The next wave of cleantech investing:  Getting beyond energytech

We had a great REBN-Boston event last night at the Warner Babcock Institute for Green Chemistry.  John Warner spoke about his journey into the field of green chemistry, and about the need for green principles to be integrated into chemistry methodologies -- not just for health and environmental reasons, but for profitability reasons as well. 

You can read some of Warner's thinking on the subject in an old interview here.  For example, Warner mentioned last night that DuPont spends $1B per year on research and development -- and $1B per year on regulatory compliance related to their products and processes.  The problem, in Warner's view, is that chemists are never trained in areas like toxicity and environmental impacts of the chemicals they work with and create.  So it's no surprise, therefore, that it becomes so expensive to deal with the waste and toxicity of the chemicals at "the end of the pipe".  Instead, if processes and products were designed with green principles and lessons in mind, up front, we could see more effective, cost-competitive and safe chemicals and processes right from the start.

This isn't just a pesticides and chemical additives issue.  Such chemistry-based design decisions are at the heart of other cleantech sectors like thin-film solar, water treatment, membranes, agriculture, etc.

It's a great example of the next wave of cleantech:  Everything else beyond energytech.  While climate change, energy independence and energy supply concerns have elevated energy technologies thus far in the cleantech pantheon, we continue to see looming natural resource shortages in other areas like water supplies, agriculture and food, and basic materials/ commodities.

It may not be this year, but at some point those other markets are going to develop to the point where they will be ripe for innovation and rapid adoption of alternative technologies.  And methodologies like Green Chemistry may help spur such innovation, in proprietary ways that VCs love to see.

The “Next Big Thing” in cleantech investing could be really… well, big.

With the economic downturn that hit in full force last fall, many cleantech VCs' minds made a pretty big shift away from capital-intensive solar, EV and biofuels investments, and (to the extent that checks were still being written) toward relatively more capital-efficient smart grid and energy efficiency bets. 

Regular readers of this column will know that I've been beating the drum for these kinds of investments for a while, for market and investment model reasons.  But it's sure true that they look that much more attractive in an environment where exits are a long way off and LPs aren't putting capital into new funds -- capital-efficiency looks better when capital is scarce, naturally.

However, as a (hopefully not temporary) sense of stability starts to return to the marketplace (and even accounting for the more bad news undoubtedly yet to come), many investors are starting to dream big again.  In the spring, a VC's fancy lightly turns to thoughts of radically reinventing the electricity industry, as it were.

Two strong potential candidates for the Next Big Thing in cleantech venture capital are nuclear and carbon capture and storage.

I've spoken with numerous VCs recently who are looking for innovative ways to play in nuclear power.  Bets have already been made by VCs in small-scale nukes, hot fusion, and technologies related to big-scale nukes.  The hope is to find a low-cost solution that is practically zero carbon emissions and also provides reliable "base load" power.  So in other words, the hope is for a lower-carbon replacement for coal power.  The challenges are also significant, however, not least of which being time to market for any new innovations, as this interesting article illustrates.

With the recent news that the DOE will be putting $2.4B into carbon capture and storage, and its inclusion in emerging climate legislation, it's also clear that CCS will be leaned upon as a hoped-for way of making our existing coal-fired generation infrastructure less impactful on the atmosphere, while still preserving its value as low-cost baseload power.  So in other words, the hope is for a lower-carbon "fix" for coal power.

These will be challenging sectors for VCs.  Like solar and EVs and biofuels, they are capital-intensive and, insofar as new tech development is concerned, face a long path to market readiness.  And unlike solar and EVs and biofuels, success will very often require getting major buy-in from the notoriously slow-moving utility industry and regulatory bodies.  But the government dollars could help with that.  And the market for anything related to baseload power is huge.  And we live in interesting times.  So these two controversial technology areas could well end up being the focus of a lot of investors' attention over the coming months.

There’s more bad news to come

With the news today that GreenFuel is shutting its doors, it's a good reminder that there is a lot of bad news yet to be seen in cleantech venture capital. 

A lot of high-profile startups have high cash burn and unclear follow-on financing prospects, because they raised big money at big valuations in the past and since then the world has changed and fewer big money / big valuation deals are getting done.  Many of those companies have over the past few months been put into a slow-down mode and maybe have received bridge financings and the like.  All of which helps them stick around, but also doesn't completely address their growth needs, in fact it might hinder their ability to grow going forward.

Meanwhile, although there's been a rally on Wall Street and some encouraging signs, the overall consensus of economists seems to still be that it'll get worse before it gets better -- the trajectory is improving, but is still down.  And with some potential for new bad news, of course.  There's been a bounce of sorts early this year as everyone digests the company sales and VC deals backlogs caused by absolutely nothing happening in the 4th quarter.  But things are still very slow relative to where they were a couple of years ago.  And so it will be hard for these struggling companies to right the ship in this economic environment. 

Thus, expect more bad news over the next few months.  But hopefully with an increasing amount of good news as well...

Powerit and other deal updates

It's always fun to see how the mainstream journalists over-react to the latest short-term numbers, and how their editors feel compelled to over-dramatize every headline.  Thus last week we saw an article in the NYT with the headline "Clean Tech's Future Dims as Financing Drops Off."  Taking the very worst of the Q1 numbers we discussed a while back, the article literally asks:  "Has the green bubble burst?"  And paints a picture of cleantech funding drying up in the aftermath of a "hype cycle" and entrepreneurs being left out to dry.

Huh?

As we've discussed, the quarterly numbers are significantly down, but at a rate pretty comparable to what happened to venture capital overall.  The whole economy came to a crashing halt, after all.  It's not easy times for entrepreneurs, but it's not like there aren't deals being done (in fact, see below).

And what bubble in the first place?  Was there a solar bubble?  Most probably -- as we've talked about here for a while now, the solar sector got frothy in 2007-2008, as the quotes in the article reflect.  Was there a corn-based ethanol bubble?  Definitely.

But to simply declare that there was a "green bubble", as if solar and biofuels made up the entirety of the investment opportunities in the sector?  I don't know any investors arguing that sectors like water, energy efficiency, agriculture, etc. are over-capitalized.  At least not yet (stay tuned). And smart investors have always had a broad view of what "cleantech" (or whatever phrase they prefer) means.  So a bit of unnecessarily breathless reporting.

But what else would we expect from an industry with such a dim future as print newspapers?

So let's take the opportunity to mention all the deals from the past few weeks:

• Extremely pleased to report that Powerit Solutions, a Seattle-based vendor of automated smart grid solutions, has raised a $6mm round of financing led by Siemens Venture Capital, and including new investor ArcelorMittal's Clean Technology Fund, alongside existing investors @Ventures and Expansion Capital Partners.

• Superconductor vendor Zenergy Power announced a GBP 9.5mm PIPE (note: link opens pdf) from new and existing investors.

• Altira led with $10mm of a $30mm round for EPS Corp., an ESCO / energy intelligence services provider.  Existing investors NGEN and Robeco also participated.

• China's Chint Solar has raised $50mm from investors including Cybernaut Growth Fund and Shanghai Alliance Investment.

• Nanomaterials startup SDCmaterials, with emissions control and other cleantech applications, has raised a $14mm Series B (note: pdf) led by Invus Financial Advisors and including existing investors Emerald Technology Ventures, BASF Venture Capital and individual investors.

• ImageTree Corporation has taken in an undisclosed amount of strategic investment from In-Q-Tel.

• Israel-based ETV Motors has raised a $12mm first round of financing from Quercus Trust and 21 Ventures.

• Demand response / energy efficiency service provider CPower (fka Consumer Powerline) has raised a $10.7mm Series B led by new investor Mayfield Fund, and including existing investors Bessemer Venture Partners, Expansion Capital Partners, Schneider Electric Ventures, New York City Investment Fund and Consensus Business Group.

• Carbon capture technology developer Powerspan announced new financing of "over $50 million" (note: pdf) from new investors George Soros, Tenaska Energy, Inc., AllianceBernstein LP, and Persimmon Tree Capital LP, and returning investors NGEN Partners LLC, The Beacon Group, The Tremont Group, RockPort Capital Partners LP, Calvert, Angeleno Group, Fluor Corporation, and FirstEnergy Corp.

• Plastics-to-crude developer Plas2Fuel raised a $4.25mm first round of financing from Chrysalix, Saffron Hill Ventures and Reference Capital Management.

• Ausra raised $25.5mm in a new "equity facility".  New investors KERN Partners, Generation Investment Management and Starfish Ventures joined existing investors including Khosla Ventures and Kleiner Perkins.

• Green chemicals startup Glycos Biotechnologies has raised a $5mm Series A led by DFJ and DFJ Mercury.

• Luxim raised a $12mm insider Series C.

• VentureWire reported that Crystal Solar raised a $10mm Series A in July of last year, from Oceanshore Ventures LP, Scatec Adventure LS, SIIF SARL of France, and David Bostwick.

• Solar-to-hydrogen startup Sun Catalytix has raised a $700k seed financing round from Polaris.

• A123 took in an additional $69mm in a round led by GE, with $15mm.  Other investors were not disclosed.

• LED cooling company Nuventix has raised $4mm to close out an $18mm Series C originally announced in July of last year.  Braemar (at $3mm) and Uniquest ($1mm) provided the new financing.

• Smart home vendor EnergyHub announced an undisclosed amount of Series A from .406 Ventures and Physic Ventures.

“Analysis pyrolysis” and climate change legislation

Warning:  The following is just one man's long-winded opinion on goings-on, and while I have been spending a bit of time engaging on these topics lately, I'm far from being an insider, so read accordingly

My guess is that we won't see any major climate change legislation signed into law this year.  There's a decent chance, but less than 50%.

I come to that conclusion after observing a lot of "strategy discussions" among proponents, and listening to a lot of political rhetoric over the past few months.  And it's becoming clear to me that the way climate change legislation is being tackled is likely doomed to failure.

And that would be a big shame.  Because we need to address climate change and energy independence as quickly as possible.  And if we can't get something useful done that's market-based by design, then we will see yet another big prolonged battle between those espousing "do nothing" and those espousing "command-and-control" approaches.  Paul Krugman touched on the cost-effectiveness of market-based solutions like cap-and-trade in an op-ed over the weekend.

But let's go back to 2006, when California's Prop 87 was on the ballot.  This would have imposed a tax on California oil producers, with the explicit goal of significantly reducing the state's oil consumption, and with the revenues being directed in part into a program of subsidies for alternative energy research.  It would have represented a pretty moderate tax of 1.5-6% per barrel on oil producers.

Prop 87 had some major endorsers (Al Gore, Bill Clinton, and Vinod Khosla, to name a few) and, it being an off-year for elections, it got a lot of attention and positive donations.  A major ad push was undertaken.  If any state would pass such a measure by popular vote, you would think it would be California, a state that prides itself as being at the forefront of green living and green energy. The prop started out with a lot of positive public momentum.

And it was defeated.

At the time, I was living in California, and I vividly remember the massive ad campaign -- almost entirely and overtly funded by oil producers -- against Prop 87.  Opponents pulled out the stops.  The proposal was attacked as tax and spend.  The use of the tax to fund subsidies for green power technology was assailed as imposing a new massive bureaucracy on a public already tired of big government.  A firefighter in full fire-fighting regalia was put on camera to argue that the tax would lead to higher gas prices, hurting firefighter budgets, and therefore making it harder for firefighters to fight fires.

The lessons that should have been learned are that a) when voters perceive something as being a "tax", they don't really care about (or in many cases, understand) the relative burden of that tax, they just react negatively no matter what price it is; and b) if that tax money is taken and spent by the government on new programs, no matter how popular those programs might be, it's easy to attack the whole thing as "tax and spend bureaucracy".

So what's going on in DC right now?  The very same thing.  And this time in the middle of a recession.

At a high level, the approach being touted for passing cap-and-trade suffers from the very same flaws as Prop 87.  It may not be called a "tax", but as most will admit, cap-and-trade is simply an alternative way to price carbon emissions.  It's already being labeled as a "tax" by opponents.  After a few months of massive negative ad campaigns (we're already all starting to see them on TV), I would bet that most voters will believe that "cap-and-trade" is a synonym for "tax".

That by itself is not a bad thing, if the message was better controlled.  If was "a tax on big polluters," for example, people might be more sympathetic.  But more on that below.

The other strategic mistake being made is that the proceeds of any auction are already being tapped for budgetary purposes.  Green energy proponents and producers are already arguing over who's going to get what slice of the revenues for subsidizing their businesses.

I'm not at all against subsidizing alternative energy technology development, commercialization, and adoption.  But that's a very separate concept from pricing carbon appropriately.  If you price carbon appropriately, then in theory consumers will make their own personal decisions about the trade-offs between green energy, efficiency and traditional energy sources.  In theory.  In reality there are market adoption reasons (not to mention the important goals of technology leadership and energy independence) for separately and additionally subsidizing alternative energy technologies.  But that should be left out of the climate change legislation, it should be part of a separate Energy Bill conversation.  Let's address the price for carbon.  Then let's have a different conversation about supporting one technology over another.  Conflating the two is confusing for voters, and also makes it tougher for them to support the overall proposal.

Because, I believe, in order to get voters (and their representatives in DC) to support even a moderate "tax on big polluters", it has to be revenue-neutral.  In other words, every single dollar of proceeds has to be kept out of the budgetary process.  And it has to be returned to each household in the form of a per capita rebate check.

I'll never understand why some politician hasn't stood up and declared:

"I want to propose an income tax reduction!  We're going to put money in the hands of average American households who need it so badly right now!  And the way we're going to pay for it is by charging a fee on big polluters.  We'll set up a separate account that the politicians aren't allowed to touch, and every dollar paid for by the big oil and coal producers will be sent back to the American public.  You'll get your share of the proceeds as a rebate check every year!"

Alas, those writing the current legislative proposals are following the Prop 87 script pretty closely instead.

Polling done with Americans suggest that they are very sympathetic to the goals of fighting climate change, growing "green energy jobs", and moving toward energy independence.  They claim to be willing to make sacrifices.  But once again, when asked about even the most minor of cost increases on their electricity bill or at the pump, they balk.  They're willing to make sacrifices like changing lightbulbs and driving smaller cars, but they're not willing to pay any higher prices during a recession.  And they simply don't trust the promised "payback" in terms of the benefits of green collar jobs growth, avoided climate change damage, etc.  Unless it's a protected rebate check delivered right to their door, they will never believe the benefits are net positive.

But from what I can see, the inside-the-Beltway horsetrading seems to be focused on two things:  Arguing over what the price of carbon should be (via the proxy argument of how much of the available pool of emissions should be auctioned vs. granted to utilities, etc.); and trying to pile additional spending proposals into the major bills or auxilliary bills being proposed over the next few weeks.

When I talk with proponents of climate change legislation, many of them appear to recognize that this is likely a flawed strategy, at least in terms of getting something done this year.  Symptomatic of this kind of active denial is the emphasis being put on the Waxman-Markey bill in the House.  But everyone agrees that the Senate (with its 16 or so skeptical Democrat senators) will be the really tough place to pass anything.  So why fight so hard about the specifics of Waxman-Markey?  Because that's the way to get something meaningful passed in the House.  And then, hopefully, that will lead to some momentum going into the Senate.

The other hope I've heard expressed is a "backup plan" of pushing for a National Renewable Energy Standard.  This would require all states to make sure that a certain proportion of their energy supply comes from renewable resources by 2025 or so.  The hope is that, even if a cap-and-trade scheme is defeated, much of the same objectives could be achieved by mandating this kind of supply mix.  But now I hear of strong objections to this kind of scheme as well, from those states (such as the Southeast) who don't believe they have good access to renewable resources.  And besides, it gets us away from the most efficacious solution:  Pricing carbon.  It's closer to command-and-control than it is to market-based solutions, and thus probably costlier in the end for power suppliers.

Those groups hoping to forestall any real carbon pricing or renewable energy standard are probably pretty happy with their position right now.  The dollar advantage they enjoy is pretty significant, and that will start to play out in the ad and lobbying campaigns.  And even before that really kicks into full swing, the schisms and strategic choices of the proponents of climate change legislation are making it difficult to see a clear path to getting something meaningful passed in this economic situation.

On the other hand, let's not forget what the ultimate alternative for action is:  Forced technology adoption, the ultimate command-and-control approach.  So called "Best Available Control Technology" has long been a fact of life for power generators in terms of other pollutants besides carbon.  Now we're seeing, in the UK, proposals for what are essentiall "Future BACT":  A requirement that any new power generation facility must promised to adopt carbon capture and sequestration technology as soon as it is commercially available.

That could end up being a lot more costly for utilities than any cap-and-trade or carbon tax.  And the threat of that kind of thing may be exactly why some utilities like Duke Energy have been publicly supportive of climate change regulation... if it isn't too punitive on them in the near term.

So there's still a chance that something gets passed that would have a meaningful "Phase 2" in its implementation.  A cap-and-trade scheme where Duke Energy, et al, can see enough other benefits (from CCS research and commercialization subsidies, and the inclusion of energy efficiency as a source of near-term offsets, for example) where they can support it.

I've long said that if you want to pass climate change legislation, it has to be something that Duke Energy's Jim Rogers would be able to endorse.  And it might not be perfect, but it would be better than nothing.

Stay tuned.  The next few months will be fun to watch.  Often frustrating for all sides, I'm sure.  But fun to watch.

*PS: Yes, I spelled it right. Apologies for a dorky pun.

Judgment calls

My last post seems to have set off some alarm bells for the various market analysts putting out cleantech venture capital tallies, since I heard from most of them today at some point…  For the record, my intent wasn’t to question anyone’s methodologies, much less competence!

But you can understand why these professionals take these things seriously, since their job is to be as accurate as possible.  Unfortunately, there was like an 6x delta between the high and low reported totals this past quarter, so it’s tough not to want to ask tough questions.

To the strong credit of guys like Eric Wesoff (GTM), Brian Fan (Cleantech Group) and Adam Wade (Dow Jones), they welcomed my questions today and gave me a lot of good info that helps illustrate just how many judgment calls there are in all these tallies.

Let me provide a few non-hypothetical examples from the first quarter.  Readers:  Would you include these deals in the Q1 tally if you were in charge?

1.  Optisolar raises a $30mm round of senior secured promissory notes, as reported on March 18th by PE Hub based upon regulatory filings.  These notes may or may not be intended to convert into equity in any subsequent financing event.

Would you count it in a Q1 cleantech venture tally?

2.  SunEdison announces on March 4th that they have raised $20mm in “project financing” from Union Bank (note: link opens pdf).

Would you count it in a Q1 cleantech venture tally?

3.  News comes out on March 6th that eSolar has raised $30mm from India’s Acme Group in exchange for 5% ownership of eSolar, as part of a deal that also included regional licensing of eSolar’s technology.

Would you count it in a Q1 cleantech venture tally?

4.  On Feb. 10th, PE Week Wire reports that SolFocus has raised an additional $19.28mm in Series C financing.  Interviews with the investors and/or company (yes, these analysts do indeed do a fair amount of legwork to bring you these tallies) indicate that the financing occured in the last part of 2008 as part of a larger round, but no one has reported it previously.

Would you count it in a Q1 cleantech venture tally?

There are no wrong or right answers to any of the above.  All are good tallies, they’re just different.  Just so you know:

• Optisolar was included in the GTM tally, but not the Cleantech Group or VentureSource tally.
• SunEdison was included in the VentureSource tally, but not the GTM or Cleantech Group tallies.
• eSolar was included in the VentureSource and GTM tallies, but not the Cleantech Group tally.
• SolFocus was included (@$47.5mm) in the GTM survey, as well as (@$66.8mm) in the Cleantech Group survey, but not in the VentureSource tally.

But I’d be hard-pressed to argue that any of the above judgments were demonstrably correct or incorrect.

And that’s just the solar category, dealing only with U.S.-based companies.  You can get a sense as to how the variances between the different surveys come up, especially once you include questions about whether a cleantech IT deal should be cleantech or IT, not to mention geographic scope issues.

Today, VentureSource also released their cleantech-specific tally (the one I cited yesterday didn’t draw cleantech investments across categories, so I had only mentioned their renewable energy numbers), and it helps draw the tallies yet closer.  VentureSource counted approximately $300mm in U.S. cleantech venture investments in Q1, which is still down from the $1B they counted in Q4.

Meanwhile, the Cleantech Group counted about $700mm (I’m eyeballing this from a chart) in North American investments.  That’s still a big difference between VentureSource and Cleantech Group totals (just to pick two for illustration purposes), but not such a wide divergence as we originally thought.  And then we go back to the potential methodological differences I mentioned in the last post.

I’ve mentioned several times before that, due to methodological differences, the most useful exercise is NOT to compare across surveys, but to compare time series within any given survey.  So:

• GTM’s totals dropped from $1.7B in Q4 to approx. $1B in Q1.  Deal count dropped from 99 to 59.
• Cleantech Group’s totals dropped from a little over $2.5B in Q4 to a smidge over $1B in Q1.  Deal count dropped from 99 to 82.
• VentureSource’s totals dropped from $1B in Q4 to $0.3B in Q1.  Deal count dropped from 44 to 25.
• Moneytree’s totals dropped from $974mm in Q4 to $154mm in Q1, but deals dropped from 67 to 33.

Forget all the differences across the different surveys, what’s clear is that there was a significant drop-off from Q4 to Q1, both in terms of deals and dollars.  Deals dropped probably by about a third to half.  Dollars dropped more, by 60% or more.

That’s not that different from the ~50% declines across ALL venture capital categories that VentureSource and Moneytree saw.  Especially once you account for the fact that the mega-deals completely disappeared, thus pulling down dollar totals more than deal totals.

In another post we’ll talk about why the pull-back happened and what it might mean.  For now, it’s back to my (supposed) vacation…

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