For cleantech entrepreneurs who were out raising funds from VCs three years ago, it was easy: Just make the biggest claims possible. Talk about reinventing the entire planet, VCs wanted to think big. Bigger dreams just meant bigger rounds.

These days, market disruption is still a major goal of many VCs investing the sector. But pragmatism, capital efficiency, and execution are the watchwords of the day. This presents the cleantech entrepreneur with a dilemma -- do they talk in very focused terms about a couple of market sub-segments where they know they can do well, or do they talk about massive market disruption but risk coming across as not being serious enough?

For what it's worth, my advice is: Do both.

Just as in the consumer web, the 'long tail' concept applies well to cleantech market opportunities. In both cases, "niches" can be very lucrative. Focusing in on one or two niches, at least at first, allows the entrepreneur to really get to know their initial target customers; to get to know all the major players in that market segment's value chain; to understand exactly what customers are looking for beyond the basic "cost per kilowatt-hour" type metric; to assess what other specific alternatives these customers have in front of them, and design a value proposition that beats them all.

You can't be all things to all customers, so this sort of narrow focus enables superior execution. Plus, it allows for a tailoring of the value proposition to get out of the "commodity trap" and capture better margins and some level of defensibility.  And also, by the way, it helps give investors comfort that the management team is deeply engaged and digging into all the details of their market in a really thorough way.

"Niche market" is still a dirty word in some VC circles because it sounds like a limited market opportunity. But in cleantech, even very niche-y markets can be huge. Your component is focused initially only on the personal scooter and motorcycle market? Well, that's going to be a 75M-unit annual market by 2015. Your lighting system is targeted initially at industrial buildings?  Turns out industrial-segment lighting is a multibillion dollar annual market in the U.S. alone. You can home in on some very specific niches even within these subcategories and find markets running in the hundreds of millions of annual dollars or more, providing plenty of beach for an initial bridgehead.

And yet... VCs still want to go for huge-win opportunities. Not only because of the returns profiles, but also because that's how they make a name for themselves even aside from their returns. Therefore, if you're raising venture capital, you also want to have a Grand Vision for how you're going to eventually break out of your bridgehead niche, and take on reinventing much larger swaths of the market. How can you use your initial niche-focused market entry to create an unfair advantage for yourself when then expanding into other large, related markets? How is your core business model and/or technology well positioned beyond your initial market niche? How are you going to use success in selling into the personal scooter market, to better enable the electrification of drivetrains across the broader transportation sector? What is the reinventive potential for "embedded intelligence" in the lighting market even beyond industrial buildings? These are the kinds of exciting stories that entrepreneurs should also be ready to tell, so that their passion and the broader opportunity is clear to them, their teams, and potential investors and strategic partners.

The key is: Have the stories ready to tell. Keep them in mind as long-term strategic guideposts. But make sure that on a day-to-day basis you're absolutely killing it within your initial niche. Think big, but be focused.

Just got back from attending Dealcatch earlier this week. My thanks and congrats to Chrysalix, and co-sponsors Nixon Peabody and Cascadia Capital, for a really productive (and fun!) networking event. Lots of opportunities to catch up with fellow cleantech investors, talk about specific deals, discuss industry trends, etc.  More firms should hold events like that; it has to be pretty valuable for them.

Being there also really helped illustrate a contrast I've observed between institutional venture investors and many (but not all) family offices I've run across over the past few years: the willingness to actively engage in such conversations with each other.  

VCs, generally speaking, embrace "co-opetition," or the idea that sometimes they're going to be collaborators and other times competitors. They regularly seek out opportunities to talk with each other -- sometimes to solicit co-investments in specific deals they're working on, and sometimes just to share more general thoughts and observations with each other. I've found that it really accelerates our individual learning curves to do so. It's obviously not a perfect source of information, but you learn something about which startups are seeking funding, which competitive startups are out there, what the overall fundraising climate is like, etc. You might even end up working with each other on a shared investment.  Some VCs share more than others, but I've always found it beneficial to keep an open line of communication with as many fellow investors as possible, because I feel it just makes me a better investor when I have more contextual information about what's going out there, and so I try to share context in return.

Family offices, on the other hand, are often self-constrained in these kinds of activities. First of all, many are secretive to (in my opinion) a fault. I understand why these wealthy families wouldn't want their investment teams going out and getting a lot of attention, which would likely result in the families themselves getting unwanted attention and unsolicited "asks." But family offices shouldn't take such low-profile leanings too far, to the point of hindering their ability to network, at least with fellow family offices. Secondly, many family offices are seriously understaffed, and covering way too much ground.  That doesn't leave much time in the day for networking. But in the vague and opaque world of venture capital investing, gathering context can be time very well spent. And additional relationships and networks will help bring in better and fresher dealflow. It's also tough to share tactical context when you're covering so much variety in terms of sector and asset categories, because you can only cover so much in a brief phone call.

Over the past couple of years of having one foot in each camp, I've been able to watch as deals often go through the venture capital community, get passed on by the VCs, and then later make their way through the family office community. That, to put it bluntly, is a pretty bad case of "negative selection bias" that such family offices are having to deal with. And it's a direct result of these family offices being so low profile, and then not being networked-in enough to have heard about the deals from fellow investors earlier.  

It's one major reason why we helped pull together a syndicate of fellow family office investors, and why we're putting a lot of effort into making sure fellow cleantech investors know about the Cleantech Syndicate, because there's no real reason why family offices should be so low on entrepreneurs' target list. Family offices can be strategically valuable investors (because of connections to operating businesses and other relationships of the principals); they are often as deep-pocketed as the VCs, or more so; and they can sometimes be a better fit than a traditional VC, depending upon investment time frame, non-IP-centric business model, etc.  Many entrepreneurs should target family offices sooner than they have been -- and perhaps they would have been doing so, if they only knew more about them!

Being at Dealcatch just reminded me how valuable it is for VCs to network with each other early and often -- and how little I see of such efforts within the family office community.  As family offices get increasingly involved in direct investing into startups and projects in the cleantech sector, I hope I see more such proactive networking within that community, because it can be quite valuable.

Information-based cleantech is an emerging "next big thing" in the sector.

During most of the last decade, cleantech VCs were putting a lot of capital into the production of physical commodities -- proprietary ways of turning photons into kilowatt-hours, or biomass into liquid fuels, etc. It takes a lot of capital and time to successfully bring such commodity-production innovations to market. And then, after all that time, effort and money, you're chasing commodity price curves. This isn't to say that there haven't been and won't be successful efforts in such investments. But it's unclear how these investments fit the traditional venture capital model, and indeed a lot of capital has been lost so far pursuing this approach. So cleantech investors are increasingly wary of putting yet more venture dollars into such efforts.

But meanwhile, investments based upon IT and web-based technologies and models are getting a lot of attention in this sector -- and for good reason. They can often get into the marketplace faster, with less capital required, and can iterate improved versions more quickly as well. And unlike commodity-based investments, some of these information-based cleantech plays can harbor potential for the kinds of positive network externalities (i.e., virtuous cycles) that have historically driven the outsized returns VCs crave.

I see three basic models for information-based cleantech:

1. Disintermediation

Existing channels and markets for energy, water and materials are quite often decades old. They operate inefficiently, through intermediaries who aren't very good at (and often have no incentive to get good at) figuring out how to incorporate new clean technologies into their offerings. But they're deeply entrenched as key channels, market makers, etc., in these markets, because of existing relationships, and lack of information available to customers, as well as regulated restrictions in some geographies. Those first two factors are ripe for cannibalization by web-based approaches. We're seeing an increase in B2B cleantech-focused purchasing platforms, B2C e-commerce sites, and other examples of disintermediation in action. Basic market creation and market reinvention is badly needed in these sectors -- and if done right, it can engender some really attractive positive feedback loops.

2. Data as a service

Our energy system and our installed base of energy-consuming equipment are stupid. But they're becoming more intelligent, as sensors and communications become cheaper and more widely available. This intelligence allows gathering and use of massive amounts of data, for monitoring and verification of performance of everything from drinking water infrastructure, to individual solar panels in a solar farm, to distribution assets in the electric grid.  

Some very basic information is also missing from cleantech and incumbent energy markets -- cost and performance data for buildings and building technologies, for generation technologies, and even for financing options toward purchases of all of the above, for example. Because it's very hard to gather the info and make it consistent. (For instance, just try to find accurate and reliable information about cost and performance data for commercial lighting fixtures.) You start to understand why so few buildings adopt available energy efficient technologies, even when it would save money: because it's just too hard to figure out the right answers. There's room in a lot of cleantech sectors for efforts to standardize and aggregate information about systems, both installed bases and new technology offerings. This data could be used as a lead-generation approach for cleantech equipment and services, as well as for providing benchmarking and other data services in their own right.

3. Automation

Once we have the data related to energy production, distribution and consumption, the next natural step is to make optimization of these activities ubiquitous and automated. Software-based approaches for automated load control in major industrial facilities; conservation voltage reduction based upon immediate grid conditions; smart homes; smart irrigation -- these are all examples of how information plus automation can lead to significant resource and dollar savings. And as automation becomes standardized, those who create the standards will greatly benefit.

If these three models seem pretty familiar, that's because they're old news for anyone familiar with the IT industry's evolution over the past couple of decades. Heck, I stole the term "disintermediation" from a b-school professor I had back in 2000, when Orbitz and "clicks and mortar" were the hot new things. And yes, I think that energy and water markets are basically at least 10 years behind other industries when it comes to the use of IT to reinvent how the markets operate.  Which is good news, because it means we have lots of room for such reinvention, and even something of a roadmap for how to make it happen.  And it means there are lots of entrepreneurs out there who will consider these business opportunities to be "old hat," and will be deeply experienced in making them work in other sectors.

Even at the intersection of the physical commodity market and the IT world, there are lots of opportunities to be had.  Making solar panels smarter will reduce installation costs and thus move us that much closer to grid parity.  Building intelligence into lighting fixtures helps us not just make the bulb more efficient, but also makes sure we only use light when and where it is actually needed.  Cleantech startups of the commodity-production variety are all seeking ways to differentiate themselves and try to get out of the commodity-pricing cycle that has driven down solar ASPs and now wind ASPs (and at some point, biochemical prices) more rapidly than many expected. Look for them increasingly to seek ways of using information-based services as a source of differentiation.

I'm seeing a big wave of such thinking in the cleantech venture sector. This, I believe, is one reason why cleantech venture capital deal dollars are so significantly down right now, even while deal counts stay fairly consistent -- investing in information-based cleantech can be much more capital-efficient than the types of investing we saw more of during the past decade. And I'm even seeing an emergence of new funds -- and a rebranding of existing funds -- to explicitly go after this concept.

On a panel a few weeks back with some fellow cleantech investors, I offered the opinion that there were a lot of opportunities to invest in cleantech that weren't inherently capital-intensive. My fellow panelists mostly disagreed, or they told me that I was only talking about a really small part of the cleantech market. Well, I think information-based cleantech is going to be the Next Big Thing in the cleantech sector.  I guess we'll all have to wait and see who was right.

The Brookings Institution is releasing a report this morning, "Sizing the Clean Economy", which you should take the time to check out.

The report counts up the number of "clean economy" jobs by sector, painting a picture of an increasingly important set of markets and employers in the U.S.  Hopefully, data points like these will continue to highlight the existing and growing importance of our sector.

The thing I find most interesting, however, is the clear indication that innovation clusters matter -- particularly sector-focused ones.  This will come as old news to anyone familiar with Michael Porter's and others' ongoing work on the subject. But I've found it's not often recognized among regional economic development and political leaders who are looking to the cleantech sector for jobs growth in their area. Still, the Brookings Institution report finds a 1.4% growth rate delta between clustered efforts and non-clustered efforts. That's a significant difference.

The reasoning for why clustering matters is pretty simple. By putting innovative companies within the same sector in the same place, you help develop the necessary ecosystem around them. These startups will require specialized talent -- if there are multiple companies in a region that are all within the same technology sector, it's easier for talent to self-select to live in that area. It's also easier for funders, customers, and vendors to focus in on the companies in that cluster and give them special attention. It's perhaps easiest to illustrate this way: VCs are going to be much more likely to hop on a plane and fly to an out-of-the-way (for them, at least) location if it means getting to see multiple companies all in the same subsector that the VC is interested in.

But when I talk to regional economic development teams, I don't know how often this filters through. The cleantech jobs message has certainly gotten through; indeed, the Brookings Institution study's data will come as old news to many of these economic development teams, with so many already targeting "cleantech" as a sector of particular interest. But the challenge is that so often they're not focusing on promoting one subsector within cleantech over another.

"Cleantech" simply isn't an industry. It's an umbrella term covering a wide range of sectors and markets. And from a Porterian Cluster perspective, it's almost an irrelevant term. Take the issue of talent, for example: solar PV engineers have very little overlap with water tech entrepreneurs, nor with energy efficiency service providers, nor with smart grid solutions providers, etc.  Similarly, the customers are different, the inputs are different -- really, the only things that these subsectors have in common are some overall market adoption drivers (or, given U.S. federal political ineptitude right now, the lack thereof) and some common funders.

I would like to see some of these regional economic development efforts be more sectorally focused. If a region already has a nascent cluster, the economic development agency should double down on helping to build out that ecosystem, rather than try to attract cleantech startups from other sectors.

Take the U.S. Southeast as an illustrative example -- we've seen several southern states' economic development agencies fall all over themselves to attract solar PV startups, providing very rich incentives to individual companies. Meanwhile, if the U.S. Southeast is rich in any potential renewable resource, it's biomass, and there's plenty of regional coal-fired generation capacity to play with. I'm not smart enough to say whether these agencies shouldn't be making those deals with PV companies -- that's not my point; these specific examples may be quite worthwhile. But my point is that if these states have those kinds of economic resources and priorities, I'm surprised I'm not seeing more efforts around commercialization of torrefaction and other ways of integrating woody biomass into the existing coal-fired generation capacity. That could be a key cluster of innovation and vertical value chain development for that region. 

There can of course be more than one subsectoral innovation cluster within a given region.  Places like the Bay Area and Boston already have several such "sectors of critical mass," for example.  But you don't start out to grow a cluster by scattering these seeds randomly.

Many regional economic development groups already get this kind of reasoning. But others are continuing to view "cleantech" as one overall sector within which they want to check off a lot of subsectoral boxes, with solar very often being the first box to be checked off. That's not the way to build innovation clusters.  And innovation clusters, as we're seeing proof of today, really do matter.

If you're a cleantech entrepreneur whose company will need more capital over the next 12 months, you have to be worried. Cleantech remains out of favor among many LPs, VC itself remains out of favor, and most cleantech VC firms are running out of money. Confirming some of this, Dow Jones reported today that while VC firm fundraising was up 19% in terms of dollars closed in the first half of the year, actual fund closings were down 38%.  

Meanwhile, even the Cleantech Group couldn't muster up the enthusiasm to report Q2 as anything other than a down quarter. And in my opinion, if you look at the charts in their very handy press-pack presentation, you have to conclude that cleantech has been a sector pretty much in the doldrums for the past year and a half.  

These numbers would suggest that, if you can't raise money from one of a dozen or so generalist VC firms, you might as well stop trying.  And most of that dozen or so firms aren't doing much cleantech investing any more.

False.

I can only speak anecdotally, but I'm seeing three trends this summer that are making me optimistic that the second half of the year will be better for cleantech entrepreneurs that are seeking funding.

First, I'm seeing a lot of stronger companies and teams seeking to close on funding in Q3. This can be read either way -- certainly, the need for capital doesn't equate to the raising of capital. But from what I can tell, many of these companies have been able to get traction among funders. It's not a comprehensive data set, but I think good companies are still getting attention from a wide range of funders, not just those who raised funds earlier this year.

Second, corporates have never been more active in cleantech markets. The LPs may be sitting on their hands and wallets, but I've never had more productive and educational meetings with corporate venture or strategic managers who have been tasked with getting serious about cleantech markets than I have in recent months, via venture-type activities or otherwise. I'm even seeing a return of the "entrepreneurial electric utility" as a meme, albeit with the appropriate caveats and such. All of which means that many cleantech startups are indeed able to get customers to finance their product development efforts. And that is a very good thing, even better than deploying expensive venture capital dollars.

Third, I'm seeing more cleantech-specific VCs getting back into the market with some seriousness, instead of just taking meetings. Perhaps it's a false dawn, but enough cleantech specialist funds are getting LP traction that they're starting to think about the first few deals they'll do after a first close.  

You put these three trends together and it feels better than the numbers might indicate. I'm not a Pollyanna about this -- it remains tough out there for many cleantech startups seeking funding. But barring a second macroeconomic collapse, I think the second half will look better than the first half of the year in terms of dollars and deals in cleantech venture capital.

Almost a year ago, I wrote about several cleantech IPOs that were taking place at that time, in somewhat skeptical terms. And I wasn't alone. With the renewed, recent spate of cleantech IPOs and filings (Kior, Luca, et al), I looked back on that same column and thought it was worth bringing up and discussing again.

How are those IPOs from back then doing now? A123 is trading way down, Codexis is down significantly, Tesla is a little bit up, Amyris is quite a bit up, PetroAlgae is a pink sheet, and Gevo lowered their offering price but has been fairly flat since the IPO. So it's a mixed bag, not a resounding set of successes from which to draw inspiration. And yet, here it is summer again and we're seeing another wave of cleantech IPOs.

So is anything different? Actually, I think so -- and in a somewhat positive way. Last summer I wrote that those IPOs were basically happening out of necessity: the funders of those companies had backed them with certain exit timing expectations, the 2009 IPO window had been slammed shut, the companies were running out of money, and so those companies were pushed through whatever tiny IPO window opened back up, ready or not.

What's not different now is that many of this summer's cleantech IPOs are similarly more akin to funding events than to liquidity events.  Companies like Kior and Luca are looking to Wall Street to provide growth and early-on project financing.  And why not?  VCs and PE firms aren't lining up to provide "first project" capital anymore, so biofuels and other capital-intensive companies have been looking to corporate balance sheets for that capital, but that often requires giving up a lot of value to the corporate partners. On the other hand, Wall Street seems willing to more cheaply provide the "first project" capital for many of these companies -- at least for now.  

And that's one thing that's different: that this is an accepted funding path. One lesson VCs appear to have learned from cleantech IPOs over the past couple of years is that companies that have a) commercially-viable byproducts, b) a long-term story to tell around attractive primary products, and c) brand-name venture backers can indeed ask Wall Street to pay for their first commercial-scale production facility.  So that's what several of these companies appear to be trying to do. It also certainly doesn't hurt that oil prices are high right now, and many of these companies are directly replacing oil. 

And the other thing that's different is that there appears (at least subjectively, to me) to be a difference in terms of the quality of the companies (overall) that are IPOing this year. These are companies with better stories to tell Wall Street in terms of longer-term prospects and value proposition. And in several cases, they have recently raised a new financing round, rather than being low on cash. I'm guessing that's because some of the sense of 'IPO or bust' isn't in place for this year's crop, and that these companies are filing for IPOs more opportunistically than at the point of a bayonet.  While several of these filings similarly appear to be too early to IPO, perhaps if you view them instead as a public funding event, you can still feel good about the long-term growth prospects for the company.

I expect I'll get angry comments from both sides for making these observations -- from skeptics for daring to suggest that some of these companies have good prospects, and from proponents who'll feel I'm still not giving these companies their due as the next Google. They're probably both right, somehow.

But either way, one thing that's the same as last year is that the IPO window is officially, if slightly, open.  And so it's "Everyone out of the pool!" time. I worry that in the mad rush to IPO, quality control is going to slip, and may have already. And that would once again muddy up the pool for everyone left still swimming: privately held firms awaiting their exit opportunity.

First of all, a congrats to the guys at Greentown Labs for their grand opening last night; the event was a great success.  I wrote about them and their role a while back, and I still am very impressed with how they're bringing a collaborative -- and cheap! -- approach to getting things actually built and implemented, without taking tens of millions of dollars of venture capital to do so.  The startups at Greentown Labs are applying a "guerrilla cleantech" model to what they're doing that really undermines the "cleantech is always capital-intensive" argument I've been hearing a lot of these days from my fellow cleantech investors. So cheers to the guys and gals at Greentown Labs on their big official launch, and also my thanks to them for arranging for Mayor Menino to be the opening act for my speech. (I kid, I kid; the Mayor and his green team, such as Galen Nelson of the BRA, have been terrific supporters of Boston cleantech over the past few years. They've really made a difference.)

But on to the other big news of the day:  The announcement of the Cleantech Syndicate.

When we launched Black Coral Capital a couple of years back, we started reaching out to our fellow family offices, just to learn who was active and who wasn't in cleantech, and to learn from what had already been done.  Our thinking was that since we were going to be doing some investing via models other than 'cleantech venture capital,' we would need to identify like-minded co-investors from outside the VC community.  And while we expected to find cleantech investors in the family office world, the level of activity and latent interest surprised us nonetheless. So many very quiet single and multi-family offices have an interest in investing in the sector, but have limited bandwidth (the one thing family offices appear to have in common is that we're all chronically understaffed) to actively seek out dealflow, and poor connections to others like them (the "quiet" factor again) for diligence-sharing and co-investing.  So by default, many of these family offices were just following along after the VCs, investing in deals the VCs had invested in. Or just being angel-type investors. Or avoiding cleantech VC altogether and focusing just on project finance. Or, frankly, any of a million other things -- it's a loosely-defined category for sure.

My colleague Christian Zabbal here at Black Coral Capital, and Ward McNally of McNally Capital, started talking about bringing together family offices with strong existing activity in cleantech private equity.  This initial inspiration quickly turned into the idea of a formalized group of leading families, dedicated to collaborating in the sector, across cleantech private equity categories.  It's an amazing group, with deep resources dedicated to the sector, deep domain expertise in a number of critical areas, and some early collaborations already underway, so hats off to Christian and Ward and the others who've played a key role in getting this effort up and off the ground.

Family offices are going to play a key role in the next wave of cleantech investing.  I alluded to this in my presentation about cleantech in 2015 a while back. It's amazing to me, when I speak with my fellow cleantech venture investors out there, to discover that all of us are still trying to figure out first principles about how we should do what we do.  Pretty core assumptions are being re-examined, and very basic lessons are still being learned, by a lot of us. And this is after more than a decade of "cleantech" investing.  

The challenge for VCs is figuring out which venture capital models apply to various cleantech sectors, and which cleantech sectors and investments just aren't a fit for venture capital at all.  My sense is that cleantech VCs are concluding that there are large swaths of the cleantech market (though note, certainly not the entirety of it) that just aren't applicable to venture capital models, whether "capital-efficient" or "capital-intensive" or otherwise. Yet that's not to say that these non-VC investments aren't attractive investments, viewed through another lens.  Innovations in business models, instead of proprietary tech.  Investments in implementation, instead of innovation.  Investments in long-term tech development efforts, instead of "growth stage".  These and others are all examples of where many VCs have concluded they can't play.  But if the 'Cleantech Revolution' is ever to become a reality, these are critical market needs, and thus that suggests they'll be attractive investment areas -- at least at some point.

Family offices typically don't have nearly as many restrictions as venture capital firms and other institutional investors.  We often don't have defined fund lifespans, which eases the pressure to find relatively quick exits.  We may not need an exit at all, but instead can back long-term company growth that will yield ongoing cash flow to owners.  We often won't have VC-type IRR targets, but instead are looking for alpha -- sometimes that will mean VC-type targets and VC-style investing, but it can also include lower-return, lower-risk investments like project finance.  And we can wear multiple hats and play hybrid roles.  

Family offices have always had this kind of flexibility -- and it's desperately needed in the cleantech sector right now.  But without a network of like-minded investors, the challenges of deal sourcing and co-investing with limited team bandwidth has often pushed family offices into the existing institutional investor boxes.  

But that's why the Syndicate is, to me, a very exciting development.  It turns the question on its head.  The question is no longer, 'What parts of cleantech are applicable to the established venture capital and project finance models?' 

Now we get to ask, 'What are the right investing models for cleantech private equity?' We don't have all the answers yet. But it's very exciting, and fun, to have like-minded partners with which to tackle this question.