Catching up on a month of cleantech dealflow

Even in this economy, cleantech deals keep happening.  We’re way behind on mentioning them here, so here’s a catch-up of sorts:

• Microbial fuel cell startup Emefcy raised a Series A round of financing.

• ChapDrive AS, a Norwegian wind turbine transmission startup, has raised an EUR 6mm round of financing.  Existing investors NorthZone Ventures, Hafslund Venture and Energy Capital Management, and new investors StatoilHydro and Innovation Norway provided the funding.

• Lithium ion battery developer Nexeon raised a GBP 10mm round of financing led by Invesco, and including return investors PUK Ventures and Imperial.

• Wind project developer Invenergy took in a $30mm convertible note from Leaf Clean Energy.

• Oasys Water took in a $10mm Series A, co-led by Flagship and ATV, and including DFJ.  The company was formed with seed investment from GreatPoint Ventures.

• Triton Format AG, a Germany-based water tech play, raised an EUR 10mm round of financing led by zouk ventures, and including Meidlinger Partners.

• VentureWire reported that Bloom Energy is raising a $150mm Series F round of financing, with an asked-for valuation of $1.45B.

• Italian fuel cell manufacturer Electro Power has raised a GBP 4.7mm round of financing led by a private investor and existing investor 360° Capital Partners.

• Intel Capital invested an undisclosed amount into Pulse Technologies FZ-LLC, a UAE-based developer of home and hotel room automation software and systems.

• Green building startup Soladigm took in $10.6 in debt and convertible notes from Khosla Ventures and Sigma, reported VentureWire.

• China-based Astronergy raised $50mm from two Chinese private equity investors.

• Smart window manufacturer SAGE Electrochromics raised a $20mm insider Series C (note: link opens pdf) led by Good Energies, and including Applied Ventures, NV Bekaert SA and Bekaert Corporation.

• Advantage Capital Partners has invested $5.85mm in Environmental Operations Inc.

• Access Venture Partners has invested an undisclosed amount of capital into LED developer TerraLux.

• VentureWire reported that Fisker Automotive has added $3mm to their $65mm Series C.  Meanwhile that money has gone right out the door as they also reported Fisker invested as part of a $4mm round into Advanced Lithium Power, Inc.

• India’s Acme Group has invested $30mm into eSolar in exchange for a 5% ownership stake and exclusive rights to deploy the technology in India.

• VWire reported that Smith Electric Vehicles took in $10mm in undisclosed financing earlier this year, as part of the company’s formation.

• Green data center startup SynapSense added $7mm to their 2007 Series B round, with the funds provided by Robert Bosch.

• Craton Equity Partners invested an undisclosed amount of capital in GridPoint.  And also committed $10mm to Principle Energy Limited, a sub-saharan Africa biofuels project developer.

• Shell has reinvested in Codexis—VentureBeat reports the amount was roughly the same as their previous $30mm 2007 investment.

• NorSun raised a $72.3mm round of venture financing and a $94mm bank loan.  Good Energies led the equity round, and were joined by Scatec AS and Norsk Hydro ASA.

• Think, the electric vehicle company, went bankrupt, reports VentureWire, and now its U.S. operation has been restructured to be a 100% subsidiary of Think AS, the Norwegian parent.  As part of the restructuring, Kleiner Perkins now has a direct stake in Think AS and RockPort has increased their stake in the parent as well.  The company is reportedly seeking a $40mm new equity infusion.

Cleantech investors and other luminaries in the news:

• Last month, VentureWire reported that CalPERS is considering a $200mm commitment to Khosla’s new $1B targeted expansion-stage fund.  The article also pointed out a few other firms out there raising $1B+ sized later stage funds, including Riverstone Holdings, Clean Energy Partners, and C Change Investments.

• VWire also reported that Macquarie is in the process of raising a $400mm cleantech fund-of-funds.

• Element Ventures announced the final close of their new cleantech fund at $486mm.

• Index Ventures closed on a $438.8mm new fund, with cleantech as one stated area of interest.

• Here’s a good thought piece from Paul Dickerson, the previous COO of the DOE’s Energy Efficiency and Renewable Energy program.  And here’s a good example of what Paul is referring to.

• Khosla Ventures has added Pierre Lamond, formerly of Sequoia…  And Braemar has added Scott DePasquale, formerly of GE…  Also, my @Ventures colleague Matt Horton has taken on an interim role as CEO at Propel Fuels [mandatory self-promotion alert, naturally].

Other news and notes:  Here in Boston, what sounds like a terrific group has been launched—New England Women in Energy and the Environment (NEWIEE)...  Meanwhile, on the policy front, without getting into the pros and cons of it, it’s worth pointing out the cleantech implications of an emerging debate on patent reform, as illustrated by this column [3/16 update: changed link]...  Also, here’s another good article looking at the implications from the mention of cap and trade in Obama’s budget…  China’s cleantech sector took in $1.3B in venture capital and private equity last year, 120% up from 2007, according to one survey...  Xconomy’s been running through a list of cleantech companies in selected regions, such as this list of Oregon players...  Martin LaMonica searches for the Google of cleantech...  Clean Edge released their latest annual clean energy market report, and while 2008 was a record year, they suggest 2009 won’t be so rosy…  In Britain, the BVCA has set up an energy, environment and technology group...  Finally, “Show of hands,” everyone!

A proposal for government seed stage funding in cleantech

A couple of weeks ago I wrote up a few thoughts on the chatter about government money being directed to cleantech venture capital firms (and then discovered I’d given fodder to the Globe, who knew?).  At the end of the column, I mentioned that I wished to see more government support for cleantech startups at the early end, too early for many venture capital investors.  It prompted some thoughtful replies from several readers.

One reader pointed me to Sustainable Development Technology Canada.  This is a non-profit, quasi-governmental corporation that makes direct investments in Canadian cleantech companies to help them in later-stage growth or for initial project development purposes.  It has taken in $1B from the government and has already made investments in 144 projects to date—they’re looking to issue their 15th round of funding later this year.  So here’s a model for some to look at, but it doesn’t really address that seed-stage gap I pointed to.

Another reader reminded me about OnPoint and In-Q-Tel, two government-sponsored firms whose missions are to invest in startups that are developing technologies of interest to the Army and the CIA respectively.  These groups are investing in some early stage opportunities, but also are coming in later stage in some cases as well.  But it’s certainly a good model to draw upon for inspiration when it comes to government financing of cleantech.

Of course, a couple of people reminded me about the proposals for an “ARPA-E”, a counterpart to the Department of Defense’s DARPA research grant program.  DARPA is another good tool to consider, and has certainly been the source of grants for a number of cleantech startups.  It’s not an investment, however, and so it comes with a very specific set of requirements (and bureaucratic headaches) for the grantee.  It’s useful, but no panacea.

Finally, Reem Yared wrote to bring up a DOE program that was in place to support seed-stage companies up until a couple of years ago:

In fact, the DOE used to run a program called Inventions and Innovations, where they funded promising clean technologies with grants of $50,000 and $250,000. The grants went to inventors who were still at the patent-filing stage, helping them go through the patent process and on to commercialization. There was a whole selection process which worked quite well.

I was one of the consultants hired by the DOE (working for Vista Ventures) to help seven of the start-ups develop their commercialization strategy. Another company was DOE-sponsored market research services. The DOE had enough experience with the program to know that simply funding the research would not be enough: the patents would just be filed and shelved. The inventors/entrepreneurs really did need the hand-holding through the commercialization process.

The start-ups I worked with were all over the country and in all different fields: wind, glass manufacturing, paper manufacturing, LP gas distribution, biofuels, car engines, AC pumps. The irony, of course, is that the year Pres. Bush mentioned a focus on cleanTech in his state of the Union address, the administration pulled the plug on the program (April 2007).

I don’t think it would take too much effort to restart it, rather than creating something from scratch.
See http://www1.eere.energy.gov/inventions/about.html

Government-run investment programs have historically been challenged for a) having unintended consequences like the patent-shelving Reem mentions, and b) not being able to bring on board top investment talent because the government salary structure and even profit-sharing aren’t possible.  That latter objection also points to operational challenges—such simple questions as “are we looking for jobs growth” versus “are we looking for strong investment returns” become pretty fundamental to the exercise.

But merging a few of these ideas together, a quasi-governmental, independent corporation sponsored (and funded) by the DOE could be launched, to focus on seed stage companies commercializing technology out of the DOE labs and DOE-funded research.  It wouldn’t have to be a huge amount of capital to have a major impact—a few tens of millions of dollars would be very significant in this context, but relatively small in comparison to the “billions” being discussed by Krugman et al.  Then the questions to be answered around staffing and incentives and compensation would be very similar to those faced by OnPoint and In-Q-Tel, which have been able to bring in experienced, motivated investors.  So no need to reinvent anything at all, we can borrow from what’s already working elsewhere.

I bet right now we could get some of the brightest investors in the cleantech venture capital world to support this and even join such an effort.

The cleantech anti-bubble is a buying opportunity

Ah, memories.  Remember way back when I had to devote significant writing on this website to the question of whether there was a bubble in cleantech or not?  And by now, it’s starting to look like even my fairly pessimistic 1H09 cleantech venture dollars predictions may have been a bit optimistic, given that Jan-Feb investment totals were on a pace of less than 50% of 2008 annual totals.

What we’re seeing now is an anti-bubble.  It’s across the entire economy, and in fact cleantech appears to be more insulated than many other sectors, but people just aren’t putting money out there.

In their March 7th issue, The Economist declares: “A share’s value must be the present value of all future dividends—otherwise stockmarkets would be a giant Ponzi scheme.”  But that’s exactly what has been happening across a wide variety of financial asset classes since the mid-80s.  It was driven by an oversupply of capital, due to a combination of loose monetary policies and the massive exportation of capital by fast-growing Chinese, et al., economies.  We’ve had 20+ years of one bubble after another in various asset classes, most recently from dot-coms to housing to corporate debt, with only a couple of hiccups along the way.

The definition of a Ponzi scheme is one where the fundamental value of what’s being invested in is irrelevant—the only assumption is that the buyer will be able to find another buyer willing to pay even more. With the oversupply of capital we experienced for so long, it had to find places to go, and so we had bubbles where investors weren’t paying attention to the underlying fundamental values of the assets they were buying.  Or fooled themselves into believing that “this time it’s different”.  Whatever.  Basically, to use the stockmarket example cited by The Economist, investors stopped caring about the dividends of stocks.  They just thought someone else would be willing to pay more for the stock later—why?

We started to see a bit of that in some subsectors in cleantech, most notably in solar panel manufacturing and food-based biofuel production.  Why was such-and-such thin-film solar company valued at over a billion dollars pre-money for a private equity round?  Because the investors felt that someone else would be willing to pay even more within a couple of years.  And certainly some of that behavior was also seen in the publicly-traded cleantech shares out there.

So these bubbles, including in some cleantech sub-sectors, were the result of too much capital chasing into a “hot” market and getting away from the underlying fundamentals.  And now, we’re experiencing the same category of problem but in the opposite direction:  Too little capital is available, and still everyone is getting away from the underlying fundamentals.

But in cleantech we really are seeing some tremendous business opportunities.  Technologies at a commercialization stage, targeting big markets with huge unmet needs.  Our global natural resource shortages aren’t going away, and while energy prices are temporarily depressed given the severity of the downturn, few expect them to stay low over the long run.  Cleantech startups selling cost-saving technologies still getting good revenue traction.  And of course, a huge influx of government support on the way to anyone with the potential to grow green collar jobs.

Yet, right now many cleantech venture investors just aren’t putting money out there.  Some are in a bit of maintenance mode, stretching out their existing funds rather than go out to raise a new fund right now.  Others are simply waiting for “the bottom”.  And that means I see a lot of strong cleantech companies not getting funding.  Good companies with good revenue growth since their last round, looking at a down round this time.  Startups with capital-efficient business models and compelling customer economics, talking to VCs who say they’re looking for capital efficient business models and compelling customer economics, but not getting term sheets.

This means there is a strong buying opportunity out there right now in cleantech venture capital.  An opportunity for bold investors with available capital (and discipline and patience) to come in and find great companies to back, with a lot less competition than they would have faced a year ago. Yes, the economy means that some of the fundamentals have changed and deal valuations should be lower.  And yes, high cash burn is now justifiably out of style.  But there are still more great deals available right now than there are deals getting done.

So consider this a call-to-arms for the entire cleantech venture community.  Let’s get out there, and grow some great businesses.

Twittering the Boston cleantech conferences

Just a real quick note:  For those of you who can’t get to the MIT Energy Conference or the GoingGreen East conference today and over the next few days, I’ll twitter a bit (yes, it’s a brave new world) while I’m there.  No promises that it’ll be anything useful, and I can’t attend many sessions, but for those curious, there you go.

A quick update on carbon goings-on

One of the interesting things to come out of Obama’s new budget is the assumption in there of revenue from implementation of a cap-and-trade scheme for carbon emissions reductions.

First of all, here’s a quick but compelling analysis by Chaz Teplin who points out that the revenue assumptions point to assumptions of fairly low (<$15/tCO2) market prices for carbon credits.  Chaz then points to what that price level might mean in terms of costs more familiar to most of us.

Secondly, here on this site we’ve previously discussed the challenges of getting to 60 (as in, Senate votes) on a cap-and-trade bill.  Well, now the inclusion of these revenues in the budget may be a hint along the lines of what got reported a couple of days ago:  That the “budget reconciliation” process may be used to prevent a filibuster on any climate regulation. That would be an interesting twist, although I continue to believe c&t legislation won’t come down to a party-line vote…

Finally, while all this goes on inside the beltway, outside regional leadership continues to push the ball forward regardless.  The latest move is by the city of San Francisco, which is launching a Carbon Collaborative designed to help make the city a hub for carbon trading.  [Mandatory self-promotion alert: One of my portfolio companies, Carbonflow, is involved in this effort]  It’s a sign of things to come, as we’re witnessing the birth of a new, multi-billion dollar commodities market.  Different regions will be vying to grab part of that, undoubtedly.  But of course, what happens inside the beltway will make a big difference on whether the nascent U.S. carbon trading industry will flourish, or languish while Europe takes all the action.

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Where there’s smoke, there’s fire

So what happens when a venture capital fund is given a few billion dollars by the U.S. government to invest in greentech?

I ask this question because it is clearly being discussed pretty seriously right now.  I’ve heard rumors for some time now that Kleiner in particular has pitched the administration on the idea, but pundits like Thomas Friedman have also been throwing it out there (in a couple of op-eds here and here), and it dovetails with a proposal Obama made during the presidential campaign for a government greentech venture fund.

Where there’s smoke, there’s fire, so I’m therefore assuming it’s being discussed at a high level.

So what would it likely look like, and what would be the effect?

I can’t see this being a “Government as LP” process, where existing VC funds (note: funds, not firms) add on a couple of billion dollars of LP commitments from the DOE.  That would mess up existing fund structures and upset existing LPs.

There may be some small component that could be done as government-managed seed grants/ loans, similar to the SEED Program here in Massachusetts ($500k convertible loans into early stage companies with good prospects for growth and subsequent venture rounds).  But hard to see that adding up to anywhere close to the billions of dollars being talked about.

So the specific approach would likely be either a pool of capital allocated out for co-investments, and/or a pool of capital allocated to special purpose funds directly managed by VCs. In the former case, funds like Kleiner’s Green Growth Fund (for example) would make an investment, the Government Co-Investment Fund would make an investment into the same round under the same terms, and then Kleiner’s team would manage both, in exchange for some fees and some carry.  In the latter case, Kleiner (for example) would establish the “US Greentech Future” fund and simply run it as a traditional standalone fund, but with a single LP (the government).

I could see either path being chosen.  Regardless of which one, here are some inevitable outcomes:

1. It would have to be done by RFP, and the RFP process would be brutal.  Every firm out there would put in a proposal for some portion of whatever pool was available.  Massive amounts of lobbying (some of which is already going on, clearly).  Cutthroat competition to see what firms could claim jobs creation and wealth creation track records, which firms would be willing to charge less fees and carry, etc.  Every firm touting their own strategy over all others’.  My sympathies to the poor government staffers in charge of that process…
2. Unclear what government body would manage it.  If it’s energy tech only, probably the DOE, but it would likely be a broader program than just energy tech.  So there’s the possibility of a big mess of government bodies getting involved in a huge cross-departmental exercise.  Thus slowing down the actual decisions pretty significantly.
3. Much of it would go into later-stage investments.  Simply put, at the level of billions of dollars you either need huge staffs to manage scores of investments, or you need to put really big checks to work, which means larger rounds and thus later stage investments.  Those who read this column regularly will know that later-stage investing is already dominant in cleantech.  To put massive additional capital into that end of the market… Wow.  And it does call into question the match of the goal (fostering innovation and jobs growth) with the process.

I’m already seeing some VCs come out strongly against these ideas (a couple of examples here and here).  They argue that there’s already plenty of money in the venture capital sector, and that any effort to pour massive additional amounts of capital into startups through that kind of financial asset class would end up with skewed results.  Indeed, only about 2% of all startups get their initial capital from venture capital firms, so it’s unclear that this would be the most efficacious pathway to get startups launched and hiring.

There’s always a perception gap about what the role of venture capital is—politicians seem to believe that the role of venture capital is to promote jobs growth and innovation, but most VCs promise their LPs that it’s all about the financial returns and nothing else.  The great thing about venture capital is how often all those goals overlap.  But they don’t always…

I personally would like to see government figure out a good way to step into the seed stage gap in cleantech:  With technologies that would take a longer time to develop than most VCs would be able to stomach, government seed grants/ loans to help get the companies to a fundable point.  You wouldn’t want to, or even have to, put massive amounts of money into each company.  At $500k per startup, you could get 2,000 startups off the ground with a $1B commitment.  I see great companies all the time that are too early even for my early-stage venture firm, and that really only need a small investment to get themselves to the next level.  Later-stage investing now has everyone across the venture and private equity landscape looking to put money at play.  It’s unclear that pouring billions of additional dollars into that stage would achieve the hoped-for goals.  But seed stage funding remains a relatively unaddressed gap.

If you want to promote green innovation and jobs growth, there are a number of different ways to go about doing it.  The government venture fund is the current one being discussed, and clearly is getting pushed pretty hard right now.  I just hope that whatever happens, we take care to specifically address the seed stage pre-VC funding gap.  Otherwise all those later-stage dollars eventually won’t have anywhere to go.

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