Rob Day 02 08 10, 1:43 PM

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“Revenue-neutral”: The last hope for climate change legislation?

I've picked up on a couple of mentions lately of Senators on both sides of the aisle starting to work on revenue-neutral alternatives to the Waxman-Markey type of cap and trade climate legislation that has been the focus of attention ever since Obama came into office.

There's been talk of the GOP staff on the Energy and Natural Resources Committee, reporting to Sen. Murkowski of Alaska, possibly working on a revenue-neutral carbon tax proposal.

And Cantwell and Collins are proposing a "cap and dividend" plan, also to be revenue-neutral.

Gee, sounds familiar.

Frustratingly, I could probably have just cut-and-pasted my entire May 2009 column on this topic into a new post with no changes, and none of you would have realized it.  Because that's how little things have moved forward over the past nine months.

Hopefully by now, however, it's becoming more clear to politicians that any climate change legislation, if it's to have a chance of passage at all, must be perceived as something other than just another tax-and-spend proposal. It has to be simple, and it should be tanglibly revenue-neutral. 

Leaders of the U.S. cleantech industry always claim they need a national price on carbon, first and foremost, so it's nice to see some legislative efforts refocusing on just that.  Even if they're not centerpiece efforts quite yet... 

Rob Day 02 04 10, 10:21 PM

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Trouble brewing?

Haven't had much time to go through the various recent cleantech IPO filings, and so haven't talked about them much.  Also just generally hoping they do well, for the sake of the overall industry.

But in a meeting today someone put up some stats that were pretty sobering.

Taking a basket of 4 high profile recent IPOs and filings, the total across the four companies was:

- Trailing twelve month revenues = $319M

- Trailing twelve month EBITDA = -($343M)

- Total venture dollars put into all four companies to date = approximately $1.5B

Like I said, I hope all of these companies do well and grow into great companies.  But this type of profile for IPO isn't the norm.  So you have to wonder about it. 

Someone today mentioned that they think these companies have to IPO now because they need yet more capital and the private equity world is tapped out.  I disagree, I think companies with prospects like these would be able to raise more capital, if not from traditional VCs, then from non-traditional private equity players.  Cleantech private equity is down, but far from tapped out.

Instead, I believe these companies are IPOing now because they raised their LAST money under the argument that it would be the "last money before the IPO", and now that the window for IPOs has opened even just a slight bit, they feel compelled to race out there and make it happen.  Come hell or high water, this is the promise they've made.  And it's a reasonable guess that there are public equities investors out there who do want to back good stories in cleantech -- stories which these companies can indeed tell.

Fingers crossed.  But my worry is that, if these IPOs are perceived later on this year as having been unsuccessful, it'll once again set back the entire cleantech venture industry, because of the example it sets in terms of lack of exits.  In reality, these companies really don't epitomize cleantech venture capital, they're special cases.  But to a journalist, it's all just one broad category, and to their editors, nuances never make the headline sing... 

(PS: I haven't verified the above stats, so treat accordingly...)

Rob Day 01 29 10, 8:50 PM

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Massachusetts’ big energy efficiency news, and some thoughts on FITs

Big news today in the state of Massachusetts, where state officials announced a plan to pour $2.2B into energy efficiency measures, including a target of tripling the number of home energy audits, etc.  On a per capita basis, at least, it would put Massachusetts ahead of any other state in the U.S.  A terrific example, a great initiative...  Great to see!  It will make Massachusetts an even more attractive region for energy efficiency startups, tech or otherwise.

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On other policy topics... I haven't spoken much about feed-in tariffs here in this column.  For one thing, the economist in me tends to favor simple tax-based solutions rather than mandates or price setting, so I've never seen FITs as particularly attractive intellectually.

But recent conversations with those in the project finance industry have been changing my mind... a bit.

If policymakers want to see big roll-outs of renewable energy technologies, project finance is a vital player.  No matter what incentive scheme is put into place, someone is going to have to pay for the project.  According to New Energy Finance's figures, clean energy "asset finance", at $92B globally, dwarfs the dollars going into venture capital, government and corporate R&D, IPOs and other public issuances, etc.  No matter how many technologies are invented and introduced to the market, unless project financiers are willing to bankroll actual steel in the ground, the new generation capacity will never be built.

As we've discussed on this site in the past, project finance is very different from venture capital and other investment asset categories.  Project financiers typically target returns much lower than what VCs target.  To make that work on a risk-reward basis, the investment must have absolute minimized risk.  This is why there is a big capital gap between the venture capitalists and the project financiers:  The VCs see their role as getting the company to a point where the technology has been successfully commercialized.  The project financiers will wait even further, however, until all details of implementation are completely understood and underwritable. So the VCs will fund only a new tech up through project #1, and the project financiers still see too much implementation risk at that point, and projects number 2, 3, and 4 have a hard time getting built built.

What kinds of risks do they care about?

• Input / supply risk
• Technology risk
• Demand risk
• Offtaker credit solvency risk
• Offtake price risk

To address the capital gap, various government policies are there to help juice the returns for investors.  Investment or production tax credits, 48C manufacturing tax credits, etc.  And there are also mandates out there such as renewable portfolio standards.  These certainly help and have their merits.  But they don't really address the above risks.  And even if the returns are enhanced through the incentives and mandates, project financiers are not used to having to assess such risks in this way.

A feed-in-tariff can directly address three of the above risks.  In most applications, the FIT is a requirement for the local utility to purchase whatever power is produced by the targeted technology, at a set price (this is obviously a simplified version of a FIT).  This means that, to a project financier assessing a FIT-driven project, the demand risk is taken care of -- the utility is required to buy the power.  The offtaker credit solvency risk is minimized, since most large utilities are very credit-worthy.  And the offtake price risk is obviously intended to be set.

I've spoken with a few project financiers who say that they are much more likely to invest in a region where there's a FIT in place, than in a region where there are tax incentives, even if the impacts on project IRRs are comparable.  The FIT just creates a lot more certainty for the investor.

Certainly FITs aren't a panacea.  Setting the price right is a challenge and prone to political inefficiency, for one.  The requirement for utilities to purchase power at such a high price also means that they'll have to pass that price along to consumers or otherwise get government support to cover the difference -- it's not a big deal when the volume of FIT-driven power purchases are low in relation to the overall generation mix, but of course the idea is to dramatically drive up that volume, so it can get costly in a hurry.  And it being a politically-driven system, when things get costly there's danger that the FIT price is reduced much sooner than expected by the market.  This crushed the solar market in Spain, and is also happening now in Germany.  It's critical, therefore, that any FIT be designed so that if there are future FIT price reductions existing projects are grandfathered in, otherwise project financiers won't perceive the policy as truly addressing the above risks for any given project.

But if policymakers want to see dramatically accelerated rollout of clean energy generation technologies, project financiers will have to be the ones supplying the lion's share of the capital required.  And if project financiers are to do this, FITs are definitely worth giving serious consideration.

Here's a link to much better thinking on the topic by the good people at NREL.

Rob Day 01 25 10, 9:18 AM

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Yep, that’s right…

... a $350M Series B for Project Better Place.  At a pre-money of $900M.  And bear in mind, this doesn't include additional financings that have gone into the company's regional subsidiaries, such as in Israel and Australia.

This should really mess up the Q1 cleantech VC tallies when they come out!  Because as longtime readers already know, the headlines are driven by dollar totals, not deals.

And we've already got some head scratching results now to think about as Q4 totals continue to come out.  Last week saw the release of the MoneyTree survey (US tally from PricewaterhouseCoopers, the National Venture Capital Association and Thomson Reuters), and the results were a little bit at odds with what we'd seen from other early counts we've discussed so far (here and here).  Dan Primack at PE Hub described the cleantech results as "particularly sluggish" and I'd have to agree.

The MoneyTree "cleantech" tally showed 2009 to be way down from 2008, with $1.9B into 185 deals showing a decline of more than 50% in dollars and more than 30% in total deals.  In their tracking of first institutional dollar rounds (seed or Series A, mostly), they showed a more than 50% decline in the number of deals in "Industrial/Energy" from 2008 to 2009. 

Contrast that with tallies like Wesoff's at GTM, which showed much less of a decline in dollars, and in fact a slight increase in the number of deals, from 2008 to 2009.  What happened?

It's tough to say, but here's my guess as to why such different results are seen.  First of all, I don't blame it on any significant error by any of the analysts -- what we've found in the past when we've seen such different numbers is that it's about methodology and definitions and not any major goofs.  And so one obvious definitional difference is that Wesoff's tally is global, whereas MoneyTree and ChubbyBrain are both US-focused.  Perhaps international financings helped make up some of what looks to have been a significant drop-off in US cleantech venture financings from '08 to '09.

Secondly, there are usually big differences in inclusiveness (ie: what's a "cleantech" deal, and what's a "venture capital" deal) between the sectoral specialists and the generalists.  Wesoff counted Synthetic Genomics' $300M multi-year commitment from Exxon, for example, in his tallies.  Willing to bet that the MoneyTree tally doesn't include that one.  And then there are always time-based distinctions (timing of dollar flows versus timing of announcement, etc.) that come into play.

So those factors might explain the differences.  What's nicely consistent with what we've seen before is that the 2009 US quarterly cleantech deal total numbers in the MoneyTree survey generally match up well with the "green" category deal totals in the ChubbyBrain survey.  And in the MoneyTree numbers we again see that Q3 2009 was a bit of a blip, it wasn't that Q4 wasn't really a weak quarter as has been generally reported, but instead the quarter fit the pattern of a weak 2009 overall.

Particularly worrying, however, is that the MoneyTree data suggests early stage financings really fell off, as noted above, from 2008 to 2009.  It would be one thing if the 2009 low deal and dollar numbers were mostly driven by delayed follow-on financings, as we've talked about before.  But to see the early stage financings fall off so much suggests even more underlying weakness, and suggests even more limited dealflow for growth stage investors even if/when things do pick back up again.

So far in Q1 we're seeing a lot more dealflow and dollars, even leaving aside exceptional examples like PBP's announcement this morning.  But with the increasing likelihood of a double-dip in the macro economy, these MoneyTree numbers are pretty sobering.

Rob Day 01 22 10, 1:29 AM

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Best wishes to Ray Anderson

Am en route back to Boston from the Clean Tech Investor Summit, which took place in an incredibly soggy Palm Springs, necessitating a lot of diverted and canceled flights.

Despite the problems participants had getting to and from the event thanks to freakish weather, it remained the very well-attended, hyper-networking, content-laden event I remembered from the last one I went to, four or five years ago.  A great event for catching up with fellow cleantech investors on the left coast (and not a few east coasters made the trip out as well).  I will attend again for sure.

A particular treat for me was that a lot of the content was somewhat of the "life goes full circle" variety, hearkening back to my days in the "business sustainability" world as a young researcher at the World Resources Institute.  Met up with a former colleague from WRI, got to say hi to one of my favorite pundits and experts in the business Joel Makower (who was actually the original inspiration for this blog, nearly five years ago), and got to hear from some of the visionary leaders who had been among the original inspirations for the "green is good business" type of research I did way back when -- including Amory Lovins, and Ray Anderson of Interface. 

So I was shocked to then see tonight that Ray Anderson has announced he is going into treatment for cancer.  Over a decade ago, when CEOs were only paying lip service to green business practices, Ray and Interface were re-defining their entire business in ways that reduced waste, improved the company's profits, and launched them into a leadership position in their market segment, all by taking green business practices very seriously.  The Interface example -- along with other early examples of profitability from green thinking -- were why I went off into the business world with entrepreneurial intents. 

Let me tell the story in overly short form, and as I remember it (so: it may not be 100% true, but it's pretty close): Interface was an industrial carpet company.  Like other industrial carpet companies, they viewed their business as selling carpet.  That's it.  It was a highly competitive, low margin industry where differentiation among competitors was difficult.  In having to think about the company's environmental vision for a speech, Ray began reading The Ecology of Commerce by Paul Hawken (another formative figure for me).  And Ray had an epiphany -- that all the massive amounts of waste being produced in carpet manufacturing was financial waste as well... and as this insight triggered more sustainable-minded thinking at Interface, they began to redefine themselves as not being carpet manufacturers, but instead as being in the service business, providing floorcovering for their customers.  So began Interface's really signature effort -- modular carpet squares, enabling not only for customers to keep new-looking carpet all the time without replacing entire carpets, but also allowing Interface to take back worn carpet and better recycle it into new product.  Interfaces revenues grew.  So did their margins.  And customers were happier for it.

If you want to see what we were thinking about this and other examples of win-win green business leadership a decade ago, you can find more here.  It's a bit outdated by now, but the principles are still sound. 

1.  Environmental responsibility can be important preserving the right to operate.  At very least, avoid acting so environmentally irresponsibly that your company gets hammered in the court of public opinion (or for that matter, real courts).

2.  Pollution and discarded materials = waste and financial cost.  Companies pay for inputs, and increasingly often they pay for waste disposal.  So any pollution and waste reduction goes straight to the bottom line, even if the products and services don't change.  And this isn't just true inside your company, you have to look at the entire supply chain and downstream customers.

3.  Look for opportunities to increase revenues by greening your products and services.  It can be a good differentiator that helps capture market share.  Just ask any real estate developer how they feel about LEED certification these days...

4.  Redefine your entire business about what the customer really wants -- and find other ways to satisfy those needs that are on the right side of natural resource trends.  In other words, get out in front of the inevitable Schumpeterian creative destruction that's going to happen (or is already happening) to resource-intensive industries and business practices.

These days, most companies get #1.  Many now get #2 (which is progress from back then).  Increasingly, #3 is something some companies are taking seriously.  But #4 remains untouched by most large companies...

The really great thing about having since moved into the world of cleantech venture capital and private equity, is that now I get to support entrepreneurs who are jumping straight into #4.  The startups that will end up grabbing market share from those current corporate giants who quickly are becoming corporate dinosaurs.  And I never would have ever headed in this direction if it weren't for inspirations including (but definitely not limited to) Paul Hawken, Amory Lovins, Joel Makower, Matt Arnold, and yes, Ray Anderson.  Some of those guys won't remember me...  but I sure remember them, with gratitude.

So please join me in sending best wishes to Ray.

Rob Day 01 20 10, 10:53 AM

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Major change in the cleantech VC industry… and over-experienced investors?

We're going to look back upon 2010 as a time of major change in the cleantech venture industry.

I haven't heard yet of many established specialized cleantech venture firms scaling back, but it will happen, starting this year.  Certainly there have been a few of the more fledgling efforts to create new specialist firms that have floundered due to the bad fundraising environment over the past 18 months.  And now we're seeing scale-backs at generalist firms (such as Atlas Venture, and Polaris which PE Hub is reporting is raising $500M for their sixth fund, versus $1B for their last one).  As generalists shrink their funds, some are doing more cleantech, but many are going "back to their core" in IT, etc. 

In the Boston area alone, I know of at least a half-dozen VCs who were doing cleantech when I moved out here, who are now either not doing new cleantech deals, or had to change firms, or are not even in the venture capital business at all anymore.  There have been a couple of additions to the community in the meantime, but not enough to make up for the exodus.

This means there are potential gaps in the marketplace (early stage cleantech venture capital in New England is starting to seem especially scarce, for example), but in this fundraising environment, not many new efforts are able to launch to fill in the gaps.

Meanwhile, as we've talked about here for a while now, lots of investors are continuing to re-evaluate the way the venture capital model has been applied to cleantech overall.  Some of this will result in new thinking and new approaches.  Some of which will work and some of which won't.

But overall, it just feels like a time of serious transition.

I'm at the Clean Tech Investor Summit on the west coast this week.  It'll be interesting to see how much my Boston-based perspective is reflected in the cleantech venture community out here...  If I can, I'll try to tweet a bit from the proceedings.

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And speaking of cleantech investors, here's a good interview with Chuck McDermott, one of my favorite guys in the business.

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And speaking of venture capital [total data wonk alert here, read on at severe risk of additional boredom], I saw an interesting article on PE Hub talking about one investor's study purporting to show that venture capitalists with less than 10 years' experience do better -- the implication being that there's a level of experience VCs may get to where they actually become WORSE investors. 

The article says that they examined nearly a thousand VCs' track records, and then looked at the 35 who had produced a "good track record".  Of those 35, the VC who did the study says, "more than half of them have been in the industry for 10 years or fewer".  I love numbers, so this caught my eye.

So first of all, if you look over the track records of 945 VCs and find only 35 with "good" track records... talk about an indictment of the industry. 

Secondly, what proportion of those 945 VCs had been in the industry less than 10 years?  If it's anything close to or more than 50%... have we really learned anything?

And finally, what about the fact that in the beginning of the last decade, a lot of VCs' track records followed the industry's overall collapse in IRRs?  Point being, there may be some underlying factors here having nothing to do with age or experience.

I'd love to see the actual study, obviously it looks interesting but I also have a lot of questions...