In my last post, I mentioned the smart grid / energy intelligence "panel" at the Future Forward event last week.  It ended up being a great informal conversation between the panelists and attendees, so I thought I would share a bit of what I heard that I thought was interesting.

The participants included:

Eric Emmons, of Siemens Venture Capital, and one of the smartest guys I know on all things cleantech-related.

Martin Flusberg, CEO of Powerhouse Dynamics, a networking and energy software serial entrepreneur.  Powerhouse Dynamics has developed a home energy monitoring system.

Tom Pincince, President and CEO of Digital Lumens, a former networking hardware entrepreneur and analyst.  Digital Lumens has developed a cost-saving lighting controls system (to date, integrated into their proprietary LED fixtures) which among numerous features also includes a strong energy intelligence / data gathering aspect.  [Self-promotion alert: DL is a portfolio investment of my firm]

Here are some takeaways that I found interesting (all obviously very paraphrased by me):

1. Smart grid and energy intelligence are coming, albeit slower than some may have expected.  And it's a bit like we're building out the lower layers of the "stack" right now -- there will be opportunities for a lot of applications to eventually ride over the intelligent energy networks being put in place now.  Automation, device management, dynamic real time pricing interactions, even social networking and gaming are possibilities.  That having been said, the long-held vision of a "third pipe into the home" serviced by electric utilities seems to be (pardon the pun) just a pipe dream.  This energy data is quite often utilizing small-bytes networking capabilities to connect to the main utility grid.  But energy-intelligent devices inside the meter are coming, slowly but surely.

2. Standards will need to be developed to allow energy-intelligent devices to more readily connect into and function on these emerging energy networks.  It's too difficult to think about your refrigerator manufacturer negotiating with a home energy monitoring system manufacturing negotiating with a smart meter vendor negotiating with a utility to make them all work seamlessly.  But if some basic information-exchange and controls standards can be decided upon (by which link in that chain, I'm not yet certain) it would unlock more plug-and-play capabilities.

3. The sector needs more experienced networking execs to get involved.  However, the experienced execs involved in this conversation also had some very cautionary notes to share.  First of all, there are some big differences between telecom companies and utilities, and those are mostly negative differences.  Second, public utility commissions are much more of an obstacle to smart grid technology for utilities than they were to new telecom equipment for ILECs and CLECs.  Third, in this sector it's easy for startups to fool themselves into falsely thinking they're not selling to utilities but only to end consumers and thus protected from the difficulties of selling to utilities; even "inside the meter" energy intelligence will somehow (via rebates, standards setting, etc.) involve utilities as critical stakeholders, and thus present a real rate-of-adoption challenge.  And fourth, the channels stink for these technologies.  How do you get intelligent devices sold to end customers? Hopefully you're not planning on early sales/installations through utilities.  And hopefully you're not counting upon fragmented efforts through broader retail channels like Home Depots and online direct sales.  Finding channel partners who are already inside the homes / businesses and selling through them is key.  Net-net, the panelists acknowledged that selling into these markets is more difficult than selling into networking equipment markets, even though there are some very analogous lessons to be drawn.

4. There's an emerging schism in the richness of data inside versus outside the meter.  Inside the meter the trend is toward richer customer data, more data points, more detailed use of the data for a variety of purposes.  Outside the meter (on the grid side) the trend seems to be toward getting the data as pared down as possible, to only what's really necessary for the utility and associated purposes.  Unclear what impacts this schism will have, but it's an interesting trend.

5. A big positive difference between networking and smart grid is that, with both being concerned at a very basic level with managing network capacity, only on the energy side can you create "negawatts" and free up capacity by curtailing usage.  Tough to free up telecom capacity by curtailing video-on-demand, etc.  And as with telecom you can shift demand out time-wise to accommodate peak traffic.  However, with the electric grid it always has to be in balance, unlike with the telecom grid.  So there are different motivators and value creation opportunities from one sector to the other.

My thanks again to those panelists, in the end we and the handful of audience members just pulled our chairs into a circle and ended up having a pretty good conversation amongst ourselves.

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On a completely other topic, I also was struck by a couple of things said during an earlier angel / seed investor panel at Future Forward. Granted, I didn't hear any mention of cleantech on that panel, but even still (or perhaps BECAUSE of that) a couple of lessons struck me.  

One panelist mentioned how Boston-area angel investors typically invest in sectors they know, and in people they know, and so most angels are previously successful businesspeople investing into the next wave of their industry.  For cleantech, we really haven't had that first wave.  So it helps explain why, despite lots of overt interest in cleantech, I'm finding that actually active angel cleantech investors here in this region are few and far between.

And partly in response to that above observation, another panelist urged entrepreneurs to go out there and make their own angel investors.  In other words, rather than just trying to find existing angel investors who are probably pretty inundated with investment opportunities anyway, find the former colleagues who used to sit around the corner in the same office; and businesspeople who have recently gotten lucrative returns from their own related business efforts.  Even if they haven't been angel investors in the past, if it's a personal and professional connection they may be convinced to get involved.

I see a lot of seed-stage cleantech startups these days scrambling for funding and many ask me for help in identifying angel investors, so I thought I would pass along the above advice in case it's helpful.

I was asked to moderate a panel at the Future Forward executive retreat, a long-running event in the IT community in Boston.  Pretty impressive group of around 150 C-level IT execs in attendance, good smart speakers.  Made sense that the cleantech panel to be held as one of the breakout sessions would be about smart grid and customer energy information, since that is a sector that has strong overlap with IT.

Nevertheless, whereas the panel on cloud computing had something like 80 people, the panel on smart grid / energy data had 8.  The IT execs at the event clearly had very little interest.

Frankly, I can understand why.  These IT execs don't know any peers who've made it rich in cleantech.  They see the overall federal government trends as being pretty much anti-cleantech, after last tuesday.  Why should they pay attention to smart grid or energy efficiency when technologies like cloud computing are closer to them and more proven?

This is happening across the entrepreneurial and tech spaces to some degree: Investors and operating-side people who could be applying all that great knowledge about how to build successful tech businesses, but aren't.  Not necessarily a wrong decision for them, but a missed opportunity for the cleantech sector.  The lack of interest at the IT event is just one indicator of how cleantech still has a long way to go to gain true acceptance within the broader tech community.    

But then that same evening I went to the New England Clean Energy Council's annual Green Tie Gala.  A phenomenal event, perhaps the best Boston cleantech networking event of the year, 400 attendees from across the local community. Investors from some of the biggest name venture firms in the area, tons of entrepreneurs, various high-level state officials, etc.  Demonstrated a huge amount of positive energy about the sector, particularly here in Massachusetts where a governor who's been very supportive of clean energy and energy efficiency got re-elected.

So it's not as if there isn't a lot of entrepreneurial energy and general excitement around cleantech.  It's just that the strong IT community here in Boston, and the vibrant cleantech community here in Boston, don't talk to each other very much.  And that's bad.

Cleantech needs more entrepreneurial talent.  It needs more senior business leadership.  It needs the IT community.  And, based upon the number of IT industry refugees I do see entering the sector, it does seem that there could be a lot of interesting ways for IT execs to tackle big problems and big business opportunities in cleantech.  If the two communities would just talk more, maybe it would happen more often.

I'm not sure how much of what I saw that day is really reflective of a community schism just here in Boston.  I have the impression there's more crosspollination between the cleantech and IT sectors in California, but I would welcome comments from folks there and in other regions as to whether they're seeing the same thing or not.

The kind folks at Ernst & Young sent over their Q3 cleantech venture deal data this morning.  You've probably already seen the headlines, but suffice to say they've confirmed what many have been saying, that Q3 was a pretty big pullback quarter.  They tallied a 55% decline in deal dollars versus Q3 2009, and not only were deals getting smaller on average, but the total number of deals was also down 22%.

Can't say this was a surprise.  As we've been talking about for a while, it's seemed that the deal and dollar totals this year and last have been somewhat propped up by insider rounds.  And also, VCs are themselves running out of money, and it's a brutal time to be fundraising from LPs.  If the VCs don't have money, they have to pull back their check writing.  Plus, it could always be just a temporary thing -- Q1 and Q2 2009 were even lower quarters than this last one, in the E&Y data, and the sector bounced back from that.

But by and large, pretty ugly numbers.  

Thought I'd do a quick dive into the actual data and see what might be of particular interest underneath all that.

By far my biggest takeaway is that this was an across-the-board pullback.  It wasn't due to one stage of deal, or one subcategory, falling off the table.  

There are degrees of emphasis,of course -- First Round and Second Round deal counts have declined this year while Seed Round and Later Stage deals have kept pretty steady.  But across all stages, average deal sizes are slightly down this year versus where they've been in previous years.

More than just the one quarter's bad news, what's interesting to me is that I see evidence of an ever-increasing shift by investors toward later-stage deals and away from first round investments.  But that's not what drove an overall down Q3, of course, since later stage rounds are typically bigger than earlier stage rounds.  If anything, the longer term trend toward later stage investing probably buffered even worse sector-wide dynamics.

But also in the sectoral breakdown there wasn't any huge shift either.  No big anti-solar movement is evidenced (yet), nor any anti-biofuels shift.  In fact, the area that saw any decline of significance so far this year is "power and efficiency management services".  And that's only because Q4 2009 was such a crowded quarter for such deals (17, versus 10 in the latest quarter).

To me, this is pretty suspicious.  Not in that it undermines the E&Y data in any way.  But that it tells me a lot of investments are still being directed toward existing portfolio companies and not new rounds.  After all, it's pretty clear anecdotally that investors are shifting their sectoral interests, away from solar and biofuels and transportation, and toward energy efficiency and batteries.  If the deal counts aren't showing evidence of this, my educated guess is that it's because true new deals are few and far between, and the deal counts continue to be dominated by insider rounds and other insider-heavy rounds.  This fits with the "first round" decline illustrated above.  Either that, or everyone is blatantly lying about what they're interested in right now.  But my guess is that investors are hunkered down, helping their existing companies, and hoping for some exits so they can go out and tell LPs they've figured this sector out.

The cleantech venture sector is basically still just digesting the deals that were done in 2007-2008.  That, and the fact that the economy continues to be stagnant and VCs continue to be low on dry powder, means unfortunately that things will probably continue to be pretty moribund in US cleantech venture capital going forward... In this environment, bringing new investors into a company (whether for the first round, or for later rounds) should be considered a pretty big victory.

PS: If you've read this far, you might enjoy looking back at what CI readers predicted would happen during the first three quarters of 2010.  By and large, readers were spot-on.  At least as a group... Thanks again to everyone who participated in that survey.

I'm already getting pretty frustrated with the unnecessarily politicization and partisanship of clean technologies, particularly by outsiders.

In case you missed it, JD Power came out with a report (note: pdf) concluding that the market for electric vehicles and plug-in hybrid electric vehicles will underperform versus all the hype around the sector, through 2020.  It's well worth reading.

They base their conclusions on some critical assumptions, existing market data, and survey data.  It's a credible effort to forecast the market.  And it's getting talked about among those who opine on political issues:  This morning's WaPo editorial by Charles Lane is particularly breathless and unnecessarily partisan and harsh, for example.  But taking a step back from whatever ulterior reasons Lane might have for using the JD Power report as an excuse to take a roundhouse swing at the Obama administration, the report and the reactions do raise a very legitimate question, "Does it make sense to subsidize electric vehicles"?

Lane argues no.  He points to the Chevy Volt's cost and concludes that it is Exhibit A of why electric vehicles are a foolish thing to subsidize.

Let's take a look at what the JD Power report actually says, tho, since Lane is clearly not a very good reader of detail.

1. They expect Hybrid Electric Vehicles (HEVs) and Battery Electric Vehicles (BEVs) [pay attention to these specific terms, they're important] to grow from a little under 1M vehicles sold per year to 5.2M vehicles sold per year in 2020, worldwide.

2. One major reason that will hold back HEVs and BEVs is the cost premium associated primarily with battery packs, both upfront costs and disposal.  And in large part this is because battery packs are "prohibitively expensive to manufacture at large scale" at $10-15k per.  

3. Survey data shows that consumers' interest in purchasing a HEV drops from over 60% to 30% when they're told the price premium will be $5k.

4. Gasoline prices are low and JD Powers expects them to stay that way because "the supply of oil remains steady, as is widely expected."

5. Environmental justifications for purchasing an electrified car might be undermined by the fact that they "might only be transferring the exhaust-emissions problem upstream." 

6. As far as BEVs go, consumers will be concerned about limited driving ranges and significant time required to recharge, as well as the current lack of recharging infrastructure.

7. In light of all of the above, customer economics and dollars per kilometer driven remain unknown.

Let me be clear before diving in here: I've never directly invested in an electric or hybrid vehicle company or battery company, and I don't have an axe to grind here. I was just really struck by the unnecessary harshness of Lane's screed this morning and thought it was worth looking at, you know, some actual facts.

So first of all, how does the JD Powers report hold up to what we know about electric vehicles and the like?

There's a lot of merit to the report, which is pretty well-informed from what I've read.  But I do quibble with some of their assumptions and how they use them.

A recent BCG report on battery packs (note: pdf), for example, does lend credence to the idea that battery packs will remain more expensive to produce than the price targets of $250/kwh that have been cited.  That would still represent a significant drop in cost versus the current $1,000/kwh price tag of such battery packs, but given the JD Powers survey data about how sensitive customers are to price premiums, even a significantly reduced battery pack cost may still mean a larger premium than customers would support.  Nevertheless, it's unclear how much of JD Powers' market forecast is based on battery pack cost assumptions that reflect current costs versus realistic costs 5 years from now.  Lithium ion battery prices may fall 19% in 2010 alone, for instance. 

I've seen a few companies looking to develop non-lithium ion technologies with even better price performance, and I know the engineering teams at Tesla and elsewhere are putting resources into such efforts.  So there's hope that BCG's "glass floor" on non-scaleable lithium ion battery pack costs can be broken or just avoided at some point.  But I don't expect such technology efforts to bear significant volumes of new very low tech much before a 2020 timeframe.  But li-ion battery packs should continue to rapidly decline in price, which should help on the price premium and vehicle performance challenges.

Furthermore, customers may be more willing than JD Powers found to take on a higher cost vehicle if the customer economics net out in their favor, and it's important to recognize that JD Powers didn't have a conclusion about customer economics.  But as we've repeatedly seen in the cleantech space, even when paybacks are attractive upfront cost premiums can be stifling to rapid adoption.

Also, their description of shifting the "exhaust-emissions" problem upstream ignores the fact that in many U.S. regions the electricity generation mix isn't coal-based, but is a cleaner mix of hydro, nuclear, renewables and natgas.  And in many of the regions where hybrids and EVs will be most popular, that tends to be the most true.  Plus there are plenty of arguments to be made about the better efficiency of using centralized large-scale generation rather than many small, variable internal combustion engines.  And they also completely ignore the energy independence benefits of ANY domestic electricity production versus often-imported oil.

Driving ranges and recharge times are indeed another barrier to adoption of pure electric vehicles.  But here's where Lane departs pretty significantly from JD Powers' logic.  Reading the JD Powers report, it does strike me that they didn't do a very good job of describing where PHEVs fit into their worldview.  Ostensibly, an extended range EV (such as the Chevy Volt), which they define as belonging to the HEV segment and not the BEV segment, avoids such range challenges and even some of the charging time challenges.  They confine their criticism along these lines therefore to applying to BEVs, pure electric vehicles like the Tesla, and not to ER-EVs like the Volt.

Lane's stepping off point, of course, is the Obama administration's support of the Chevy Volt.  In fact, he CRITICIZES the Volt for (gasp) using gasoline for drives over 25-50 miles.  He declares that this means "much of the time the car will be running on gas".  Define "much"?  The average American commute is something like 16 miles one-way. Most of these cars will be used for commuting. If the Volt is plugged in at night to recharge and has a commute like that it would be running electricity most of the time. 

Then the part that particularly fired me up to blog on a Saturday morning: Lane then turns around and misquotes the JD Power survey.  It says "Rather than rushing to commercialize BEVs, the industry might be better served to pursue continued fuel economy improvements in ICEs and the mass production of HEVs." Lane conveniently changes "HEVs" (which JD Powers very specifically defined to INCLUDE ER-EVs like the Volt) to "conventional hybrids".  

So basically, Lane took a quote where JD Powers suggests investing in Volts rather than Teslas, and twisted it to suggest they said investing in Volts is a bad idea too.

Okay, so Charles Lane can't be bothered to tell the basic differences between types of hybrid vehicles and electric vehicles. Frustrating to see something like that turned into useless partisan hackery, but those are the times we live in.  What SHOULD we take away from the JD Powers report?

First of all, seeing hybrid and EV vehicle volumes grow 5x over 10 years would undershoot some analysts' expectations but doesn't feel unrealistic to me, and would frankly still be a big win.  Elsewhere in the JD Powers report they state: "The near future will depend on improving existing technologies, while also experimenting with new technologies that will carry the global community into the next 125 years." In other words, it's not that they conclude EVs have no future.  It's just that they don't expect EVs to take over the market over the next 10 years.  Agreed.

And I also would point out that some of JD Powers' assumptions, such as that gasoline prices will remain low, could be wrong.  There appears to be a lot more upward pressure and potential on oil prices right now than downward potential.  If nothing else, we can expect oil and gas prices to remain highly volatile.  It's entirely possible that there will be another period, perhaps prolonged, of high gasoline prices, and if so this would significantly change customer perceptions of electricity versus gasoline as their transportation fuel.

But in short, I largely agree with the JD Powers report's overall conclusions that hybrids and EVs will see strong growth over the next 10 years, but not the stratospheric growth some pundits have been calling for.  And that does have significant implications for cleantech investors.

Especially since the report's forecasts of market shares suggests not much room for new entrants.  Those investors backing standalone hybrid and EV OEM startups won't find much to cheer in the report.

But does all this mean government incentives and investment to promote early adoption of hybrids and EVs is a bad idea?  

I'm not going to pull a Charles Lane and tell you what you should think about this, there are legitimate arguments to be made on both sides of the question, and the JD Powers and BCG and other recent reports on the topic can lend evidence to support either answer.  But I'll point out that the supposed purpose of incentives into costly new technology areas is to help bridge the gap and encourage a market ramp-up so as to accelerate the scale-driven cost declines that it would take for the technology to stand up on its own.  You're welcome to draw your own conclusions as to whether a) it's warranted for this technologies; and b) if it will work for these technologies.  It's a worthwhile discussion to have, based upon the fundamental potential of the technologies and whether they can ever achieve good customer economics at scale, and these reports are additive to that debate.

But it's wrong to point out that the price premiums are too high for the first few products and thus conclude that incentives are a bad idea on that basis alone.  Because really, that price premium is the rationale for those incentives.  Charles Lane needs to go back and re-read the JD Powers report.  Or at least pick another topic to get angry about.

Cleantech is just not a partisan topic.  Or at least, it shouldn't be.

It's well understood that one of the most critical skills a venture capitalist must have is knowing when to walk away from a portfolio company.

I've heard this aspect of the job described in terms ranging from coldly mercenary to grudging acceptance and regret.  But regardless, no one bats 1.000, so at a certain point you need to cut your losses.  Sometimes the decision is easy, it's effectively made for you.  But in many cases VCs are faced with tough decisions about portfolio companies that went sideways but still have a chance and "just need another round of financing to turn the corner".  The problem is, very few companies do ever turn that corner, so the VC has to decide if it's a smart investment decision to put more money in.  It's one of the toughest parts of the job, both in terms of analysis and in terms of emotions and relationships.

Unfortunately, I'm not sure cleantech VCs have been willing to make these tough decisions, at least up until recently.  A year ago I did a quick little analysis of North American venture rounds during the past decade, divided the companies into three basic categories:  Exited successfully, visibly collapsed (or bad exit), or just still hanging around.

By far, the biggest category was in the "just hanging around" part of the pie chart.  This was true REGARDLESS OF WHAT INVESTMENT STAGE, seed/early or "last money in".

That speaks most of all to the lack of exits.  But it also says there were a lot of companies that were hanging around in portfolios, and maybe had made some progress but not nearly as much as had been hoped when the investment had been done.  Yes, there've been more companies that have been going under recently, but still... Especially when one considers the evidence that a lot of cleantech VC rounds being done over the past few quarters were insider-led, it suggests a lot of companies that have gone sideways are being propped up by their investors, rather than those investors cutting their losses and walking away.

Why?

First of all, a lot of investors have seen this lack of progress as being due in part to the macroeconomy.  If we can hang on, the theory goes, when the economy picks up then so will we!  The problem is, I don't see a major economic rebound anytime soon, do you?

Second, a lot of these companies have been still in the tech development stage.  As gets talked about all the time, in subsectors like solar, biofuels, etc., it takes years to go from the lab to the market.  As long as the company is still hitting technical milestones, why walk away?  I've seen some investors get pretty ruthless about what they do when a company misses its technical milestones, but in 2007 there were a lot of pre-revenue investments into companies that remain pre-revenue, and are still being supported by their investors with follow-on financings (albeit often having to run a lot leaner than they'd expected).

Third, there's an increasing wave of recaps and repricings.  I'm seeing it more and more in the dealflow I review that companies that spent millions of dollars trying to introduce something to the market hasn't made as much progress as hoped, and hasn't wanted to just give up, so they've gone out to raise more money but have recognized they'll need to do it under pretty cram-down valuation conditions.  In this case, their existing investors may actually have walked away, but the company would still be in the "just hanging around" category in my analysis.  

Fourth, and relatedly, there's still a lot of interest in cleantech among investors.  So even as the investment pool has dried up a bit (and will continue to do so as GPs run out of dry powder), those reboot rounds are still happening.  As an investor with capital to deploy it's just so tempting when you see that company you've followed for a few years and never wanted to pay the exorbitant price that it was raising money at, and here it is now at a more reasonable price.  So these companies are finding some price elasticity, and the ones willing to drop their price, if they've made any progress at all, are often finding SOME investment dollars to keep them going.

And fifth -- and this is important -- the GPs know they're going to need to fundraise soon.  And they don't have many positive exits, so they also don't want any smoking craters in their portfolio.  I don't think funds are doubling down on bets they know are losers simply to paper over losses, but I do think it's skewing some decision-making on the margin.  So they give the company enough money to keep floating, and hope for the best.  Especially if they can arrange non-dilutive financing (ie: government grants and such) and significantly scale back costs (ie: personnel) in the meantime.

This will end, tho.  There's only so much "floating" VCs will be able to support out of their existing funds, and then the tough decisions will have to be made.  And while the few investors with significant capital to deploy are scrambling around grabbing bargain-priced low-hanging fruit, many companies with otherwise decent stories to tell are finding it really hard to raise capital.  And that non-dilutive financing isn't going completely away, but the meat of it is already served and somewhat digested.  

We're already seeing a wave of startup failures, some that are pretty big-named.  We're going to see more, as cleantech VCs are increasingly forced to finally make these tough decisions.  Frustratingly, some of these failures will be good companies making good progress that just ran out of capital and couldn't raise more.  But the companies and funds that DO make it through this period, history suggests, will be very well positioned down the road.

Kind readers, by popular demand (and out of personal necessity), I'm going to start writing these columns a bit more infrequently and certainly with more brevity going forward.  Or at least that's the plan...  What's making me (and other investors) so busy right now?  Turns out right now is a pretty interesting time in our market.

I'm realizing that I've never been more overwhelmed with interesting dealflow.  When I look at the log we keep at my firm of incoming deals, the aggregate number of deals is only slightly up versus what I've historically seen.  But the deals that are coming in are harder to say "no" to at a cursory glance, on average.

For the six years I've been a cleantech investor, I've had in mind a mythical creature type of deal I would be most interested in.  A unicorn of sorts -- not to be confused with black swans, which are always in season for some (although I suspect some are bagging regular old swans painted black... but I digress).

This "unicorn" deal would be a compelling business offering with:

1. A top-notch team

2. Said team holding a very pragmatic approach to how to bring a technology/ product to market and get early sales traction

3. Said team having a strong focus on keeping cash burn relatively low (see point #2 above)

4. No-brainer customer economics

5. Attractive markets

6. Existing sales and/or key market partnerships already in place

7. Reasonable valuation expectations

8. Good exit prospects within a reasonable timeframe

9. An exciting "big picture" story with lots of upside

In the past I've been guilty of stretching on some of the above points in selecting deals, because of falling in love with an investment thesis, or a team, or a deal opportunity. Live and learn. But basically, the above list (plus other criteria that would be more subsector-specific) has always knocked quite a few deals off the table right away.  And after all, the odds are an investor will say "no" to at least 99 deals for every one they say yes to, so it's all about managing limited time resources.

But right now the unicorns are stampeding right at us.

The influx of strong entrepreneurs into the sector is starting to bear fruit.  I meet with many more companies on their second CEO already, or where the founder is an experienced CEO, versus in the past.  And these entrepreneurs are bringing a less over-optimistic, much more sober approach to the massive grinding-it-out exercise that is bringing a successful startup to market.

The economic collapse appears to have "scared straight" a lot of entrepreneurs as well.  Much more of a focus on managing cash burn. We're seeing $10M follow-on rounds that would have been a $50M follow-on ask 3 years ago.  And practical approaches to finding early entry market niches and grabbing early revenue, rather than attempting to build the entire macro-vision of a massively reinvented market, etc. etc., all pre-revenue.  Not that folks are giving up on the big dreams.  Just that folks are realizing how important it is to succeed one step at a time.

Much more active corporates that are now more seriously partnering with startups in a variety of ways, but with some substance to the interaction.

And of course, valuations are still a mixed bag, but flat rounds remain the new up round.  Lots of down rounds, recaps, and generally reasonable valuation expectations.

It's not universally true, of course, but all of the above is more often true of the deals I'm seeing these days.  Which makes it a lot tougher to turn them down quickly.  Which keeps me and my colleagues pretty busy.  Which is great.  Except for blogging.

In the last post I walked through questions entrepreneurs need to think through, research, and thoughtfully answer before attempting to turn a component-level cleantech innovation into a business.  And a natural next question is, "but who will fund this?"

It's perfectly okay if the answer is "hey, we're going to make a component and then sell that component or license it to OEMs."  But if so, you need to choose your potential investors wisely (in this case, probably angels and smaller venture firms focused on such business models, rather than the NEAs and Kleiners of the world).  And regardless of where you do believe you need to draw the boundaries for your future business, you need to show investors you've answered all of the above questions.  

• Talk about the 20 conversations you've had with downstream customers and partners, providing quotes and other evidence that the pain points are real, and that they would be eager to try out solutions like yours.  
• Show you understand all the complexities upstream of you -- for example, if you're a waste-to-energy company, show you know how complex waste stream procurement and materials handling is, and that you have concrete and pragmatic (and cost-effective) plans for addressing those concerns.  
• Show your work -- explain your rationale for why you've drawn the boundaries where you've drawn them.  
• And be forthright about skillsets and capabilities you know you'll need to add to be able to succeed -- the right investor won't mind knowing they'll have to be "value-add" in helping to address these gaps, as long as they know you see them as gaps too.

I suspect this will continue to be an increasing dilemma for entrepreneurs in cleantech.  The innovation cycle is so much faster than the market adoption cycle that people are innovating 3rd generation components for systems that don't really have any sales yet.  So if this column speaks to you, also know you're not alone.

But above all else, don't go to investors and pitch a component as a standalone business for an industry that doesn't yet exist.  Yes, I'm looking at you, photobioreactor designers...