A couple of weeks ago I wrote up a few thoughts on the chatter about government money being directed to cleantech venture capital firms (and then discovered I'd given fodder to the Globe, who knew?).  At the end of the column, I mentioned that I wished to see more government support for cleantech startups at the early end, too early for many venture capital investors.  It prompted some thoughtful replies from several readers. One reader pointed me to Sustainable Development Technology Canada.  This is a non-profit, quasi-governmental corporation that makes direct investments in Canadian cleantech companies to help them in later-stage growth or for initial project development purposes.  It has taken in $1B from the government and has already made investments in 144 projects to date -- they're looking to issue their 15th round of funding later this year.  So here's a model for some to look at, but it doesn't really address that seed-stage gap I pointed to. Another reader reminded me about OnPoint and In-Q-Tel, two government-sponsored firms whose missions are to invest in startups that are developing technologies of interest to the Army and the CIA respectively.  These groups are investing in some early stage opportunities, but also are coming in later stage in some cases as well.  But it's certainly a good model to draw upon for inspiration when it comes to government financing of cleantech. Of course, a couple of people reminded me about the proposals for an "ARPA-E", a counterpart to the Department of Defense's DARPA research grant program.  DARPA is another good tool to consider, and has certainly been the source of grants for a number of cleantech startups.  It's not an investment, however, and so it comes with a very specific set of requirements (and bureaucratic headaches) for the grantee.  It's useful, but no panacea. Finally, Reem Yared wrote to bring up a DOE program that was in place to support seed-stage companies up until a couple of years ago:

In fact, the DOE used to run a program called Inventions and Innovations, where they funded promising clean technologies with grants of $50,000 and $250,000. The grants went to inventors who were still at the patent-filing stage, helping them go through the patent process and on to commercialization. There was a whole selection process which worked quite well. I was one of the consultants hired by the DOE (working for Vista Ventures) to help seven of the start-ups develop their commercialization strategy. Another company was DOE-sponsored market research services. The DOE had enough experience with the program to know that simply funding the research would not be enough: the patents would just be filed and shelved. The inventors/entrepreneurs really did need the hand-holding through the commercialization process. The start-ups I worked with were all over the country and in all different fields: wind, glass manufacturing, paper manufacturing, LP gas distribution, biofuels, car engines, AC pumps. The irony, of course, is that the year Pres. Bush mentioned a focus on cleanTech in his state of the Union address, the administration pulled the plug on the program (April 2007). I don’t think it would take too much effort to restart it, rather than creating something from scratch. See http://www1.eere.energy.gov/inventions/about.html

Government-run investment programs have historically been challenged for a) having unintended consequences like the patent-shelving Reem mentions, and b) not being able to bring on board top investment talent because the government salary structure and even profit-sharing aren't possible.  That latter objection also points to operational challenges -- such simple questions as "are we looking for jobs growth" versus "are we looking for strong investment returns" become pretty fundamental to the exercise. But merging a few of these ideas together, a quasi-governmental, independent corporation sponsored (and funded) by the DOE could be launched, to focus on seed stage companies commercializing technology out of the DOE labs and DOE-funded research.  It wouldn't have to be a huge amount of capital to have a major impact -- a few tens of millions of dollars would be very significant in this context, but relatively small in comparison to the "billions" being discussed by Krugman et al.  Then the questions to be answered around staffing and incentives and compensation would be very similar to those faced by OnPoint and In-Q-Tel, which have been able to bring in experienced, motivated investors.  So no need to reinvent anything at all, we can borrow from what's already working elsewhere. I bet right now we could get some of the brightest investors in the cleantech venture capital world to support this and even join such an effort.

One of the interesting things to come out of Obama's new budget is the assumption in there of revenue from implementation of a cap-and-trade scheme for carbon emissions reductions. First of all, here's a quick but compelling analysis by Chaz Teplin who points out that the revenue assumptions point to assumptions of fairly low (<$15/tCO2) market prices for carbon credits.  Chaz then points to what that price level might mean in terms of costs more familiar to most of us. Secondly, here on this site we've previously discussed the challenges of getting to 60 (as in, Senate votes) on a cap-and-trade bill.  Well, now the inclusion of these revenues in the budget may be a hint along the lines of what got reported a couple of days ago:  That the "budget reconciliation" process may be used to prevent a filibuster on any climate regulation. That would be an interesting twist, although I continue to believe c&t legislation won't come down to a party-line vote... Finally, while all this goes on inside the beltway, outside regional leadership continues to push the ball forward regardless.  The latest move is by the city of San Francisco, which is launching a Carbon Collaborative designed to help make the city a hub for carbon trading.  [Mandatory self-promotion alert: One of my portfolio companies, Carbonflow, is involved in this effort]  It's a sign of things to come, as we're witnessing the birth of a new, multi-billion dollar commodities market.  Different regions will be vying to grab part of that, undoubtedly.  But of course, what happens inside the beltway will make a big difference on whether the nascent U.S. carbon trading industry will flourish, or languish while Europe takes all the action. . . .

So what happens when a venture capital fund is given a few billion dollars by the U.S. government to invest in greentech? I ask this question because it is clearly being discussed pretty seriously right now.  I've heard rumors for some time now that Kleiner in particular has pitched the administration on the idea, but pundits like Thomas Friedman have also been throwing it out there (in a couple of op-eds here and here), and it dovetails with a proposal Obama made during the presidential campaign for a government greentech venture fund. Where there's smoke, there's fire, so I'm therefore assuming it's being discussed at a high level. So what would it likely look like, and what would be the effect? I can't see this being a "Government as LP" process, where existing VC funds (note: funds, not firms) add on a couple of billion dollars of LP commitments from the DOE.  That would mess up existing fund structures and upset existing LPs. There may be some small component that could be done as government-managed seed grants/ loans, similar to the SEED Program here in Massachusetts ($500k convertible loans into early stage companies with good prospects for growth and subsequent venture rounds).  But hard to see that adding up to anywhere close to the billions of dollars being talked about. So the specific approach would likely be either a pool of capital allocated out for co-investments, and/or a pool of capital allocated to special purpose funds directly managed by VCs. In the former case, funds like Kleiner's Green Growth Fund (for example) would make an investment, the Government Co-Investment Fund would make an investment into the same round under the same terms, and then Kleiner's team would manage both, in exchange for some fees and some carry.  In the latter case, Kleiner (for example) would establish the "US Greentech Future" fund and simply run it as a traditional standalone fund, but with a single LP (the government). I could see either path being chosen.  Regardless of which one, here are some inevitable outcomes:

1. It would have to be done by RFP, and the RFP process would be brutal.  Every firm out there would put in a proposal for some portion of whatever pool was available.  Massive amounts of lobbying (some of which is already going on, clearly).  Cutthroat competition to see what firms could claim jobs creation and wealth creation track records, which firms would be willing to charge less fees and carry, etc.  Every firm touting their own strategy over all others'.  My sympathies to the poor government staffers in charge of that process...
2. Unclear what government body would manage it.  If it's energy tech only, probably the DOE, but it would likely be a broader program than just energy tech.  So there's the possibility of a big mess of government bodies getting involved in a huge cross-departmental exercise.  Thus slowing down the actual decisions pretty significantly.
3. Much of it would go into later-stage investments.  Simply put, at the level of billions of dollars you either need huge staffs to manage scores of investments, or you need to put really big checks to work, which means larger rounds and thus later stage investments.  Those who read this column regularly will know that later-stage investing is already dominant in cleantech.  To put massive additional capital into that end of the market... Wow.  And it does call into question the match of the goal (fostering innovation and jobs growth) with the process.

I'm already seeing some VCs come out strongly against these ideas (a couple of examples here and here).  They argue that there's already plenty of money in the venture capital sector, and that any effort to pour massive additional amounts of capital into startups through that kind of financial asset class would end up with skewed results.  Indeed, only about 2% of all startups get their initial capital from venture capital firms, so it's unclear that this would be the most efficacious pathway to get startups launched and hiring. There's always a perception gap about what the role of venture capital is -- politicians seem to believe that the role of venture capital is to promote jobs growth and innovation, but most VCs promise their LPs that it's all about the financial returns and nothing else.  The great thing about venture capital is how often all those goals overlap.  But they don't always... I personally would like to see government figure out a good way to step into the seed stage gap in cleantech:  With technologies that would take a longer time to develop than most VCs would be able to stomach, government seed grants/ loans to help get the companies to a fundable point.  You wouldn't want to, or even have to, put massive amounts of money into each company.  At $500k per startup, you could get 2,000 startups off the ground with a $1B commitment.  I see great companies all the time that are too early even for my early-stage venture firm, and that really only need a small investment to get themselves to the next level.  Later-stage investing now has everyone across the venture and private equity landscape looking to put money at play.  It's unclear that pouring billions of additional dollars into that stage would achieve the hoped-for goals.  But seed stage funding remains a relatively unaddressed gap. If you want to promote green innovation and jobs growth, there are a number of different ways to go about doing it.  The government venture fund is the current one being discussed, and clearly is getting pushed pretty hard right now.  I just hope that whatever happens, we take care to specifically address the seed stage pre-VC funding gap.  Otherwise all those later-stage dollars eventually won't have anywhere to go. . . .

There are two critical roles for energy efficiency in upcoming 2009 federal legislation.  But you almost never hear about them. First of all, energy efficiency is shovel-ready.  In other words, if you're looking to have an immediate impact on both green-collar jobs creation and cost-effective carbon emissions reductions, you absolutely have to include energy efficiency retrofits into the equation.  For example, look at commercial building energy efficiency retrofits:  The technology is available already; The nature of the work is service-oriented and building controls and HVAC and lighting are readily "trainable" for new recruits; and the economics often make perfect sense, if only regulatory support would help address the upfront capital cost hurdle. And yet what I hear from folks battling inside the Beltway right now is that energy efficiency support has been one of the items on the chopping block in all the Stimulus Package horsetrading.  Apparently the CBO came out with a report saying that much of the energy efficiency incentives put into the bill wouldn't have an effect until 5 years out?  I haven't had a chance to review the specifics, but I would find that hard to swallow if true. And while I'm also a big supporter of renewables, it's hard to make a case that regulatory support for solar panel manufacturing (for example) would be something that would have a 2009 jobs impact, and in fact much of that market will eventually go overseas.  I'm not arguing against support for solar panel manufacturing, we have technology leadership reasons for wanting to pursue that as well, and good green manufacturing jobs should be encouraged in any case.  But if your metric is jobs creation in 2009, it's tough to make the argument that renewables should be prioritized over energy efficiency.  And yet, apparently, that's what the pencil-pushers are doing. Secondly, energy efficiency could play a critical role in any climate change regulation that comes out. To begin with, from a "wedges" perspective we cannot afford to ignore the role energy efficiency must play in any comprehensive climate change effort.  It's not sufficient, but it sure is necessary. Also, from a timing perspective, once again energy efficiency shines versus alternatives like sequestration and renewables.  It's reductions we can do immediately, not after further waited-for innovations. Finally, and most tactically, energy efficiency based carbon offsets may be very powerful in bringing key Senators "onsides" with carbon cap-and-trade regulation.  As we all watch how critical it is to reach 60 votes in the Senate, it's important to recognize that major regions of the country consider themselves to be at a severe disadvantage in a cap-and-trade scheme, because (rightly or wrongly) they feel they lack the renewable generation potential (solar, wind, geothermal, etc.) of other regions.  Specifically, the US southeast feels disadvantaged versus the west or northeast.  It would be very easy for regional blocks to stand in the way of effective cap-and-trade regulation. But of course, one potential "resource" that the US southeast has is lots and lots of inefficient air conditioners.  It's an easily mined source of offsets to help them meet their requirements -- if energy efficiency-based offsets are included as a key source. Energy efficiency does face some technical challenges (for example, establishing accurate baselines and proving "additionality") if it's to be included effectively in any scheme.  It gets complex quickly. We'll talk another time about these complexities and possible ways to deal with them. But it's worth wrestling with these details, because otherwise it's tough to see how we get to 60.  And without that, the political efforts of a lot of people who are currently ignoring energy efficiency may be wasted anyway.

What a historic day! Most pundits seem intent upon comparing Obama's likely presidential role to that of past presidents like Kennedy, FDR, and Lincoln. My guess, however, it that it will be much more like that of Andrew Jackson -- in form, at least, if not in terms of specific policies.  Jackson was really the first president to effectively use the powerful tool of public opinion (as confirmed by the voters) to lend critical support to policies of his that were unpopular in the Senate.  He also was pragmatic about shifting allegiances with legislative leaders to get whatever results he thought were necessary for the country.  It is in these two ways in particular that I expect an Obama administration will aspire to be Jacksonian. What does this mean for cleantech and climate change policies? I think 2009 is going to see a lot of appeals to the public, rallying support for getting something -- anything -- done.  Anyone looking at the makeup of the senate and the geographical realities involved in climate change politics (ie: getting southern and midwestern senators of either party on board) will recognize that any effort to put in place climate change regulation will need to overcome a lot of resistance in the Senate in particular.  If a serious effort is going to be made to get something done in 2009 (which is the plan I hear from people who should know something about it), it will require a moral high ground of having marshalled strong, vocal public support in favor of achieving significant outcomes. I look at the amazing sea of faces on the Mall today and I do believe Obama has a mandate to selectively target at least a few major issues for this kind of treatment.  So far climate change seems to be on the short list of such issues.  Here's hoping! Secondly, I expect that -- while the goal of doing something "significant" will be held true -- the approach will be very pragmatic in terms of what the specific policies are and how the political effort is pursued.  In other words, expect to see a "purple" effort if climate change policy is pursued as a key initiative.  And expect to see a lot of effort to give southern and midwestern senators reasons to feel okay getting on board.  Carve-outs for energy efficiency-sourced carbon offsets, for example, would go a long way to making cap-and-trade seem less punitive to southern states.  Carve-outs for agriculturally-sourced offsets would help similarly in the midwest.  And even such "givens" as a cap-and-trade system instead of a carbon tax remain open questions -- we don't know what the final form of the climate change policy will look like because we don't know who on the Hill will be tapped as champions (for me, I suspect McCain will play a crucial role, but that's just a guess). We already see the example of this in the economic stimulus bill and what it includes for green collar jobs creation:  Everything and the kitchen sink.  All good ideas welcomed, and whatever gets key support gets thrown in. This will continue to be the pattern, I expect.  And that generally means good things for getting SOMETHING done, but also means we can't plan on what that something will specifically be... On a day when 2 million people gather to witness history -- and on a day when Chrysler sells a third of themselves to Fiat because they need Fiat's help in learning how to make smaller cars -- there are a lot of good reasons to believe that major change is coming.  But with a lot left to be determined as well... Enjoy the day, everyone! . . .

One of the things that's so powerful about the energy and water and resource challenges we face are that they touch everyone's lives on many levels:  As individuals, as communities, as countries, and as a world.  And another powerful fact about these challenges is that we have been now wrestling with them for some time, without making good progress. In energy in particular, I am constantly hearing about (and learning from) the experiences of those who have been thinking about these issues for a long time.  So many good ideas yet to be executed on.  So much debate recycled from previous debates, without drawing the lessons from what had worked before and what had not.  And so many unfortunate assumptions about what can be accomplished (politically, technically, etc.). I had lunch today with an investor who pointed me to this article from a long-time veteran of energy and finance.  Theodore W. Noon, Jr. was an oil wildcatter in the 1940s, a petroleum geologist and engineer for 60 years, and an energy investor for several decades.  He was also a bronze star and distinguished service cross recipient, receiving five purple hearts for his service in World War II. T.W. Noon died last year, but in the final months of his life he wrote two articles full of thoughts and insights on two subjects on which he had a lot of experience -- our economic challenges, and our energy challenges. He wrote them while in hospice; he knew they would be his last chance to share the lessons he had learned along the way, and he hoped people would read them. So please read them.  Some of what he has to say may surprise you.  He doesn't pull punches, and doesn't go with the flow.  An oil wildcatter and investor proposing a phased-in energy tax?  Regular readers may recognize that that kind of thinking strikes a chord with me... I never met T.W. Noon, but I wish I had.  I would have enjoyed the conversations greatly.  I'd like to think he would have been as excited as I am by some of what I'm seeing in the entrepreneurial and policy worlds these days.  But I sure hope we don't let the opportunity slip by yet again... . . . .

We've been digging even deeper into carbon trading topics lately, for obvious reasons (self-promotion alert).  And then I had the pleasure of participating on a "cap-and-trade vs. carbon tax" panel yesterday sponsored by the New England Clean Energy Council (and very well executed by Panel Intelligence).  So I thought it might be useful to put down a few thoughts on the subject. Conventional wisdom says that we should be expecting a cap-and-trade scheme sometime during Obama's first term in office.  We discussed this possibility in a post on Wednesday. In thinking about how such a scheme might impact U.S. cleantech startups and investors, it's important to look at the examples of existing trading markets:  EU ETS, US regional markets, and voluntary markets like the Chicago Climate Exchange (CCX).  The devil's of course in the details, but if a U.S. federal cap and trade system is enacted we can draw a few operational conclusions: 1.  Any system is likely to overtly encourage energy efficiency adoption, but with unknown effectiveness. There is general agreement around the concept that encouraging energy efficiency is a good thing, naturally, and we've heard discussions about "carve-outs" for energy efficiency as a source of offsets in a U.S. cap and trade scheme (see Karla Bell's great blog for good discussions on these and other related topics).  And even if it does, the administrative overhead associated with getting carbon credits validated and acknowledged as financial/ regulatory instruments can be quite costly, if not prohibitive.  At least the way it's done right now, concerns about "additionality" (ie: was the energy efficiency improvement really in addition to what would have been done under "business as usual") and the need to validate and verify actual carbon emissions reductions from a lot of small energy efficiency improvements is difficult even at the utility level. That's one of the reasons we like CarbonFlow, as they're developing scalable solutions to this challenge, so that energy efficiency gains can more easily and cheaply be accredited for trading. As it stands right now, cleantech startups would really have to partner up with bigger players (ie: utilities, or oil refiners) in order to gain any advantages to their value proposition as a result of a high-level cap and trade scheme.  That's somewhat daunting... 2.  Something's gotta give in the current carbon offset accreditation process. In a system like RGGI where it's basically just utilities trading emissions credits with utilities it's less important.  But in Europe, the inclusion of carbon offsets from overseas ( for the most part, the so-called Clean Development Mechanism, or CDM) has allowed for very economic emissions reductions and significantly reduced the negative economic impacts associated with limiting carbon emissions. So you want to include CDM-like elements into a U.S. system.  But then you're bumping up against a very labor-intensive, expensive, and time-intensive process to get such projects approved.  A typical landfill gas capture project in an emerging economy, for instance, might take 7 months and $100k in fees (mostly to consultants, etc.) to gain validation as a "credit" -- and only then can the project developer sell those credits. There's been an entire industry that has grown up around the creation and selling of these kinds of credits, whether into official systems like the EU ETS/ CDM, or just for voluntary markets.  Everything from growing trees to fuel-switching projects to growing plankton for deep ocean carbon sequestration is being planned with strong dependency, at some level, upon this value creation path.  I've seen numerous business plans where entrepreneurs are counting on gaining such credits as an important part of their future revenue streams.  But for this to be feasible, the bottlenecks and high transaction costs associated with accreditation have to be greatly alleviated.  That 7 months and $100k can be hard to make work for a number of these opportunities...  That's another reason we like CarbonFlow, because they're working directly with leading validators to come up with smart solutions to these challenges. 3.  In an ideal world, these carbon offsets become highly liquid, fungible commodities. If you're an energy trader, you love the concept of trading carbon offsets, because they become another way to play around geographic inefficiencies.  Think about it -- carbon is a global issue, not a local issue.  So a carbon offset from one place is the same as a carbon offset from another place.  But meanwhile, energy traders are used to working in a market where energy supplies are very geographically determined.  The interplay between, say, temporarily turning off a power plant in one place, getting carbon credits from that, and applying them toward turning on a peaker plant somewhere more capacity constrained, is just one example of how commodities traders might find a lot of arbitrage opportunities... if we can create a truly global carbon trading market. However, for this to happen, for offsets to be readily traded multiple times per day, we need to have a strong understanding of where each credit came from.  After all, it's not like other commodities -- it's the ABSENCE of a negative, so it's tough to prove the asset is real unless there's a lot of transparency around where it came from, how it was derived, how it's being verified, etc. And not all carbon offsets will be created equal.  To the consumer product company seeking "carbon neutrality" for marketing purposes, it might be worth paying more for a carbon offset created by protecting a wildlife preserve, than for a credit created by capturing previously released coolants at an obscure chemical plant somewhere unphotogenic. In all these cases, we need a lot more information about the credits, and this information needs to follow the credits around as they change hands over and over again.  Industry participants like New Energy Finance will typically project a "churn" per offset of around 4x (meaning that each credit will change hands an additional 3 times per year after its initial sale), but I suspect that would really be on the low end if we can figure out answers to all of these challenges. If we can figure out solutions and put in place a cap and trade system that encourages simplicity, transparency, and inclusiveness, then such a system could be very encouraging to the growth of the cleantech industry in the U.S. and elsewhere.  If we design it to be too onerous and limited, however, not only will we find the system to be costlier than hoped, we'll also not see much positive impact for young startups and small businesses where most of the jobs growth is typically seen. So get on it, Obama team! . . .