The “what if” factor

Perhaps the single biggest difference between cleantech and other venture sectors is the "what if" factor.  As in, what if something comes out of left field and blindsides an entire investment thesis.

Last week Earth2Tech profiled 13 different lithium ion startups, most of them venture-backed, all vying to make a big dent in the market for the batteries that are presumed to end up powering future cars and other vehicles.  Each has a different technological solution that they think will give them an advantage on cost or performance or both versus other lithium ion batteries.

But what if EEStor is for real?  If you haven't read it yet, read the highly entertaining transcript (Tyler swears it's real) supposedly of EEStor's CEO giving an interview on what the company is up to.  I'm personally a bit skeptical of the company's prospects, for a number of reasons, and the UL certification effort that bloggers are going ga-ga over really doesn't validate anything.  But if you believe Weir, the company's products will soon obviate all other energy storage options, including lithium ion.

I'm not trying to either slam or boost EEStor (so direct your flames elsewhere, people), it's just a really vivid example of the "what if" principle I'm describing.  What if EEStor's products are for real and as ready as promised?  What would that mean to lithium ion investment theses?  Or other energy storage investment theses?  After all, there are a million different ways to store or regenerate electricity.  Even if EEStor's technology isn't all it's promised to be, what if there's some other breakthrough waiting in the wings?  VCs have backed any number of battery chemistries, after all.

In areas like biotech this "what if" factor appears to be a bit less of an issue, because there's more openness about what people are working on, and the research tends to take place in more well-known places.  There aren't a lot of biotech entrepreneurs working on a new drug discovery platform in their garage.  But there are lots of garage inventors in energy tech, and even with the more well-known research institutions they can either be very close-lipped (like corporate R&D shops), or the substitutionality described above might mean that the "killer app" comes from an entirely different discipline, so simply knowing everything going on in the world of chemical engineering (for example) might not be enough to mitigate the "what if" factor.  Or it might not even be a new technology; as in solar, where an expected flood of really cheap "Gen 1" panels out of China might obviate a whole lot of "Gen 2" efforts...   All of which makes it just about impossible for investors to know everything that's going on that could blindside their investment theses.

This is also driven by the fact that most clean technologies are, in the end, involved in the production of a really basic commodity like kwh, drinking water, energy storage, etc.  There are so many different ways to accomplish the intended goal, that a mono-disciplinary approach will leave out many otherwise unanticipated competitive threats.

The only solution as an investor is to be deeply, deeply networked across a very wide range of markets and disciplines and geographies.  And to be really disciplined about valuations and capital efficiency (so that even ancillary markets can yield good outcomes), due diligence, and most importantly the need for strong execution. 

Good management teams need do their best to know everything that can be known about potential competitive threats (and don't just trash the competition), and understand that it's not always the best technology that wins...

Here are deals from the past week or so -- we're starting to see the return of some bigger deals:

• Carbon-zinc battery developer Blue Spark has raised $1.5mm of a planned $5mm Series B, from insiders.

• eMeter has raised $32mm in new financing from Sequoia and existing investor Foundation Capital.

• Quercus and 21Ventures have put a second round into Advanced Telemetry.

• FRX Polymers, a developer of more environmentally-appropriate flame retardant additives, has raised a $6mm Series A co-led by Israel Cleantech Ventures and Capricorn Venture Partners.

• Fuel cell developer Intelligent Energy has raised a $30mm round of financing from unnamed existing and new investors.

• Suniva has raised a $75mm Series C from new investors Warburg Pincus and Apex Venture Partners, and including existing investors NEA, HIG, and Advanced Equities.

• Smart home startup iControl has raised a $23mm Series C, with participation from new investors ADT Security Services, Cisco, Comcast Interactive Capital and GE Security, alongside existing investors Charles River Ventures, Intel Capital and the Kleiner Perkins Caufield & Byers (KPCB) iFund.

• Flagship has presumably made an investment in recently-unstealthed Joule Biotechnologies.

• Produced water treatment company Ecosphere Technologies has taken in a $10mm PIPE from Bledsoe Capital Management -- and there's another retired QB in on the action, too!

• NEAH Power has raised a $500k PIPE.

• SunRun raised a $18mm second round of financing, led by Accel Partners and including existing investor Foundation Capital.

• Solicore has raised $12.2mm of a $13.3mm Series D, led by Rogers Corp., and including existing investors Draper Fisher Jurvetson, Rho Ventures, Braemar Energy Ventures, OPG Ventures, and Firelake Capital.

• Cleantech investors in the news:  Khosla's reportedly soon to announce closure of $1B in new funds...  DFJ is also raising...  And here's some info on 21Ventures' investment approach.

Other news and notes:  CleanLaunch, a new cleantech incubator in Colorado...  Interesting take on a secondaries market for privately-held cleantech shares...  This sounds like a relatively soft landing...  Finally, who do you believe, the Nobel laureate or the politicians?