Hardly surprising to see that the major headlines coming out of the release today of the Cleantech Group's Q1 numbers focused on the top-line dollar count -- $2.57B!

But here's what you need to read in that:

1. Yes, deal dollars were up, but deal counts were way down.

As we've talked about for a while now, cleantech VCs are continuing to shift to later-stage companies. In fact, 93% of dollars in the quarter went into follow-on rounds. That bears repeating: Only 7% of cleantech venture dollars tracked in the first quarter were for first rounds.

This is not a sign of health for the sector. It's not a sign that VCs are actively putting money into the sector. Rather, it's a sign that VCs are predominantly putting money into existing portfolio companies. Their own, and maybe each others' --  maybe. Which brings us to point number two.

2. No one -- the Cleantech Group or otherwise -- is tracking "new" money into cleantech companies.

Because it's pretty much impossible to do so, no one is able to tally up how many of these announced deals represent re-ups from existing investors supporting existing portfolio companies, and how much is coming from new investors making an affirmative investment into a company they hadn't invested in before.

This is an important distinction. When a VC makes a new investment, they typically reserve follow-on funds for investing in that same company later. If the company crashes and burns, they won't do so. But if the company goes sideways, they may still opt to put more money into it, in hopes that it can turn the corner. It's a lower bar. Comparatively, in the case of a new investment, the VC will put a higher bar on a decision to invest -- especially now.

That's not to say that insider-only or insider-heavy deals are necessarily a sign that a company isn't going well. I have seen situations where a company is doing so well that insiders don't want to give up any ownership to outsiders, all things being equal, so this isn't necessarily a bad thing. 

But my sense (and again, there are no real numbers to support this, but it's just my sense) is that many of these follow-on rounds have been insider-only or deals where the insiders set the terms. And that's a sign that valuations offered by new outside investors remain low, which in turn is a sign of a continued imbalance between supply and demand of investment opportunities -- investors with money for new deals have lots of these opportunities, so why pay up for anything? And then insiders, who may not be doing new deals at the tail end of their fund but do have reserves for follow-ons into portfolio companies, decide just to fund it themselves and save the headache.

This is further bolstered by the sectoral breakdown, which doesn't show much evidence of any shift in how investors are spending money sector-to-sector. That's a sign of follow-on activity, not new thinking.

This means that mark-to-market in cleantech VC portfolios is even more suspect than usual, by the way.  

It means that new cleantech entrepreneurs don't have many choices when it comes to finding investors.

And this tells me there will be a reckoning sometime soon, when insiders start running out of reserves, and before new investment activity picks up.

All of which means, despite the headline dollar total, this is a very tough time for cleantech entrepreneurs to raise money, unless they're already backed by deep-pocketed investors.

3. Corporate investors are getting more and more involved in the sector.

In the specific deals that have been announced, there's a lot of evidence (and I see it echoed anecdotally) to suggest that large corporate players are, contrary to VC pullback, getting more active in the sector.

This is a good thing. Corporate investment into follow-on rounds, even those that are insider-led, can help address the need for new capital and can also -- when the relationships work out as hoped -- give startups a leg up in getting into the marketplace.

There's some worry that corporations getting involved in venture capital has typically been a lagging indicator. But generally, I believe cleantech startups, since the channels in their markets aren't equipped to handle new products and services very well, might get more value out of such corporate venture activity than we might see in other venture sectors. Also, since so many of these follow-on stage cleantech startups are in capital-intensive plays, corporate balance sheets can be a critical way to get around the lack of project financing.

In the past, we've seen that this is a lot easier said than done. I know of several cleantech startups that have been disappointed by the lack of promised value from corporate investors that actually gets delivered, thanks to organizational inertia, mismatched expectations, NIH syndrome, etc.

Generally speaking, however, seeing corporations get more involved in funding cleantech startups feels like a very good thing. It's validation of the market opportunity. It's vital capital and market expertise. And it may be the first step toward a wave of acquisitions.

Among VCs (and their LP backers), cleantech is on the outs right now.  So says this pretty good article from the past week, anyway. It reflects what we've been saying here in this column for a while -- there's a shakeout underway in the cleantech venture sector, with many generalists abandoning deal-making in cleantech to head for "easier" returns in social media, and many sectoral specialists having a hard time raising new funds.

But there's a revolution underway in cleantech, and it's being led by the entrepreneurs.  

In my recent "Cleantech Venture Capital in 2015" presentation, I talked about the need for a new truly capital-light style of company-building in the sector (which I whimsically called "Cleantech.VC"), but I've seen very little evidence of VCs in the sector truly getting this yet.  One intriguingly different effort is Sunil Paul's "CleanWeb" approach, but for the most part, when cleantech VCs say they're into "capital efficiency," they're still focusing on the same old approach that delivered mediocre results during the past decade -- backing proprietary technology, major new product development, chasing commodity price curves, not rethinking service delivery models in the sector, etc.  In other words, a recipe for spending significant capital to develop great new products, but with slow market adoption.

As I described in the presentation, there will continue to be an important role for this approach to cleantech venture capital, but it will need to be more sectorally focused so VCs can more effectively open up channel partnerships and pathways to the market, and it simply can't be the only way we build cleantech startups.  Meanwhile, Cleantech.VC-style investing doesn't require a big fund to be effective, so in a time when LPs are generally down on putting money into cleantech venture capital, it might be the way we see the next wave of cleantech venture firms arise. Maybe.

Just spend some time with the startups in Boston's Innovation District and Greentown Labs, however, and it starts to become clearer how the next wave of cleantech startups are being launched, even ahead of any Cleantech.VC venture model catching on. Some of this next wave of startups will be hardware, but many will be software and/or services. Many will be bootstrapped or at least run very lean until they have actual revenue. "Lean Startup" approaches will be adopted, formally or informally. Business model innovation will often be stressed over technological innovation. They will sometimes marry energy-related market opportunities with Web 2.0 and social media business models and platforms. Most strikingly, they will be led by young, underpaid entrepreneurs, bringing a heck of a lot of fresh energy and a strong sense of mission to the sector. And they'll therefore be able to make a relatively small amount of angel and grant money, and low-rent space, go a long way. I was invited to speak to a group of these entrepreneurs this past week; there was some free grub and beer for the entrepreneurs, and a few words by me on the current political climate. The crowd made me feel old -- which was awesome and invigorating.

I've backed my share of well-staffed cleantech startups with nice headquarters, and I will continue to do so. I'm certainly not saying that all of cleantech will switch over to this lean cleantech startup model. But I'm excited to see it start to emerge. It won't get much attention from business journalists at first, because these startups won't be taking in big venture rounds, and they won't have big P.R. and press outreach budgets. But the revolution is happening. Go spend some time in your local cleantech incubator, and with your local university's energy club. You'll see what I mean.

I've received a ton of helpful feedback after putting out the Cleantech Venture Capital in 2015 presentation; thanks much to everyone for the thoughts and reactions. Glad to see it sparking some thinking and conversation out there, which is why I did it. I'll post a follow-up here in a while.

In the meantime, I'm finding myself spending a not-insignificant amount of time on two "extracurricular" projects lately, the Clean Economy Network (where I'm co-chair of the board of the CEN Education Fund) and the Cleantech Open (where I'm serving as the chair of the Northeast regional competition/organization, Ignite Clean Energy). It's not like I don't have a ton of direct investor activities occupying my time. Since I joined Black Coral Capital in mid-2009, we've made five direct investments (and I work with the boards of 4 of those firms) and four LP commitments, and we are evaluating new investment opportunities and working to support our existing portfolio on an ongoing basis. So clearly, I've decided these nonprofits are priorities for me.  While working on these extracurriculars is a significant strain on my schedule, it's something that I believe is important for doing my job well as a cleantech investor.

Many other cleantech investors and entrepreneurs will ask, Why? Why get involved, an investor might ask, in anything time-consuming that's not directly involved in dealflow, diligence, and supporting the portfolio?  

I completely sympathize with this perspective from investors and entrepreneurs from outside this sector. But I firmly believe that in the cleantech sector, things are different because of the nascent stage of our community. Things aren't "plug and play" yet.

In the fragmented, emerging cleantech community, we need people to step up and help glue together all the diverse voices and networks so that entrepreneurs can find investors and vice-versa, so that entrepreneurs can better find new hires and new customers, so that there's more effective policy advocacy in support of the overall community, and so that entrepreneurs, investors and other stakeholders can all gain collective context to help us all make better strategic decisions.  

Maybe in 10 years there will be enough established and interwoven cleantech business networking organizations so that someone like me can just become a member and find all of the above, without having to do anything significant. But for now, it doesn't exist unless someone works to make it happen. And who is better positioned to have an impact on this than investors and entrepreneurs?

Furthermore, getting involved has significantly helped my firm's dealflow and relationship-building, certainly more so than just attending conferences.  So while time spent on these activities may seem like time spent away from finding and making deals, I find that's most often not the case.  

My firm is far from alone -- we're just one example of a broader trend in the sector.  While some investors and entrepreneurs take the perspective that they have one single job and everything else is a distraction, in the cleantech sector I more often find investors and entrepreneurs making the time to get involved in these community-building initiatives somehow. But then the challenge becomes: Which initiatives?  Because while the overall sectoral community is still emerging, there are already a wide range of worthy community-building efforts underway. Which ones are most worthwhile to get involved in? Choose well and you get the benefits described above, but choose the wrong extracurricular activity and it's a significant time investment for little return. So making the commitment to get involved in something like this has to be done very thoughtfully.

For me, the two criteria I look for are impactfulness and helping to create the broadest possible networks.  Forgive the blatant plugs for these two efforts I obviously support, but I do want to use them as examples of what I'm talking about.

The Cleantech Open, for instance, attracts well over 100 early-stage startups as applicants each year. By using a business competition as the motivating factor to bring out and inspire these startups, the organization not only provides prizes and visibility to regional and national winners (some of which by now include some of the more high-profile cleantech startups out there), but mentoring, access to investors, and access to other resources.  Even before taking on this regional chair role, I've found value in previous years' competitions in terms of finding potential investments, as well as networking with investor peers and other members of the ecosystem. It's no coincidence that the idea had been copied by many organizations and groups in different sectors, but with the Northeast's ICE competition merging with the national Cleantech Open competition, it's great to have that deep access locally matched with the exposure to the national community of cleantech entrepreneurs.

I also appreciate the Clean Economy Network's approach to building two critical layers of the community, both at the local level with 17 local chapters focused on helping cleantech businesspeople connect with each other, as well as at the national level by being a nonpartisan voice on policy issues for the entire sector, not just one technology or industry. At a time when people involved in solar often don't talk to people involved in wind or nuclear power or energy efficiency, etc., the "big tent" nature of the organization provides a pretty useful one-stop-shop to those like me who want access to as many subsector networks as possible. And we particularly strive to use CEN's member network to provide leverage for other regional community-building efforts as well; we have dull elbows and a collaborative goals-oriented approach.  We're building a tool for the entire community to use.

And as energy policy has become increasingly politicized, CEN's role as direct voice of the pragmatic business community seems even more important.  Advocacy remains critical for this sector, since there are still major policy questions being hashed out that will directly impact all of us.  Many investors and entrepreneurs want nothing to do with anything policy-related, but I applaud those willing to speak out in support of the industry. There's a hunger among policymakers on both sides of the aisle for pragmatic voices from the business and investor community. Particularly  important are those willing to say with clarity: "This clean energy policy has been effective, but this other clean energy policy has been ineffective, and here's how to fix it." Policymakers are inundated with white papers arguing completely opposing and partisan viewpoints, but nothing makes an impression like a nonpartisan first-hand account. Entrepreneurs and investors, particularly those from regions outside of Silicon Valley, with real-world, on-the-ground stories to tell are definitely in a position to be influential and heard. CEN is the most effective platform I've found for bringing this together, as an overall industry, in a purposefully nonpartisan way.

That's why impactfulness and broad networks are my chief decision-making criteria when it comes to choosing which organizations I want to get involved with. Other investors and entrepreneurs will have different criteria and will therefore support plenty of the other worthy efforts out there. The point isn't to elevate these two organizations above any others, but to illustrate why I've chosen these for myself, and why I've prioritized the time to get involved with them. But regardless of which efforts investors and entrepreneurs choose to support, many are indeed getting involved. As long as the various efforts are committed to collaborating with and supporting each other, the more the merrier. 

For many cleantech investors and entrepreneurs, there are important direct benefits to getting involved in efforts like these: networking, dealflow, potential funding opportunities, and general context and knowledge. In addition, there is also the need to help the overall cleantech community continue to become more interconnected and robust, which helps all of us. All of this emphasizes why it's important and valuable to spend the time on extracurricular activities like this, even if it can sometimes feel like a distraction from "real work."

We've been talking about the need for new investment models in cleantech venture capital for some time now.  A couple of years ago, I put out a presentation calling out some of the more unsustainable trends in cleantech VC in evidence at that time. By now, many of those trends and practices are even more upfront in the minds of many investors and LPs. In the meantime, the cleantech venture industry has entered a period of significant stress. . . and potential reinvention.

Over the past few weeks, based upon lots of conversations with fellow cleantech investors, LPs, and entrepreneurs, I've been working on an effort to look forward to what's next for the sector. It's been an evolving perspective, informed along the way by the helpful comments of these colleagues, and below is a presentation which covers much of what we expect to see develop in terms of new models and emerging trends in cleantech venture capital.

Cleantech Venture Capital in 2015

What's really guided me in thinking about this perspective has been my own experiences as a cleantech investor over the past seven years -- where I've made bad investment choices, and where I've made ones that I still feel good about, and why. Where I've been able to add value to my portfolio companies, and where I've been frustrated at my relative inability to do so. I've raised money from LPs, and I've been an LP. I've had good exits, and I've had write-offs.  I've tried to capture a lot of these lessons here.

On the whole, what I believe we need to see is more specialization -- more specialized roles; more sectoral specialization. What we've learned over the past few years is that this is hard, that cleantech markets don't necessarily lend themselves easily to venture capital models.  However, I reject the thinking that says venture capital models can't be applied to cleantech sectors at all.  First of all, which venture capital model -- the biotech one? The social media one?  And secondly, which parts of cleantech?  We know quite clearly now that cleantech is really not a sector -- it's an umbrella investment thesis developed around natural resource shortages, tying together several different sectors, industries, markets, geographies, business models, technical disciplines, etc., etc.  So rather than trying to apply a one-size-fits-all approach to venture investing in the sector, it's only logical that there be a variety of different "correct" ways to invest in these diverse sectors.

Furthermore, I think it's time for cleantech VCs to stop being so overwhelmingly focused on breakthrough, proprietary technology. It's still unclear whether there are huge investment returns to be made from such approaches.  And there are plenty of other places where VCs invest without looking to proprietary tech as a critical factor at all.  But in the years I've been a cleantech investor, I've rarely heard any cleantech VC describe their investment approach as being about execution plays and smart business model reinvention -- "What's your IP?" has remained one of the first three questions VCs ask prospective investments. That's not a categorically incorrect approach to investing in the sector, but it's also not a categorically correct way to invest in the sector -- yet that's how it's largely been done to date, with all the resultant capital intensity and long development cycles that that approach entails. But if you look at the (smallish) population of successful venture-backed exits in cleantech to date, quite often, proprietary IP has not been a critical underpinning of the company's success.

A lot of cleantech VCs out there are seeing many of these same trends.  But what will they do with this knowledge?  That's really what this next phase is all about -- and it will be fascinating to watch as "Cleantech 2.0" emerges out there in the venture community.

A few things to note about this thought piece:

• I'm hoping this helps prompt some good public discussion of important issues for the sector. While several colleagues have provided very helpful input along the way, this is far from a consensus perspective -- instead, this is one investor's opinion.  Many other investors will disagree with what I'm saying here. And that's good.  Hopefully, it will serve as fodder for a broader discussion.
• Much of what I critique here are trends and practices that I myself have been as "guilty" of as anyone else -- for example, on the slide where I lay out three funds' portfolios by category, one is from one of my own former funds.  We're all learning and thinking through this shift as it happens, with no one investor having all the right answers.  This uncertainty, of course, is what continues to worry LPs looking at the sector, but the way to start moving forward is to bring out many of these issues for public debate.
• Why 2015? Well, I do expect things to contract significantly before the next wave of cleantech venture capital.  During that contraction, the emergence of new models and new thinking will be masked.  My expectation is that this next wave will begin before 2015, possibly much earlier -- but certainly by 2015.  
• I've used several different data sources for this presentation -- that's on purpose. The data reporting efforts of the Cleantech Group, Bloomberg New Energy Finance, Ernst & Young, and others are all pretty valuable, and I didn't want to distract by focusing too much on one single data source (because each has its own methodological strengths and flaws). I use them all, and have tried to give due credit here.

Forgive a combined post on two different topics today, but between the ARPA-E conference in D.C., the MIT Energy Conference in Boston, and a general flood of activity in the office, it's been a crowded week. Plus, at least in my mind, they're connected.

First, on the ARPA-E conference: one thing that struck me at the conference was how the exhibit hall seemingly was dominated by bugs and carbon-capture techs. Now, I'm glad that ARPA-E funds are going to tackle such difficult technical challenges, and I hope that someday there will be breakthroughs in these areas as a result.  

But it did drive home for me just how much I'm bothered by the disconnect between the strong efforts by ARPA-E on the innovation side of things and the much weaker efforts by the DOE in general to create markets for the resulting products -- and for other clean energy products and services as well.

ARPA-E has been, in my opinion, a very well-done effort to focus on using a limited amount of funding for maximum innovation (and, to a lesser extent, commercialization) impact. Anyone who's been part of the ARPA-E selection process knows the program staff have managed to drive an impressive number of projects through a review-driven and analytical-driven process in a short amount of time. It would be impossible for no duds to have gotten through, but I think most people with knowledge of the specific projects and research ARPA-E has backed would agree that on the whole they've done a great job picking projects that could make a difference. And certainly there's a capital gap in the early innovation stage of certain clean energy techs (especially in bugs and clean coal, for example), where if you believe in the promise of the technologies at all, government can and should play a role in fostering early-stage innovation.

But as we've discussed on this site before, the big question for me isn't where will the innovation come from in overall cleantech markets -- it's how those innovations will get into the market and gain wide acceptance.  And that's where I see other DOE efforts as having fallen pretty flat.  

DOE/EPA Energy Star standards, for example, have been important over the last couple of decades for signaling to utilities and customers which energy-efficient products they should adopt.  And it has been good to see the program crack down on offenders who've fraudulently claimed to meet the standards.  But on the lighting side of things, the standards have been so delayed that they've forced utilities and others to come up with their own substitute standards, which, of course, has meant serious delays for approving rebates for new products, which has in turn hindered advanced lighting startups' efforts to get market traction.  

And the loan guarantee program, while a well-meaning attempt to directly address the commercialization challenge, has fallen very flat -- to the point where it's Exhibit A for the short-sighted partisan politicians in Congress who want to slash government support for energy R&D to the bone. The loan guarantee program staff are doing the best they can, but the process has just been poorly designed, and has been put under too much political pressure.  It's been the ultimate example of "the government picking winners," which can work if done at the industry level and done very strategically, but definitely doesn't work at the individual company level. I personally would love to see loan guarantee program funds redirected to more general industry new-tech-adoption efforts, like incentives for customers, and category-based tax credits for project developers.  That may not make me many friends in our industry, but it's how I feel.

The biggest challenge preventing adoption of cleantech products and services is, of course, the lack of an appropriate pricing signal, due to the general policy ineptitude in Washington, D.C.  But aside from that, the biggest obstacle is, in my opinion, the lack of educated, incentivized and properly structured channels.  The IT industry was greatly assisted in its rapid expansion phase by the emergence of "value-added resellers," or VARs.  These critical channel partners were (and are) the facilitators who allowed skeptical and overwhelmed customers to figure out which IT products worked, help to manage implementation, etc. Cleantech needs VARs.

Instead, we have 100-year-old channels -- lighting distributors, HVAC service providers, roofers, etc. -- or no channel at all, in many cases.  This is why so many residential energy efficiency product developers have attempted (and largely failed) to roll out their products through either the utilities or big-box retail stores, neither of which are effective or timely.  

This is exactly where the DOE could be helpful, and in inexpensive ways.  They could help end customers simply find whatever VAR analog does exist, for example, and create a vetted directory of such channel partners.  Well, my team has done a pretty exhaustive search for such service providers, and no such list exists, at least not in any useful form.  There is one EPA Energy Star Partner list, but it is completely unvetted, and the low quality control over who gets included and what they claim to do makes it effectively useless, not to mention that several such VAR-like service providers I happen to know of aren't even on that list. It wouldn't be expensive to set up something like that at the DOE.  It wouldn't have to be done in a very bureaucratic way; it could be done in a wiki-type fashion with some limited oversight for quality control. (In fact, consider this an open call to anyone out there who can figure out a great way to make it happen independently.)

The DOE could also help educate the channel, aggregating knowledge of all of the fast-emerging products in these markets, and regularly informing existing channels about what's being offered, what's been installed and where.  Again, it wouldn't have to be comprehensive or bureaucratically programmed to be quite valuable. And don't tell me it would be hard for the DOE to know about everything going on -- if they were to establish an effective program for identifying new products and sharing that knowledge with downstream channels and customers, then product developers would rush to make sure the DOE knew about their new offerings.  The challenge comes not in aggregating the product info but in vetting it, weeding out the fanciful and the fraudulent.  But a little bit of dedicated resources put to work in organizing and screening the inbound info would go a long way, and something would certainly be better than nothing.  Occasionally, a useful report is put out on a particular tech topic by a DOE-run lab, and that's a great start.  We just need more such efforts, more often updated.

Most valuable would be for the DOE to dive into exactly why channel partners in these sectors are not incentivized or structured to be effective VARs. It would also be helpful to fund some basic academic research, and perhaps to fund some pilot programs to test new models. It's not difficult to invent new service models and other market structures. It doesn't require laws to dictate market structures.  How commercial property landlords in California pass through their tenants' energy bills, for example, is very different from how it's done in Dallas, and both are different from how it's done in Houston.  And that's all just because the market standards in each place have evolved that way.  But those differences are huge in terms of how the property owners are incented to adopt new energy-efficient technologies, and thus in terms of how service providers can be effective at pushing new tech.  There are also existing efforts out there among major property developers, etc., to identify and test new technologies. The DOE could easily help facilitate, provide information to, and highlight the information gleaned from such efforts.

All of the above, in aggregate, could be tackled at significantly less than the cost of a single DOE Loan Guarantee award.

These kinds of efforts could help launch a wave of VARs and customer adoption in cleantech markets, thus accelerating the commercialization and adoption of some of the technologies being developed through ARPA-E and elsewhere.

Not coincidentally, rumors that I'm hearing suggest that the White House is increasingly frustrated with the slow pace of market implementation of energy tech -- and that there's pressure to think about a new Secretary of Energy to replace Secretary Chu, whose background lends itself much more to the innovation side of things than the commercialization side of things. In fact, I'm hearing rumors that Arnold Schwarzenegger is being groomed to be the next Secretary of Energy.  Certainly he gave a great speech at the ARPA-E conference, by all accounts, and also participated in some other meetings alongside Chu.  I can't tell you whether these rumors are true... but that would be interesting.

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Pulling me away from the conference was the fact that our newest deal was announced, an investment in Powerit Solutions, a smart grid tools provider.  Katie Tweed did a nice write-up this week.  

I wanted to mention it because it's a prime example (at least to this biased writer!) of one principle I was writing about recently, namely, that competitive advantage is not just about proprietary technology.

I've known about Powerit for a while and have been fascinated to watch as they've established a pretty unique position in the industrial side of demand response. There are multiple vendors out there who have developed technologies to automatically adjust HVAC and lighting systems in commercial and residential buildings to participate in demand response and other load-shifting programs.  Controlling an office building's HVAC system for load control purposes isn't hard technically, and while the market is somewhat skeptical, they're not petrified of what happens if the tech fails; people are uncomfortable and complain, the system is disengaged, and life goes on. In the industrial market, however, it's much more difficult to get customer buy-in.  If you're controlling the major electricity loads in a factory or plant, you're potentially disrupting production.  

What I've always liked about Powerit is that they've already established a strong level of credibility in the marketplace with hundreds of installations -- and that's very difficult for any new startup to establish.  I don't care how whiz-bang and proprietary a new industrial controls technology is that might be introduced to the market -- if you're going to go sell to managers of foundries or food processing plants, they're not going to adopt that new technology unless it's been tried a lot of times in someone else's plants. Of course, if there were effective VARs that the customers could trust to stand behind the new innovations, and they were themselves confident enough to rapidly vet and adopt new innovations, it might be easier for a new entrant into that market. But lacking that, customers have to be skeptical about any technology that doesn't already have a long track record, which can be a big challenge for any new startup in that sector. Besides the fact that it's also just generally harder to build a smart tech for that segment, this probably explains why Powerit remains so uniquely positioned in the one-third of the electricity consumption pie that is the industrial sector. A single Powerit-enabled industrial plant can free up demand capacity worth 10 times the capacity of a commercial office building -- at lower cost, too.

There are a lot of other things I like about Powerit, obviously (bringing on board a proven CEO, Matt Shiltz, to help take the company to the next level; plus, there is more news to come out soon that will illustrate how valuable the system's flexibility is, so stay tuned), and that get me excited about their potential to grow quickly.  But my point isn't just to self-interestedly talk them up (sorry!), but really to point to them as a concrete example of a principle I'd recently written up.  

Powerit is a great demonstration of the fact that it's very often more important to think about sustainable competitive advantage in cleantech in ways other than proprietary technology.  Social media venture investors, of course, already know this principle well, but many cleantech venture investors are just waking up to it.  We need to learn to treat skeptical, conservative markets and channels as not a regrettable obstacle, but as a potential opportunity to build an advantage.  

In other words, to take advantage of that very market gap that, on the whole, I wish the DOE would do a better job of addressing.

There's been too much blind faith within the cleantech venture sector on proprietary technology as the primary way for startups to create a competitive advantage.

Certainly, holding a defensible patent can help a startup with a cost or performance advantage to maintain that advantage over time.  Proprietary IP has been part of the success story of early cleantech "winners" such as First Solar, for example.

But the pursuit of such proprietary technology can be very expensive -- in both direct and indirect ways.

First of all, it can be expensive to develop and commercialize products based upon truly differentiated core technology.  Thin-film solar is again another example of this.  From successes like First Solar to to-be-determined stories like Nanosolar, MiaSolé, Solyndra, etc., the pursuit of proprietary manufacturing techniques has meant having to invest hundreds of millions of dollars and years of effort in developing manufacturing equipment and techniques, all mostly from scratch.  

But indirectly, there's also a significant cost from trying to be secretive during the development process, out of fear that larger established competitors will be able to steal (or just borrow from) the tech sooner than the startup can get out to the market.  This is the not-often-discussed downside of a company remaining in "stealth" -- it's tougher for the startup's technologists to get outside input on alternative approaches that might improve their tech, and for the startup's bizdev / senior management to know how best to position their product when it's ready for the market.  This can increase the chances that the startup develops a product that, by the time it's ready, has been leapfrogged, or that simply doesn't meet customer needs for other reasons.  When in the pursuit of proprietary tech, the startup remains insular for a few years -- and this indirect cost can have significant impact.

Furthermore, none of the above fits very well with the current cleantech VC rhetoric about "capital-efficient" businesses.

But there are other ways to create a sustainable competitive advantage.  A startup can build a key set of channel or customer relationships that would be hard for a follower to wrest away.  A startup can build in a level of integration with customer processes or products that would be tough to un-do.  Brands can be built and utilized. There's even a form of "capital momentum" that we've seen where an early market leader uses their position to raise a lot more capital, including perhaps via an IPO, than their competition.  And then they'll be better-positioned to grow more quickly than those competitors. EnerNOC was an example of a firm using this kind of approach.

One key way of creating a defensible competitive advantage that I'm increasingly seeing deployed by cleantech entrepreneurs is market partnerships.  In many cleantech markets, the value chains have certain chokepoints where there's a high level concentration of component or product vendors.  And given the increasing interest in the corporate world around cleantech as a growth market, often these larger companies have aspirations (and sometimes even have launched their own products and services) to get into cleantech markets.  

Over the past couple of years, I've seen a lot of cleantech startups seek to develop sustainable competitive advantages in the marketplace by forming partnerships with these larger players.  

Most often, it's a partnership where the larger player is helping the smaller company to commercialize their proprietary technology. Forming a JV to build a first commercial production plant, for example. This can help with some of the challenges mentioned above in developing a proprietary technology.

But what I find more interesting are the partnerships I'm seeing where the startup works with entrenched upstream companies. Product manufacturers in traditional product lines (like, for instance, lighting products) who are developing new products based around emerging technologies (so to continue the lighting example, LEDs), but realize that their existing channels and sales models don't do a good job selling these new products. So a startup comes along with a system integration play, or a business model innovation, and is able to establish an exclusive relationship with the larger vendor.  

These and other examples are pretty interesting ways that cleantech startups with or without proprietary tech are creating competitive advantages not based on patents, but instead based on market dynamics.  For the startup, it's a lot more capital-efficient and speedy than developing a brand new technology from scratch.  And it also takes advantage of existing value chains, rather than attempting to disrupt existing value chains -- and when these energy, etc., value chains are 100 years old or so, they have a tendency to resist disruption.

Now the question is, will cleantech VCs be open to such non-tech approaches to creating sustainable competitive advantage?  

After attending the Clean Economy Summit a couple of weeks ago, things have been a bit of a blur, so I'm only now able to write about one major takeaway I had from the event.

There's an emerging love affair between the cleantech sector and the U.S. military.

At the event, two of the best-attended sessions were a speech by the Secretary of the Navy Ray Mabus and a special panel session on the military and energy technology innovation.  And for good reason -- while the legislative branch of the U.S. government continues to dither away the opportunity to establish robust cleantech markets in the U.S., the military can't afford to wait.  And so they're providing a pathway to commercialization for emerging clean energy technologies, which is exactly what many cleantech startups desperately need right now.

The Navy, Air Force and Army have always provided strong support for technology innovation in the U.S. The long-standing DARPA program has helped launch any number of technology innovations that later became important to the private sector (the most often cited example being, of course, the internet) by supporting early research and 'productization.' That way, successfully commercialized technologies can rack up early (and lucrative) sales to the U.S. military, because of the services' prioritization of mission success over cost savings.

I recently sat in on a small private talk featuring John Trbovich of Arsenal Venture Partners, which has very tight relationships with the military.  He made a compelling case that the Department of Defense's energy challenges are actually a strategic opportunity.  According to my (perhaps faulty) notes from John's talk:

• The DoD has 93 billion square feet of facility space, spread out over 545,000 buildings.
• The DoD is the world's largest oil buyer. They spend $16B annually on fuel.
• The military directs $81B per year to R&D, which represents 22% of the overall R&D spending in the U.S.
• The Air Force has become one of the most important "buyers" of solar power, but primarily by leasing their land and engaging in power purchase agreements.
• The Navy has laid out very aggressive goals for reducing fuel use and carbon intensity across both sea and land operations.

I've also been invited into small sessions where Navy tech people have gotten together with cleantech VCs, as just one example of a case where the military leadership is directly reaching out to the cleantech entrepreneurial community for ideas and solutions.

All of which helps explain why the cleantech industry regards the military as such an intriguing potential partner -- deep pockets and compelling needs.  And I see this in some of my portfolio companies, particularly those who've engaged with various military efforts as potential early-adopter customers and research funders.

But as Trbovich pointed out, this is a lot easier said than done.  

• The DoD has no consistent technology acquisition policy or vehicle.
• Despite these strong directives from the top, actual purchasers are often given no budget authority for new tech.
• Decision-making is often highly decentralized.  For example, in energy efficiency and onshore renewable power, it's often a base-by-base decision -- which isn't very scalable.
• The DoD can hinder itself.  For example, the DoD has put a moratorium on new wind installations because of antiquated radar systems that are still in place.
• There's often a timeframe mismatch.  Solar PPAs are generally at least 20 years to make the economics work, but the max lease allowed for any base is 10 years.
• Base commanders may have the desire, but often don't have control over capex.  They are stuck with high operating expenses because they don't have the capital budget to do anything about it.
• It's easy to waste significant time chasing DARPA dollars and sales contracts where the process isn't as open as it may appear -- and where another vendor is already essentially baked in.

The ability to help navigate some of these challenges is exactly why my firm is an LP in Arsenal VP's fund. It's just a lot easier said than done, and those guys understand how to do it.

Secretary Mabus' speech at the Clean Economy Summit brought the conference crowd to its feet in applause. He spoke not only of the above needs, but also talked poignantly about how U.S. men and women in uniform are dying because of the need to transport massive amounts of fuel and batteries into war zones. He also described the frustration of military leadership when they see energy-related dollars ending up in the very regions where the military is engaged in conflict.

And so part of the reason for this love-fest is even more basic: it's the most visible way that those of us in the U.S. cleantech industry feel we're working not only for our own sake and for environmental goals, but also to support our country.  

If only such sentiments were more widely felt and understood on Capitol Hill, we'd see a lot fewer partisan political games around energy policy.