPO story.  And in some cases, when you dive into the details of the S-1, you see that the existing funders have put the company in a position where it's IPO or else...

These companies are also seeing their competitors file for IPOs, and they know that as a result these competitors are about to have good access to capital to go out and start the inevitable consolidation trend as the shakeouts continue in these sectors... So they want to also be among the acquirers, but are too low on cash, and so need to be able to tap into the public markets.

Plus, these companies are still struggling with that same old classic cleantech problem:  The first commercial-scale project.  For many biofuels, solar, battery and vehicle companies (ie: where VCs have mostly been placing their cleantech bets), no matter how capital-efficiently (or not) they try to get the company to be ready for commercialization, at some point they need to build out a large production plant, and project financiers won't do it for an unproven technology.  So these VCs have turned to (in order, as the options have dried up over time) other VCs, then hedge funds and "special" funds, then the government, then corporate JV partners, and now to public shareholders to supply the tens if not hundreds of millions of dollars necessary to build these first-time production plants.

So to paraphrase Obi-Wan, "These are not the IPOs you're looking for"... This crop of cleantech IPOs doesn't represent the upside of the sector.  I don't believe that the VCs are expecting that after taking into account this market and their 6-month lockup, an IPO today is their way to a massive IPO exit story.  

Unfortunately, this wave of such IPOs hides the fact that there are many other cleantech startups that are now generating revenue, are profitable or within sight of it, and are seeing good signs of rapid market adoption.  These are the companies that will eventually be the ones with the great IPO stories... but they're taking the "let's wait until we're clearly ready and the market's clearly ready" approach.  

It's almost a perverse selection bias -- many of the best IPO candidates are waiting for better market conditions so they get the best exit, leaving companies that are worried about falling behind or falling out to slip out the IPO window while they can...

I just hope in the meantime, these early IPO stories don't muddy the water too much for the sector.


[Note: While I don't have any direct exposure to any of the aforementioned companies, it's worth noting that I have indirect exposure to some of them]


The other big climate policy battle

Rob Day: August 8, 2010, 8:45 PM

Now that Harry "Lucy" Reid has pulled the climate legislation football away at the last minute, cleantech investors can be forgiven for taking a big sigh and forgetting about climate policy for a while.  After all, until a couple of years ago most cleantech VCs were adamant about purposefully ignoring policy efforts and effects, because of the randomness factor it would imply for their investments.  Of course, with a more supportive administration and supposedly looming national climate legislation many VCs have ended up spending much more time on policy work and visits to Washington, DC than they'd expected to.  And so it wouldn't be surprising to see these investors take the opportunity to step back from all that mess, to wait and see what happens at the Federal level over the next few months.

But one other big mess is still looming, on the opposite side of the country from Washington, DC.  In California, Prop 23, an effort to roll back the state's landmark climate law AB32, is on the ballot in November.  And the silliness is already in full swing (carbon emissions aren't "pollution", really?).  

The damage to the cleantech industry if Prop 23 succeeds would hit more broadly than just in California, according to one report by the Clean Economy Network.  Since California is such a major economic market, environmental regulations introduced in California tend to impact markets even outside of the state -- witness how California's auto emissions standards and goals have impacted automaker fleet efficiency efforts over the past few decades.  Besides, so much of the US cleantech industry and venture dollar pool is based in California to begin with.  Certainly, Prop 23 is already introducing regulatory uncertainty to the market across many cleantech sectors, and as mentioned in my last policy-related post, such uncertainty is damaging by itself.  

It's unclear how Prop 23 will fare.  On the one hand, early polling suggested that Californians were against it (ie: for keeping AB32 in place).  On the other hand, the ad campaigns are just getting started, Prop 23 has some deep-pocketed proponents, Californians have a history of simply voting in favor of ballot props, and it's a non-presidential election year with a big backlash against incumbents and any and all regulation...  

If Prop 23 passes it will mark a pretty big setback for the US cleantech industry.  On the other hand, if it's defeated it will be a compelling example of the cleantech industry teaming up to win over public sentiment in favor of supportive policies.  So with the US Senate increasingly looking useless on energy and climate issues, even being across the country in Massachusetts it looks like this California ballot initiative is something I personally will start spending more time on.

[Note: I'm the co-chairman of the board of the Clean Economy Network Educational Fund, which is a 501(c)3 (ie: non-advocacy) affiliate of - but separate from - the aforementioned CEN, so nothing in this column should be construed as representing CEN or CENEF or anyone other than me on any policy issues]