[pagebreak:Q&A: CMEA Ventures' Bruce Pasternack]

Bruce Pasternack, a partner at CMEA Ventures, isn't new to energy. He worked at the Federal Energy Administration, before it was renamed the U.S. Department of Energy, back in the 1970s. He also served on the principal staff to the White House Energy Resources Council and the President's Council on Environmental Quality.

He joined CMEA last year after nearly 30 years as managing partner of Booz Allen Hamilton Inc.'s energy, chemicals and pharmaceutical practice. CMEA has often placed more emphasis on science and long-term bets than other firms and its push into green follows the pattern. It has invested in A123 Systems (batteries for cars), Solyndra (a novel CIGSsolarcell), Codexis and Luminus Devices (next-generation LEDs).

Q: How has CMEA Ventures chosen its investments in green technology? How has CMEA's emphasis on "mashups" of science from one field into another influenced its strategies in the green space, and how do you feel those investment strategies have worked out? 

A: Within the energy and materials space, we've kind of focused in on about five different areas. [In the first area], we've invested a fair amount in advanced power generation. That can range from solar to nuclear, if you want to pick a couple that are somewhat different. [Ed. Note: CMEA has invested in Solyndra, a thin-film solar company with a unique tube-shaped module design, as well as NuScale Power, a company developing small-scale nuclear plant technology.]

A second area is premium power, where we look at those oppo rtunities to supplement what you would normally get off the power grid. It could be something like battery technology for vehicles – we have some investments in one that's particularly interesting [A123 Systems].

A third area that we focus in on is future fuels. There, we've had a real focus in cellulosic ethanol through one of our investments, Codexis, which is, again, a transformative technology in our view, and is probably the wave of the future some years down the road.

A fourth area we look at is energy-efficient products. That could be lighting. It could be in buildings, where there's a staggering number, if you look at the percentage of carbon dioxide or other forms of carbon that are emitted, a lot of it comes from buildings.

Then the fifth area we look at is energy intelligence, which broadly defined means ... a convergence play between IT and energy and materials. It could be anything from smart grid type investments to information gathering, areas like that.

Q: Your investment in Luminus seems to indicate that you see energy-efficient lighting as a field for growth (see Luminus Closes $72M to Light Up New Applications). But how do you think Luminus will compete against giants in the lighting field, such as Philips, General Electric and Sharp? What would you say is Luminus's strategy for competing in this space, and what might its exit strategy be?

A: I would say in general, in any of our portfolio companies, we look at exit strategy all the time. The question is, normally, is it ultimately a strategic partner that becomes a buyer? It's easier for them to buy the company than to be an investor. Or, does the company have a technology that would easily fit [the company that wants to acquire it]? The exit strategy is, historically, you either go public at some point, or you get acquired. Sometimes it's both – you go public, and then get acquired.

The reason that an established player might acquire you is straightforward – you have a technical capability that they don't. They may want to copy you, but sometimes it's much easier to buy you. 

Q: Given A123's rumored troubles (as reported by Reuters last month) in securing itself a place at the table to develop the battery technology for General Motors's promised Chevy Volt plug-in hybrid, what do you think of the prospects for the company?

A: I can't answer that. ... Whatever's happening inside a company – it's not our job to give that information out.

Q: What about Solyndra? The company's unique thin-film solar module design has drawn lots of interest (see Solyndra Rolls Out Tube-Shaped Thin Film), but some industry observers suggest that Solyndra's solution may be too complex for project developers who want more tried-and-true designs. What do you make of those arguments, and what do you think will come of Solyndra's effort?

A: I think most customers who would be targets for Solyndra would be very smart to pick Solyndra. It's a brilliant technical solution combined with a lot of other positive factors that would make it something people would want to buy.

Q: Let's talk about the credit crunch. How will this affect green technology venture investing, as well as the short- to mid-term prospects for various companies in the spaces you invest in, and how long will these effects last?

A: Again, it depends a lot on the stage the company is in. For those companies that were very close to exiting through an IPO – and we have a couple of those at least where it was certainly in the plan, that market is essentially dry right now (see Codexis Says No to IPO). The question there is, for how long, and what do you do in the interim? ...

I don't know how long this credit crunch is going to last. In the interim, the things we're advising our portfolio companies to do, is to be very, very frugal, be focused on the most important things. If your key product or key technology is going to drive most of your growth, you should put most of your efforts in that area, and as for things that were interesting forays into a new space, be very careful, because you don't want to spend a lot of money or cash in the short term that may be for an opportunity that may be further down the road.

[pagebreak:Pasternack: Continued]

Q: Do you see any parts of the green technology space in which an investment bubble may be forming, perhaps akin to what happened with first-generation biofuels several years ago? If so, how do you think that will affect companies in that space?

A: You get back to an interesting question, which is, what is a bubble? A bubble doesn’t necessarily mean that it was a lousy investment in something. When you’re looking at a bubble, and when people talk about the bubble that hit in the IT space in the late ‘90s, early 2000s, part of the bubble was a lot of irrational exuberance. People were investing in things because there were a number of clicks on a Website. In a bubble, people forget about what are the real economics – is it something that you can transfer interest from people singing on to your Website to making money? The brilliance of Google is finding out how they could make money.

So, are we in a cleantech bubble? To some extent, because there is some money going into things that, when you look at it, you say, what are they thinking? It will never sell. But a lot of things in cleantech right now, there are real economics, there’s real advances in productivity, there are real opportunities to increase efficiency in solar or wind, and there are real players in the game.

The umbrella around all that is the political and policy environment, which even before this recent election had changed fairly dramatically over the last five years, and it’s going to change even more dramatically over the next five years.

There’s a bubble in the sense that there are a lot of people in the game that might not have been in the game before – and there’s a lot of interest and money that’s gone into this whole cleantech area. But on the whole, there’s a lot of rational thinking going into this. There are a lot of fundamentals that lead you to believe that these investments are going to pay out.

Q: On the other hand, do you see any longer-term bets for venture capitalists to make? Are there different timeframes for payoff in the different areas you’re investing in?

A: I think they’re all different. Let’s take something in solar right now. Solar – there are some real drivers in there – we know there’s a need to be much more efficient and effective in getting solar to a price point that works, and it’s moving very quickly there. At the same time, there’s a real receptivity on the part of either people who own commercial buildings or residential space, or utilities that are trying to shift their profile form coal-fired to something that’s a lot cleaner. You look at, number one: How ready is the market? Number two: How difficult is it to displace the existing players I the market? Number three: What are the economics? And fourthly, how far advanced is the technology that will displace the current technologies?

In each of these areas, you can’t generalize. Batteries for electric cars, depending on which one they are ... there are long lead times in some cases in getting the manufacturers to put up the fleet that will match your technology. So partnerships are really important – you have to look at who will be the leaders in this area.

You get to something like cellulosic biofuels, there the real challenge is proving out the concept and then building to scale, and then making sure you’re able to deliver at a price point that’s less than or equal to – hopefully less than – the prevailing price of fuel. So you have to make bets on the technology working, you have to make bets on the technology being adopted by the people who are going to get it out in the field, and, to use ridiculous numbers, at $20 or $30 a barrel [for the price of oil] it isn’t going to happen. So you have to say, what is the five to 15 year outlook on the price of oil. ... I wouldn’t bet on low prices for oil in the period these things are coming to fruition.

Q: What will be the next wave of green technology innovation? In what industry or industries do you think it will occur, and what’s your timeframe for seeing it come to pass?

A: I’m going to be coy. If I really had the answer here, I probably wouldn’t tell you.

The areas we talked about in the very beginning are the areas that we feel we ought to focus our investment in. That’s saying we see opportunities to displace existing technologies and build successful companies.

The things that do change – and they change radically in the cleantech area, which is why I think so much investment is going into this – is the overall concern over climate change. I remember doing public opinion polls 20, 25 years ago and asking about things like energy independence and climate change, and people didn’t care. What they cared about is how much it cost. .... What’s really changed now is, one, the price of oil has gotten really high, and two, what’s happened to our climate and atmosphere has really gotten (public attention). That’s driven a lot of changes in behavior, and I don’t think that’s going away.

Q: How will the election of Barack Obama change the equation of investing in renewable energy and green technologies?

A: It’s hard to predict exactly how it’s going to unfold in this new administration. [But] if you look at where the cleantech industry cast their votes, as best I can tell, I think they’re going to be a lot more optimistic than they were six months ago, in terms of where the political environment is going to go. I think this is going to be a new priority for the administration and the legislative branch to incent and support a lot of these technologies and the people involved in them.

Q: Do you think an Obama administration will focus first on efforts that spur incentives for growth and job creation in the green sector, or will efforts to tackle greenhouse gas emissions and climate change come first? And how will the economic downturn affect those decisions?

A: Energy policy is very complicated, and it’s gotten more complex over the years. The one thing I learned in Washington, when I was in government and responsible for energy policy, is that there are more special interests than you can possibly imagine. It’s never as easy as you think getting policies changed, because there are so many interests. For every person who’s helped, or for every company that’s helped in a policy change related to energy, someone is going to feel some pain. So who’s feeling the pain now? Coal producers are anxious, as well as the people in some other industries.

As we think about policy and say, what’s likely to happen, what’s not likely to happen - this is not going to be a cakewalk, changing our policy about climate change and what’s acceptable and unacceptable. Some will win and some will lose. You’re going to hear a lot from those who feel they’re going to lose in the process. [Promoting policies that won’t cost the taxpayers too much] are the things that will carry the change through, rather than rhetoric or beliefs in general terms. It’s going to have to look right from several different perspectives.