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.

 

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.

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.

 

 

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).

 

 

 

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.

Even in this economy, cleantech deals keep happening.  We're way behind on mentioning them here, so here's a catch-up of sorts:

• Microbial fuel cell startup Emefcy raised a Series A round of financing.

• ChapDrive AS, a Norwegian wind turbine transmission startup, has raised an EUR 6mm round of financing.  Existing investors NorthZone Ventures, Hafslund Venture and Energy Capital Management, and new investors StatoilHydro and Innovation Norway provided the funding.

• Lithium ion battery developer Nexeon raised a GBP 10mm round of financing led by Invesco, and including return investors PUK Ventures and Imperial.

• Wind project developer Invenergy took in a $30mm convertible note from Leaf Clean Energy.

• Oasys Water took in a $10mm Series A, co-led by Flagship and ATV, and including DFJ.  The company was formed with seed investment from GreatPoint Ventures.

• Triton Format AG, a Germany-based water tech play, raised an EUR 10mm round of financing led by zouk ventures, and including Meidlinger Partners.

• VentureWire reported that Bloom Energy is raising a $150mm Series F round of financing, with an asked-for valuation of $1.45B.

• Italian fuel cell manufacturer Electro Power has raised a GBP 4.7mm round of financing led by a private investor and existing investor 360° Capital Partners.

• Intel Capital invested an undisclosed amount into Pulse Technologies FZ-LLC, a UAE-based developer of home and hotel room automation software and systems.

• Green building startup Soladigm took in $10.6 in debt and convertible notes from Khosla Ventures and Sigma, reported VentureWire.

• China-based Astronergy raised $50mm from two Chinese private equity investors.

• Smart window manufacturer SAGE Electrochromics raised a $20mm insider Series C (note: link opens pdf) led by Good Energies, and including Applied Ventures, NV Bekaert SA and Bekaert Corporation.

• Advantage Capital Partners has invested $5.85mm in Environmental Operations Inc.

• Access Venture Partners has invested an undisclosed amount of capital into LED developer TerraLux.

• VentureWire reported that Fisker Automotive has added $3mm to their $65mm Series C.  Meanwhile that money has gone right out the door as they also reported Fisker invested as part of a $4mm round into Advanced Lithium Power, Inc.

• India's Acme Group has invested $30mm into eSolar in exchange for a 5% ownership stake and exclusive rights to deploy the technology in India.

• VWire reported that Smith Electric Vehicles took in $10mm in undisclosed financing earlier this year, as part of the company's formation.

• Green data center startup SynapSense added $7mm to their 2007 Series B round, with the funds provided by Robert Bosch.

• Craton Equity Partners invested an undisclosed amount of capital in GridPoint.  And also committed $10mm to Principle Energy Limited, a sub-saharan Africa biofuels project developer.

• Shell has reinvested in Codexis -- VentureBeat reports the amount was roughly the same as their previous $30mm 2007 investment.

• NorSun raised a $72.3mm round of venture financing and a $94mm bank loan.  Good Energies led the equity round, and were joined by Scatec AS and Norsk Hydro ASA.

• Think, the electric vehicle company, went bankrupt, reports VentureWire, and now its U.S. operation has been restructured to be a 100% subsidiary of Think AS, the Norwegian parent.  As part of the restructuring, Kleiner Perkins now has a direct stake in Think AS and RockPort has increased their stake in the parent as well.  The company is reportedly seeking a $40mm new equity infusion.

Cleantech investors and other luminaries in the news:

• Last month, VentureWire reported that CalPERS is considering a $200mm commitment to Khosla's new $1B targeted expansion-stage fund.  The article also pointed out a few other firms out there raising $1B+ sized later stage funds, including Riverstone Holdings, Clean Energy Partners, and C Change Investments.

• VWire also reported that Macquarie is in the process of raising a $400mm cleantech fund-of-funds.

• Element Ventures announced the final close of their new cleantech fund at $486mm.

• Index Ventures closed on a $438.8mm new fund, with cleantech as one stated area of interest.

• Here's a good thought piece from Paul Dickerson, the previous COO of the DOE's Energy Efficiency and Renewable Energy program.  And here's a good example of what Paul is referring to.

• Khosla Ventures has added Pierre Lamond, formerly of Sequoia...  And Braemar has added Scott DePasquale, formerly of GE...  Also, my @Ventures colleague Matt Horton has taken on an interim role as CEO at Propel Fuels [mandatory self-promotion alert, naturally].

Other news and notes:  Here in Boston, what sounds like a terrific group has been launched -- New England Women in Energy and the Environment (NEWIEE)...  Meanwhile, on the policy front, without getting into the pros and cons of it, it's worth pointing out the cleantech implications of an emerging debate on patent reform, as illustrated by this column [3/16 update: changed link]...  Also, here's another good article looking at the implications from the mention of cap and trade in Obama's budget...  China's cleantech sector took in $1.3B in venture capital and private equity last year, 120% up from 2007, according to one survey...  Xconomy's been running through a list of cleantech companies in selected regions, such as this list of Oregon players...  Martin LaMonica searches for the Google of cleantech...  Clean Edge released their latest annual clean energy market report, and while 2008 was a record year, they suggest 2009 won't be so rosy...  In Britain, the BVCA has set up an energy, environment and technology group...  Finally, "Show of hands," everyone!

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.