It's been pretty fascinating to watch how many strong opinions have been expressed over the past couple of days regarding Fred Wilson's "two VCs" post (and then some others pointed at me after my response to his post). So I thought I would paraphrase some of what I heard (note: mostly NOT from Fred, but from others who've piled on) and give some replies.

--

Rob, are you saying Fred is wrong?

No. I totally agree with Fred that there's an important divergence of two very different approaches to venture capital right now -- the lean VC (put as little capital as possible to work in each company, grow it quickly and as low-cost as possible, and then sell it as early as possible), and the big VC (find winners, give them even more momentum via advice, capital and brand leverage, and drive to as big an exit as possible).

If anything, I tend to favor the lean VC model Fred is clearly espousing. I do think venture capital is due for a re-invention (or a back to basics, as others view it).

I just don't think it's fair to imply (as Fred and many others have done) that ALL of cleantech venture capital falls into the "big VC" category.

To put my point as simply as possible: Fred is right, there are two separate venture capital industries right now. And you can find BOTH within cleantech.

--

But statistics show that cleantech is more capital intensive than web investing!

First of all, don't try to apply averages (especially in the form of means and not medians, c'mon Techcrunch you can do better) to "prove" anything about cleantech as an overall sector. As we've discussed ad nauseum on this site, all it takes is a small handful of megadeals to totally skew the sector dollar totals, so means are worse than useless, and even median deal sizes will reveal only that 51% of deals are large ones, right? It doesn't prove that there isn't any capital-efficient investing going on within the sector.

Secondly, it's a little tiresome to see all these web and software journalists and investors castigate cleantech in such simplistic terms (maybe they're all too distracted by AngelGate). Don't get me wrong, I like the web (in fact, I'm using it right now!) and have nothing at all against web and software investors, it seems like a compelling set of markets. I don't paint their entire sector(s) as one single monoculture, so I wish they would do the same.

As Tom Pincince, President and CEO at Digital Lumens (and former Director of Forrester Research’s Network Strategy Service) emailed to a few of us: "Cleantech is such a diverse category ranging from biofuel to consumer power portals. We could just as easily lump software into IT and drag in big networking boxes and telecommunications companies."

Thirdly, while some of the rhetoric around "capital efficient cleantech venture capital" is just empty words, I do think there are a number of investors out there putting serious effort and thought into how to do it. So backward-looking data will only tell us so much about what the sector looks like going forward.

--

How dare you say cleantech isn't capital intensive! Just look at the high-profile capital intensive deals that have been talked about so much!

Just like how I don't think it's fair to paint cleantech with a broad brush and imply it's all capital intensive, nor am I trying to make the argument that all of it is capital efficient. In fact, if you look at the deals done in cleantech from 2006-2008 (ish), much of them were indeed capital intensive.

But I increasingly see attempts to apply the "lean VC" model within subsectors of this market. And even within some of the sectors of the market that are infamous for being capital intensive (e.g., solar).

But making a significant impact on the energy, etc. industries will require some significant capital to be deployed.

--

Sure, but why does that have to be venture capital in particular?

Venture capitalists are supposed to be focused on returns, not impact. Often they conflate the two, especially when standing on stage at a conference. But it's increasingly unclear that VCs are supposed to be the ones providing all the capital that will be necessary to put significant amounts of clean power generation out

Fred Wilson recently wrote that there are now two venture capital industries: One software-based, and one that is capital intensive. He argues that the former has gone capital efficient, and the latter (including "cleantech, biotech and other capital intensive tech businesses") that "operates largely the same way it has operated for the past twenty or thirty years". It's a good post, as with many of his thoughts, well worth reading if you haven't seen it already. He mentions forthcoming data that should be interesting to see.

I think he's right. There really are two divergent strategies in venture capital right now. The one goes for as little cashburn and as quick an exit as possible. The other looks to put money into leading companies, position them as winners, and then put as much capital as possible behind those winners.

I do think Fred misses an important point, however, when he paints cleantech with the broad brush of implying it's all about that capital-intensive strategy. Certainly there are plenty of high profile examples where such an implication is indeed correct! But as Jeff Bussgang then wrote in another good column (not just good because it mentions Digital Lumens, one of my portfolio companies, but because of the basic argument), it's also possible to invest in capital-efficient, non-software startups in cleantech... If management and Board are willing to take it that route.

I think of it more like the divergence in semiconductor investing. At first all semico investments needed to be pretty capital intensive, because they required building out specialized fabs. But as the industry matured, it became possible to invest in "fabless" companies that focused instead on the core innovation, product design and market execution. Such choices are available across sectors.

Perhaps this is why data provided by CBInsights, in response to Fred's column, don't really seem to support the idea that software plays are diverging strongly in their capital intensity versus other categories. While software does show itself to be less capital intensive in general, it's not like that sector's headed one way while the others head the other way.

Fred tweeted me that he's got different data that will look at it in a different way, which could be right. But my strong suspicion is that he's identified a correct pattern -- a divergence of venture capital strategies -- but incorrectly applied it sectorally. I suspect instead that these two investment models can be found WITHIN many of these sectors, including cleantech. I met with a GP the other day who has a strategy of investing in capital-efficient life sciences tools, for example, rather than capital-intensive drug development efforts. I meet cleantech GPs all the time who target capital efficient plays within cleantech (and a few of them actually seem to mean it). So I don't think it's fair to say that software VCs are a new breed and VCs in other sectors are tackling an old model AS A RULE. But to be fair, Fred's right that there really are a lot of VCs in cleantech who (especially up to 2008) were indeed trying to apply that old-school model to the sector. And the results of such efforts are very unclear to date...

But what I think might be interesting to take a look at would be fund size as the causal factor for the schism Fred's identified. I don't know how to prove chicken or egg. But I strongly suspect that the really big funds that have done some cleantech (among multiple other sectors) are the ones most likely to invest in the capital-intensive models. Perhaps it's just out of necessity, but VCs with funds <$200M really do seem to do a better job of staying true to the capital-efficient investment model Fred is espousing, across sectors (including cleantech). And meanwhile I've had a generalist VC with a fund >$500M tell me his fund was explicitly looking for capital intensive opportunities (note: this was in 2008).

I can't say for sure, but I bet fund size is a more important determinant of which of the "two VCs" you are, instead of sector.

Rolling up startups is hard to do correctly.  It's easy to say that two companies would work better as a combined entity, but in reality it's quite difficult to do regardless of the scale of the companies involved -- you have cultural shifts to make, personnel who will need to change roles and perhaps leave, a combined set of investors to fit into the same size boardroom, significant operational disruption, not to mention the difficulties involved in pricing and structuring the deal, etc.

So it's not something to be bandied about loosely.  But nevertheless, I think it's time for more cleantech startups to be thinking about how they can team up and carry forward as combined efforts.

First of all, there are just way too many "components" out there.  I use that term in a very general sense.  What I mean is that there are a lot of independently run efforts out there that are trying to build entire standalone businesses on the basis of one innovation within a larger product or service effort.  We've all seen them.  They are the tweak that makes an improvement in solar panel efficiency.  Or the widget that helps connect various pieces of residential equipment.  Or an improvement to a particular part of a biofuel production process.  On the one hand it's great to see all of this emerging innovation that will eventually be part of a more compelling overall offering in these categories -- it is the aggregation of such improved components that will eventually unlock the breakthrough customer value proposition that will take these sectors to the next level of market adoption.  

But it's time for such aggregation to start happening.

Secondly, it's just increasingly hard out there for companies who are out fundraising.  I know the deal tracking data from the Cleantech Group et al suggests that deal counts and dollar amounts of cleantech VC are back to where they were in the 2007-2008 timeframe.  But take it from me, it's really hard out there.  I am seeing so many companies out raising money right now, and many of the deals that are taking place are being done largely as insider rounds.  Certainly down rounds remain the norm.  And in addition, it's impressive and scary how many VCs themselves are out fundraising or gearing up to be fundraising.  This is a bad leading indicator for startups.  So many funds are probably tapped out for their current funds, and then will clearly have trouble raising their new fund, that additional capital won't be there for a while.  So startups are already having to work hard to raise new capital, and it's just going to get worse.

Nevertheless, there definitely is still capital available for really compelling stories.  And as an overall observation, the more comprehensive the story, the more compelling it is to investors.  If you are providing a complete solution to customers, with a strong economic value proposition, driven by multiple innovations across the full tech/product/service offering, and owning as much of their spend in that category as possible, that's much more compelling than being a tweak or a component level innovation.

Thirdly, top notch management remains the single most limited resource in the cleantech sector.  There are lots of good management teams out there with emerging experience and/or pieces of the complete skillset that will be required in order to make a startup a rousing success.  There are, however, very few GREAT management teams with the complete skillset already in place.  This is really tricky, but generally speaking the more you can combine and optimize these teams by bringing them together under the same roof, the better chance you have to aggregate a great management team out of a set of good managers.

Like I said at the top, rolling up startups is not to be taken lightly.  It's really tough to do, and has a high rate of failure.  It will likely require specialized expertise and assistance.  But it's time for a wave of it to take place, because of the economic times we're in, and because cleantech markets are in need of more comprehensive solutions.  Cleantech startups, and their backers, need to be increasingly looking for such opportunities.  

There's been an uptick in M&A activity in cleantech, according to the latest figures.  This likely represents opportunistic purchases for the most part by larger incumbent players.  Startups need to begin playing the same game, or they'll be left behind.

I'm not much of a web guy, but I'm terrifically impressed with Twitter these days.

For one thing, after I posted a pretty critical take today on a book I'd just read, it was a new experience to have the author (Vinnie Mirchandani, "The New Polymath") pretty immediately reach out to me to ask why I felt that way.  That launched a good online dialog between the two of us.  We agreed that cross-disciplinary innovation is huge for cleantech in particular.  We agreed on the need for significantly more resources to be put behind it, and to be put into the sector in general.  We disagreed on the level of demonstrated effectiveness shown by IT entrepreneurs and investors crossing over into cleantech (at least so far)... In any case, I enjoyed "virtually meeting" Vinnie and appreciated that we had the opportunity to connect.

And today Twitter also delivered to me this message, from Vinod Khosla:

"Lomborg: $100b/yr needed to fight climate change. Wrong before & wrong again! Brute force won't work. Need R&D not huge $."

Which I found very interesting.  Vinod is a smart observer and thought-leader in the sector.  The above message is illustrative of a line of thinking I've been seeing lately from several such very smart thinkers, which basically makes the argument that what's really needed is bold innovation.  That we need to be thinking very much "out of the box" and coming up with new technologies that will out-compete incumbent technologies, even with all the advantages incumbent technologies hold in the marketplace, and even with all of the market inertia to overcome.  As Vinod puts it, we "need R&D not huge $."

Certainly I believe we always need more innovation, and the appeal of doing more to promote disruptive technology development is obvious.  Yes to R&D spending!

But it's not enough.  

Let's look at the evidence:

1. There's a lot of innovation already out there.  

At one point last year, Eric Wesoff of Greentech Media had counted up over 200 venture-backed solar startups.  Many, perhaps a majority, of these were backed by investors who believed they were potential breakthrough innovations.  Just focusing on solar for a second, let me ask one basic question:  At this point, is an additional solar R&D effort going to by itself significantly accelerate the pace of adoption of solar technology?  As one solar CEO put it to me last week, "it's not about innovation now, we're totally focused on manufacturing."

Solar's an interesting example because it IS growing quickly.  But from a climate change perspective, it's not growing nearly quickly enough, its impact remains miniscule as a portion of the overall global power generation mix.  And that industry growth that we've seen has been largely NOT from breakthrough innovations at the panel level -- in fact, it remains a challenge for second generation thin film players to gain acceptance from a market that prefers to go it safe with tried-and-true poly-si panels.

Not to mention the fact that the rapid growth of the solar industry has been predominantly a result of the significant incentives being provided by various governments' policies.  Significant incentives, which basically means "huge $"... Essentially, an investment being made by these governments to help the industry scale up and drive down the cost curve.  I'll return to that point later.

2. In many areas of cleantech, markets have been highly resistant to adopting new technologies even when they make compelling economic sense.

Whether it's efficient lighting, or residential energy efficiency retrofits, or lower-cost solar panels, or recycled materials, or alternative fuels, there's a long history in cleantech of compelling value propositions failing to achieve the market potential that would be expected by looking just at supply and demand curves.

In many cases, it's just the customer's lack of adequate information about the available options.  They don't want to purchase the new product, even if it promises compelling paybacks, because they haven't tried it and haven't seen others try it before, and they can't guarantee it will work as promised.  Or maybe it's just basic lack of awareness.  Or simply the confusing morass of competing and obfuscatory claims made in many of these marketplaces by all the vendors pitching their product or system as the very best one to get.  

In many other cases, it's a structural issue that makes it difficult for even "winning technologies" to make strong headway in the market.  For example: Anyone attempting to sell energy efficient products into the office building market quickly learns that the owner-tenant relationship is a huge complication that means even compelling cost savings don't necessarily translate into compelling payback periods for the purchaser.  Another example is the slow utility adoption cycle driven by multi-year public utility commission rate case cycles.  

Or it might be that the customer would find a 4-year payback period attractive but they don't have the capital budget to support making any investment with more than a 2-year payback period.  And regulatory incentive programs often push people into sub-optimal purchasing decisions (investment tax credits and cost-based rebates, for example, reduce the delta between an older more expensive solar panel and cheaper, newer options).  And project or equipment financing lenders often require going with very proven technologies, not new entrants.

In other words, just having a superior innovation doesn't guarantee market success in cleantech markets.  And in fact, the more disruptive the innovation, the more the market will be reticent to adopt it quickly.

3.  Incumbent commodity prices are low... and can go lower if necessary.

Even when -- as appears to be happening now -- new solar technologies become cost-competitive, all things being equal, with current grid provided electricity prices, coal-fired power generation remains much more heavily subsidized in aggregate than any subsidies the adopters of solar are getting.  Ditto in vehicle fuels.  Not only does this mean that nascent clean technologies would have to be INCREDIBLY low-cost in order to provide compelling differentiation versus the status quo... it also means that those incumbent fuels have a lot of margin they could sacrifice to compete at even lower prices versus any new offering.  

I see startups all the time in the fuels space who make the argument that "we're cost-competitive with oil at $x per barrel market price, and everyone expects oil prices to remain up at $y per barrel for some time to come."  Which is fair enough.  But to truly make an impact on climate change will require such alternative fuels to achieve a strong enough market penetration rate that they start affecting market pricing, they're not just price-takers anymore.  And as the chart in this column shows, major oil production areas have a lot of room between current market prices and current production costs.  Not to say we won't see costs increase as the lower-cost resources get tapped out.  But alleviating supply challenges by introducing significant new supplies of alternatives would also likely somewhat mitigate those effects.  In the long run, fossil fuel prices must rise, unless demand for them goes down significantly.  But of course, "in the long run we are all dead."

An appropriate price for carbon, of course, would address this point well.  But the other two points would still stand.

So what exactly is being talked about when a luminary like a Vinod or a Bill Gates declares that what's needed first and foremost is truly disruptive additional innovation, as a higher priority than putting significant resources into other activities?  I suppose the hope is that we can uncover something so TRULY disruptive that it sells itself.  That, even in the face of all of the above obstacles, the customer value proposition is so stupendously compelling that everything kind of sorts itself out.  That would be wonderful.

But it ain't gonna happen anytime soon.  I would be quite pleased to be wrong about this, but from what I've seen the cleantech R&D deus ex machina is largely a myth.

If I've learned anything from investing in this sector for the past six years, and having worked with large companies on these issues well before that, it's that even "no-brainer" innovations and customer value propositions are still hard sells into these markets.  The obstacles I describe above create so much market inertia that I've seen it feel like pulling teeth to get some customers to agree to buy things that provide 1 year paybacks and less.  And the ever-increasing number of technology options, thanks in part to so much increased R&D in the sector over the past decade, only further slows down market adoption as customers have even more trouble figuring out their choices, and become even more wary of purchasing a 20-year product only to discover it's obsolete in a year.

So let's go back to that solar market.  What has that taught us?  That if you provide the money to drive implementation, people will indeed implement.  

There are deep, deep needs for capital elsewhere in cleantech than just in the R&D lab.  So-called "first projects", the first production facilities for a new product, are infamously difficult to finance.  Elsewhere, customers may balk at a 3-year payback period but would gladly take on the cost-saving product if it was offered as a lease (thus saving money from day one), but that requires the vendor to provide the financing.  Services -- the businesses that would actually be doing the installation of the hoped-for disruptive innovations -- remain very difficult to raise capital for.

And because of these gaps... because of the challenges in the marketplace... no matter how compelling an innovation you can create, it will have very little real-world impact without additional impetus on the implementation side of things.  

It can be government-provided demand creation via subsidies for installations.  It can be additional project financing for clean energy and energy efficiency, in a format that perhaps we haven't seen yet.  Or it can even be venture capital financing into the innovating companies at very expensive prices, with such corporate equity being then directed into implementation activities (cleantech VCs tried that; it hasn't worked out so well so far).  

I understand the PR and political calculus:  Saying governments need to spend a hundred billion dollars per year on anything, no matter how important, is politically unpalatable right now.  So there's a need to provide an alternative.  And if that alternative ends up being more directly supportive of the advocate's day job, well, so much the better.

But sooner or later it comes down to this:  Especially in the absence of an appropriate pricing for carbon, in order for cleantech to make a significant impact on climate change, we will need to see significantly more dollars being put into implementation than into R&D (and in fact, we already are).  At very least it would be good to put significant implementation dollars into the existing technology innovations we already have that would make compelling economic sense at scale.  "Brute force" or not, implementation is just as critical as innovation, and takes significantly more capital to do.  It just doesn't fit very well with venture capital as currently structured.  Which, perhaps, is why some VCs in the sector make a point of putting R&D on a pedestal.  Tech development is what VCs do.  Implementation, generally speaking, isn't.  

It's worth re-emphasizing that I'm definitely in favor of more resources devoted to innovation, and that I'm constantly energized by the entrepreneurs and inventors I meet who are striving hard to make "crazy dreams" become a reality.  The above thoughts are intended to drive pragmatic attempts at disruption, not an abandonment of big thinking.  The need for big, massive change is why I chose this area we now call "cleantech" as my career way back when.  I'm excited whenever I see thought leaders like Bill Gates and Vinod and others turn their attentions to these really big problems and conclude that something really big can be done.  But it has to be done right, or it won't be done at all.  I just think it's a mistake to take a faith in the power of innovation so far as to imply that implementation will take care of itself.  I suspect there are very few people making such statements who would truly profess, if pressed, that energy and water are markets where "Build It And They Will Come" holds true.

But hey, comments and flames welcomed at @cleantechvc! After all, Twitter is proof that SOME big market shifts really can happen pretty quickly... 

Now that energy efficiency is all the rage in cleantech venture circles (note to cleantech VCs: don't pitch LPs on your firm being "differentiated" because you target capital efficient businesses...), investors have been particularly attracted to the energy efficiency plays that appear to be at the intersection of energy efficiency and information technology.  The hope being that these investments would scale like an IT play, but be accessing the large market opportunity in energy efficiency.

The majority of such investments I get approached on, however, are simply information gathering and presentation tools.  A dashboard, either for the home or for a larger building, showing the user how much energy is being used and at what cost.  The idea being that the user, armed with the information, will better manage their energy use and generate savings that pay for the information tool and then some.

There's plenty of evidence that this does work.  I've talked with everyone from homeowners to big real estate managers who have used such systems and recommend them to their peers.  There's some body of studies which show that such information does result in real energy savings, on average.  But not much.  O-Power, for example, talks about 3.5% savings.  Not knocking that -- aggregated, that adds up to a nice amount of saved energy.  

But the problem for investors is that each customer is only willing to spend a very little amount to get those meager savings.  Aggregated, it might be a big deal.  But for each individual customer, even for large buildings, it's just not that much.  Alex Taussig has a nice recent post which includes some useful stats on typical office buildings, where he calculates that a 15,000 square foot US office building would on average spend around $30k per year on electricity.  That's a pretty small building, even if it's "typical", so let's look at the per square foot average electricity spend as around $1/yr.  So for a 20 story, 400k sqft downtown office building you're looking at around $400k per year in electricity spending.  Applying that O-Power metric of 3.5% savings means an annual savings of only $14k.  For a very large building -- that same building would consume about the same electricity as over 500 homes.

And how much of that $14k can an information services provider capture from that customer?  Probably well less than half.  So the vendor has to put a lot of sales effort into winning a very large building over to their information service, all to get less than $10,000 per year in revenue.  Not to mention the fact that the most likely customers to be interested in a service like this are also the ones most likely to already be running an efficient building, so the potential savings are probably less for the otherwise early adopters.  And don't forget there's a very sizable portion of the market that just won't care, either because they have tenants who pay the energy bills, or because they simply can't be bothered.  Alex preaches in his post that the vendor must bring their costs down in order to make their margins at that level.  But even if the margins as a percentage of sales are nice, how difficult will it be to add them up to something attractive in the aggregate?

Don't get me wrong, that commercial building energy information service (CBEIS) can be a very good business to own, and a useful tool for the building owner.  But from the venture investor's perspective, it's going to take a long time to scale up a business like that to something that would generate compelling returns, if that's the only service and customer benefit the system offers.  Plus, how defensible will it be when other companies increasingly offer the same thing?  I talked to one customer who's thinking about dropping one of these CBEIS vendors in favor of a pretty similar interface his utility is now offering for free...

For these reasons I increasingly think about building energy information as being an unimpressive investment opportunity by itself.  But I also think of it as being a critical enabler for significant additional services and products that can be then offered to the building owner, made possible thanks to the availability of the information.  I'm not that interested (as an investor, at least) in one of the cool-looking "home energy displays" that are being offered out there.  But if it was a loss leader to pull people into a social networking/ online shopping play based around communities of energy-conscious consumers, that might be potentially interesting.  And I bet Comverge and EnerNOC would be very interested in a residential energy information company that offered such a display but ALSO cost-effectively enabled the homeowner to participate more easily and effectively in a demand response program, via integrated controls and an easy integration into as many enabled devices as possible inside the home. 

And turning the information into action is really the key.  Automation is what will drive savings in these fragmented building energy efficiency markets.  And it's also what's going to make new energy efficient equipment be more attractive to customers, because automation will be what allows the customer to take full advantage of the efficiency-generating features of the new equipment.  A challenge for new types of equipment is that customers aren't used to doing the new activities they can do with it, but that are what drive the efficiency gains.  Automation solves that. 

A great example is news that came out today about Digital Lumens, one of our portfolio companies.  They released a story about one of the initial customers for their intelligent lighting systems that has saved 87% on their lighting bill as a result.  About 1.7M kWh per year, or enough to power 200 homes.  Some of that savings is because LEDs are an efficient lighting source in general.  But a large part of the savings results from DL's automated controls system that makes sure the lights are being used only when and where needed, taking full advantage of the unique features of LED lighting.  DL's CEO Tom Pincince wrote up a nice column about it, check it out.  

Obviously that's a specific story I'm more than happy to share.  But I hope it serves as a good illustration of my bigger point.  If all Digital Lumens was doing was gathering information about lighting and sharing that information with the building owner, would these savings result?  No.  But with the embedded intelligence and automation included in the system, such information allows the building owner to set up the settings for the system and drive some really serious savings.  

THAT'S an energy efficiency story that's scalable.  So for energy efficiency entrepreneurs, the lesson is this:  Don't just show your customers what their energy situation is.  And don't just show them what they could do to improve their energy situation.  Actually do it for them, in as automated and low-cost a way as possible.  Yes, that's incredibly more difficult to pull off.  But that's what it will take to start having some dramatic market impact.

As you pull into the parking lot, the grit of crumbling asphalt crunches under your tires. No shade trees or white curbs in this parking lot, just lines on tarmac, narrow spaces, and an unfiltered summer sun.  You get out of your car and look up at the tall, nondescript brick building, and head toward the effectively unmarked entrance, a metal door that makes you remember public schools from years ago.  A train rattles by on an elevated track directly behind the building, picking up speed as it carries its daily delivery of bankers and lawyers downtown. A few other people amble into and out of the building, but it's far from busy.  This isn't one of the newer generation buildings with retail on the ground floor and offices above, this is an old-school office structure through and through, and you can tell most of the tenants have been here for years.  Some random service providers, maybe a social services agency.  There's an elevator around the corner from the entryway, but you know it might take longer to wheeze its way to the fourth floor than walking up the stairs.  So you walk up and, catching your breath, you walk around a bend in the linoleum-tiled hallway and enter an office lit only from the windows to either side, the lights having been turned off to save electricity except for in the small area occupied by the people you're there to meet.

And you think to yourself, "This is EXACTLY what incubators should look like."  Open space, easy to divide up and then redivide up as needed.  Inspirational views, past some urban sprawl, of Nahant and the sun's twinkling reflections off Massachusetts Bay.  Low rent, but laid out for collaboration and activity.  Yes, it's a relatively new space and thus pretty empty, prompting inevitable jokes with the entrepreneurs about wintertime and The Shining.  But this space isn't designed for aesthetics.  It's designed to be a platform for thinly-capitalized entrepreneurs to get something up and off the ground.  Just around the corner from a commuter rail stop and multiple restaurants, places to sit down and have a coffee.  Productivity first and foremost, with no frills or wasted cost.  A fingertip hold, a small but effective place for a rock climber to latch onto as they scramble up to the next level.

Welcome to the Cleantech InnoVenture Center (CIVC) in Lynn, Massachusetts.  A new space launched by North Shore InnoVentures, about 20 minutes north of downtown Boston.  Housing, at first, a couple of tenants just getting started.  And they're both in the energy efficiency space.  Naturally.

Energy efficiency, specifically regarding buildings and homes, is where the bootstrap cleantech entrepreneurs are going these days.  Launching an energy efficiency startup doesn't require any breakthrough technology, or MIT-based pedigree.  It doesn't require major capital outlays just to ante up, just entrepreneurs willing to work for cheap.  And the market opportunity is huge, yet still clearly waiting for that new business model and unique approach that will unlock all the ROI that has been ignored by building owners for decades -- simply making their offices, stores, homes, etc. less wasteful.

As the capital markets have dried up, cleantech VCs have paid more and more attention to energy efficiency.  While on a dollar basis it remains behind solar and biofuels et al, energy efficiency now has the highest number of deals as a subsector, according to recent tallies by the Cleantech Group.  In part this is because VCs do see the opportunity here, the obvious customer economics, the entry of many more smart entrepreneurs, the ties into IT and internet models that have worked well in the past.  But in part this is because the VCs are now all about "capital efficiency", that buzzword du jour.  Really, VCs nearing the end of their fund life, and seeing little opportunity to raise a new fund, are looking for those 1 or 2 final deals in the current fund to only use up a small amount of capital.  I overgeneralize.  But you get the drift of what's going on.

The problem is, the same challenges that kept VCs out of energy efficiency back when solar and biofuels and EVs were hot remain solidly in place.  Tough to find truly defensible IP, since even a patentable approach to saving energy will face a multitude of competitors using entirely different IP but going after the same wasted kilowatt-hours.  And most energy efficiency startups aren't using patentable approaches to begin with.  Plus, customers remain really reticent to adopt even "no-brainer" services and technologies.  Payback periods of 2 years or better often aren't enough to convince a factory manager or hospital facility manager to take on the risk that some new energy efficiency system will negatively impact the lights, or comfort, or productivity, or simply will just generate complaints they don't want to have to deal with.  And few "network externalities", the positive feedback loops that drive internet users to all want to flock to the same websites and tools.  Furthermore, since so much of energy efficiency is in the service offering and implementation, that's just typically a mismatch for VCs unless they see strong existing market momentum they can jump on board with.  

So while energy efficiency is on the rise among cleantech VCs, it's still really tough for most energy efficiency entrepreneurs to think about VCs as being their initial funding source.  Speaking for myself, I see lots and lots of great entrepreneurs and great ideas in the sector.  But BECAUSE of that, and given all of the above challenges, it's tough for me to think about funding one of these efforts until I see proof of execution:  Customer traction, repeat business, proof of savings, significant revenue.

But how do the entrepreneurs get from just getting started around a table at the CIVC, to that point?  If VCs aren't going to go in so pre-revenue into energy efficiency as they'd done in the past with solar et al, who will help the entrepreneurs get through the first couple of years of operation?

Energy efficiency is where angel investors are really going to shine.  Angels, and efforts across the country like the CIVC.  

I took a quick look through the most recent Pepperdine Capital Markets survey recently.  It's still a work in progress, but it gets better each time.  They're still not getting enough participation from the venture community, or from New England investors, and they still need to better segment the answers from VCs so that the interesting answers from the few big-name firms don't get lost in the reported medians of so many pretty small shops.  

But the survey illustrates nicely exactly how important angel investors are going to be to energy efficiency.  It shows their strong inclination to investing in companies within 30 miles of where they live.  Service-oriented energy efficiency startups are going to be very local, at least to get started.  The survey shows that angels are really reliant upon formal and informal angel groups, and energy efficiency entrepreneurs come from the same professional networks these angels are coming from -- not just from highly technical research institutions.  And it shows that, while VCs may be forced to target what they consider "capital efficiency" right now, angels are ALWAYS having to target it, since a median $25k check can only go so far.  

So it's not surprising to see that, out of all the various cleantech segments, angels identified energy efficiency as the top area they're targeting for future investments.

This is great news all around.  It's great news for energy efficiency entrepreneurs that cleantech was the fourth most popular sector for angels (out of 18 choices), and that energy efficiency was the top choice among those seeking to do cleantech deals.  It's great that so many angels see their role as being Seed and Series A investors.  And it's really helpful for VCs that angels and facilities like the CIVC are there to give these companies the boost they need to get to the revenue stage where VCs can finally get themselves comfortable with the other challenging aspects of these startups.  

One lesson learned for angels and places like the CIVC is that they really need each other.  

CIVC and other local incubators, finding themselves inundated with interest from energy efficiency entrepreneurs just getting started, need to be thinking about angels as being the most likely funders of these companies.  Too many, I've found, focus too much on hunting for a VC to bring their capital and notoriety, instead of focusing on the investors who will be the right fit at this stage.  These incubators need to reach out to local angel groups and establish relationships with them, hosting angel-only events, providing the market context and data that angels always hunger for, bringing these groups these deals early and often.

And angels need efforts like the CIVC to be able to make sure that their $25k checks, even when matched with other angels, go as far as possible.  CIVC is just one illustration of the kind of effort that's happening in similar spaces all over the country, across the midwest, the southeast, etc.:  Efforts to promote entrepreneurship as one point of leverage as the U.S. economy tries to lurch into recovery and growth.  So angels need to be reaching out to such regional incubators, and directing these companies their way.

As these companies establish themselves in the marketplace, they'll graduate out of the incubators.  And they'll eventually raise more money, if necessary, from larger check-writers who see the momentum and now want to jump on board.

But angels, and to a certain extent the CIVCs of the world, are going to play a critical role in launching the energy efficiency innovation sector as it enters a high-growth stage over the next few decades.

Been away on a major travel binge, so apologies for a download of a bunch of randomness that has accumulated over the past few weeks.  So, in no particular order:

1. Selling even millions of dollars' worth of a Gen 1 product at zero or negative gross margins doesn't count as "Commercialization".  It's just a large beta test.  ...Yes I'm talking to you, thin film solar and solid-oxide fuel cell industries. 

2. Tom Pincince, President and CEO at my portfolio company Digital Lumens, is also a former Forrester Research analyst.  And he has some pretty interesting predictions on LEDs.  Definitely check them out.

3. VC/PE funds often pass on great deals.  And know it.  Constantly-shifting internal firm dynamics often mean they just can't write checks to a company they like, for reasons having nothing to do with the potential worth of the investment.

4. The U.S. Senate advocates of climate change legislation continue to place the wrong emphasis, imho.  They have attempted to craft a law that would have significant near- to mid-term climate impact but still be politically and economically palatable.  But the (short) history of market-based environmental regulations suggests that timing isn't nearly so important -- people get out ahead of regulatory impacts as soon as they see a clear signal.  So pass a law this year to significantly price carbon... in 2020.  The net-positive economic changes will start hitting much earlier anyway, and the painful economic changes will be pushed out beyond most politicians' career half-life. 

5.  I talk about venture investment decisions for the most part on this site.  But that's different from career decisions.  Were I someone looking to choose a career right now, becoming an expert in building energy efficiency commissioning and retrofits would top my list.  So much latent demand, and much of it will have to be labor-intensive... and impossible to outsource overseas.

6. The single biggest missing need in cleantech?  Great sales leaders.  I've been searching for them for a while now, and yet have found very few.

7. The cleantech IPO candidate pool continues to look weaker and weaker.  Strong hype can't overcome negative margins and high cash burn -- at least in the absence of a pre-existing stock market bubble. But I do think there are a lot of great companies waiting in the wings for a second wave... if the market conditions allow it.  And if the market forgives this decade's first batch of cleantech IPOs for having a few belly-flops.

8. If you care about climate change, stop conflating natural gas and oil.  Yes, they both often come out of the same holes, and have the same players.  But not really.  There are "oily" and "gassy" producers (to borrow the parlance of Wall Street), and the communities are fairly separate as far as I can tell.  And as this great MIT study shows, any serious effort to combat climate change will need to embrace the substitution of coal and oil with natgas, at least over the near- to mid-term.  Yet environmental rhetoric and federal legislative proposals around climate change continue to significantly subsidize coal but treat natgas production the same as oil production.  That's a mistake.

9. The more time I spend driving up and down the east coast, the more I appreciate the train.  And the more I appreciate crowd-sourced real-time traffic applications for GPS navigation devices...

10. To anyone who was attempting to take a late-morning nap in my hotel in DC on wednesday, my apologies for undoubtedly waking you up by screaming so loud when Landon Donovan put that ball in the net.  Go USA!