Viewing posts tagged "Biofuels"

In defense of Vinod

During several discussions I’ve had with industry observers and fellow venture investors over the past few weeks, the topic of biofuels have come up, and those I’ve spoken with have mentioned “Vinod’s bad bet” on ethanol.  Their point being that Khosla Ventures and Vinod Khosla himself placed a number of different ethanol bets and then publicly backed that sector, which is now seen as being somewhat out of favor.

But that conclusion is probably off-base, in my opinion.

First of all, most of Khosla Ventures’ biofuels investments haven’t been first-generation (ie: corn- and sugar-based) ethanol, which is the specific subsector that is out of favor right now.  The jury is still out on cellulosic ethanol—people have strongly-held views both ways on the technology, but in the meantime most startups in the cellulosic space are still waiting to find out if they’ll have a good path to market and exit, they haven’t had to put up or shut up yet.  And many of the other biofuels bets in the Khosla Ventures portfolio, like LS9 and Gevo, are even further out in terms of tech and market development.  So it’s a bit unfair to point at just the corn-based ethanol and other first-gen bets in that portfolio and say that the verdict on their biofuels strategy is in.

And it’s also not quite clear that even the first-gen biofuels bets by Khosla Ventures haven’t been smart ones, from a strategic perspective.  Regardless of what the individual investments themselves look like, it’s important to recognize that Khosla Ventures has taken a different strategic approach to their investment thesis around biofuels than most venture firms take.  Khosla’s been happy to place multiple bets across a single sector, whereas many firms prefer to only place a couple of bets in any given sector.  Why be different?  Because of the special advantages Khosla has.  He’s writing his own checks, not having to report to an investment committee.  He has been actively leveraging his own personal brand equity and political access to bring government dollars and private sector attention to the ethanol story.

Most venture firms don’t want to end up having their portfolio companies compete against each other.  But by taking more of a concentrated approach to ethanol, Khosla Ventures appears to be betting that they can take advantage of a rising tide raising all boats, when they own half the fleet in the harbor (I overstate, but you get the point), and being able to combine those efforts when opportune.  And also betting that they can make the tide rise faster than it would have otherwise.  It’s a very specialized strategy that only works when a very quick and flexible investor with a lot of political access and brand equity can identify an investment thesis ahead of the crowd and take a strong early position in that sector.  And then, as Vinod does, speak anywhere and everywhere, and visit D.C. regularly, to make the case for the sector.  Hard work, but something many other venture investors couldn’t duplicate.

Such an investment/political/PR strategy also only works, however, if there are near-term jobs and revenues to tout.  Politicians need to see jobs creation opportunities in order to do their part of this kind of sectoral strategy.  Revenues and exits need to be seen in the near term by the press and the private sector before they’ll play their roles in the development of the sector.  So to effectively pursue this strategy, it becomes necessary to make some investments in first-gen players that are relatively close to market.  These first-gen players then become key examples to point to.  And even more importantly, perhaps, they can provide an eventual platform for the second-generation technologies that end up working the best, accelerating the paths to market for cellulosic players that would otherwise have to build capacity that would potentially be redundant to whatever first-gen players were already in the market by that time.

Long story short, you don’t need to believe in sugar- and corn-based ethanol as a long-term story in order to want to make a couple of bets on such companies, if you’re Khosla Ventures.  You just have to believe that the first-gen bets you’re making will be a good bridge for your second-gen bets.

The problem?  The market turned against first-gen ethanol much quicker than anyone expected.  A controversy about food and energy balances arising at almost the same time that oil prices drop precipitously and corn markets go out of whack.  Many people predicted some or all of these things would come to pass eventually.  I don’t know anyone who thought all that would happen in 2008.

Does that mean it was a bad strategy?  Nope.  And by the way, as per the first point above, their overall biofuels strategy may still end up making great returns anyway.  Political support and incentives for biofuels don’t seem to be going away.  And the sector continues to develop even as first-gen players fall out.

Vinod and Khosla Ventures certainly don’t need the likes of me to defend their biofuels strategy.  Plus, I’ve probably gotten it all wrong from their perspective, I haven’t discussed the above with anyone on that team, so I’m likely guilty of projecting my own views more than reflecting theirs.  But I thought this might be a useful case study to point out a few unique things about the cleantech venture sector, and put down my two cents’ worth.

Some scattered thoughts on a Friday

First of all, comes the news today (from Jonathan Shieber at VentureWire) that Element has done a first close on their latest fund at $270mm, and that it’s likely they’ll “fly past” their $400mm stated target.  A very good example of how the sector continues to shift toward later stage:  One LP (LACERS) reports that Element plans to allocate only 20% of the fund to early stage investments, with the rest going to expansion stage and later stage.  They’re far from alone, and this news is proof of the continued strong LP interest in the sector.

Secondly, on the topic of biofuels and food prices (headline stuff these days), stay tuned for an upcoming report from New Energy Finance on the subject…  As a preview, there’s the following passage:

New Energy Finance has analysed food price increases between January 2004 and April 2008, breaking them down into their constituent drivers: input costs, dollar depreciation, supply-demand factors and speculative activity (see Figure 2). We conclude that increased biofuels production has been a meaningful driver of food price inflation, particularly in certain crops and geographies, but it is far from the dominant factor. Increases in input costs have played a much larger role, as have changes in consumption habits and increases in global population which, for the first time in decades, have not been offset by increases in agricultural yields, particularly in grains (see Figure 3). Furthermore, where biofuels have had significant impacts, this has been due to overly-rapid application of support schemes and protectionism, rather than to the impact of production on land use itself.

Thirdly, I thought this passage from Tim Healy’s (EnerNOC) Chairman’s Letter was also worth quoting:

I believe that energy is one of every company’s five basic inputs, along with land, labor, raw materials and tools. (Information Technology, the realm of the CIO, is a subset of tools.) But in most cases, energy is the only one that is not actively managed. Corporations invest time and talent in assessing and developing land; in managing and motivating labor; in forecasting and negotiating the price and supply of raw materials; and in sourcing and procuring equipment and tools. Energy hasn’t normally received a similar level of senior executive attention. For example, US corporations spent an estimated $129 billion per year on telecommunications in 2007, and all of them also invest in advanced products and services to actively manage these systems. But less than one per cent of companies make a significant investment in advanced technology to manage electricity, even though electricity spending was greater at approximately $194 billion per year.

Are the above three notes sobering?  Encouraging?  Readers will judge for themselves.

Deals from the past few days:

• SmartSynch, a smart meter technology developer, raised $20mm in expansion funding from Credit Suisse.  This follows on their $10mm insider Series D last year.

• Principle Power, a green power developer based in San Francisco, announced that they raised a $2.3mm convertible note seed round from a variety of angels including members of the Keiretsu Forum.

• CamSemi, a UK developer of energy efficient power controllers, expanded their Series C by $8mm, with BankInvest Group providing the financing.

• CrystalQ, a Dutch developer of sapphire wafers for use in white LEDs, raised an undisclosed amount of financing from Sustainable Energy Technology Fund (SET Fund), EPT / Benno Wiersma and E2 Cleantech.

• Speaking of Element Partners, they provided $29mm in financing to ECORE, a provider of products made from cork, recycled rubber and other green materials.

Cleantech investors in the news:

• Cleantech.com is reporting that Craton Equity Partners closed their debut fund at $191.5mm.

• Kurt Falhauber, who had been active in the Austin cleantech cluster as part of the Austin Clean Energy Incubator, has joined Macquarie’s cleantech private equity team.

• Another brand-name cleantech venture partner:  James Woolsey has joined VantagePoint, as has Dave Edwards (formerly with Morgan Stanley).

Other news and notes: Jeffries reports that the cleantech IPO backlog is starting to build...  Bill Aulet has some pretty interesting thoughts about decoupling energy and water…  Also worth checking out, a good interview by Neal:  Marc Stuart on the REAL story of carbon offsets...  For those who may have seen the VCJ’s kind write-up about this blog (and its author) in the latest issue, a couple of small corrections—no, I don’t live in Connecticut and drive to Boston every day; and no, M2E Power isn’t putting flashlights into cell phones, they’re developing innovations to power the cell phone (and other devices) altogether. But yes, this site does lack in personality at times, it’s true…  Finally, this will be fun to watch.

Guest Blogger Eric Wesoff Covers the Week in Cleantech

Rob Day, pioneering renewable energy VC investor, blogger and all-around good guy is on vacation in much sunnier climes this week and has given me the honor of filling in for him. My name is Eric Wesoff and I’m a senior analyst at Greentech Media and the author of the Venture Power Report.

Here’s this week’s Cleantech Investing blog, now with slightly higher snark.

Stealth Solar

Stealthy solar firm Solexel is listed on Technology Partner’s website and on KP’s website but information is scant.  They do have some job listings for epitaxial silicon engineers and MEMS engineers and the MEMS aspect is intriguing.  Their write-up claims that they develop, “disruptive, high efficiency, cost-reduced energy conversion products for the solar energy market.â€?  Which is much less than informative.  Apparently they already have a CFO, unusual for a company this small.  The Ira has not responded to inquiries.

There is No Such Thing as Clean Coal

The DOE is trying to resurrect and restructure the battered FutureGen project - issuing a quick-turnaround RFI [PDF link] for projects to equip clean coal commercial power plants with carbon capture and storage (CCS) technology. If you have some ideas on “less dirty coal� - the deadline is March 3.

Solar Umbrellas?

SKYshades (caution: crappy soundtrack), co-founded by the Great White Shark, has inked an MOU with VC-money-oxidizer,  Konarka, in order to issue press releases abut organic PV umbrellas.  Konarka supposedly builds flexible solar devices on plastic substrates and has raised at least five funding rounds (not really a good sign).  Konarka has been raising VC money, issuing dubious press releases, and switching CEOs since 2001.

Cellulosic Ethanol Funding with Political Connections

PE Week Wire breaks the news on Mascoma’s $50M C Round, a combination of debt and equity. The Cambridge, Mass.-based start-up is working on cellulosic biomass-to-ethanol development and production.  Funding came from General Catalyst Partners, Khosla Ventures, Atlas Venture, Flagship Ventures, Kleiner Perkins, Pinnacle Ventures, and VantagePoint Venture Partners. Mascoma had previously raised ~$40M in VC funding.  Former senator Tom Daschle, an Obama supporter, is on the firm’s board.  Former president, and soon-to-be-failed first husband, Bill Clinton is involved with Cilion, another VC-funded ethanol start-up.

SoCalGas – An Enlightened Utility with a VC Investment Arm

I had a great conversation with the venture arm of Southern California Gas recently and will report in detail in the next Venture Power.  But here are some quick notes and observations – their venture arm is considered part of their research program and they are actively making venture investments in technologies and companies that “have a strategic fit with their charter or their customer’s needs.â€?  Their hot buttons include:

• Energy efficiency
• Smart grid technologies
• Solar thermal systems – In their opinion, “the technology to beat is horizontal trough systems.â€?  More on SoCalGas soon.

Exploding Windmill

The exploding Danish windmill video deserves repeating.  Windpower is a great thing and this type of braking failure is an exception to windpower’s safety and effectiveness as a renewable energy source.

Harnessing Big Wave Power at Half Moon Bay California’s Mavericks.

Rob Day returns next week unless he goes native.

Big solar deals keep rollin’ in

• Germany-based Odersun has raised a EUR 40mm Series B, led by Virgin Green Fund, and including participation by PCG Clean Energy & Technology Fund, AGF Private Equity, as well as existing investors DHTV and Advanced Technology & Materials.  The company will use the funds, as well as other funds raised, to build a second manufacturing plant for their thin-film solar, currently being integrated into accessories like messenger bags, but with additional potential for building-integrated PV.

• Thinner-silicon solar cell developer Suniva raised a $50mm Series B for commercialization of their technology, which they say will be as cheap as conventional electricity.  NEA and Advanced Equities co-led the round, which also included participation by Goldman Sachs, Quercus Investments, and existing investors HIG Investments.  According to VWire, NEA will hold 3 board seats.

I’m looking forward to discussing all the doings in solar financing at the upcoming Solar Market Outlook day in NYC, later this month.

Cleantech investors in the news:

• Venture Wire is reporting that DFJ Element is raising their second fund, targeted at $400mm.  The firm closed their first fund in 2006, at $284mm.  They’re re-branding as Element Partners.

• Advanced Technology Ventures has closed their eighth fund at $303mm—the firm invests across several sectors, including cleantech.

• Chrysalix’s Wal van Lierop on the emergence of nuclear fusion options.

Other news and notes:

One of the major news items on the week were some studies pointing to the potential downsides of biofuels, particularly when forestland and other land conversion is part of the process.  Nathanael has some good thoughts on the issue here and here.  Clearly, the devil is in the details when it comes to the environmental impacts of biofuels.  One can envision a day when biofuels are being certified as being waste-derived, etc., similar to how forest products have seen certification efforts like the Forest Stewardship Council.  But while the debate rages on, cellulosic ethanol is coming to market soon, but it’s unclear if people will buy it—one big problem is the lack of good retail purchasing options for those drivers and fleet owners who might be interested.

Meanwhile, in other news...   An Evergreen Solar board director is the latest solar exec to leave, but it’s tough to see what trends are underlying this, if any…  Arno Harris has some interesting thoughts on green building trends...  Tyler has a cautionary tale about exactly why it can be so hard for clean technologies to get initial market traction…  (Sigh)...

Finally, CERA has some bad news for incumbent energy companies—clean energy options are coming, thanks to an anticipated $7 trillion in investments in the sector by 2030, and when they do the effects will be “disruptive” and not “incremental”...  But of that $7 trillion, this article suggests not much of it will go to privately-held companies…  Richard Stuebi argues that we need to gear up for a more substantial effort to make some dramatic changes happen—and yet, the DOE EERE budget is lower than last year’s appropriations and other similar cuts are proposed.  Hard to see how all of the above adds up.

Vinod’s hybrids vs. biofuels argument

If you haven’t before seen or heard Vinod’s arguments in favor of biofuels and against hybrids, it’s well worth reading the three-part column he wrote in Grist earlier this month.  (Part I, Part II, Part III)

Three quick reactions:

1.  This is a very well-done argument which really points out the strengths of Vinod’s highly analytical, deep-dive investment style.

2.  It’s a bit strange that it’s set up as an argument about hybrids vs. biofuels, since as even Vinod notes (buried in the third part) these techs are probably complementary instead of competitive.  Flex-fuel hybrids, and hybrid diesels, are already being developed.  And while he rightly points to the emergence of more efficient internal combustion engines and lighter cars, these are also going to be very complementary with hybrids.  I’d be more interested in an analysis of future all-electric vehicles versus a biofueled serial hybrid with a nextgen ICE, and suspect there would be places for both in the market…

3.  It’s also a bit strange that it’s set up (per the title, “Pragmatists vs. Environmentalists”) to sound like he’s having a fight with environmentalists.  When in reality, reading the argument made, it really comes down to Vinod’s analysis of the market adoption timing of one tech versus another, and per point #2 that’s kind of moot anyway (we need all of the above, not one or the other)...  And in addition, Vinod points out that he is himself investing on both sides anyway.  I would hope that most readers would understand that there’s not really a schism between the environmental community and the cleantech investor community on nearly all issues, and that in fact there’s a lot of commonality and shared purpose.

Let’s hope this kind of eye-catching title doesn’t end up picking an unnecessary fight.

(for full disclosure, my firm also has investments that would support the development of markets for both hybrids and biofuels)

1/29 Update:  Astute readers have already pointed me to two other responses to Vinod’s argument, one at the always-helpful AltEnergyStocks site, and a more pointed reply by Joe Romm.  More to follow, I’m sure…

Quick hits:  Deals and other news

Cleantech deals over the past week:

• Dan Primack reported on Monday that ZeroPoint Clean Tech, a developer of biomass gasification technologies, has raised a $3.12mm Series B.  Investors weren’t disclosed.

•  LedEngin, a developer of LED packaging solutions for solid state lighting, has raised an $11mm Series C.  The round was led by Partech International, and previous investors WK Technology Fund and individual investor Dr. Lu also participated.

• Water management darling HydroPoint topped off their Series C round with an undisclosed additional amount of funding by Citi Alternative Investments.

•  Nordic Windpower has taken in a “significant investment” from Goldman Sachs.

• Is it a venture deal?  Unclear.  But wind developer EverPower took in $55mm from Good Energies.  Interesting to note the mention of Good Energies having a longer investment horizon than most venture capital firms.

Cleantech investors in the news:

• Tyler reports on the launch of the Canadian Cleantech Fund.

•  Belgian VC Capricorn Venture Partners has raised EUR 50mm so far for their Capricorn Cleantech Fund, with hopes to make a final close at EUR 75-100mm.

• Braemar Energy Ventures has closed on their second fund at $250mm.

• GreenTech Media has the scoop that Mark Huang appears to be leaving GE’s cleantech investing team.

• Cleantech (and especially the venture capital community) should have more women managers and investors.  Here’s a good list of 10 of the better known members of what is currently a very small club.  Of course, Lauren Bigelow of the Cleantech Network really should have been on the list as well—here’s a good recent column by Lauren on corporate cleantech activity.

Update on the New England cleantech cluster:  Here’s a good interview with Massachusett’s Ian Bowles on the state’s efforts to promote decoupling and other important energy policy changes.  It’s clear that there’s a lot of momentum in Massachusetts and around New England to promote the faster development of a strong clean energy economy—and as this article illustrates, cleantech can be an important driver of jobs growth.  That’s why it’s very encouraging to sense the state moving quickly beyond basic rhetoric toward real action.

Other news and notes:  Good venture exit trends across all categories…  It’s shameless promotion of an @Ventures portfolio company, but besides that this is a great article on the problems of biodiesel availability at the retail level…  Jennifer Kho notes that demand response and energy management is in a rapid-consolidation phase...  Here are a couple of interesting analyses on energy generation technologies and transportation fuel choices…  Neal writes some interesting thoughts on hybrids and the electric car...  Finally, they’re going to be using Grey’s Anatomy to measure energy use?