Viewing posts tagged "Investors"

Rob Day 01 20 10, 10:53 AM

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Major change in the cleantech VC industry… and over-experienced investors?

We're going to look back upon 2010 as a time of major change in the cleantech venture industry.

I haven't heard yet of many established specialized cleantech venture firms scaling back, but it will happen, starting this year.  Certainly there have been a few of the more fledgling efforts to create new specialist firms that have floundered due to the bad fundraising environment over the past 18 months.  And now we're seeing scale-backs at generalist firms (such as Atlas Venture, and Polaris which PE Hub is reporting is raising $500M for their sixth fund, versus $1B for their last one).  As generalists shrink their funds, some are doing more cleantech, but many are going "back to their core" in IT, etc. 

In the Boston area alone, I know of at least a half-dozen VCs who were doing cleantech when I moved out here, who are now either not doing new cleantech deals, or had to change firms, or are not even in the venture capital business at all anymore.  There have been a couple of additions to the community in the meantime, but not enough to make up for the exodus.

This means there are potential gaps in the marketplace (early stage cleantech venture capital in New England is starting to seem especially scarce, for example), but in this fundraising environment, not many new efforts are able to launch to fill in the gaps.

Meanwhile, as we've talked about here for a while now, lots of investors are continuing to re-evaluate the way the venture capital model has been applied to cleantech overall.  Some of this will result in new thinking and new approaches.  Some of which will work and some of which won't.

But overall, it just feels like a time of serious transition.

I'm at the Clean Tech Investor Summit on the west coast this week.  It'll be interesting to see how much my Boston-based perspective is reflected in the cleantech venture community out here...  If I can, I'll try to tweet a bit from the proceedings.

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And speaking of cleantech investors, here's a good interview with Chuck McDermott, one of my favorite guys in the business.

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And speaking of venture capital [total data wonk alert here, read on at severe risk of additional boredom], I saw an interesting article on PE Hub talking about one investor's study purporting to show that venture capitalists with less than 10 years' experience do better -- the implication being that there's a level of experience VCs may get to where they actually become WORSE investors. 

The article says that they examined nearly a thousand VCs' track records, and then looked at the 35 who had produced a "good track record".  Of those 35, the VC who did the study says, "more than half of them have been in the industry for 10 years or fewer".  I love numbers, so this caught my eye.

So first of all, if you look over the track records of 945 VCs and find only 35 with "good" track records... talk about an indictment of the industry. 

Secondly, what proportion of those 945 VCs had been in the industry less than 10 years?  If it's anything close to or more than 50%... have we really learned anything?

And finally, what about the fact that in the beginning of the last decade, a lot of VCs' track records followed the industry's overall collapse in IRRs?  Point being, there may be some underlying factors here having nothing to do with age or experience.

I'd love to see the actual study, obviously it looks interesting but I also have a lot of questions...

Rob Day 01 11 10, 10:39 AM

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The trickle-down effect

2010 may be looking up economically (although I'm personally feeling like we're headed for a double-dip, but let's stay optimistic), and yet 2010 may not be as happy a fundraising environment for cleantech startups as many would hope.

Why?  Because there's a lag between when venture firms raise their capital and when they can deploy it.  And 2009 was the worst year for VC fundraising since 1993, according to the NVCA (note: link opens pdf).

Only about half as many funds successfully raised money as we've seen in other years of the past decade.  And the dollar amounts dropped similarly.

VC funds are typically raised in a fairly consistent two to three year cycle.  So when you see a drop-off like this, it means a lot of firms pushed off fundraising until things picked up.  Which means there are a lot of firms that were due to raise funds in 2009 that instead decided to wait.

These firms will have to go out and raise new funds soon.  The cycle can only be pushed so far out for many funds, before their internal dynamics get squeezed.  Fund fees typically decline over time, meaning that the operating budget for the firm goes DOWN if they don't raise a new fund.  So unless they're going to start shedding staff, either the delaying firms will need to raise new funds in 2010, or the GPs will have to take pay cuts.  Probably a mix of all of the above...

The easing denominator effect for LPs and other LP dynamics probably means that GP fundraising will indeed be easier in 2010 than in 2009.  But even if all goes well (and I'm not saying it will), it'll still mean a lag time before those new funds get up and running.  Meanwhile, all these firms are running out the string on their last fund, and many are thus out of dry powder and unable to do many, if any, new deals (most will be reserving capital for follow-ons with existing portfolio companies, fortunately).

So what does this mean for entrepreneurs?  The trickle-down effect doesn't look good right now.  At least for the first part of the year, it will mean it's still very tough to raise outside capital.  Expect to see yet more insider rounds and bridges.  And expect to have to take a lot more meetings (the GPs will need to be seen as still being "in the game" so they'll still take meetings) before you land a funder.  Follow the money, and watch who's actually doing NEW deals (not just follow-ons into their existing portfolio companies), they'll be the best targets.

Rob Day 12 11 09, 11:28 AM

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First impressions on cleantech venture capital in Israel

I've spent the week in Israel -- my first time ever visiting the country -- as the guest of Israel Cleantech Ventures (I'm a bit biased toward these guys, I admit), visiting a bunch of cleantech startups and getting a first-hand view of the market.  And it's been fascinating.

Israel is among the most innovative countries, especially on a per capita basis.  Israel was recently ranked 4th in terms of scientific activity, and ICV claims to be tracking 800 cleantech venture investment opportunities here.  And all this activity is taking place in a country with only 7 million people -- just a bit more than the total population of Arizona.  As was recently written about elsewhere at GreenTech Media, cleantech innovation is particularly emphasized here as energy and water issues are very top of mind among Israelis. 

In terms of first impressions, I have been very impressed by the entrepreneurs I met this week.  Very strong technical teams, driven entrepreneurs, and a lot of pragmatism (which we all agree can be critical in the cleantech market) and emphasis on capital efficiency.  I met entrepreneurs working across a number of different sectors, from solar to wind to water to industrial processes.  I began to joke that no Israeli pitch deck needs to be more than one page -- each conversation basically was the CEO flipping to the first page, then verbally downloading the entire story of the startup for the next 45 minutes, and then flipping rapidly through the rest of the presentation over the last 15 minutes just to recap what was already said! 

But joking aside, it's also clear that there are a number of significant challenges to investing in Israel.  First of all, it is a tough to penetrate market for foreign investors.  The innovation and investment community really is that -- a community.  So many people either are friends or related or served in the same military unit, that as one person told me, "it really is an 'old boys network' here."  Coming in as an outsider and trying to jump into a couple of deals would be very tough.

Secondly, the innovation side of the equation may be strong, but with such a small country the market isn't sufficient to support venture-type startups by itself.  By necessity, VC-backed Israeli startups will almost always need to find significant export markets in order to grow to significant size.  The eventual acquirer of the startup is also likely to be overseas.  So Israeli entrepreneurs and investors have to be very outward-facing in order to succeed.

So my overall lesson is that Israel cleantech is an area that looks rich in investment opportunities.  But that it can't be effectively done alone either just by outsiders or just by Israelis.  Many other investors have clearly reached the same conclusion -- numerous US-based generalist VC firms have Israel-based offices to have people on the ground here, and ICV as a pretty unique sectoral specialist firm here has clearly made a practice of syndicating with external funds when appropriate, so that you see a lot of efforts by investors to do exactly what I'm suggesting:  Invest with on the ground presence but also with access to overseas markets. 

My many thanks to the team at Israel Cleantech Ventures for being such incredibly gracious hosts (a special thanks to Melanie Braunold!), it was a very productive week and a great introduction to the country's cleantech sector.

Rob Day 09 27 09, 8:38 PM

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A123: A deeper look

Many cleantech investors were cheered by the successful IPO of A123 this past week. 

I noted a very interesting column on PE Hub (sub req'd), by Lawrence Aragon, one of the finer private equity journalists out there.

(We need to caveat all this by acknowledging that it's unlikely much of the VCs' returns have been realized yet, there's typically a lock-up period.  So here's hoping the market valuation holds up.  Still, Lawrence's approach of using current valuations is still quite useful for our illustrative purposes...)

Lawrence takes a look at estimated investment totals and returns for major VCs in the company, and concludes that these investors didn't produce "a huge return", because the major holders only got like 4x or 5x.  But let's look at that a little deeper.  One thing that really struck me about Lawrence's column is that his assumption seems to be that these were all venture investments, and that therefore if you don't get a 10x you didn't get a "high voltage charge" for "venture investors". 

I would argue that much of the pre-IPO capital that was put into A123 wasn't "venture capital", at least in the sense Lawrence seems to mean it.  Let me illustrate what I mean:  If you have the chance to make 2x on an investment over 1 year, would you do it?  Sure, 100% IRRs are pretty sweet.  2x over 2 years, 3x over 3 years are all pretty attractive returns as well, on an IRR basis.  So when Lawrence points to 4x type returns to "venture investors", he seems to be assuming that these were long-term holders, but many weren't.  The Series D was in 2007, for example, and was at an approximate pre-money of $300M. Right now, that return looks pretty good on an IRR basis, even after an extra year's delay past the originally intended IPO date.  North Bridge, for example, was looking at a much higher multiple on their investment before they had to pump in an extra $10M as part of a May 2009 Series F, and while that very late round yielded a much smaller multiple, it was over just a few months, and probably looks great right now on an IRR basis.

So I don't think Lawrence crystalized the point he was trying to make.  However, I think the A123 experience illustrates a couple of important principles at work in cleantech investing today:

1.  I continue to have a hard time thinking about pre-IPO equity investments at pre-money valuations in the hundreds of millions as being "venture capital".  At very least, we need a new sub-category to describe this type of investing.  We have early stage investing, the Series As and Series Bs that are what most outsiders think of when they think of "venture capital" (if at all), typically aiming (read: "hoping") for a 10x return over 5-7 years.  Then you have "growth stage" venture capital, which is later-stage VC investing, aiming for a 5x in 3-5 years.  But as I noted back in that August 2008 post, much of the Series E (June '08, ~$100M raise, approx. $1B pre-money) appears to have been provided by first-time investors.  These investors weren't brought into the raise as "venture capitalists," I guarantee you.  Instead, it's probably best to think about that type of investment as a "mezz equity round".  In other words, the expectations were probably for a 2x in 1-2 years.  That's not necessarily better or worse investing than "venture capital" as Lawrence is referring to.  But it's certainly different.  It means a simple analysis of returns based on multiples is useless if all these types of investors are bundled together.

2.  Growth and even "equity mezz" financing isn't as low-risk as it's made out to be.  It's worth noting that those Series E investors are the ones who didn't make out so well.  Right now it's looking good as A123 trades almost 50% above its IPO price, so if that holds up through their holding periods they may still make out with a 1.5x return.  But the initial offering price appears to have been at just about the same post-money (around $1.1B) valuation of the Series E.  So a zero return at that price. And since my write-up last August after the Series E, apparently investors needed to pony up an additional $99M Series F round according to the updated S-1... and that was at a significant down round valuation (something like $9.20/sh vs. the Series E's $16/sh).

A lot of non-VC investors such as family offices and hedge funds have been brought into these kinds of mezz equity rounds in the past.  The pitch to those investors is, "hey, this company is going to IPO, and you're going to double your money over a year or so -- you can't lose!"  What we've learned about these kinds of rounds in thin-film solar, and now with A123, is that even at that late stage there's still plenty of risk of an exit not happening in the timeframe anticipated, or at a lower than hoped for valuation, or perhaps not at all. 

There's this theory out there that being a very late investor into cleantech is the way to go because the risk has been taken out of the equation.  Do the later investors into thin-film solar companies still feel that the risk of a timely and high-valuation exit was low?  Do the Series E investors in A123 feel like the risk was low in retrospect, after a year of holding their breath amid high cash burn and a down round and no exit window in sight? It worked out for A123.  But so far, for most of the large late-round investors in cleantech, the exits still haven't appeared. We all know early stage cleantech venture capital is risky.  But when I see it said/written/implied that we somehow can conclude with confidence that early stage cleantech VC doesn't make sense because it's "too risky, too long" whereas growth stage is the "smart way to do cleantech", I just shake my head.  And when anyone tells me I "can't lose" on a later-stage investment, I run away as fast as I can, because there's no such thing.

So basically, I look at the A123 IPO and am cheered.  I see it as being a sign of more good exits to come, in a sector that really needs them.  And I believe it shows us something about the shape of cleantech venture investing right now.

Rob Day 09 02 09, 9:43 AM

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Proving clean technology works

The headline-grabbing news this week is Khosla Venture's recent fund closings, of their $275M seed fund and $800M "main fund".  It's good to see more seed capital available in the sector -- as we've talked about here before, things have probably shifted too heavily toward late stage deals over the past few quarters, leaving a critical funding gap at the seed stage for cleantech startups.  And it's also good, I think, to see such seed efforts split out into a separate fund from later-stage efforts.  In many of the larger recent cleantech funds, seed and growth stage have been conflated within the same fund, which sets up some internal management challenges and also from an LP's perspective makes it tough to find specialized early stage focus.

In the NYT article about the closings, however, I was a bit surprised to see the suggestion that a few million dollars' worth of investment is all it takes for a cleantech startup to prove their technology to the point of being able to secure project financing.  Now note, I'm not going to pick on Vinod for that quote, because I would bet there were nuances to it that didn't pass through the journalist-editor translation.  But it brings up an important point to discuss, nonetheless.

There is in fact a huge capital gap for cleantech startups around early project finance.  In most cleantech startups that will actually be producing anything (as opposed to software-based cleantech startups), building out production or manufacturing capacity is capital-intensive by definition.  To build out a commercial-scale solar fab could require tens or even hundreds of millions of dollars.  Ditto for biofuel plants, for utility-scale solar generation facilities, and for battery manufacturing lines. 

The problem is, project finance is traditionally very risk-averse, and very intolerant of any new technology.  Project finance firms are very good at structuring deals to enable the build-out of large generation or manufacturing projects, as long as they're not taking any technology risk and as long as the construction timeframe and future revenues and costs are very well understood.  That's why project finance will take a much lower expected rate of return than venture capital, because it's correspondingly lower risk.

So what we've seen this decade in cleantech has been the inability of cleantech startups to raise project finance or high levels of leverage for their first or even second commercial-scale facilities.  Even after having "proven" the technology at a pilot plant scale, it's still too early for project financiers to feel they have a good understanding of the construction timeframes and costs for a first of a kind ("FOAK") commercial scale plant.  Also, in many cases the market acceptance is still not locked in, and furthermore the technology will likely not be proven out to nearly the level of confidence that the project financiers would want to see.  So they just don't touch such things.

Thus, for the past few years we've seen venture capitalists stepping in to fund the FOAKs out of necessity.  When you see a $100M+ solar round, for example, there's some working capital and growth equity in there, but the majority of it is going to fill the gap that project finance is unwilling to fund.  It's not really venture capital.  It's quasi- project finance. 

I'm not against this type of activity per se, it can still provide some attractive risk-adjusted returns when it's done creatively.  But it's tough to see how that type of activity can be expected to generate the kinds of absolute returns that VCs are telling their LPs they're targeting, unless there's an opportunity to push a very, very attractive near-term exit afterwords (and there are few such exits right now).  And so when it gets done out of the same venture fund, it's just important to note that it's a bit of a stretch on the definition of "venture capital" as traditionally used.  So be it, rules are made to be broken.

However, what we've seen very clearly over the past 12 months is that such financing will greatly dry up at times.  And a number of high-flying startups have been left high and dry by the pull-back of VCs from FOAK funding.  So it's strange to get the impression from the NYT article that it's fine for VCs to invest in early stage capital-intensive opportunities, because it won't take much capital for the henceforth "proven" technology to bring in project finance to support full-scale commercialization.  FOAKs remain a big gap, one that has already killed a number of promising cleantech startups that had taken in tens of millions of dollars just to get to that point.  What I'm guessing the quote was really intended to say was that non-traditional players like corporate partners, large family offices and government financing can help solve the FOAK challenge, and to an extent that's true.  But it's far from the slam-dunk prospect that comes across in the article.

With $275M to put to work, at around $2M per first-time check, that "seed" Khosla fund must be planning on doing some significant follow-ons (tough to see how they would be able to manage upwards of 100 investments).  And then with the additional $800M in the "main" fund, it's probably a safe bet that KV will have to put some money into FOAKs just like many other VCs have.  Investors may have been advocating for smaller funds focused on capital efficient opportunities.  But there's little evidence such advocacy has really taken hold in Silicon Valley.

Deals from the past week or so:

• WoodPellets.com has raised an $11M Series B, led by Monitor Clipper Partners, and including previous investor .406 Ventures.

• Think Global AS has emerged from bankruptcy and has taken in a capital infusion of around $47M, from investors including several strategics.  Ener1 has put in $18M as part of the financing, in exchange for getting exclusive rights to supply Think with lithium ion batteries, and along with converting $3M in debt is now the biggest shareholder in the company at 31%.

• Utility-scale solar startup Tuusso Energy has raised $2M led by Pivotal Investments, and including Akula Energy Ventures.

• Solar converter startup eIQ has unstealthed and announced $10M in financing from NGEN and Robert Bosch Venture Capital.

• CFX Battery Inc. has closed on $5M of a planned $26.9M round.

• PE Hub reported that li-ion battery startup Seeo has raised $8.6M of new financing, including return backer Khosla Ventures.

• Membrane-based separation startup BPT has taken in a $12M Series B, co-led by US Venture Partners and Pitango Venture Capital, and including existing investors Aurum Ventures and Elron Electric Industries.

• ClearEdge Power, which is developing fuel cell systems for residential applications, has raised a $15M round of financing.

Other news and notes:  Another nobel laureate has come out as a pessimist on fuel cells -- at least "present" ones...  Here's a good list of the recipients of the recently-announced ARRA battery and EV awards...  Finally, if you're going to be in Boston on October 27th, check out the cleantech networking session being organized by PE Hub, featuring five insightful panelists (oh, and yours truly as well).

Rob Day 03 29 09, 3:04 AM

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Are cleantech VCs finally starting to get active again?

I spent a couple of busy days in Washington, DC this week, meeting with old colleagues and making some new connections.  (And I drove all 1,000 round-trip miles instead of taking the train, how do you like me now, Xconomy!)  One thing that was impressively clear in DC is how front-and-center energy technology is among staffers on the Hill.  A lot of very important things being worked on there right now, and minds seem to be pretty focused.  Great to see.  Unfortunately, it’s also clear that the entire cleantech venture and startup community is gearing up to bombard the Hill and the DOE with funding requests...

Meanwhile, outside of the Beltway, it’s starting to feel like maybe some cleantech VCs are starting to get back in the game.  It’s just anecdotal, but I see my colleagues in the industry getting more serious about doing deals, after a hiatus of a few months.

For a while there, even VCs with capital left in their funds were sitting on the sidelines.  The limited partner community just wasn’t making commitments to funds.  So VCs were forced to consider that it might be a long time before they could raise additional capital.  And thus, even if they still had capital left in their existing funds, they needed to hoard their resources and a) make sure they had enough in reserve to fully back their existing investments; and b) make sure that they stretched out their remaining new deals, so doing fewer deals over the course of 2009 than they had originally anticipated.

Of course, many funds are still in this situation, so it’s not like dealflow is coming rushing back.  It’s still a very difficult time for VCs to raise capital from limited partners, and thus it’s still a very difficult time for startups to raise capital from VCs.  But I do see some faint stirrings of life out there.

Naturally, however, that won’t be reflected in recent deal announcements, since there’s a significant lag between VC interest and then deals and then the eventual press releases…  So here are the few announced deals from the past week:

• Lightscape Materials, an LED phosphor spinout from Sarnoff Corp., has raised a $3mm Series A from Wisepower Co. LTD and Foosung HDS Co. LTD.

• Nordic Windpower has raised $3.5mm in convertible notes from new investors I2BF Venture Capital and Pulsar Energy Capital, alongside existing investors Goldman Sachs and Impax Asset Management.

• New Leaf Paper, offering “environmentally responsible papers”, has taken in a $5mm round of financing led by Pacific Community Ventures.

• Cleantech investors in the news:  Redpoint Ventures has added a cleantech CTO, Dr. Nety Krishna…  and Robeco is teaming up with China’s TEDA International to launch a new sustainable private equity fund.

Other news and notes:  REBN continues to grow, with another great REBN-MidAtlantic event in Philly, and a new chapter being launched in North Carolina...  If you’re reading the NYT Mag article on Freeman Dyson today, here’s Hansen’s reply...  A good catch-up on cleantech in the Pacific Northwest…  Here’s a cogent critique of efforts to focus on breakthrough R&D efforts in energytech instead of driving adoption of already-commercialized energy efficiency technologies…  You heard it here last—Al Gore is planning a new book timed to impact the upcoming climate legislation debate in Washington…  Finally, the Conspicuous Consumption Award has to go to this vacuum, which nature must certainly abhor—if you can afford to buy it, I’m guessing you’re not using it yourself.