Defenestrate your assumptions

If one is to go by what cleantech VCs are saying these days, it seems like we're at a time where some of the core assumptions and current patterns in cleantech venture capital might be about to see some changes.

This is all within the context of VCs generally agreeing that cleantech is going to see continued interest and investments going forward (note: pdf), of course.  But the colleagues I speak with will often refer to some key challenges facing the sector's status quo:

1.  The venture model is (kinda) broken, across all sectors.  Lots of people say this phrase, but they all tend to mean different things by it.  In general, however, there's a growing recognition that in the overall venture capital industry the big funds are getting too big, the returns have been too low, the valuations have risen as too much money floods in, and true company-building skills have fallen away in favor of attempts to simply harvest already well-established opportunities. 

2.  We're still waiting on the big exits in cleantech.  To be clear, there have definitely been some big cleantech success stories and there has been an increasing pattern of exits overall, but we have yet to see the big "make the fund" type of exit that would justify the kind of dollars that have been thrown at certain opportunities (ahem, solar, ahem).  There are plenty of good excuses for this, including the lack of an IPO window, the overall economy, and the fact that the major investment activity has only taken place over the last few years.  But lacking success stories, VCs lack good examples of what works in the sector.  And so many of the most ardently-felt and -stated opinions about investment models (ones that become conventional wisdom and accepted at face value by journalists and others) remain very untested.

3.  There are too many VC firms in general, and too many inexperienced teams throwing themselves at cleantech in particular.  That sounds more disparaging than I mean it to be -- I've met with many first-time teams that have very smart ideas and good backgrounds outside of cleantech venture capital.  Some will end up being the engines of the new creative thinking that we might be about to see in the sector.  But the fact remains that there are well over 100 venture capital firms that are focused only on cleantech venture capital, and then another couple of hundred that want to put money into the sector along with other venture sectors.  They can't all thrive, and in fact many won't survive their initial fundraising efforts.  But the number of these firms running around meeting with companies, with LPs, etc. is dizzying.  And yet at the same time, actual experience (much less track records) in cleantech venture capital remains tough to find.

4.  It's become conventional wisdom that the sector should focus on "growth stage" investments (although different investors have different ideas about what exactly that means).  On paper, at least, it appears to be the stage where the risk/rewards and the timeframe to exit fit best with the returns hopes of these investors.  However, as per point #2 above, it's completely uncertain that the exit multiples in industries like energy and water (where the market prices are often affected by the availability of multiple alternative solutions to what is essentially the production of basic commodities like kwh and drinking water) will be as healthy as these investors expect, since we haven't seen many such exits yet.  And the sheer volumes of capital being directed into this stage means that, in order to win these deals, many of these investors will likely end up overpaying for the opportunity.  It may seem less risky on paper, but the capital supply and demand dynamics in growth stage cleantech venture capital means that the efficacy of that kind of a stage focus is very much an open question.  Yet in general, according to the NVCA survey linked above, many more VCs expect to be shifting later rather than earlier over time.

5.  There remain some pretty major underserved "gaps" in the marketplace.  A) There's a gap at the seed stage, in subsectors within cleantech where the gestation period of an innovation is going to take longer to bring to market than typically meets the timeframes of even "early stage" cleantech investors.  B) There's a gap in "first of a kind" and "second of a kind", etc., project finance -- financing the build-out of a CIGS solar manufacturing facility, for instance.  VCs have done some of this, but it costs a lot and they're reticent to keep paying for steel in the ground.  Government dollars are helping to address this, but it remains (as always) a slow and uncertain source of such capital.  C) There's a gap in all of the non-proprietary-technology parts of clean energy and water markets.  Much of the business opportunity from any "clean energy revolution" (as some have termed it) will actually be captured by service players like specialized installers, consultants, outsourced service providers, etc.  But these types of businesses really don't fit the typical venture model, because it's tough to see huge exit multiples and tough to see how they scale quickly enough to provide 10x returns for VCs.  Yet they will make money as businesses, even if they won't do it in the specific model that VCs will look for.

What's the answer to all of the above?  To be determined, stay tuned.  But these are the kinds of challenges that I hear about from my fellow investors in the space, and these investors are often talking about this being a time to be innovative about investment models, investment structures, and the like. 

Of course, VCs are infamous for not really putting their money where their mouths are when it comes to changing the traditional VC model.  So we'll have to see if anything actually happens.  But if there's ever to be innovative new approaches that could change the way our industry does things, now would be the time.

What happens if coal ISN’T cheap and plentiful?

Almost a year ago, I wrote about reading a National Geographic special issue on energy from 1981.  So I was interested to pick up a copy of a new National Geographic special issue on energy.  What's most interesting about the 2009 version is how much gloomier it is than the 1981 version.  The 28 year old report reads almost like an issue of Popular Science, focusing on new technologies and potential solutions to energy supply challenges.  The 2009 version talks about how we are stuck between a "played-out rock and a hard place," focusing as much on environmental challenges as supply challenges.  The tone of the public conversation around energy has certainly changed over the last three decades, even if -- as the 2009 version also makes clear -- the solution set really hasn't.

The 2009 issue spends a lot of time discussing coal.  For good reason.  In terms of electric generation, coal is king.  In the U.S., coal fired power is nearly half of the total generation mix.  Globally, it's nearly a third.  And in China, it's almost 70% of primary energy consumption.  For decades, coal has been the primary baseload power source for many regions, because of its low cost and ready availability. 

The U.S., according to reports from the Department of Energy and elsewhere, is very well-positioned to continue this pattern for many years to come -- with the 2009 National Geographic issue, for example, citing DOE coal reserves data suggesting that the US has over 200 years' worth of coal at current rates of consumption.  According to the Energy Information Administration, the US has 27% of global coal reserves, followed by Russia at 17%, China at 13%, and Australia at 9%.

But for a while now, there have been signs that the era of cheap and plentiful coal might possibly be closer to ending than many people think.  Coal reserves have been written down, significantly so in some case, in many regions.  China is using up their reserves at a prodigious pace.  And now some analysts are arguing that official coal reserve figures around the world are greatly overstated.

Here are a couple of examples:  At CalTech, David Rutledge has done an analysis of coal field productivity to derive an estimated total world coal reserve of 666 billion tons, versus 3,400 billion tons as one other estimate (the IPCC's maximum extractable estimate) relying upon official reserve tallies had shown.  The Energy Watch Group put out a report back in 2007 where they estimated (note: link opens large pdf) that peak coal may happen by 2025, with demand growth starting to outstrip supply as early as 2020.  The USGS has now scaled back their estimates of the US's economically recoverable coal. 

I've already seen some dismiss this news as being too far out to be meaningful -- it's not like anyone says we're going to be bereft of coal anytime soon, after all, even under the most pessimistic analyses.  But the significance of all of this isn't that we wouldn't be able to find coal anywhere.  It's not about when we mine that last ounce of coal out of the ground, it's about that inflection point in pricing where coal stops being cheap.  As China uses up their supplies they will need to start importing coal from regions still producing.  According to the Energy Watch Group report, in terms of energy content (versus volume) US coal production already peaked earlier this decade.  So accessing untapped coal reserves will be more costly in the near future, and increasing competition amongst coal consumers may drive up prices even more than that attributable to production cost increases. 

So within a couple of decades, if not sooner, we may start to experience much higher coal prices, if all of these analyses are an indication. And if so, that would mean coal-fired generation would become a lot more expensive.

So what would the implications be for cleantech investors?  Obviously this impacts coal-related techs, but in different ways depending upon the application.  Carbon capture and sequestration would be less attractive in a high-coal-cost market, but innovations aimed at making coal-fired plants more efficient might be even more valuable, for example.  Elsewhere on the generation side of energytech, alternative baseload power candidates (such as wind, wave- and hydropower, solar-plus-storage, geothermal, etc.) would be more attractive. 

But the big winner would be energy efficiency technology, because electricity prices overall would rise significantly.

It will be interesting to watch the coal supply forecast debate -- and its implications for both investment theses and public policy.

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Speaking of energy efficiency, check out the upcoming green building summit from Greentech Media this week in Palo Alto.  Looks to be a good agenda for this market that's really been getting a lot of interest lately...

A new pet peeve

So it seems that the big push among cleantech startups right now isn't just asking for money from the government...  It's also putting out press releases announcing that they're asking for money.  I won't name names, but I now get a few of these PRs in my in-box each day.  I can't imagine it does much good towards affecting any official grant decision-making process.  And if that startup doesn't get the requested grant, then how does it look for them?

Worse, these announcements are often covered as breaking news by the industry media.  Sign of the times, I guess.  But it's still a bit much, IMHO. 

So onto real news -- recent announced deals:

• Solar startup Tigo Energy has raised a $10mm Series B, led by Israel Cleantech Ventures, and including existing investors Matrix Partners, OVP and Clal Energy.

• Cellulose-to-sugars startup HCL CleanTech has raised a Series A (amount not disclosed) from Burrill & Co. and Khosla Ventures, alongside existing seed investors Zohar Gilon and founders.

• I believe that 2009 is going to be a big year for venture investments in carbon-market IT.  Today's exhibit A is the unstealthing of Hara, which was funded by Kleiner last year (Kanellos reported the amount at $6mm).  

Other news and notes:  Here's a good update on the tidal power market...  Smart grid to be $17B market by 2014, says one analyst...  Here's some great market data on geothermal...  It's not about cleantech per se, but to an econ dork like me it has resonance -- a good overview of the use of auctions in economic policy...  Finally, here's someone who actually made money from corn-based ethanol!  (Well, not from the ethanol itself...)

One quick note -- if you enjoy the news and notes portions of these posts, I've been putting other such things up on a twitter feed (yes, I know, I know).

Recent deals

Here are reported cleantech venture deals from the past few weeks, showing that things are still a bit slow but the money is starting to flow into a more diversified mix of sectors:

• GreenRoad, a vendor of fleet driver safety and fuel efficiency monitors, has raised $15mm in "growth funding", led by DAG Ventures and including return investors Benchmark Capital, Virgin Green Fund, Amadeus Capital Partners and Balderton Capital.

• OutSmart Power Systems, a developer of commercial building energy efficiency systems, has announced a $2mm seed round from Bainco, Clean Energy Venture Group, and Manifold Products.

• Micro fuel cell developer UltraCell announced a $3.8mm insider round, from existing funders BASF Venture Capital GmbH, OnPoint Technologies, Espirito Santo Ventures (ES Ventures) and Miami Valley Venture Fund.

• VentureWire reported on a few fundings that have been discovered through Reg D filings:  Arxx Corp. (green building materials) has raised $3mm of a targeted $4.3mm round; Infinia Corp. (solar) has raised $14.1mm of a targeted $50mm debt/rights financing;Tendril Networks (smart grid) has raised $19mm out of a targeted $30mm equity raise; and Renewable Fuel Products (biofuels) has raised $145k.

• SpectraSensors raised a $6mm round of financing from new and existing investors, including Blueprint Ventures, Nth Power, American River Ventures, Nomura Private Equity Investment, and Chevron Technology Venture Investments.

• Wind developer OwnEnergy has added to its Series A with new financing from Clearpoint Ventures and GoGreen Capital.

• Lighting ballast vendor Fulham Inc. has raised $10mm from Braemar.

• Daimler is buying a 10% stake in Tesla.  For more information, see any news website anywhere...

• Biogas plant developer agri.capital has raised a EUR60mm round of financing.  TCW Group, Inc led the round, alongside existing investors Altima Partners, Green Partners, Halcyon and Ludgate Environmental Fund. agri.capital also raised a EUR10mm mezz debt facility with Ecofin.

• Terralliance, which got in a news a fair bit last month, has raised some new funding and (probably more importantly) converted a large portion of its debt into equity.

• Solar inverter vendor Sustainable Energy Technologies has raised C$1.3mm in a PIPE (note: link opens PDF).

• Germany's P21, which is developing fuel cell for backup power systems, has raised a EUR10mm round of financing led by Yellow&Blue Investment Management, alongside existing investors Target Partners and Conduit Ventures.

• Madrone Capital Partners has led a $22.5mm round of financing into solar micro inverter company Enphase Energy.  New investor Bay Partners also joined the round, which included existing investors Third Point Ventures, RockPort Capital Partners and Applied Ventures.

• Swedish transformer company Hexaformer has raised a EUR3.3mm round of financing from Sustainable Technologies Fund and InnovationsKapital.  

• Capricorn Cleantech Fund and GIMV have put EUR1.5mm each into a first round of financing for NovoPolymers NV. 

• Deeya Energy raised a $30mm Series C led by Technology Partners, to further their flow battery development efforts.

• ZettaCore raised a $21mm Series C -- GreenLight mentioned that part of the proceeds will go toward the development of energy storage applications.

• It's not a cleantech deal, but still, I thought this report by Cooley Godward (note: opens PDF) was very much worth highlighting, since it does a great job of illustrating the dramatic downtown in venture capital valuations over the past few months, across all stages.  Entrepreneurs, take heed...

Other news and notes: If you haven't seen it already, it's well worth reading Joel Serface's piece on his year as an EIR at NREL...  Finally, while the WaPo editors are down on the Chevy Volt, this column by Michael just made me jealous!

Memorial Day and clean energy

For all US based readers, welcome back from the Memorial Day weekend.  It's not just a 3-day weekend, folks.  It's a day of remembrance and thankfulness, first and foremost. 

Insofar as cleantech issues impact that, Ian writes passionately about the link between supporting clean energy, supporting energy independence, and supporting our troops.  I would add that it's also important to recognize the role that the US military has played in supporting the development of clean technologies.  The military needs renewable distributed generation technologies badly.  They have been major supporters of technology developments in everything from advanced motor design to sensors to biofuels to wind power.  DARPA grants have been valuable for several companies I've backed and evaluated as an investor.  In many ways the Department of Defense has been a second Department of Energy for some time now.

Andy Bochman here in the Boston area has been writing a good blog on energy tech matters related to the DoD.  Check it out.

A deals update will be coming soon...

What capital efficiency?

Had the pleasure of moderating a very interesting panel at Boston University today on smart grid and energy efficiency, including representatives from the State of Massachusetts, NSTAR, GE, BU, and Millennial Net.  Lots of optimism about ongoing pilots and smart grid roll-outs.

And of course, here in this column we've talked quite a lot recently about how the cleantech VC community seems to be much more vocal about targeting capital-efficient energy efficiency and smart grid investments these days.

Except that I took a look at the details in the Q1 2009 Cleantech Venture Monitor (another great job by Cleantech Group's Brian Fan and colleagues), and there's no evidence yet of such a shift.

In their tally, solar remains the big dog, at almost 35% of all cleantech venture dollars in the quarter.  That's just barely down from the ~38% it captured in Q1 of last year, for example. 

Biofuels and transportation (not exactly the poster children for capital efficient investment areas) continue to be other big targets for VC dollars, at ~10% and ~20% respectively. 

And where is "smart grid"?  At under a 5% share.  In the Cleantech Group's methodology, energy efficiency investments tend to be spread across a number of different categories, but even the "green buildings" category garnered only ~10%, about the same as in Q1 2008.

Will we see VCs start to put their money where their mouths are in upcoming quarters?  We'll just have to wait and see.