Two years ago, I heard today, at the NVCA Annual Meeting the Cleantech session had 200 participants.

At today's, it had around 30.

And yet I walked away very encouraged. Why? Because in a room that probably had something like 200 or so collective years of cleantech venture experience, so many smart minds were focused on the basic question that we're wrestling with these days: "What will the next wave of cleantech venture capital look like?"

The panel session quickly turned into a full-room discussion on the subject, with lots of fodder for future columns (I'll get to them eventually, I promise). But perhaps the biggest takeaway for me from the conversation was Josh Green's suggestion that there will be two separate cleantech categories. "Energy/Industrial", and what I'll generally call "Market Reinvention" (while continuing to think of a better way to describe a wide range of consumption-facing business models and technologies -- suggestions welcomed).

"Energy/Industrial" would be the cleantech that many VCs and others seem to instinctively think of when they think about "cleantech": Hardware innovations, production processes, physical innovations. And this always seems to be what VCs gravitate toward. If you get more than two VCs together in the same room to talk about "cleantech", I guarantee you that within 5 minutes the conversation will have skewed over into the difficulties of getting venture returns from materials science or bio-chemistry innovations. (It was fun to watch the cleanweb investors like Mitch Lowe from Greenstart smile and go silent when that happened today.) There are a lot of reasons for this dynamic, including that many of the original cleantech venture investors came out of such hard-engineering disciplines, as well as the fact that cleantech markets are inherently about the physical world and thus there's no escaping the significant needs for such physical world based innovations. But clearly, a lot of venture investors, LPs, pundits, etc., tend to have a primary image of "cleantech" as being all about this subcategory, not just sometimes about this subcategory...

And the other category, as regular readers will no doubt recognize, is about business models and system integration (sometimes financial-oriented, sometimes web-oriented, sometimes software and controls oriented, sometimes deployment-oriented, sometimes just plain services). In large part, these are innovations focused on accelerating the adoption of the increasingly-attractive physical innovations and other resource efficiency improvements that the last decade of cleantech venture capital has done so much to bring about. They can create competitive advantage through proprietary IP, but as often they utilize brand, network effects, captive value chains, etc. to create their competitive advantages.

The point of the conversation, as it dwelled on this division, is that these two subcategories are really very, very different. Very different in terms of the skills required by the entrepreneurs and investors; different in terms of capital requirements; different in terms of time to market; different in terms of which strategic partners are critical, and what roles they need to play.

I happen to personally believe (and am investing around the thesis) that the current investment opportunity is in the Market Reinvention subcategory. Because there's a backlog of ready-for-prime-time physical innovations that aren't being adopted nearly as fast as their economic value propositions would suggest, so there are rapid growth opportunities to be found in figuring out how to unleash accelerated adoption.

Indeed, when Cambridge Associates put out a recent analysis of cleantech venture returns, the differences in performance between these two strategies was quite stark. From 2000-2011, they found that the pooled IRRs of bets in "Renewable Power Development" (basically, deployments/finance/etc. downstream of powergen) and "Energy Optimization" (lighting, efficiency, etc) were relatively more attractive at 11.4% and 8.9% respectively, whereas IRRs for "Renewable Power Manufacturing" (at 4.6%) and "Resource Solutions" (at 1.5%) were significantly less attractive. 

But the point isn't to argue that one of these subcategories is better or more attractive than others. That will likely be cyclical. If Market Reinvention is successful, in fact, it will create both increased demand for and more rapid adoption of new Energy/Industrial innovations and thus create the opportunity for superior returns there. It's analogous to when corporate America got to a point of prioritization of and dependence upon new IT innovations that CIOs became prevalent -- when corporate America starts hiring "Chief Energy Officers" we'll all be much better off and physical innovations may find more rapid paths to market adoption and exits. And heaven knows, as a society we need much significant progress in these innovation areas -- a need that may well lend itself to tremendous investment returns for investors with the right strategies and in the right market conditions. 

No, the point isn't to advocate for one of these subcategories or the other; the point is that these subcategories are indeed very different and thus require very different investment strategies and skill sets. In any rethinking of the cleantech venture category (and perhaps leading to some rebranding efforts), it's important to acknowledge these differences, and indeed embrace them.

In short:

1. "Cleantech" is not one opportunity. It is lots of completely different opportunities in completely different markets, built upon completely different technologies. It is more of a lens through which to view a wide range of innovations by entrepreneurs, some of whom may not even consider themselves "cleantech". And that's okay.

2. Not all of these opportunities will be a fit for the venture capital model, with its exceptionally high returns expectations and relatively short time to exit expectations. And the boundaries of that will vary over time. And that's okay. 

3. And even within these subcategories, there will be very different strategies and skillsets required. Smart investors will move away from "checklist investing" as so many of us have engaged with in the past ("I still don't have an advanced battery company in my portfolio, let me go get one of those") and start to focus on particular areas (skill-wise and/or market segment focused) where they have particular access and expertise. And that's okay.

Lest we forget, these are markets that add up to trillions of dollars of revenue opportunity per year that are practically screaming out to be overtaken by new, more efficient technologies and market processes. Clearly, only a subset of this opportunity will be applicable to venture capital returns. But even that subset will be hugely attractive, when we can figure out how to crack it open.

Let's go crack it open.

Consolidation in an industry sector can be a good or a bad sign.

The waves of consolidation in the PV manufacturing sector for example, presaged (when it was vertical consolidation to lock up access to demand for panels) and then highlighted the overcapacity in that industry. Much of the ongoing consolidation upstream in the solar value chain at this point is opportunistic consolidation of IP on the cheap. Not exciting at all from an investor's perspective.

But the looming consolidation in the "intelligent energy" (ie: IT applications in energy efficiency) sector is, I believe, a very different story. One that is positioning the sector to start showing some really exciting growth stories.

There is a paradox at the heart of the building energy efficiency opportunity.

Many venture investors have shied away from the sector because it doesn't lend itself to what they consider "proprietary technology" that has massive scale -- because it is a highly fragmented market, when you get down to ground level. A home in Nevada behaves very differently and has very different energy costs than a home in Connecticut; much less trying to compare either building to an office building in Chicago, or a foundry in Idaho. So the matrix of optimal lighting, HVAC, etc. solutions ends up looking quite different from customer to customer.

And yet conversely, many of the basic solutions do have commonalities; and many customers end up having some of the same space-driven needs in common. That foundry in Idaho does have an attached office that's smaller than, but has similar needs to, that Chicago office building. Those homes both have opportunities to participate in automated demand response programs and voluntary efficiency programs.

As we've discussed here before, one of the challenges for "single solution" vendors is figuring out how to scale up in the face of such a fragmented market. It's tough to navigate through that matrix of potential customers to find the ones that need your particular solution AND have budget, authorization and motivation to act. One solution we've discussed is to cast a very wide net, and harvest the scattered "easy wins" out there.

But an alternative approach is to offer a full solution set. If you have a full suite of solutions, it's more likely that any single customer will have a need you can satisfy. And that's what the looming consolidation in the intelligent energy sector is shaping up to look like. An early mover in this wave, EnerNOC, acquired several ancillary businesses in energy procurement, carbon accounting and wireless demand control for small commercial facilities -- acquisitions with mixed results, but clear intent. And then yesterday's announcement of Nest's acquisition of MyEnergy. These were acquisitions to provide more completeness of offering to customers who want a single vendor to solve their overall energy issues, not just offer one particular solution. They don't complete that aspiration, of course, but they're pointed in that direction.

While there have been and will continue to be opportunistic acquisitions of distressed assets, of course, I believe this is going to be a healthy consolidation wave in this sector. Why? Because the most strategically-valuable acquisitions will be the ones that customers are already experienced with and are proven out in the marketplace, not distressed assets. Acquisition targets that already have some additional strategic value beyond any proprietary technology, such as customer/user networks, brand recognition, etc. This will be real companies buying real companies, and if done right, will end up with even faster sales growth. And in intelligent energy in particular, it is relatively easier (stress: relatively) to integrate different offerings into a consolidated single platform for customers.

What this likely means is that we're going to start seeing the emergence of several acquiring platforms that could eventually challenge the incumbent sleepy technology providers in these markets (the Johnson Controls, Honeywells and Rockwell Automations of the world). These acquirers will increasingly look to offer a full-service solution set to a particular category of customers -- utilities on the one hand, and on the demand side likely different platforms for different major categories like residential, retail, manufacturers, etc. Some solutions will be outright acquired, others will be licensed or otherwise brought into the solution set without an acquisition. But for major categories, the offer will be "one stop shopping" for their energy needs.

Controls providers will be well-positioned, if their solutions can be easily integrated into a wide range of other vendors' equipment. Network effects really come to the fore when you're looking to consolidate control of a very fragmented user equipment base onto one platform.

This also likely means that owning the customer relationship, is going to become even more valuable. Those who own the customer interactions are going to want to be such consolidation platforms; startups that can aggregate a significant customer or user base and aren't planning on driving consolidation will themselves become prime acquisition targets.

The rapid proliferation of new, intelligent solutions for the building energy efficiency market has therefore opened up an opportunity for some new, big players to emerge. And for the incumbent providers to also therefore need to drive strategic acquisitions of their own so that their offerings to their customer base also don't develop gaps. 

This feels like the launch of an arms race in intelligent energy, in other words. And investors who are building and selling into it should be pretty excited right about now.

As I sit here at the jam-packed BNEF Summit listening to Senator Murkowski express her frustration about unrealistic political rhetoric on energy, I'm reflecting upon all the recent discussion among clean energy advocates here in the U.S. about priorities.

There's a recognition that in this policy environment, at a federal level this sector won't be able to enjoy all the policy support it should. But upon recognizing this the three major camps of clean energy policy advocates immediately fall upon each other, arguing that their camp deserves the most attention and support.

Advocates of deployment argue for implementing today's energy efficiency and renewable energy technologies at scale, as the best way to affect ongoing carbon emissions and build a stronger sector that can provide fertile ground for future generations of technology. Advocates of breakthrough innovation argue that today's technologies aren't sufficient so it's more important to emphasize R&D for the future solutions that can actually be full solutions. And those of an economic bent still advocate for putting a price on carbon as the biggest overall piece of the puzzle, but they tend to be more quiet these days, with a few stalwart exceptions.

They're all correct. But they all too often insist the other camps are wrong.

We need as much deployment as possible of RE and EE today where the economics make sense, and increasingly they do. The bigger the installed base, the more simple cost curve dynamics drive down prices. And the more people employed and making profits off of clean energy, the bigger voice we have in politics. Momentum matters. Forgoing momentum today to attempt an end-around via breakthrough innovation that solves everything down the road seems improbable, and also unrealistically assumes that a weak market with non-existent channels, etc., could even rapidly scale up such innovation when it becomes ready. And as for carbon tax advocates, it's unrealistic to expect a price on carbon to be politically acceptable if the alternatives aren't evidently at scale.

So I'm encouraged to see the efforts of Sens. Coons, Moran, Murkowski and Stabenow and others to put in place policy changes like MLP treatment for renewable energy that could help unlock deployment capital. These and other policy changes are possible (if still not probable) even in this broken political climate, and could make a significant impact. At a local level, movements to promote PACE and EE financing and feed in tariffs are all also welcome. I love the "race to the top" model for state-level energy policy encouragement outlined in the Obama budget. Furthermore, I've also talked here in the past about non-budgetary ways the White House could do a lot more to focus corporate America on making energy efficiency a shareholder-pleasing priority. If something like these kinds of efforts gets momentum, clean energy advocates of all camps should throw their weight behind it, and not whinge about how their individual camp is being left out.

Similarly, we clearly need to support more R&D spending on clean energy technologies. The Obama budget underlines this need and asks for significant more resources -- this may well not happen when Congress gets around to their own budget versions. But again, it's worth all clean energy advocates fighting for, arm in arm. Even among later-stage deployment folks, the emergence of alternative cheaper energy solutions would only enhance future economics. And to be blunt, as human beings we also need this type of breakthrough innovation, eventually.

Finally, we need a price for carbon. I see deployment advocates and innovation advocates pooh-pooh this basic fact way too often, arguing that a patchwork quilt of incentives for their pet priorities are sufficient. And there's a somewhat defeatest attitude presented along the lines of "oh, Americans will never go for that, so stop distracting yourself with the concept." But let's remember that the climate challenge is at its root a challenge of externally-priced damages. When dumping carbon into the atmosphere is free, no one internalizes these externalities and thus any patchwork of policies will find loopholes exploited, key solutions left out, arguments against "government picking winners", etc. Thus, an overarching policy solution is an inevitability, frankly.

Which is where I take issue with the White House (sorry, Mike and David). I agree that a price on carbon is probably unrealistic in this Congress, and I agree that the President's bully pulpit role will be insufficient to change that fact due to entrenched obstacles, and I understand that this White House is looking for battles they can win right now. But that's such a terribly short-sighted perspective on the President's role. Addressing climate change is going to be a decades-long struggle more akin in its political dynamics to civil rights progress than to near-term economic policy debates. And seen through this lens, the President should take every opportunity to simply utter the phrase "There will eventually be a price for carbon emissions". Just say that. Yes, the President talks about climate change and yes there are some good efforts being done by the Administration such as those mentioned above and many others. But eventually we need a price on carbon. And the President of the United States cannot be cowed into silence on that fact, even if it's politically impossible to push any specific legislation during this particular Congress. Repetition of this phrase, by this President and future presidents, helps shape the expectation that it will happen. It keeps the sense of inevitability that powers long-term political fights. It reminds everyone that, even if it's not a top three priority at any given time, it remains a long-term priority. It's too important to leave to patchwork half-solutions and short-term political silence. And just talking about climate change is not enough. People need to hear that there is an inevitable long-term solution. Or the inevitable keeps getting pushed back.

And along those lines, advocates of clean energy innovation and deployment need to stop their own reticence to engage in this inevitability. I've seen studies talking about how, for instance, dollar for dollar a direct subsidy to deployment results in more deployment than a broader carbon tax. Well duh. If all you care about is deployment of certain technologies, then put your dollars directly into that. But a) this type of argument only serves to illustrate how a broader approach to ALL carbon-reducing options is important, because dollar for dollar internalizing externalities will be more efficient for reducing carbon emissions than any subsidy; and b) a price on carbon can be made partially or entirely revenue neutral, and thus "dollar for dollar" should actually serve multiple economic purposes and have even broader benefit. But that's not to argue that a price on carbon is more important than supporting deployment or R&D -- it's absolutely true as well that if carbon emissions were priced but no support was given to emerging technologies or innovations, barriers to entry and lack of R&D capital would slow down necessary progress.

In short, we need all three: Innovation, Deployment and a Price on Carbon. The right answer isn't one or two of these policy areas. Appropriate and comprehensive clean energy policy is a three-legged stool. I recognize that policy advocates are incentivized to be contrarian and thus divisive. And I agree that we can't do everything, so some prioritization is necessary. But please, stop arguing that your leg should be longer than the others. Let's all get behind whichever of the three has a window of opportunity at any given moment. And let's all speak loudly at all times about the importance of all three; now if possible, later if necessary. We're too small of a community to be able to afford being so internally divided and riven with cynicism.

The traditional utility model is under threat. Industry leaders like Jim Rogers and David Crane are talking about this publicly. It's becoming harder and harder to make profits managing wires that distribute centrally sourced kilowatt-hours to end customers on demand. The aging T&D workforce, new potential significant loads like PHEVs, intermittent and distributed generation sources, an increasingly complex array of technologies on the demand side and on the grid for utilities to be on top of -- it's not surprising that utilities are finding it a daunting challenge to profitably manage their businesses with their existing wires-based revenue models.

But what I'm surprised about is that utility managers and their boards aren't taking advantage of the unique positioning and branding they have with customers, and their big balance sheets, to tackle other emerging profit pools. In fact, they're letting other players come in and chip away at them, even though they are in a strong position to capture a lot of shareholder value here.

Ultimately, I believe that the wires-management portion of the electric utility business will be used by investor-owned utilities (IOUs) to enable other, unregulated profit centers.

There's already a strong history of IOUs running unregulated subsidiaries. This practice has waxed and waned over the past couple of decades, but I've seen IOUs that have run outsourced billing services divisions, energy trading shops, and even fuel cell businesses. In many cases, those unregulated subs weren't designed to take advantage of the market position of the regulated T&D business unit actually managing wires, etc., but there's no reason they couldn't be if structured appropriately.

Let's look at the business opportunities on the demand side right now. Utility customers are looking to take on energy-efficiency projects, distributed generation installations, inclusion in demand response and ancillary services and other load control programs, backup power and combined heat and power systems, etc. But what holds back these activities from scaling up even faster than they are today? Lack of capex, and lack of buyer information (which vendors to work with, which systems actually work, what other options are there, etc.).

What are utilities uniquely well suited to provide to the customers they literally touch, via managing the wires? Financing of capex, and access to buyer information. How?

Utilities have big balance sheets, thanks to all of their T&D assets. They can tap into that to get very low-cost capital, which they could then offer as financing to interested customers. If done through an unregulated sub, they couldn't maintain an exclusive financing opportunity to customers -- naturally, other third-party financiers would also be hitting up these same customers. But utilities have a primary advantage of likely lower-cost capital because of the balance sheet, and also more accessibility to customers. On-bill financing has demonstrated that it can be dramatically more effective at unlocking customer purchases than third-party leases and other third-party financing -- customers just find it much easier to pay their financing fees on their existing utility bill. It's not another vendor or a new relationship, it's a bill they're already used to paying each month. IOUs could conceivably make significant high-margin, very stable income by becoming a financier to customers for demand-side projects, or, in a lighter form, by charging a fee to third-party financiers who want to offer customers "on-bill repayment" via the utility billing system. Even in a competitive financing market (so as to not take unfair advantage of the natural monopoly of managing T&D wires), utilities could have enough competitive advantages to grow big businesses here.

Utilities, thanks to their brand and existing connections with customers, are well positioned to be a more effective channel for solutions providers. They have the data to be able to show customers how a specific project would affect their energy spend. Plus, utility-approved vendors and systems (akin to Rockwell Automation's Encompass program) would be given more credence by end-users who don't have time to do an exhaustive investigation of all of the proliferating options available to them (which would make it easier for the utility T&D department to better manage all the more variable inside-the-meter load and generation effects). Utilities could even leverage new or existing unregulated service/channel subsidiaries to compete for this work themselves. 

What's necessary? IOUs would need to have a major strategic shift, away from treating the distribution of kilowatt-hours through managed wires as being their primary profit center. They would need to embrace that the grid will be the source of kilowatt-hours of last resort in many cases, and stop trying to make their margin off of the kilowatt-hours thus sold. They would need to embrace that the ability to have that T&D role with end-consumers is worth much more than that, because of the above-named businesses, and bring in strong managers to launch/expand such unregulated subs -- and let them take senior leadership positions within the utility, which as yet never seems to happen. And they would need to educate PUCs as to how this ends up lowering costs for ratepayers, without endangering reliability.

So clearly, it won't happen soon.

But it's going to happen to them if they don't get out in front of it. They need to eat their own lunch before someone else does. And it wouldn't require any major regulatory shifts. So I'm surprised I haven't seen more IOUs starting to talk about a future business model that looks more like the above, rather than just lamenting that the existing business model is in trouble. This could actually be a big win for the shareholders of IOUs, but for now, such shareholders must instead just sit back and watch as other financiers and startups (and increasingly, bigger companies like NRG) take advantage of IOU inaction.

It's been quite a while since we did a roundup of recent news items here on the Cleantech Investing blog, but a few smaller news items have caught my eye and are worth discussing.

First of all, some housekeeping issues -- at my firm, we have made the decision to change the name of our firm to address a surprising amount of confusion out there in the marketplace. After receiving numerous business plan submissions addressed to "Black Corral Capital," we've determined it makes sense to change the firm's name to match apparent expectations. Of course, by that logic we also could have renamed the firm "Blackstone" or "Black Rock," but those are already taken. As we believe strongly in partnering with the best entrepreneurs and following their lead into new investment opportunities, it became awkward to be constantly replying to investment submissions with corrections about our company's name. So we've decided to make the change. Please adjust your contact databases accordingly.

Furthermore, we and many other investors in this sector have begun to rethink the "cleantech" phrase as a good descriptor, as it appears to now be out of favor among limited partners and Sand Hill Road types. Unfortunately, many other potential phrases have also become stale or are just silly, and it's even been suggested that the simple term "green" is now too politicized. So a big hat tip to Walt Frick of BostInno for recently coming up with the very pithy "Sustainnovation Greenruption" moniker. It finally captures all the key aspects of the investment thesis at work in this sector, and also should be difficult for extremist politicians in Congress to politicize, because it is so challenging to pronounce. At Black Corral Capital, we now will be shifting our communications to incorporate this new descriptor for the sectors and subsectors we seek to invest in.

Now onto some news items that caught my eye recently:

• Surprisingly quietly, Tesla announced plans to purchase Nest. Terms were not disclosed, but it does make some strategic sense. They tend to have the same customer base anyway, so this allows the combined entity to capture more "share of wallet" among those buyers and hopefully up-sell them to entire newly built green homes designed around Nest thermostats, organic grocery deliveries via self-driven Tesla roadsters, etc. The rumor is that the merged company will be renamed to "TEST" (a combination of the two existing names) as part of a marketing strategy they're internally referring to as the "CleanTEST," which sounds to be something like a Klout score but based entirely upon how much discretionary income you spend on pricey, fashionable clean energy devices. At very least, public scoring of this kind should motivate additional personal purchases by Silicon Valley VCs.
• Not to be outdone, Fisker is supposedly in final negotiations to acquire the assets of the short-lived Tucker automobile company. In a cashless transaction, naturally. Efforts to combine the companies' names appear to be a major sticking point, however. 
• Former executives of Advanced Equators have begun fundraising for a new effort geared around "crowdsourced big data demand response". According to this blog post, the pitch to potential investors involves raising funds to build the IT infrastructure to aggregate DR capacity at the investors' own homes and offices, simply by tapping into their potential capabilities to adjust dimmable lighting when signaled to do so by a phone call from one of AE's many, many, many associates. According to an AE spokesman, "By investing a minimum of $1,000, investors who certify that their net assets are over $1 million can buy into this program, where they are in control of the profits of the enterprise by dimming their own light bulbs. We think there are a lot of dim bulbs out there, and we plan to take advantage of them by selling this 'verified' capacity to utilities and recycling all revenues into future growth (and management fees). Eventually, this IPOs, of course." Details on how individuals can invest into the "Energy Suckers Fund" can be found here.
• According to this article, A123 has renamed itself B456. I like this change. The sustainnovation greenruption sector has long lacked strong branding and marketing skill sets, but moves like this are an encouraging signal of change in this regard.

I wish I could also include news of forward progress toward comprehensive federal energy policy, but then readers would probably just assume this was a silly April Fool's Day post, and we wouldn't want that. So for now, here's to all the greenruptors out there. Keep on sustainnovating.

[Editor's note: Rob asked us to post this tomorrow but since it seemed to include sensitive information of a timely nature, we decided it would be prudent to publish it today instead, as a public service.]

We recently held a one-day retreat for all of our portfolio CEOs at Black Coral Capital, and it was a really energizing affair. Rather than a day of stale presentations, we created lots of opportunities for our CEOs to compare notes with and look for ways to work with each other, and it was just terrific to be a fly on the wall as all those smart entrepreneurs chatted / cajoled / brainstormed / opined. Just great fun to watch. It certainly helped that all of our companies are in a revenue-growth phase, so they had lots of common points of discussion. And of course, they all had one shared investment partner to complain about with each other...

But to kick off the day I gave a little update on the sector from the investor's perspective. Here's some of what I presented to the group:

We expect that 2013-2014 will see another wave of shakeouts in commodities like biochemicals, electricity storage, etc. There's too many solutions being commercialized right now by high cash-burn startups for the market to absorb in time, some shakeout is inevitable.

But we also think 2013 will see the first data points of success of the "next wave of cleantech investing" -- especially rewarding business model innovation over technical innovation. Thus, we expect LP dollars will start flowing back into this huge macrotrend opportunity, starting in 2014-2015. In the meantime, however, capital will remain scarce. According to Prequin, 2012 was the worst year in more than half a decade for VCs looking to raise cleantech funds, with aggregate capital raised down to $2.8B from $6.1B in 2011 -- part of a downward trend that has continued since 2009.

I also found it interesting to compare our inbound dealflow composition during 2H12 with the reported consummated deals in the market, as reported by the Cleantech Group. In a way, we can assume that the dealflow we see at our shop generally reflects what's being shopped around the broader market, so differences between what's being shopped and what's actually garnering investments might point to gaps and tensions in the market.

Fascinatingly, the dealflow we saw matches up really tightly to the deals that got done. As illustration, 13% of the deals we saw were in the solar space, and Cleantech Group reported that 13% of the reported deals those two quarters were in solar. Similarly closely matched levels in sectors like energy efficiency, biofuels and biochem, agriculture, materials, etc. This suggests that, at least at a sectoral level, there isn't that much divergence between where the entrepreneurs are and where the checks are being written. Of course, in such deal counts an insider-led follow on counts the same as an outside-led round, and trends within subsectors (such as toward downstream solar) aren't available in this data, and it's very susceptible to apples to oranges comparisons for a number of reasons... but it's still a fascinating comparison. If the VCs are actually moving away from some cleantech sectors and into other "new" ones, leaving entrepreneurs behind, you can't see that in this data. At very least, they're still backing their old bets, generally speaking.

In another interesting datapoint, we looked at the stage of development of the companies that approached us for funding in 2H12. Fully 75% of them were at or pre-commercialization. That stands in marked contrast to the significant fall-off the Cleantech Group identified in early stage deal counts (a negative 9% CAGR from 2010-2012). It's getting harder and harder to be an early stage cleantech entrepreneur out there.

Finally, while the Cleantech Group's data suggests that consummated deal sizes have been shrinking over time, we also track how much the fundraising ask was. And since 2009, in our dealflow we have seen remarkable stability in fundraising targets by stage. This suggests that a lot of funding rounds are coming in below target as the asks remain the same size but the reported round sizes drop.

Again, lots of apples to oranges in this data comparison, with possibility of data selection errors as well, so it's important to treat the above as just possibly indicative and far from comprehensive. But the overall picture is pretty clear -- investors don't have as much capital to invest, so deal counts and deal sizes are down, and yet there hasn't yet been any large-scale shift in how and where investments are being done in the cleantech sector, except to veer toward late-stage. Same old, same old.

But I think in 2013 we'll start to see some data points emerge out of alternative investment strategies for the sector. And hopefully that will mean better things for 2014 and beyond. It's certainly a good sign to see some recently announced successful cleantech venture fund closings! Here's hoping these funds and others can help drive the necessary next wave of cleantech investing.

If you read this column regularly, you know I'm a bit obsessed with this question: Why do many startups in the cleantech sector see much slower-than-expected sales traction after successfully bringing solutions to market?

On the surface, it should be simple. If you bring to the market a solution that offers a compelling economic proposition, given how big the energy markets (etc.) are we should expect to see revenues skyrocket after commercialization. And yet that doesn't often happen. I often mention the company I saw that recently offered a customer a six-month payback period with a proven solution, and it took the customer nine months to say yes.

There are several reasons for the underwhelming post-commercialization revenues growth, of course. In many cases, the products aren't yet ready -- lacking proven reliability, or just being a component and not the full-fledged solution customers need to see before they will readily adopt. And there are market-driven barriers as well, including (but not limited to): The underlying low incumbent energy costs; misinformation in the marketplace; customer risk aversion; mis-designed incentives; etc., etc., etc.

But one other pattern I've seen is a sales approach by the startup that is itself a limitation to rapid growth. It is a "conversion-oriented" sales approach that involves relatively small volume, heavily-vetted pipelines, with sales teams working very hard to close each sale. The sale is heavily education / consultative in nature, and very hands-on. 

This is necessary in some situations, but has the inherent limitation that it leads to long sales cycles. And delays in closing deals is the same as losing deals, because of the opportunity cost.

Cleantech startups (aside from those selling to utilities or building large chemical plants, etc.) should consider shifting to a sales process that is more "harvesting-oriented". Shoveling lots of relatively unqualified pipeline into a self-selection sales process. Putting in a lot less conversion effort per customer, and grabbing easy wins and moving on.

This is because of the nature of these markets. Whether it's residential solar installations, or industrial energy efficiency, or any number of other "distributed" cleantech plays, we can all point to inspiringly huge TAMs. Especially once a compelling solution has been developed, the natural assumption is that customers will make the economically rational decision and purchase the offering, once they get a chance to learn about it.

The problem is that most buyers aren't really motivated, often aren't authorized to make unilateral decisions, and certainly are not focused on educating themselves (or even getting educated, for that matter). This means that even when all questions about the startup and their offering have obvious answers (e.g., it's been installed a hundred times, with no reliability issues, reliable economic benefits, and a compelling payback or ROI), the buyers still take months to say yes. I hear it again and again in board rooms, "We're not really losing the deal, it's not competitive, it just didn't close this quarter." Perhaps they needed to do more research on alternative solutions. Perhaps they needed to go to their CFO to get approval. Whatever. The net result is big delays for the startup's revenue growth, as this scenario plays out again and again. 

But too often this is presented as an inherent problem that occurs with all customers in these sectors, because of the low urgency of fixing what isn't broken. Instead, I offer that even if only 10% of potential customers already have budget and authorization and motivation to make a decision, these markets are often so large that it's a much better strategy to spread a wide net to catch and harvest those 10%, rather than try to work with the 90% to convert them to a decision.

What this means is that you need 10X the sales pipeline you have. And you need a very low-touch and inexpensive way to both build that pipeline, and quickly harvest as much out of that pipeline as possible. And then move on.

This sounds obvious, motherhood and apple pie. But I see it coming up again and again in these markets, among very smart management teams. It's understandable. Sales at the commercialization stage, when you're first bringing product to market, are always necessarily hands-on as you need to convince the first few customers to take a risk with you. And it's tough to make a hard pivot away from that sales approach. Also, because you're offering a smart solution, customers always sound favorable and motivated; not many people are pitched an obviously smart thing and want to say no to it. But that positive reaction is easily misconstrued as activation, and can fool salespeople into devoting time and energy into a no-win effort, in ways that are hard to qualify until you've already spent a lot of time on it. And certainly, it's tough to wrest salespeople away from trying to convert those high-priority targets at the end of the quarter as they try to hit their targets, rather than go off on another fishing expedition. I've seen this recently at one of our portfolio companies, where the decision to move away from a consultative direct sales approach has been made, and it makes everyone nervous. It's a big shift, after all. But it's a necessary one.

So while it sounds obvious, I just don't see it happening out there like it should. If this sounds like you, if you're falling into a Conversion Sales Trap, consider the following shifts of emphasis:

1. Put even more emphasis on inside sales than you do today, even at the expense of outside sales. Inside sales can cover a lot more ground more quickly. In many cases they can't be the ones to push the ball across the line themselves, but they can often carry it down to the 1 yard line and work with a closing-team of outside sales and sales engineers to punch it in.

2. Focus your outside sales teams on more bizdev-type activities. National accounts and other big wins that are worth the conversion effort.

3. Create a "quick kills" culture that forces time discipline: Only spend time on the easy wins (aside from the bizdev activities described in point #2).

4. Develop and offer free tools that customers find valuable, but that when they use the tools it also flags your inside sales team that the customer is motivated to do something. This is the principle that got us excited to partner with the team at Noesis, for instance, that they were going to roll such offerings out for just this purpose.

5. If the nature of your offering is that a consultative sales approach seems unavoidable, work like heck to simplify the offering, even if it means not being able to serve as much of a TAM. Don't subject your customers to the Tyranny of Choice, it just slows things down. You can expand via other offerings over time.

6. If the nature of your offering still requires a very hands-on sale, you're going to need to put a lot more emphasis on sales via channel partners if you're ever able to rapidly scale. And unfortunately, your channel partners are unlikely to be any better at rapid customer conversions than you are. So you'll need to enlist and manage a whole lot of channel partners for the math to work out.

7. Develop direct marketing programs that are designed to ping high-potential customer pools (e.g., certain types of customers in a certain geography) two or three times very quickly, drive them to action, and then move on having harvested the easy wins. This requires highly targeted and efficient marketing, to keep costs down.

The net result from where I've seen this type of approach (sometimes on purpose, sometimes by accident) is sales cycles that drop from six to eighteen months, down to two to three months. That's huge. 

This is not a universal fit, of course, nor is it a black-and-white differentiation of approaches. But I've seen the relevance of this different sales emphasis across many different cleantech subsectors, across both B2C and B2B, across hardware and software.

Here's the good news: Even if you do only harvest 10% of a potential customer pool, that's not your limit, you haven't left money on the table. Because you can go back to them. You go back to the same pool a year or two later, and in the meantime a completely different set of buyers have gotten budget and motivation. And this time they've already heard of you. This approach lends itself well to building self-propelling sales momentum over time, because it also lends itself well to clustering effects such as now are being identified in many of these markets. 

I talked with a proven CEO recently who's extended this approach even to a B2B market that requires OEMing a highly technical embedded solution into products with long design cycles -- the classic example of a consultative sales process. "I talk with everyone," he told me. "I talk with anyone who'll talk with me. I quickly figure out if they have a real serious need, and I offer them a solution to that. I don't try to convince them to buy what I've got, I solve their immediate pain. And if they don't have a real serious pain point I can solve quickly, I move on." He's been highly successful with this approach, which is all about opportunistically building momentum while simultaneously taking on longer, strategic projects. "Even if there isn't a way for us to work together today, they'll be there the next time I come through. And sooner or later they'll be at the right place for them to want to buy from me, because no one else can offer them what my company offers. No sales meeting is every really wasted."

Stop trying to convince the customers who nod their heads when you describe your offering but don't move quickly. Start touching a lot more potential customers. Move quickly to harvest the customers who already want to say yes, and move on. And then come back and harvest other customers from the same pool next year as well. 

If you want to scale revenues quickly, you're going to have to consider leaving some customers behind.