Quick reminder:  If you've been missing the dealflow notices that used to appear on this column, they've moved over to Twitter so they can be timelier (and a lot less work).

Anyways, many thanks to all the readers who participated in this year's CI Reader Prediction Survey.  We got lots of good responses, and there's a lot of agreement out there about the coming year, surprisingly to me.

In terms of survey participants, it appears to have been a good mix of entrepreneurs, investors, corporate managers, and service providers, with a smattering of researchers, government/NGO types, and others thrown in.  Lots of entrepreneurs and investors.  Geographically, more than 80% of participating readers are in North America, but Europe, Asia and the Middle East also had a presence (I'm very, very disappointed in you, Australia).

So what do readers predict?

1.  In terms of North American cleantech venture deals, Q1 through Q3 2010, readers expect it to be a moderately good year.  Two-thirds of readers expect that the number of venture deals will grow, but by less than 50%, compared to 2009's same period.  Over 25% expect the number of deals to remain about the same.  Less than 5% thought the number of deals would drop, and less than 5% thought the growth would be more than 50%.

2.  In North American cleantech venture dollars, same period, it was about the same picture.  7% thought the dollars would actually drop, 24% thought they would be about the same, 62% thought they would grow but by less than 50% year on year, and 7% thought they would grow by more than 50%.

3.  There was a bit of a more bullish take on global clean energy private equity (which is mostly in project finance).  4% thought the global dollars going into these projects would fall, 21% thought they would be about the same, 49% thought they would grow but by less than a third.  And interestingly, more than a quarter of readers thought they would grow by more than that. 

4.  I asked that, if 2008 was the "year of solar" and 2009 was the "year of the car" in cleantech, what would 2010 be known as?  Readers pointed to a lot of favorites, but by far the top two vote earners were a) Green buildings and building energy efficiency; and b) Smart grid.  Both got votes from more than 40% of participating readers.  People are really down on solar -- it only beat out wave power and agriculture, with votes from 3% of participating readers.

5.  Readers showed a bit more optimism in terms of U.S. cap and trade legislation getting passed than I'm feeling at the moment.  Asked whether we would see enactment of "meaningful" (purposefully vague phrasing, btw) climate change legislation in 2010, 40% of participating readers said yes!  Of course, that means 60% said no...

Here are some of the tips and thoughts readers wanted to share with other readers:

"Stay the course, markets will rebound and investors will start investing again."

"Come to Europe"

"Why haven't we initiated intense policies mandating a reduction in emissions? Adapt or fall to ruin. Businesses have to learn."

"The US gov't continues to derail real momentum in the renewable space. $3.8B to GMAC? Let 'em die and put that money into all of the above; repurpose the workers into something that matters. No action at Copenhagen? Disgraceful."

"Solyndra and possibly Codexis IPOs are likely to be canaries in the coal mine - but tough to see how the canaries make it out alive..."

"I have been and continue to be amazed by the lack of "energy awareness" on the part of normally intelligent Americans. This is a fundamental problem and HAS TO change."

"A more diverse range of investor funds is needed in cleantech (as opposed to one-size fits all structures); as soon as we see an inflow of money we'll see innovations in investment strategies. I think 2010 will see meaningful evolution towards investment vehicles that better match cleantech investment opportunities."

"Investors will lick their wounds from 2008-9 biofuel and solar investment catastrophes, but continue doing deals in cleantech. My magic 8 ball is telling me that entrepreneurs will respond to the challenging investment environment by focusing on building more capital efficient cleantech businesses. I like the software enabled efficiency businesses (green computing, building monitoring & controls, logistics, and industrial logistics sectors) and capital efficient execution companies that wrap up (near) market-ready technologies in new and exciting business models (building and lighting efficiency, transportation, and finance models of these plays)."

And my personal favorite:  "Pyrolysis will explode!"  Not literally, I hope...

We'll check back in at the end of 2010, one way or another, and see how everyone did.  Thanks to all who participated!

 

Don't forget:  Take the 2010 Cleantech Investor readers' survey.  I'm going to close it over the next day or so, we've plenty of good responses to work with, but the more the merrier.

In case you missed it, among all the other VC predictions for 2010, Peter Hebert of Lux Capital posted a really compelling set on PE Hub (note: link may disappear behind the sub-only wall soon).

I enjoyed all his points, but agreed with some more than others, so in the spirit of dialogue I thought I'd post some of my own thoughts on them:

1.  Venture-backed IPOs rebound smartly, with 50%+ first day price jumps on name brand offerings from Facebook, LinkedIn or Zynga. Among the S-1 clutter, another big beneficiary will be IPOs from smaller, little-known, and speculative-grade companies that also make it out. The visceral response to many IPO filings: Who?

In the cleantech sector, a lot of attention is being focused on Solyndra's IPO.  But in many ways that company is a pretty big exception in comparison to the rest of the sector.  I'm interested to see what other cleantech IPOs make it out this year, and how they do, because they'll tell me a lot more about the potential exit paths for typical cleantech venture investments.

2.  At least one famed VC partnership fractures or sees an orderly wind-down, with insider gossip eventually leaking out. The changing of the venture guard moves full steam ahead, as weak fund performance from the lost decade finally forces LPs to question historic allocations to “franchise funds”.

I do think this is going to happen sooner or later. 

The worst thing anyone ever did for the LP community was to do that famous backward-looking study showing that 1st quartile funds have tended to stay 1st quartile funds.  It was surely an accurate study.  But that study has subsequently skewed LP behavior and thus skewed GP behavior, so that 1st quartile funds are expanding in ways that force them to change what made them so successful in the first place.  Some will pull it off.  Some will just get lucky.  And some won't pull it off.  But this myth that some LPs believe, that the only way to make money in venture capital is to back high-profile top tier funds, will slowly get broken down.

But not this year.  Peter's 2010 prediction might come true if there was more transparency and accountability in the venture community, but even if LP managers were more willing to risk their career on up-and-coming GPs instead of big-name GPs, there still would be the problem that VC manager performance is really difficult to assess and takes years to play out.  Over time, I think Peter will be right.  But it'll be slower shift than he implies.

3.  A large, non-traditional investor enters the venture fray, boasting a very long fund duration (~20 years) vehicle focused on science and technology. Commence discussion on whether the traditional 10-year fund life makes structural sense for early-stage life sciences and energy investments.

There's a lot of merit to this concept.  But what kind of non-traditional investor, besides the family offices that have been doing some of this already, or a large private equity or sovereign fund with little early stage venture experience? 

And if it's a returns-oriented investor, what does such a long timeframe do to IRRs?  What's described here is, at least at first blush, a recipe for higher risk and lower IRRs (because of the holding period).  Not sure we'll see someone jump to do that on more than a token basis, or possibly as a one-off fund done by a traditional VC for marketing purposes as much as anything...

Cynicism aside, I do think there's a kernel of something important in Peter's point, and given more space to write about it I'm sure he'd fill out more of the details he's got in mind, but the devil will be in those details.  A new structure would need to be developed so that capital outlays were kept very low for the 1st half of the fund, and also not have burdensome fees (ie: low cost or subsidized staffing), yet still bring a lot of resources to bear in helping these companies.  I know institutional investors who are noodling on this, but I haven't heard any concrete answers yet.

4.  Stealthy cleantech companies unveil. After years of intrigue and speculation, not to mention tens to several hundred million dollars invested, several energy technology companies finally lift the curtain and introduce themselves to the world. Will the emperor be wearing clothes?

Yep, will be a fun year...

5.  Spike in biotech M&A. December 2009 served as an excellent indicator of what’s to come, with more than $1 billion returned to venture funds through the acquisitions of Acclarent, Calixa and Gloucester. Expect this month’s JP Morgan healthcare conference to play host to the industry’s ultimate speed dating session.

I think there will be a spike in cleantech M&A as well.  If the economy continues to track upward, even if not dramatically so, big buyers will start looking for bargain opportunities -- and after such a rough patch for startups, there will be some of those available.  Also, some big players will look to acquire smaller startups that have gotten inside tracks on major government dollars. 

6.  Semiconductors regain luster. After years spent languishing as pond scum in the VC pool, the public market chip rebound finally extends to its capital-starved, private brethren. Expect several IPOs and profitable M&A for some of the largest revenue generators.

This is potentially true for all the highly capacity-driven cyclical tech sectors.  Of which there are several in cleantech, naturally.

7.  Solar failures litter VC landscape. Schumpeter’s gale of creative destruction blows through the 250+ private solar companies. A handful of heavily-funded solar PV and CPV companies flame out, while sector leaders like First Solar consolidate their market position.

I could be wrong, but while I do expect a bit of a solar shakeout, I don't expect it to be so dramatic. 

It's tougher than you may think for someone like First Solar to grab smaller companies' techs and successfully integrate them into their products, so the idea that one of these companies will go on a big horizontal integration spree is intriguing but tough to pull off, unless what the acquirer pays for isn't technology but is instead advanced sales bookings, etc.  However, vertical integration is something we'll likely see more and more of. 

And certainly a bunch of solar companies will go splat.  Some will be the ones that had a smallish tweak as their core innovation and have been spending money like they wanted to be a standalone competitor to First Solar or SunPower.  Some will be the ones that just got too far out ahead of their skis, were spending money expecting an IPO in 2009, and then the economy came to a screaming halt, and so they're in trouble but they just haven't completely wiped out quite yet. 

But while I think there will be some high-profile examples of both types of flameouts in the solar sector, and while I do think sooner or later VCs have to pull back from putting so much capital into this space, I think plenty of those 250+ private companies will be around in 2011.  I know too many sober entrepreneurs in the sector who now understand the need to be capital efficient, are focusing on their core innovations, and are planning for a few lean years.  That doesn't bode well for future gargantuan exits for their investors, because these companies will end up being smaller and more interchangeable than their VCs had hoped.  But it doesn't mean 2010 will see a huge wave of "solar failures".  That would require a regulatory retrenchment ala the early 1980s, and instead the opposite trend seems to be taking place.

So on this one, Peter and I are in agreement at a high level, but I would differ in tone.

8.  Energy investors swap wind and solar for abundant natural gas and carbon-free nuclear. Looking to replace a large swath of coal-fired power for base-load electricity generation? Natural gas and nuclear are not just attractive base-load alternatives—they are the only options.

Wind is already scaling up so quickly that many regional grid operators can't handle it.  So discounting wind in this way is overly simplistic.  The problem with wind power isn't cost or ability to build out generation capacity rapidly.  The problem is that there's no way to store the power, so when the wind blows, in some places like Texas and the Midwest grid operators are forced to literally shut down power production.  But I've seen good efforts to address this.

I do agree that natural gas is a seriously overlooked option if you're looking for large-scale, rapid shifts in the powergen (and transportation) mix.  But nuclear capacity won't be fast to develop, no way.  So I think Peter misses the mark a bit here.  But his focus on economics and scalability are quite well taken.

9.  Russian oligarchs and other foreign investors snap up late-stage U.S. tech. DST’s investments in Facebook and Zynga serve as a role model. Let’s hope they encounter more success than the sovereign funds that purchased big stakes in U.S. investment banks.

There are certainly plenty of candidates for this type of investment within the cleantech sectors.  Big checkwriters with less valuation focus could be poised to make a big direct-investment splash in the solar and battery and smart grid sectors in particular.  But see below.

10.  Return of the VC mystique. A counter-intuitive prediction, but one that reflects the above assumptions and data points. A select few IPO grand slams create massive returns and fanfare, sparking a resurgence of interest in the asset class. LPs actually begin to talk about new opportunities in venture capital

I think VC has to be poised for a bit of a temporary uptick as an asset class, everyone is so beaten down right now and VC performance tends to track the economy roughly speaking.  2010 will be better than 2009 for VC fundraising, perhaps significantly. 

But beyond 2010, the sector will continue to contract, there are still way too many managers and way too many dollars in the overall category.  And as far as "mystique" goes, I think that will really continue to be depleted over time. 

Some of the biggest names out there in the venture world have started to risk their brands.  Some are letting bankers use the VC's reputation to push non-institutional investors to do high-priced follow-on rounds into struggling startups, when institutional investors have already passed on the deals (so... what do those institutional investors know that the individual investors don't?).  Some venture firms continue to risk their "mystique" by using their brand to attract LPs into ever-bigger funds and extensions into categories and asset classes where the GPs have little investment experience and will be learning on the fly, which is not a recipe for consistently top-tier results.  And when these top firms risk their brand, that risks the "VC mystique" overall.

I'm a huge fan of the venture capital industry and its role, and am continually humbled by the brains and effort and pattern recognition many VCs show, both the well-recognized and the relatively unheralded investors alike.  These are smart people doing some inspired work.  But I do think the VC mystique is more at risk right now, than poised for a comeback. 

Regardless, kudos to Peter on a really thought-provoking set of predictions!

------------------

Administrative note:  Miss the cleantech venture deal roundups that used to be a staple of this column?  Well, they've migrated over to Twitter, where it's a lot easier to get others to do the work for me.  If you're interested, follow the cleantechvc feed.

About this time last year, I put together a few predictions and readers chimed in with theirs.  How did we all do?

 

Question 1:  How far will U.S. cleantech venture dollars drop from 1H08 to 1H09? 

I wrote it could be as high as 40%.  I argued that what was going to go completely missing were the mega-deals, and that on a dollar basis at least those made up a significant chunk, around 40% of quarterly tallies. Readers voted for a drop, but totaling less than a third on a dollar basis.

Well, according to the Cleantech Group's tallies, in 1H08 the total North American disclosed venture capital tally was $2.9B, and for 1H09 it was down around $1.6B.  Which is a 45% drop... 

 

Question 2:  How much, if at all, will the # of U.S. cleantech venture deals drop, 1H08 to 1H09? 

My argument was that the number of deals would probably drop, but by a lot less than the dollar amounts, as investors still did follow-on rounds but backed mostly away from the mega-deals.  I pegged the drop in the number of U.S. deals at around 20%.  Whereas CI readers tended to believe in a drop in the number of deals, but by less than 20%. 

In 1H08, the Cleantech Group counted 136 total North American venture deals.  In 1H09, the total was 139.  So the number of deals was indeed pretty flat!  But obviously the average size per round went way down.

Interestingly, it wasn't because of any significant shift in stage preference, i.e., investors didn't shift back to earlier stage in any significant way.  In 1H08 seed and first round were 32% of the North American total number of rounds, and in 1H09 they were 31%.  Investors still dramatically favored later stage deals.  They just weren't putting so much into them.  In fact, the mean size (sorry, I don't have median readily available) of disclosed "Follow-On" rounds in this data set dropped from $31.1M to $16.5M.

 

Question 3:  How much will cleantech dollars into China rise, 1H08 to 1H09?

I suggested they could rise 25%.  CI readers agreed with a rise, but were split as to whether it would be more or less than 25%.

We've got a bit of a data availability issue, as CG only started tracking China deals in 2Q08, and so we're missing 1Q08 data.  However, it's enough to show that the dollar amounts did in fact drop -- 2Q08 alone saw $257M, but 1H09's tally was only $170M.

 

Question 4:  What will be the "hot" sector in 1H09?

Of course, such an undefined question is tough to answer, but CI readers pointed most to energy efficiency and solar as the two most likely categories.  I'd said that solar was going to have to see a retrenchment, and that energy efficiency seemed most poised for growth.

Since the CG's sectoral definitions don't overlap well with my own (they bundle in biofuels and batteries together under the "Transportation" tag, for instance), it's a bit tough to make a definitive statement about how accurate everyone was in their predictions.  However, it is notable that solar dropped from being around 35-40% of venture dollars as it had been throughout 2008, down to a low of 13% share in 2Q09 (before rebounding back up to a 28% share in 3Q09).

Meanwhile, that amorphous "Transportation" category grew to rival the solar sector in terms of share of venture dollars.  So I suppose that means it's a likely candidate for "hot sector", although drilling down into it we see a healthy mix in there of everything from EVs and hybrids to batteries to biofuels.  Still, if 2008 was the year of solar, perhaps 2009 was the year of cars.

 

In another post, we'll have to do another prediction survey.  This was a pretty useful exercise.

As we near the end of the year, it's time to take stock of 2009 and look ahead to 2010.  We'll look back at the past year and what we learned in another post, but for what it's worth (and remember what you're paying to read this, and value accordingly) here are five predictions for the coming year in cleantech investing:

 

1.  In terms of U.S. climate change legislation, something will be passed, but it will be more symbolic than impactful

The health care reform kerfuffle has demonstrated that it won't be easy for the Democrats to pass major legislation through the Senate without it being majorly watered down if it happens at all.  For something like climate change legislation in particular, it's difficult to see how Senators from major coal-producing and coal-consuming states will be able to support anything that would significantly impact the coal-fired generation industry.  One thing the Obama Administration had been hoping for was that Copenhagen would have produced a mandate for pushing through significant climate legislation, but as it now becomes clear that China blocked any significant deal from happening, this will add even more momentum to those who don't want the U.S. to enact climate legislation without China doing the same.  It's politically important to too many people to think that there will be nothing done at all.  But I don't see how any climate legislation that's passed will have any significant impact anytime soon.  Perhaps a cap and trade scheme to establish a future framework, but with caps that are either overtly or de facto (ie: via exceptions) very loose.

On the other hand, I predict that there will be significant additional subsidies for clean energy technology as part of new energy legislation.  Politicians may shy away from climate legislation, but many will love to deliver "green jobs" (and blunt any criticism about the weakness of any climate bill) via incentives for cleantech innovation, manufacturing, and implementation.  And these incentives WILL have an impact on the industry. 

 

2.  2010:  The year of energy efficiency

Certainly a lot of the aforementioned incentives will be directed to clean power generation and fuels, but I'm betting that energy efficiency will get a lot of support as well.  Energy efficiency implementation is a particularly useful target for politicians because of its high jobs-growth impact, and because it can be tangible for many voters.  Providing incentives to establish a new solar fab can provide a few jobs and a photo op.  Providing incentives to help homeowners reduce their energy bills can provide many more jobs, and impact voters' wallets.  And the bloom is starting to come off the rose for clean power generation in any case.

Even without any new incentives being put in place, the programs that were established in 2009, and that look to be established in 2010, will have significant impact on energy efficiency adoption.  Utilities and cities and states are now pushing energy efficiency more than ever before.  Plus, I'm seeing lots of financing options come about to help defray the upfront costs that have hindered building energy efficiency adoption in the past. There's just never been a more lucrative time to weatherize a home, or to do a lighting retrofit in an office building or warehouse, or to upgrade an HVAC system.  The economy doesn't look like it's going to pick up quickly, so capex budgets will still be low, but with the incentives and financing options available, many homeowners and building owners will see the opportunity to do energy efficiency retrofits that result in relatively short-term paybacks and ongoing cost savings.

For venture capital investors, this will present a dilemma.  As we've talked about on this site, energy efficiency doesn't fit the mold that the traditional VC investing model looks for, but it's too attractive of a market to completely ignore.  Many VCs will look for IT-based ways to try to play the wave: Home energy monitoring, LED-based lighting, etc. are already popular sectors and will become more so.  But I think VCs will be left out of most of the emerging wave of energy efficiency adoption, because it will be mostly service-based, and tapping into the biggest pools of incentives will require working with utilities and governments.  Non-VC investors may be the most critical source of capital for energy efficiency.  And I also expect a fair amount of mid-market private equity activity in the sector as well.

 

3.  A pickup in investing activity, including the return of the megadeals

Remember 18 months ago, when it wasn't unusual to see "venture capital" financings larger than $100M going into already heavily-capitalized pre-revenue startups?  Well, some of that is going to be coming back.  I already know of two such deals in advanced stages that could close as early as Q1. Such megadeals will make the dollar tallies for cleantech venture capital appear to jump back up to moderately high levels.

But even beyond the dollar totals, I do get the sense from my investor colleagues that the number of deals will be picking up a bit in 2010.  I see some hiring going on once again, I see some renewed investor interest in generating active dealflow, and a lot of existing companies are going to be going out for new financings next year after having waited out what they hope is the worst of the recession. VC surveys indicate that investors expect to be doing a bit more deals, and that cleantech is the sector most poised to see them.

On the other hand, let's not get too excited, things won't go from zero to crazy.  There are still a lot of investors taking meetings with entrepreneurs but not really having capital to deploy.  For all but a few venture firms, it remains really hard to raise capital for a new fund.  And without those new funds, either from existing firms or the new ones that were popping up all the time a couple of years back, deal volumes will remain fairly flat.

 

4.  New hybrid investment models will emerge

We've spent a lot of time on this site discussing the various ways that the traditional venture capital model does and does not fit with cleantech.  And we've also discussed a number of the resultant capital gaps, at the seed and first-project stages in particular.  In 2010, I think we will see the emergence of efforts to address these gaps in ways that attempt to mesh existing investment models into new methodologies.

To be clear, there will still be plenty of cleantech venture capital.  And there are many parts of the cleantech market that are indeed a good fit for the traditional venture capital model.  But I've had a number of conversation in 2009 with investors who believe a) that the traditional venture capital model is broken; and b) that the traditional venture capital and project finance models are either being wrongly applied to major parts of the cleantech market or are leaving major investment opportunities untouched.

It's too tough to introduce a radically new investment model in a funding environment like this.  LPs are not adventuresome at the best of times.  And these aren't the best of times.  So going to LPs with a radical new idea probably won't go over so well right now.  However, going to LPs with an experienced investment team and showing a "new investment model" that's not a radical change but is instead an amalgam of two well-understood investment models may go over well. 

I've seen a few such efforts so far, but few from big-name investment firms.  But as the big-name firms need to go out for new funds in 2010 (many of them having delayed through 2009), we'll start to see more rhetoric, and perhaps some actual implementation, around such new approaches.

 

5.  Some booms and some busts

IPOs are now lining up to go out.  My guess is that the stock markets will see a lot of volatility in 2010, so I don't know if there will be enough of a window to allow many big cleantech IPOs.  But certainly some observers are expecting it.  If even a handful of visible cleantech IPOs can take place and do well, it will do wonders for the sector overall.  I do worry, however, about the impact of pulled IPOs and IPOs that flop.  And there could certainly be some of those.

Meanwhile, the quiet shakeout of cleantech startups will continue.  It doesn't get reported on very much, but a bunch of cleantech startups wound down, or were sold off for scraps, in 2009.  And I expect that to continue.  We will likely see at least one high-profile cleantech startup very visibly flame out, in the type of episode that will garner a lot of industry media attention.  But for every one of those, there will be many more startups that end not with a bang, but with a whimper.  Government incentives are coming too slowly to help many companies, and investors' pursestrings remain very tight, so it'll be tough for startups that don't have good momentum already and that are burning significant cash to make it through the year. 

It'll mean that keeping cash burn low will be an imperative for cleantech startups.  And it also means that if your startup is going to need additional capital at any point in 2010, start those conversations immediately and cast a wide net.  Especially since there's a chance of another economic disruption at some point, you don't want to be caught needing capital and having only a short amount of time in which to bring it in.

 

Overall, I think 2010 will be a bit happier than 2009 for the cleantech sector.  But it'll be slow going at best.  And it appears there's a good chance the overall economy has another hiccup at some point.  So in 2010, by all means aim high.  But make sure to plan conservatively as well.

 

You may or may not have heard of the World Resources Institute before, but for anyone interested in environmental data, green business best practices, and policy analysis, it's a hugely valuable institution. Of course, I'm a bit biased, having had the privilege of starting my career there.  But I was reminded again of the value of WRI's work at a breakfast meeting here in Boston yesterday, where Jonathan Lash -- WRI's President -- gave a terrific presentation covering the top environmental stories to watch in 2009.  You can read and see some of the presentation here. A few points from the talk really stuck out for me: 1.  Climate change effects are being seen and felt even more rapidly than had been expected, emissions are growing faster than expected, and temperature changes are accelerating.  Taken together, these trends reaffirm that the situation is much more alarming than most public debate and news reporting would have us believe.  Jonathan pointed out that the significant effects already being felt are all the result of only 0.8 degrees C in temperature increase so far -- and even if we perform herculean efforts and achieve all our most aggressive goals for addressing climate change, expectations are that temperatures will rise another 3x or so before leveling off.  That's a best case.  And it's frightening enough by itself.  There's a reckoning coming, in other words, and our choices are about how best to manage it -- will we suffer a "climate crash", or do can we mobilize and do our best to contain the damage?  Remember this basic fact, when the Senate starts debating climate change legislation, and the inevitable horse-trading and watering-down start happening... 2.  Speaking of that, we've talked a bit here about some likely scenarios for climate change legislation in the Senate (and Jonathan mentioned that in the House, Waxman has promised to get legislation out of his committee by Memorial Day), and the importance of this being a "purple" legislation, to try to get to 60 votes.  I think it'll be important to provide carve-outs for emissions offsets from energy efficiency and international imports (ala Clean Development Mechanism projects under the Kyoto process), to try to get some of the southern senators on board...  But Jonathan points out that there is a "Gang of 16" Democratic senators who also have expressed reservations about climate change legislation (and they tend to come from the states where coal-based electricity dominates the supply mix).  Winning them over will also require some creative bargaining as well, likely around funding for "Clean Coal" for example.  Getting to 60 on any kind of aggressive climate change regulation is therefore a daunting task.  In my opinion, entrepreneurs and investors should hope for the best, but plan for a likely weak outcome... 3.  The stimulus bill had a number of great programs in it, from a cleantech and green jobs perspective.  One thing to note, however, is that while the DOE was given something like $40B to spend, it'll be an organizational challenge for the Department to get that disbursed productively and quickly.  After all, the DOE has historically been very slow at putting money out the door -- 24 months after Congress approved a major loan guarantee program to help build biofuel and other facilities, for example, not one dollar has been paid out.  Steve Chu and his team seem very committed to changing this... But it will still require a major change.  This dovetails with anecdotal evidence I keep hearing from across various states, where federal, state and local energy program managers know they're getting a big slug of money for "shovel-ready" infrastructure projects and energy efficiency programs, etc... but have no idea when, or what they're going to be able to do, much less how to put the money out there.  It's a great thing to see all these efforts getting ramped up, but entrepreneurs and investors need to recognize and plan around a likely slow process for getting money out of these programs. 4.  Jonathan talked about a pretty interesting use of advanced technology for monitoring illegal logging and then, in conjunction with a revison of the Lacey Act to allow prosecutions of mills that take in illegal wood.  It's an interesting development for the forestry industry.  But even more important from my perspective is the demonstration of how advanced monitoring technologies will be increasingly enabling more effective environmental regulations in the future.  For a great example on a completely different set of environmental issues, see Planet Hazard, a potentially powerful tool -- it allows easy access to Toxic Release Inventory data for air emissions in your hometown (if you live in the U.S., of course).  Take a look at the major emitters in your area, and think about what your neighbors might think about that information.  Technology innovations and smart regulations can be very effective together, and information itself can be a really powerful tool.  We need a TRI for carbon emissions... Those were just some of the important take-aways for me from Jonathan's talk.  WRI tracks a tremendous amount of environmental data from around the world, and does a lot of really innovative work to develop innovative policies, to work with the private sector on key issues, and to address environmental challenges all over the world.  Innovative efforts like the Global Impact Fund, an internal venture fund to develop new programmatic activities, help the organization stay at the forefront of policy and engagement efforts.  Their publications are great educational resources as well.  So I encourage readers to check them out. . .

$7.7B in cleantech venture investments in 2008.  That's the record number Eric Wesoff has tallied up -- and it may not include some deals done at the end of the year, so that number may go up.  More great work from Eric, who's been consistently able to come out with the fastest numbers each quarter... (Eric also touched upon one of the topics of the @Ventures "what's wrong with cleantech VC" presentation when he argued that early stage hasn't completely dried up, since "at least 30 of the 115 greentech deals this quarter were seed stage or A rounds."  But since no one has ever said that early stage is non-existent, I would argue that having only 26% of deals be in early stage is pretty indicative of an imbalance in the market.  But I digress...) So what do Cleantech Investing readers think 2009 will look like?  I'd asked folks to take part in an online survey over the holidays, to gauge how optimistic or pessimistic everyone was feeling.  The short answer:  Not super-optimistic, but not really pessimistic either. Basically, it's a good thing I'm not a bookie, because I wasn't very good at setting the over/under! Question 1:  Who are C.I. readers? There's always selection bias in a survey like this where people choose whether or not to participate, but about 1/4th of the participants were venture investors; 1/4th were entrepreneurs, other investors, or other corporate participants in cleantech; 14% were some kind of service provider; and the rest weren't actively involved in cleantech, just interested.  So a nice mix of folks across and from outside the industry. Question 2:  Will cleantech VC dollars in the U.S. drop by more or less than a third in 1H09 vs 1H08? Two-thirds of readers think that the venture dollars will drop versus last year.  But almost half of all respondents felt that there would be a drop, yet of less than 1/3rd. So more than three quarters of participants took the "over" here, meaning readers are more optimistic than my prediction... Question 3:  Will cleantech VC deals (numbers, not dollars) in the U.S. drop by more or less than 20% in 1H09 vs 1H08? 83% of C.I. readers took the "over" here, including 24% who feel that the numbers will actually rise.  But again a majority of respondents feel that the deal numbers will drop. So basically, C.I. readers expect deal counts to fall, but only slightly. Question 4:  Will cleantech VC dollars into China rise by more than 25% in 1H09 vs 1H08? A solid 71% of C.I. readers think that venture dollars into China will actually rise.  But those readers were pretty evenly split as to whether the rise would be as much as 25% or not.  And almost 3 out of 10 readers feel the dollars into China cleantech will actually fall. Question 5:  What will be the "hot" sector in 1H09? I made this question intentionally undefined, and also failed to include carbon markets in my list (thankfully one reader called me on it). The answers were all over the map, with every listed category (and some unlisted) getting at least one vote, but the two most popular choices were Energy Efficiency and Solar, each getting over 30% of the votes.  Energy storage came in third, with 1/4 of the votes, and after that came everything else.  Readers don't expect a huge year for biofuels, vehicles, water, green buildings, or advanced materials, in other words. But everything got at least ONE vote. Question 6:  What will be the headline that best captures the 1H09 cleantech venture capital market? This one was just for fun, and there were a lot of great answers.  A sizable minority of answers were pretty pessimistic -- talk of bubbles bursting or unsustainable levels of investing.  And a sizable minority of answers were pretty pessimistic -- talk of sustained market growth and good support from the new administration. A couple of ones just to pull out in particular that I found interesting:

"Return to VC Basics" "Winners Emerge as Wheat Separates" "Transportation Electrification Dominates Thinking" "I have no idea."

It's probably a safe assumption that last one didn't come from a VC.  None would ever admit something like that! Thanks to everyone for participating!  When the 1H09 tallies come out, we'll revisit and see how accurate everyone was... . . . .

'Tis the season for VC predictions, and the NVCA says that VCs still think the world of cleantech, so what kind of cleantech VC blogger would I be if I didn't have a few predictions of my own... But let's break with VC tradition and make some predictions with teeth.  And then let's break with tradition further and let readers vote on them.  No more VC "predictions" like "government will play a bigger role in cleantech" or other so-safe-its-useless bromides -- here are some predictions where I'm setting a quantified "over/under" and then readers are invited to click here to participate in a very brief survey to place your bets on whether I was high or low. 1.  As Michael Kanellos already wrote about, I think it's likely that US cleantech venture dollar amounts could fall significantly in 1H09.  That's because if you look at the Cleantech Group's totals over the past few quarters, the top 5 mega-deals have made up rougly 35-40% of the total.  If those mega-deals and similar large late-stage deals are going to be particularly tough to come by (because VCs and others aren't able to count on near-term exits, etc.), then the dollar amounts could fall significantly even if deal volumes don't fall that much. Just a simple shift back toward more early stage investing would by itself drive the dollar amounts down significantly. Thus, I told Michael I wouldn't be surprised to see the U.S. dollar totals fall 40%.  But I've set the over/under at a 33% drop.  What do you think? 2.  I do think there will be a contraction in deals, but to a much lesser extent than the contraction in dollar amounts, for the reasons described above.  Many investors have put on the brakes, but many still have dollars to spend, and early stage in particular seems to still be "okay". For the U.S., I've set the over/under on the reduction in the number of cleantech venture deals from 1H08 to 1H09 at 20%.  What do you think? 3.  In regions other than the U.S., it will be interesting to see how things play out.  Europe, for example, I expect to look like the U.S. in terms of drops in dealflow and dollars.  But in the still-growing (albeit more slowly) economies of China and India, I think many generalists and even cleantech specialists may find a place to put down some bets where the natural resource shortage thesis still holds true and the underlying economic growth story looks better. So for China, I've set the over/under on the growth in cleantech VC dollars (1H08 vs. 1H09) at 25%.  What do you think? 4.  All I have to go on is anecdotal evidence from my conversations with fellow investors, but it seems like VCs I speak with are now nodding their heads a lot more vigorously when I say that I think there's no way solar will continue to be 40% of cleantech VC dollars like it has been so far in 2008.  There seems to be more interest in broadening into more of the cleantech market, and in particular more investors say they're looking at energy efficiency these days. So I think the "hot" sector (as unfortunately, but necessarily defined by some loose combination of growth in deals and growth in headlines and VC quotes in stories) will be energy efficiency.  What do you think? 5.  Finally, I think that while it won't be at all unhealthy for the sector to see solar venture dollars decline significantly, overall dollar and deal tallies fall, it won't be reported that way.  Journalists don't deserve the abuse they get from everyone (and mea culpa, guys... happy holidays to you, too), but still, they're incented to find controversial stories to write about, and the finer nuances of dollar amounts vs. deal amounts, etc., don't often make it past the editor. So I think the defining headline of 1H09 will be "cleantech venture bubble bursts".  What do you think? Take the survey to add in your thoughts, and we'll take a look back at it once we get into the new year to see how these predictions worked out! ----------------------------------------------- Readers have continued to provide great feedback on the "What's wrong with cleantech VC?" presentation from @Ventures that I posted a couple of weeks ago. Reader P.S. of Massachusetts (who's been raising a Series B) writes:

I have found that most of the money is interested in early stage deals and not mid to late stage deals, which is different than the data you presented.  One possible explanation is sector, that the vast majority of clean tech deals are solar-related so there is a lot of late stage activity there.  In our sector (biochemicals), most of the companies are still in early stage (we're among the first to commercialize a product – already generating revenue).  So my question, is your data solar-skewed?

Sure, if the overall industry is solar-skewed then the data will probably reflect that on all more general topics as well.  But I don't think if you removed solar from the picture, the follow-on vs. early/seed stage picture would flip.  Follow-on deals would probably still significantly outnumber the earlier stage deals.  Does that mean early stage is dead?  Of course not.  So P.S.'s comment is a good reminder that these trends are only indicative of overall patterns, they're not absolutes.  Early stage companies can definitely still find interested investors. But I keep coming back to the numbers, which tell their own story.  And also to the fact that the very large funds that have recently been raised "locks in" a late-stage focus almost by necessity -- if you have to deploy $400mm across a small number of partners, either you need to be writing large checks (which then steers you toward later stage deals), or each partner needs to be juggling a dozen board seats.  Will there be a shift back toward earlier stage investments, esp. in 1H09?  Probably.  But it'll be tough for some of the bigger pools of capital to make that happen in any major way... Reader M.J. of California writes:

Nice work Rob. I think many agree w/ you, but as you mentioned don’t talk about it publicly. Today it’s trendy and cool to do late stage cleantech investing…how the hell you get to that w/o early stage investing is the question – especially when it’s only been a category in earnest for the last 3-5 years and that’s being generous.

There've been some interesting comments on the original post as well, check them out. More comments, reactions and feedback are definitely welcomed.  Supportive or not!  It's great to get a dialogue going on these things. Either post your comments, or email me -- I'll continue to post interesting ones I get. It's also fascinating to see how the presentation points out five trends, but really everyone seems zeroed in only on the stage (late vs. early) one... . . . .