It was fascinating to see this new study come out, suggesting that soot from deforestation, home cooking fires, coal-fired power, etc., has a significant role to play in climate change.  What was particularly important as a takeaway was that soot is more readily addressable as a near-term climate change driver. We all see entrepreneurial efforts to get cleaner-burning fuels and equipment implemented across developing economies -- in the last few months I've seen plans for solar cooking stoves, rice husk-fired generators, and microbial fuel cells, all with the idea of bringing electricity and heat to various developing regions, while minimizing the use of "dirty" biomass fuels more commonly used today.  For many investors with a North American focus (such as myself), these and other regions are simply not part of our funds' investment mandates, but even for investors with a global mandate these investment opportunities can be difficult to get behind.  Lack of proprietary technology (a solar cooking stove, for example, is essentially just a polished metal reflector), highly scattered target customer base, and low purchasing power leading necessarily to low prices -- all of these and other reasons are why institutional venture capitalists haven't traditionally targeted these "bottom of the pyramid" investments.  It's a capital gap -- and an important one, because there are some significant needs out there in terms of sustainable development and the role that technology (even "low-tech") can play. If (a big "if" at this point) efforts to replace high-soot activities with low-soot activities can gain momentum because of its potential for immediate impact on climate change, perhaps this could help bridge that gap.  Large organized efforts to bring about such shifts could mean -- from the entrepreneur's perspective -- a few large buyers instead of a billion scattered customers.  The efforts around the $100 laptop are an example of this.  That would potentially help VCs get comfortable with the scalability of some of these opportunities.  In terms of most of the better solutions to soot being relatively low-tech, VCs investing in developing regions are already learning that winning investments there are often those with better execution instead of cutting-edge technology.  And finally, if the benefits of lower soot levels are felt equally by those in developed AND developing economies, this could also help create additional value creation opportunities beyond just selling the equipment itself at affordable prices -- something akin to carbon credits, perhaps. None of this is to minimize the impacts of atmospheric carbon emissions, it would seem.  But if soot can become a focus of those worried about near-term climate change, perhaps it could end up having some beneficial impacts on developing economies and the VCs who are investing in them. Deals and news from the past week:

• Very late to mention GMZ Energy, the thermoelectric material startup that emerged from stealth mode last week.  As part of that PR effort, the company revealed an undisclosed amount of seed financing from Kleiner Perkins.

• Jonathan Shieber at VentureWire mentioned this week, in an article that covered all of the recent activity in energy storage, that stealth battery storage company Seeo has taken in "nearly $1mm" in financing from Khosla Ventures, following on another $1mm financing back in April 2007.

• Arxx Building Products, a green building materials company that recently merged with venture-backed Apex Construction, has taken in $5mm from MMV Financial, according to VWire.  Via the Apex connection, the company's existing venture investors include Element, Nth Power, and Emerald Technology Ventures.

• MIT solar spin-out 1366 Technologies -- which I'm assuming is named after the year that the Stella Artois brewery was launched (just kidding, it's probably named after the solar constant) -- has raised a $12.4mm Series A.  North Bridge Venture Partners and Polaris Ventures co-led the round.

• Elevance Renewable Sciences, a specialty chemicals developer, has raised a $40mm round of financing led by TPG Growth and TPG Biotechnology Partners.

• Cleantech investors in the news:  Jonathan Shieber at VWire also reported yesterday that Generation Investment Management is entering the cleantech venture space, raising a targeted $400-600mm fund.  Generation IM is already connected with a few high-profile investors you may have heard of before...  and also boasts one of the smartest investors you probably haven't heard of, Duncan Austin.

Other news and notes:  Lux Research brings another gloomy perspective to forecasts about the solar market over the next couple of years...  Another cleantech cluster in the making?  Colorado State kicks it in gear...  And finally, on that same story, what kind of "tricycle" doesn't have three wheels, anyway?

It’s business plan contest season, and many of us cleantech VCs have been enlisted as judges for the various events. I’ve had the pleasure of being a judge for numerous contests over several years now, and so these events become an interesting yardstick for measuring developments in the industry at the company formation level. Certainly, we already know that VCs are getting more active in cleantech. And large companies as well. What’s very encouraging is that, if these contests and other anecdotal evidence are any indication, entrepreneurs are also increasingly drawn to the sector. There’s a virtuous cycle that appears to happen in any venture capital investment sector when that sector starts to get hot. A few successes encourage investors to begin targeting a sector. Then as the money starts to flow in, the press jumps on board the bandwagon. All of which focuses entrepreneurs’ attention on that sector. You might think that the money just follows where the entrepreneurs go, but it can actually be the opposite, and certainly the two drivers actively feed off each other. Cleantech is now in the midst of this kind of virtuous cycle. What we’re seeing in these business plan contests is an impressive level of entrepreneurial activity. At the MIT Clean Energy Entrepreneurship Prize contest, for example, there were over 90 entries this year. What’s also impressive is the quality of these entrepreneurial efforts, in relation to those of years past. There are a lot of credible cleantech startups being launched right now. I’ve been a part of cleantech business plan contests in the past where there were a couple of decent ideas hidden in the midst of a lot of chaff. But at the CEEP contest, we semi-final round judges had a very difficult time eliminating entries from dozens of good ideas just to get down to 20 semifinalists. Don’t get me wrong. I’m not saying there were 20 sure-thing successful startup ideas in this contest, all of the ideas we reviewed faced some daunting challenges. I’m just pointing out that the ideas held more promise, and were more scrubbed and realistic, in relation to similar sets of ideas I’ve seen in similar events in the past. Stronger management teams, better thought-out IP, stronger business models, more credible go-to-market strategies, etc. This helps explain why, when I speak with my cleantech VC colleagues, many of us are busier than we’ve ever been. While the number of investors coming in has grown, the number of entrepreneurs getting in has grown even more rapidly, so that many of us are chasing down (or just as often, being referred to) an almost overwhelming number of qualified investments these days. These are a different set of opportunities than those in these business plan contests, sure, but it’s all indicative of an overall trend. Of course, with all of this entrepreneurial interest in the sector, the natural question is – are we running out of the GOOD ideas? Certainly, as entrepreneurial activity grows, a lot of “me-too� ideas and bandwagon efforts are often a result. And the usual (low) ratio of venture-backable to non-venture-backable ideas seems to be holding fairly steady. But that in itself is encouraging, since the overall level of entrepreneurial activity is up, so holding the ratio steady means the absolute number of venture-backable ideas is up. Essentially, as with all emerging market sectors, the growth of early sub-sectors encourages the growth of other new niches. (Bear with me here...) To use an analogy from ecology, in any emergent investment sector you might start with a base market that might resemble a clearing after a forest fire. Thin soil without much nutrients, relatively little biodiversity, little biomass. But as the first-colonizing fast-growth plants move in, they start to change the clearing, contributing more diversity and nutrients, establishing a healthier habitat for next-stage plants. And then those plants further create new ecological niches and build biomass for other creatures to utilize. Over time, from such slim beginnings you grow back a rich, diverse climax forest with mature plants, and an amazing array of habitats and niches for a variety of food chains to exploit. In other words, as the early technology sectors grow, they provide a platform for the next technology sector to emerge. Good ideas beget even more good ideas. And this appears to be what is happening in cleantech. It ain’t just solar and biofuels and a couple of other lesser sub-sectors. Ironically, as the diversity of high-growth investment opportunities increases, it may make the market even more challenging for some investors. As dealflow goes up, so do the knowledge requirements. Many enthusiastic entrepreneurs jumping into the hot market often know little (at first) about their newly-adopted industry, and thus will be drawn to learning about the higher-profile sectors, rather than having the time, knowledge and resources necessary to dig into the full range of possibilities and find more out-of-the-box ideas. Generalist investors, meanwhile, who do some investing in cleantech but don’t focus on it exclusively may have a hard time developing the breadth of domain knowledge necessary to be able to sort out the wheat from the chaff across the full set of possible investment sectors by themselves. After all, a solar cell looks nothing like a fuel cell, and neither of them look anything like a D-cell or a desalination unit. But despite the learning curve challenges, LPs are telling their generalists to invest in cleantech, so they may assign someone to get look into it, gravitating naturally toward the high-profile subsectors first. When these generalist entrepreneurs and these generalist investors find each other, you might start to see momentum investing in some subsectors (er, solar, anyone?). Within these subsectors, the startups become harder and harder to differentiate, and the valuations get driven up as VCs compete to put their dollars to work in already crowded subsectors. Generalists, being experienced and smart, recognize this challenge. So one approach increasingly used by many generalist VCs is to co-invest with the specialists -- often at the prompting of entrepreneurs looking for a well-balanced set of investors. And thus we're also seeing increasing efforts by specialists to syndicate with smart, collaborative generalists. Because this kind of collaboration can often work very well: It takes advantage of the new entrepreneurial energy and technical and market knowledge that can be borrowed from other investment sectors (biotech, IT, etc.), but also takes advantage of informed vetting by the cleantech specialist firms during diligence, and eventually the domain expertise value-add by the specialist firms around the boardroom table. Such multi-dimensional collaborations remain more the exception than the rule, of course, and simply bringing these ingredients together around the same table doesn’t assure disciplined and informed investing – otherwise you wouldn’t see such momentum investing in certain sectors. But when they are done right, these collaborations can be powerful. Meanwhile, at the edges of all that, but in sufficient numbers to be drive significant dealflow, we’re also seeing entrepreneurs with the intellectual curiosity and energy to dig into the next thing, not just me-too ideas. …And specialist investors with the breadth of knowledge and networks to recognize when some of these ideas hold promise, even when they’re not in a sector with a lot of existing momentum. …And the multiplier effect of success begetting success, creating rich opportunity for growth in subsectors where once such prospects seemed dim, or in brand new market niches altogether. …All of which continue to drive the virtuous cycle forward. Other news and notes: John Doerr wants more government-sponsored energy research... Finally, we need a version of this contest for cleantech ideas.

Almost all VCs will say that they look to invest in "disruptive" technologies -- new products or systems where the value proposition is so markedly better in comparison to the incumbent choices that the market will have little choice but to go with the new option. Venture capital, needing to see rapid growth potential, naturally needs to see such opportunities, so it's easy for VCs to say that they're looking for Disruptive Technologies. But VCs mean different things when they say this. And in cleantech, the differences between what I'll call Compatible Disruptive Technologies and Incompatible Disruptive Technologies are, perhaps, even more stark than in other sectors. Compatible Disruptive Technologies (let's create an acronym and use "CDTs") are those that offer significant economic disruption, but without necessarily disrupting value chain relationships (at least at first). They are the solutions that dramatically reduce costs versus the status quo, but still go to market through the same channels, and could fit nicely into customers' facilities/ habits/ lives without too much of a mental or behavioral shift. They offer such a cost or other economic advantage, however, that they are still "disruptive" versus incumbent approaches within their targeted portion of the value chain. And often, the hope is that once they get into the market in a traditional way, they will further disrupt the rest of the value chain in some fundamental way. Incompatible Disruptive Technologies (okay, okay, "IDTs"...) are those that blow up value chains. To be successful, they must have compelling economic value propositions as well, or no one would go through all the trouble. But to be successful, they also require some pretty fundamental shifts in value chains. Some examples might help break through all the ex-consultant lingo... The differences between these two kinds of disruptive technologies can be found in most cleantech sectors.

• Hybrid vehicles are CDTs -- you're still filling up at the gas station. Fuel cell powered vehicles are IDTs -- you're filling up with hydrogen from some as-yet unknown retailer or home option.
• LED-based lightbulbs with edison screws are CDTs -- you can screw them into your existing sockets. Lighting fixtures designed around LEDs, with the diodes integrated into the fixture itself, and other LED-only features (like specialized lighting controls) built in, are IDTs -- no more sockets, you'll throw out the entire light fixture before the bulb ever burns out.
• Thin-film solar panels in traditional format are CDTs -- still a roof or ground-mounted panel, even if it's cheaper. Building-integrated PV could be IDTs -- when roofers or general contractors can just slap products in place, who needs solar installers?

As with all jargon-y business concepts, readers are free to dismiss the distinction as non-existent, or to dismiss the specific examples above... But regular readers of this column will easily be able to point to recent cleantech VC deals that fall into one or the other category. Anyway, charging ahead: The markets that cleantech is targeting are huge, and resistant to change. So in this investment sector perhaps more than any other, the investment choices between backing CDTs and IDTs are clearer. And so you get very divergent investment strategies, where two very smart VCs may take entirely different approaches to how they invest in this sector. Those VCs backing CDTs argue that it's tough enough to break into the market with new tech in energy, water, etc. markets even when you're offering little disruption and a compelling value proposition. They point to the failure of previous "big idea" IDTs. For example: in the late 1990s, it was pretty much an accepted given by many observers and investors that by about 2008 or so we would be living in a "DG world", where microturbines and other distributed generation technologies, in a deregulated electricity market, would have dramatically changed the way utilities ran their businesses and their wires. Well, that hasn't really played out yet, and being early looks an awful lot like being wrong, as they say. So CDTs are seen as the way to go, because revolutionary changes in the market aren't necessary in order to get initial market traction. There's an installed base of OEMs and channel partners who can integrate the new tech in easily to their existing businesses, and/or an installed base of systems out in the field where the new products can simply possibly be slotted in. And earlier market traction means an earlier track record, more opportunities to demonstrate low remaining technology risk, and thus a more rapid path to broad commercialization and exit. To grossly over-generalize, in comparison to IDTs, CDT plays can drive to earlier cashflow breakeven, they can therefore be more capital efficient, and still offer very big upside returns if the innovation catches on quickly. Investors backing IDTs, on the other hand, say things like "if you're hunting elephants, you need to bring an elephant gun." They argue that if you really want to end up backing the huge success stories in cleantech, you need to back the plays that will revolutionize entire markets. That's the way to not only back big-growth market opportunities, but also importantly to CAPTURE the market opportunities. When you're the one who organizes the coup d'etat, in other words, you're usually the one who ends up in the president's mansion. Sure, it's riskier. Significant capital will need to be deployed not only to develop the technology, but also to educate and proselytize the market, and to build momentum even ahead of market entry (ie: PR, key market and policymaker relationships, etc.). But with greater risk comes greater rewards. And besides, if we're going to move quickly enough to change the world in the timeframe necessary to adequately address climate change, etc., we're going to need to move beyond what's easy. No one knows which strategy will produce higher returns. It might be possible to succeed wildly with either approach. It's certainly possible to fail with either approach. Really smart investors are lining up behind both strategies, and some are trying to build portfolios with a balance of both. But it's an important distinction to have in mind when reading about the latest deal -- pay attention to who was involved, and how the deal was structured, and the patterns will emerge. Here's another pundit's take on the same general topic. Speaking of the latest deals:

• Stirling engine/ solar concentrator startup Infinia has raised a $50mm Series B, after raising a $9.5mm Series A last year. New investors GLG Partners and Wexford Capital participated in this latest round of financing, alongside existing investors Vulcan Capital, Khosla Ventures, EQUUS Total Return, Idealab, and Power Play Energy LLC.

• Dan Primack at PE Week Wire had two scoops on Friday: Battery developer Lion Cells has apparently raised a $12mm Series B with participation from return backers Battery Ventures and Nth Power, following on their 2006 Series A. And in the green building materials space, Apex Construction Systems has brought in $16mm of a $22.3mm Series B, with backers including DJF Element, Nth Power and Emerald Technology Ventures.

• Pythagoras Solar has raised a $10mm Series A, led by Israel Cleantech Ventures, and including participation by Pitango Venture Capital and Evergreen Venture Partners. More from Israel Cleantech Ventures on the deal here.

• Ed Gunther has a post up describing how Cool Earth Solar, which had previously been bringing in bridge funding, is now going to be announcing an "initial closing" on a $21mm Series A round of financing. It's unclear how much of that round is actually signed on at this point.  [2/19 update:  Jonathan Shieber at VentureWire is reporting that the company has actually raised a total of $21mm to date, and may take in a total of $26mm for the round.  He reports they're also looking to bring in $10-20mm in debt.]

• Impax Asset Management has invested GBP 4mm into waste treatment startup New Earth Solutions.

• Efficient lighting vendor Lumenergi has raised a two-tranched $7.5mm round of financing, from Low Carbon Accelerator and Noventi. The first $3mm tranche appears to be at an $11mm post-money valuation, and the second $4.5mm tranche appears to be at a $25mm post-money step-up.

• VentureBeat revealed that hybrid drivetrain startup Adura Systems has raised an undisclosed round of strategic financing from wind farm developer New Frontier Renewable Energy. Very interesting to see a wind developer investment in a hybrid vehicle technology startup described as a "strategic round".

Other news and notes: Planktos, we hardly knew ye... Cree's acquisition of LED Lighting Fixtures will probably bring even more investor interest to the solid state lighting space, since $103mm is a pretty nice exit valuation on a company that probably had something like $2-4mm in ttm revenues... Richard Branson wants an "environmental war room"... Solar continues to be white-hot -- besides the new deals mentioned above, Moser Baer has announced they're putting $1.5B into thin-film manufacturing capacity, India's $7B Fab City is switching its focus to solar, and here's a WSJ online column on the topic... A nice interview with Mr. Oz Cleantech, Ivor Frischknecht... Finally, recently stumbled upon a fascinating Los Alamos presentation on the possibility of underground nuclear power parks -- enjoy! (note: link opens pdf)

In the cleantech market there are a lot of very smart, worthy ideas for energy techs aimed at residential applications: energy efficiency plays, distributed generation and backup power plays, etc. It's important to remember that there are two very different markets for these kinds of applications -- new homes and retrofits. In sales to new homes, the key target customer is the builder. Installation issues are relatively lessened, costs are more easily bundled into the overall house value, and it's a single corporate sale rather than multiple individual homeowner sales. Nevertheless, the retrofit market is significantly larger and in many cases critical to the upside revenue potential for any new technology, product or service. So the retrofit market is the key. Unfortunately, in the retrofit market there are serious obstacles standing in the way of widespread adoption of even winning residential energy technologies. This fall, our family decided to switch our New England home from oil heat to natural gas heat. A low-tech decision. In this region (as well as many others), the cost of natural gas is currently less than half that of heating oil (on a $ per mmBtu basis, wholesale). And besides the economics, it also brought some benefits in terms of better heating and ability to use gas-fired appliances, etc. Someone tell Bob Catell (CEO of KeySpan Energy, our natural gas provider) to give me a call. Because just like my similar experience installing new insulation, the implementation of this change was far from easy. And that's hurting his business. First of all, the information for us to make an informed decision about our various choices wasn't there for us. We had some non-specific information self-searched from the internet, and a KeySpan-sponsored contractor who spun us with best-case economic scenarios, hadn't even heard of most of the newer innovations I asked him about, but assured us that "My guys are professionals. They're not kids. They're men." Alrighty then. And other potential contractors weren't helpful either. A chimney sweep helpfully informed us that the switch from oil to natural gas would require installing a new stainless steel chimney liner for the low price of a few thousand dollars, or suffer dire consequences. And then the KeySpan guy told us that the chimney sweep was blatantly lying, and we had to (hopefully) confirm it with other information after much additional web searching. Basically, homeowners don't have impartial, accurate, specifically useful information to turn to. Secondly, the economics were challenging. Even with some discounts from KeySpan (which also greatly limited our equipment choices), and the much lower fuel costs going forward, it was still several thousand dollars by the time all was said and done (even without a new stainless steel chimney liner) and that makes the payback period about 4 to 6 years or so. All up front cash, too. There may be financing options we could have used, but they weren't presented to us by the service providers. Thirdly, the cast of characters involved was quite long. KeySpan had to come hook up our house with gas. A contractor sold us on the job. He brought in a subcontractor ("Digger", a great guy) who actually did the installation of the new equipment and removed the old boiler. KeySpan had to then come back and hook up the pipe to the boiler. An inspector then came by and growled at Digger for a while. And then someone else had to come back and remove the oil tank. With so many players involved, planning suffered, and different perspectives meant re-directs midstream. Without ever talking to him directly, we were informed that the inspector said that we're going to have to get the chimney sweep to come clean out the boiler's flue, sign a piece of paper certifying that it's clean, fax that to the general contractor, have them cross out any disclaimers and take on liabilities that the sweep isn't willing to take on, and then get that back to the inspector. Yeesh. Finally, it was a royal pain during implementation. The research on the front end (including competitive pricing) took too much effort. Digger was here for three days, requiring one of us to be at home during the process. The whole chimney sweep issue has been frustrating to say the least. And now our home stinks of heating oil, as a result of the tank removal process. All of these problems can be pretty easily fixed. Massachusetts should be providing better incentives for this kind of retrofit -- it just makes economic sense for the state. KeySpan should be making it a lot less painful with better project management and by mandating better and more consistent processes (and really, this is a critical top-line business issue for them, they need to cannibalize the oil heat market as a first priority for growth, so it's pretty amazing it's managed this way). And some entrepreneur should be making the information and competitive pricing readily available for us to do this with a one-stop-shop approach -- and perhaps taking on even more of this challenges. But the challenges remain un-fixed. I find it hard to recommend this decision to my neighbors. And this was an example with a very well-understood technology choice with relatively well-understood economics (albeit challenging). Imagine taking on a new technology as part of this kind of process? Without any incentives in place? Without even the limited information we had available? You start to understand why energy and water techs aimed at residential applications, even those with a really compelling story to tell, face huge challenges in market adoption. And thus why it's a challenging market for venture investors to get into. The opportunity is worth investigating, but the challenges must be acknowledged, and addressed. [2/13/08 update: Wanted to make sure and include an update on the flue liner question... After the KeySpan guy said that the chimney sweep was lying, but the sweep insisted he wasn't, we spoke with a house inspector and got his take -- that indeed you do need a new liner if you're installing a high-efficiency gas-fired heater and pumping the flue gas out your old heating oil exhaust flue, because it does create acidity issues that will degrade the old liner. He said that if your new furnace is 85% or more efficient, it could be an issue. "Fortunately" it turns out that the "high-efficiency" furnace we got through KeySpan's rebate program is actually only 80% efficient. So we're supposedly safe. We will continue to monitor it, however. Also useful to note is that the inspector explained that we would be just fine with an aluminum liner, not a stainless steel or even a new clay liner, and that therefore it should only be "a few hundred bucks" and not the couple of thousand the sweep had told us. ...In all, just more fodder for the argument I made in this column at the time. rd]