Rob Day: July 26, 2010, 10:02 AM

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Must-read: Jeremy Grantham’s take on global warming

It's already been making the rounds, but in case you missed it, here's a link to Jeremy Grantham's "Everything You Need to Know About Global Warming in 5 Minutes" that was a section of his Q2 investor newsletter.

Do give it a read.  I especially appreciated the postscript, myself.

Rob Day: July 22, 2010, 3:22 PM

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What climate bill?

It's 2nd down and about 10 yards to go, and Harry Reid decided he might as well punt.

With today's news that any upcoming energy bill won't include climate legislation or even a renewable portfolio standard, cleantech entrepreneurs and investors are left scratching their heads.  Yet more uncertainty.

I continue to see pitches from companies with smart, low-cost approaches to carbon emissions, but lacking more of a certain price and market for carbon credits, they're having a really hard time raising capital.  Ditto for anything related to carbon capture and storage.  And in many other areas of cleantech, the lack of certainty around energy and carbon pricing is a killer.  I'm even seeing smart grid companies include carbon emissions related savings in their sales pitches to utilities.  But if the utilities can't expect regulatory clarity, they can't value that.

So what's a startup CEO to do?  Avoid mentioning carbon if at all possible.  Everyone knows the U.S. will have to deal with it sooner or later.  But no one knows if it'll be sooner, or later.  So try not to mention it at all.  And if you have to mention it, try not to make any assumptions about pricing.  If you send me a business plan which includes a price per carbon as part of your economic value proposition, I'm going to have to mentally reset that value to $0/ton and assess your value proposition through that lens.

It sounds like HomeStar is still in, which is good for the residential energy efficiency retrofit industry, and perhaps some small other cleantech-focused programs will be included.  But basically there's not much in what's being discussed in the upcoming energy bill that will do anything to clear up all the uncertainty.

And it's not just startups and their backers that are affected by this.  Large utilities and large energy consumers need more price certainty as well, and they're not getting it.  They can't do capital budgeting effectively, and they can't make affirmative decisions to invest in new technologies and systems if they don't know how to value it.  It's a weird situation where everyone pretty much knows SOMETHING will have to happen at some point, but lacking more information about what that something is, and when it will be, nobody can do anything significant.  Even the electric utilities sound like they're getting impatient for some clarity.

If there's one thing the energy industry learned from the cyclical subsidies for the wind industry over the past decade-plus, it's that uncertainty is an absolute industry-killer.  Especially for young industries having to sell to large, slow-moving incumbent industries.

Meanwhile, the U.S. industry exported about $7.7B in cleantech products and services last year, compared to China's $22.7B and Germany's $19.6B -- according to a US Senate report from January.

Thanks, Harry.

Rob Day: July 16, 2010, 10:19 PM

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What’s EnerNOC up to?

That's, increasingly, the question all smart grid companies need to be asking themselves.

I had the opportunity to visit with Tim Healy at EnerNOC last week, toured their demo center, had a fun lunch talking shop.  As longtime readers might be able to guess, I am pretty keen on the energy efficiency industry as an investment area.  What they might not know is that I missed out on investing in EnerNOC years ago as part of a Series B round -- the company had approached my firm for an investment, but then Foundation Capital invested quickly and at a price we wouldn't match, so we missed out.  And it ended up being a very good investment for Foundation... So it's always been one of "the ones that got away" for me.  No big deal, in venture capital you worry about the deals you do, not the deals you don't. Bygones. But I've enjoyed keeping up with Tim over the years.

What I saw this time reaffirmed for me that EnerNOC is going to be important in smart grid markets, but somewhat surprisingly, mostly inside the meter.  

I've seen and heard EnerNOC being somewhat criticized on Wall Street and among investors for being focused on demand response, which is seen as being a smallish market that is going to be low-margin over time.  And I think that the criticism of demand response is correct.  EnerNOC has a strong early mover position, and is deploying technology to try to maintain their advantage, but at the end of the day demand response is a market where the service providers (note: as separate from the equipment providers) are to date basically calling up building facility managers and asking them to reduce their energy consumption on demand. Phone calls, pages, and emails.  Not rocket science.  So as the various geographic markets for demand response get saturated, we will see margin compression over time.  Heck, back in 2006 I passed on a demand response investment because I called up one of their biggest customers and asked them why they selected that service provider, and they said that it basically came down to which vendor was most willing to cut their profit margin to win the deal.

But what I think a lot of people involved in energy efficiency investments don't quite realize is that EnerNOC is making a serious effort to use their early mover advantage in demand response, to develop a similar early mover advantage in inside-the-meter energy efficiency services.

Think of it this way -- EnerNOC is going around signing up office buildings and factories and getting them to participate in demand response programs.  But as long as they're there and getting involved in the energy consumption patterns of those buildings, they might as well sign up those same buildings for other energy services: Procurement, Optimization, etc.  Demand response becomes a customer acquisition tool.

I and lots of other cleantech investors have been reviewing numerous inside-the-meter efficiency plays over the past few years.  As office buildings generally become more "intelligent" (due to the adoption of building automation systems and building energy management systems), we're seeing more efforts to take advantage of the information coming from those systems to optimize energy savings for the buildings.

Thus far most of what has been done has been pretty basic services: Information and alerts. Information in terms of a presentation of energy consumption information across all the various information producing equipment in a building with an existing energy management system.  And alerts in terms of being able to quickly notify a building manager if something is going haywire and something's using a lot more energy than it should.

What was interesting for me to see is that EnerNOC is getting into these services.  They're taking the information and company relationships that they have access to through their DR activities, and launching business that are more about optimizing the energy spend of the buildings.  

Which means that as all the various inside-the-meter "building energy intelligence" startups that I've seen go out there and try to establish a presence in the market, they need to be asking themselves, "What is EnerNOC up to?" Because EnerNOC has pretty much made it clear: They want to own the inside-the-meter energy spend for all commercial and industrial buildings.  Will they succeed? The jury's still very much out, they're just getting started.  But it's a big mover in the space that entrepreneurs and investors now need to be aware of.

[Note: I should note I own a few EnerNOC shares in my personal public equity portfolio... So, you know, there you go.]

Rob Day: July 8, 2010, 11:09 AM

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VC fund fundraising remains depressed

Just a really quick follow-up on my last post regarding cleantech venture investments... Entrepreneurs need to realize that this is unlikely to change very soon.  Why? Because VCs themselves are still finding it hard to raise new funds.

Dow Jones put out their tally of VC fundraising in 1H10 today, and the headline was "US Venture Fund-Raising Up 13%".  I've seen people talking about how that's great news.  Not really.  Simply look at the very first data slide in their presentation and you'll see what I mean.  The totals are up compared to 1H09 because 1H09 was awful.  The dollar amounts remain way down from previous years, however.  

I said a while back that my guess was 2010 cleantech venture firm fundraising was going to end up being somewhere in between the 50% decline of 2009 and the "normal" level of previous years.  I may have been over-optimistic.

So entrepreneurs, just remember: If the VCs don't have dry powder, they can't spend it.  Be conservative, hoard cash, stay lean.

Rob Day: July 7, 2010, 8:42 AM

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Cleantech venture capital remains tepid, not hot

To judge from the headline of the Cleantech Group's Q2 numbers, "Global Clean Technology Venture Investment Increases 65 Percent in 1H 2010", you might think that cleantech venture capital is white hot right now.

It's certainly not as bad as it was in 1H09.  But there are signs in the CG numbers that things remain fairly tepid.  As the press release describes, the number of deals actually went down from Q1 to Q2 (from 192 to 140), for example.

But this is why we ignore headlines, and even dollar totals, and dig into the details, right?

So what are the trends of interest within the broader mediocre activity level in the sector.  First of all, much of the decline in deal count (which, as a reminder, we care about a lot more than any dollar total which can be skewed by a big deal or two) occurred in North America, according to the CG tally.  North American deals plummeted from 128 in Q1 down to 76 in Q2.  Meanwhile, Europe and Israel appear to have had an uptick in dealflow from quarter to quarter.

In terms of sectors, energy efficiency is now officially mainstream for cleantech venture capital investment, being the sector with the highest number of deals tracked (31), topping even solar (26 deals), biofuels (13) and smart grid (11).  Of course, the dollar totals for energy efficiency put that category at the BOTTOM of sectors tracked, but that's exactly why the sector is popular right now, because of its capital efficient attributes.

So in short, yes, when compared to the trough that was 1H09, cleantech venture capital has picked up.  But it's still pretty rocky, particularly in North America.  

My guess is that the dealflow drop-off reflects the fact that so many cleantech VCs are out fundraising right now.  They're in check-gathering, not check-writing, mode.  My gut feel is that many of the insider rounds to arm existing portfolio companies with additional cash are also done by now.

Unfortunately, for cleantech entrepreneurs this means it will continue to be lean times on the fundraising front going forward.

Rob Day: June 29, 2010, 8:37 PM

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Nikola would be proud

Tesla went out to IPO today quite successfully.  I was very glad to see the offering do well, at least on the first day. I've seen complaints about it going out too early (as yet unprofitable, and mass market car not due until 2011), but it does seem from the outside like a relatively well-run company with a compelling story. Low risk? Absolutely not. But I'm hoping they do well. Especially because this sector needs more success stories.  LPs have been waiting very, very patiently for more big visible stories like First Solar... will Tesla prove to be one of them?  Time, and stock market investor patience, will tell... 

I reiterate my long-standing tongue in cheek offer:  If the company would simply give me a roadster loaner for, say, two months, I promise them a glowing product review on this website!

But more seriously, I just hope cleantech VCs realize that stories like Tesla, big capex and somewhat still risky at exit, will be exceptions, not the rule. Not to tar Tesla with this brush, but too many VCs have been hoping that their cleantech companies can IPO early, before they're profitable. This isn't 1998.  And it won't be anytime soon.  Then it was sock puppets and eyeballs. This time it's fabs and negative gross margin beta units.

The age of hunter-gatherer cleantech venture capital is over.  When I started out in cleantech venture capital six years ago there were still plenty of unexamined subsectors, but by this point I don't know many subsectors that haven't been at least studied by multiple investors.  We're now deep into the age of both cultivators (ie: those who look for steady, if unexciting, returns) and big game hunters.  As always, big game hunters get the visibility (ie: press coverage).  But to over-extend the analogy, over time the farmers provide most of the nutrition, er, returns.

But seeing Tesla do well does help the exit window for others, including the many less sexy companies out there tackling our many energy problems. Today's performance is proof that investors are still hungry for compelling cleantech stories to back.  Of course, A123 did well immediately after the offering as well.  But I, and most other cleantech investors, are hoping that we see a nice sustainable story from this one.  It certainly is a fun one.  As a sector, not just as individual investors, we need to put some numbers on the board.