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Looking ahead to 2008, pt. 2:  Reader predictions

Rob Day: December 28, 2007, 7:16 PM
Thanks again to all of you who participated in the Cleantech Investing Readers' Survey over the past week.  Pretty good turnout, actually, esp. considering how many folks were on vacation and out of the office over the past few days...  As promised, we randomly selected a few participants to receive either a mug from demand response system provider (and @Ventures portfolio company) Powerit Solutions, or a USB memory stick from GreenTech Media -- we've emailed those folks already to get their addresses, so the rest of you will have to settle for our heartfelt gratitude... The results provide some pretty interesting predictions for 2008.  But first, it's useful to note that the participants came from across the spectrum of cleantech market participants:  Investors, entrepreneurs, service providers, students, government types, even a self-described "rancher".  "Entrepreneur" got the highest number of responses, but no category claimed more than 25% of participants, so it's a nice broad sample. So to jump right into it -- is there a cleantech VC bubble? Participants overwhelmingly (95%) felt that there is not an investment bubble across all cleantech categories.  And they expect strong growth in the volume of cleantech venture deals in 2008 (a 64% plurality chose "will increase 10-50%", and only 12% expect deal volumes to drop).  However, participants felt (79%) that there ARE bubble-type conditions in specific investment subsectors.  And biofuels and solar were overwhelmingly fingered (each by about 2/3rds of participants) as being the epicenters of these bubbles. The theme that solar and biofuels are and will continue to be somewhat over-bought came through clearly throughout the survey.  When asked what sectors might see bubble conditions develop in 2008, solar and biofuels were again the strong favorites (although notably, demand response/ energy efficiency and advanced lighting got more than a few votes).  I did inexplicably forget to include energy storage when laying out the various categories, and a couple of readers volunteered this as another suspect investment area going forward. Energy efficiency and demand response is clearly a crowd favorite sector right now.  When asked where they would like to invest right now, 90% of those surveyed rated this sector as "Attractive" or better.  Perhaps unsurprisingly, most of the cleantech investment sectors mentioned got strong support from survey participants -- with the exception of biofuels, which seems to have lost some of its luster:  Only 27% rated the sector as "Attractive" or better, and more than 50% gave it a low rating (1 or 2 out of 5).  Solar, water, advanced lighting, advanced materials, and new tech in incumbent energy all received very positive ratings, however.  It's particularly interesting to see solar get such a high rating (52% at "Attractive" or better) in light of the bubble sentiments described earlier... And in terms of exits, as we discussed earlier this week?   When asked to indicate the sub-sectors within cleantech where they expect to see "spectacular" successes in 2008, solar (43%) and energy efficiency/ demand response (45%) got high marks.  Advanced lighting and advanced materials also had a strong showing, but aside from solar and EE/DR no category got a thumbs up from 20% or more of participants. In terms of "spectacular" failures, solar (50%) and biofuels (61%) are the two sub-sectors where CI readers expect to see a shakeout in 2008.  No other sector had even10% of respondents expecting major failures in the coming year. Putting it all together, it seems that:
  • CI readers think too much money is chasing too few opportunities in biofuels, despite all the visible government support for the market, and they expect some kind of a shakeout in 2008.
  • CI readers also think that there have been some questionable venture investments made in solar, but that 2008 will present a mixed bag of some big wins, and some big collapses.
  • Readers seem to generally look to energy efficiency, demand response and advanced lighting as possibly being the "next big thing" in cleantech venture capital, but there is already some contrarian sentiment out there expecting investors to jump into these sectors too quickly as well.
Finally, when asked what investment areas should be getting more attention from VCs than they are so far, the results were very interesting -- and I'm keeping those to myself. Just kidding.  No, the responses were all over the map:  Energy efficiency, water, wave energy, geothermal, energy storage of various flavors, waste-to-energy, clean coal, wind power, etc., etc., etc.  Even vertical farming got a nod!  What this really demonstrates is the depth and breadth of the investment opportunities in cleantech.  When asked to pick just one under-examined investment area, readers came up with a long laundry list of opportunites... So there you have it, your CI Reader Predictions for 2008.  Thanks again to all who participated.  This worked out well, we'll have to do it again next year -- but with better thought-out questions and more fun prizes!

Looking ahead to 2008, pt. 1:  Finally the exits?

Rob Day: December 27, 2007, 10:22 AM
Since the beginning of 2005 there have been something close to 700 cleantech venture capital financing rounds in North America (using a broad definition of "cleantech", of course).  Even accounting for multiple rounds per startup, this still means several hundred venture-backed cleantech startups have been invested in since the uptick in VC interest in the sector, around 2004 or so. And yet there haven't been many exits (good OR bad) since this dramatic upswing started.  That means a lot of venture dollars have gone into a lot of companies, with investors still waiting for their returns.  Sure, there have been some good indications of favorable exit potential:  IPOs like Sunpower, Hoku, Metabolix, Comverge and EnerNOC, and M&A exits like Powerlight and Celunol.  But I took a quick review through a popular venture capital database, which revealed less than 20 IPO or M&A exits for U.S. cleantech venture-backed companies that had taken in their VC dollars since 2004. Furthermore, a shake-out hasn't occurred either.  That same database scan revealed only 3 bankruptcies among U.S. VC-backed cleantech startups. These numbers are probably a bit understated on both sides (there have definitely been more M&A activity and more foiled startup efforts than recorded in the database in question).  But the point still stands:  There are billions of dollars of cleantech venture capital dollars already out there, and a pretty deep inventory of existing portfolio companies being managed, while the track record for sectoral exits is only now starting to come together. 2008 will see this story start to emerge.  Particularly for some of the high-profile cleantech startups that have taken in very large amounts of venture capital investments and yet still haven't started generating revenue, the clock is ticking, and 2008 will be a "make or break" year.  We're already starting to see some of the first indications of this pressure:  Top management changes at Miasole (self-"promotion" alert: yours truly is a shareholder), Greenfuel and Imperium, as well as stories about layoffs at some of these and other cleantech startups.  Expect more of the necessary shake-out in 2008, especially in particularly heavily-invested sectors... On the other side of the coin, numerous startups that have been making progress for a while now are primed for some kind of exit.  If the economy is good, strong IPOs and acquisition binges by larger strategic buyers could mean very good things for the industry. If the economy turns south as many expect, however, we could see the exit window fail to open as hoped, and thus a raft of potentially valuable companies run through their capital and be forced to either take in dilutive new financing rounds, or shut down. This is one reason why many VCs say that capital-efficient startups with management teams focused on achieving cashflow break-even will often have a better chance at being successful investments -- even if the "swing for the fences" efforts get all the headlines.  Because it can be very difficult to plan out years ahead of when the exit windows will be open or not.  So it's best to have the company able to self-support and continue growth, until the windows open again... In any case, as previously mentioned, 2008 will probably see the beginnings of the exit cycle for this latest surge in cleantech investing -- some good stories, some not so good.  Hopefully mostly the former, but definitely more of both than we've seen to date. Deal announcements from the past week:
  • VWire's Jonathan Shieber wrote this week that Khosla and GreatPoint Ventures have invested an undisclosed amount of financing in Ethos, a Cambridge, MA company developing ethanol projects in Latin America.
Other news and notes:  Michael Kanellos at thinks 2007 was an off year for Kleiner's "greentech" efforts, but Al may disagree...  Green bricks?  Cool...  An interesting review of the past year in green transportation tech...  Last (and least), this may give you a year-end laugh.

If you're in the Boston area, save the date of the next REBN-East happy hour, Jan. 22nd at the Muddy at MIT, co-sponsored by the Clean Energy Council... 

Also, don't forget to take the Cleantech Investing readers survey -- you only have a day or so left to put yourself in the running to win a GreenTech Media USB stick or a Powerit Solutions mug!

Finally, a very happy new year to everyone, our heartfelt thanks for continuing to visit and read this site, we hope it continues to be useful... Best wishes for a clean, green, peaceful and successful 2008!

Year-end Cleantech Investing survey

Rob Day: December 21, 2007, 10:38 AM
Loyal Cleantech Investing readers -- We'd like to invite you to participate in a very brief year-end survey, to share your thoughts on 2007 and predictions for 2008.  This is your opportunity to share your opinions on the market with your peers and colleagues in the industry. Please click here to take the Zoomerang survey.  It being a busy time of year, we've kept it very short, it should only take you 5-10 minutes.  The deadline is a week from now:  Friday, December 28. To add to your motivation to participate, GreenTech Media has kindly offered up a few GTM USB memory sticks -- perfect for sharing your business plan or marketing materials at your next cleantech networking event.  Also, demand response/ demand control system developer Powerit Solutions (an @Ventures portfolio company) is also offering up a few coffee mugs to participants as well!  A few lucky, lucky winners will be randomly selected from the respondents, so make sure to include your email address (spam-free, I promise) at the end of the survey, so I can get in touch with you if you win one of these highly coveted prizes. So take the survey today!  The results should be pretty interesting, stay tuned...

A big week for energy-efficient lighting deals

Rob Day: December 20, 2007, 11:30 AM
This week has already seen several new deal announcements and other developments in energy-efficient lighting:
  • Element Labs, a provider of LED-based products for entertainment, architecture and signage applications, has raised a $12.75mm Series B (note: link opens pdf), led by Expansion Capital Partners, who contributed $10mm of the round. Existing investor Sierra Ventures and lender Gold Hill also participated in the round.
  • Meanwhile, Ceelite, another developer of LED solutions for signage and other "highlight" lighting applications, announced a $4mm round of financing, with half coming from the Musser Group and the other half from undisclosed investors.
  • Orion Energy Systems, a manufacturer of energy-efficient lighting solutions for "high-bay" (ie: high-ceilinged) environments, had a very successful IPO today (although it's been drifting back down this afternoon), demonstrating the exit potential for energy efficient lighting (and overall energy efficiency) investments. (self-promotion alert: yours truly was involved in Expansion Capital's initial investment in Orion)
  • Pretty busy week over at Expansion Capital -- they also announced this week that they and Advantage Capital Partners had co-led SensorTran's new $8mm round of financing (VWire reported that the first tranche of the Series B round was $5mm), with other existing investors WHEB Ventures and Stonehenge Capital also participating (self-promotion alert: yours truly served briefly as an observer on the SensorTran board during my time at Expansion Capital)
  • The other cleantech deal announced this week was a $25mm Series C announced by Purfresh, the ozone-production device manufacturer formerly known as Novazone. Lots more details in this GTM article; the round included Chilton Investment Co., Foundation Capital, Grauer Capital, Chrysalix and one "strategic investor to be named."
Other news and notes: Here's an interesting attempt to track cleantech-related patent issuances... The new energy law is in the books, but not everyone's pleased... Nick Parker's Eight for 2008... Here's a well-done article linking climate change and water shortages... Finally, here's a sign of the times, regarding the polysilicon shortage.


First-year MBA student readers -- here's the final notice of @Ventures' Summer Associate opportunity

“Cleantech venture bubble” watch, pt 5:  VCs predict a cleantech bubble in 2008

Rob Day: December 18, 2007, 8:22 AM
We've talked a fair bit about all the buzz about a possible bubble in cleantech venture capital. So it's interesting to note this NVCA survey (link to PPT of results also found here), in which 80% of VCs surveyed expect that cleantech will attract higher levels of funding in 2008. In the same survey, when asked "Which single industry will be overvalued in 2008?", 61% of those surveyed picked cleantech (vs. 18% choosing Internet, 12% choosing media, and 9% choosing another sector). Leave aside questions about the survey methodology (why would only one sector be over-valued?) and the naturally contrarian reactions to the cleantech-focused hype cycle (when compared with the level of mass media attention and hyperbole regarding other investment sectors) that we've talked about before. Even accounting for all that, the clear signal from the general VC community is that they expect a cleantech venture bubble in 2008. It's a sobering assessment. The other survey results are pretty interesting as well (VCs predict a bad U.S. economy in 2008, oil above $92 per barrel a year from now, and Hillary to be elected president). Notably, VCs are predicting consolidation in the industry, with fewer independent funds and a larger average fund size. This is indicative of an overall trend in the industry along these lines. But with fewer, bigger funds, that necessitates at least one of three things: 1) Fewer, but bigger deals; 2) more deals per GP, and thus less involvement/support by VCs with their portfolio companies; or 3) the number of independent funds goes down, but the number of GPs per fund goes up. So far, the trend seems to be mostly toward #1, with some lesser evidence of the other two shifts as well. It may seem to be a bit of a stretch to relate the cleantech survey results and the industry consolidation predictions, but to some observers these are definitely inter-related trends. As larger, generalist firms have been jumping into cleantech over the past months, they are coming in with the need to write larger checks. This will (on the whole) mean investing later-stage and in "proven" investment areas like solar and biofuels. That's because writing a big check into an earlier-stage company in an unfamiliar technology area is perceived, with some justification, as being pretty darn risky. This is one reason why (as we've talked about here ad nauseam) the headline-grabbing growth in investments into the cleantech sector has been largely driven by a few (or even more than a few) mega-sized later stage deals. Although it's hard to parse out on the basis of just one survey question, the cleantech-related results of the NVCA survey probably indicate an expectation that this dynamic will continue in the sector. A few very large deals by fewer, larger check writers, into just a few sub-sectors of the market, at therefore higher valuations. The possibility of mini-bubbles in particularly hot sub-sectors, particularly later-stage. Meanwhile, the role of the smaller sectoral specialist would likely stay the same, as the bird-dog, going after the as-yet underexamined cleantech subsectors. And as we're already seeing, there will also be plenty of opportunities for these two types of VCs to work well together, where a "new" subsector and specific investment opportunity requires both sector-specific expertise and deep pockets. At least that's what we are all hoping for, and are seeing so far in the market... After all, the underlying economic fundamentals supporting continued rapid growth of cleantech markets are getting even stronger, right? But we'll have to see how 2008 pans out. Perhaps the simplest and most pessimistic interpretation of the NVCA survey and other available data will in the end be the right one...

Over the last couple of weeks of 2007, we'll do a couple more posts here looking ahead at what seems likely to happen in the new year.

In other news:

Finally, my firm @Ventures is looking to bring on a couple of Summer Associates in 2008. First-year MBA students with a strong technical background in cleantech and an interest in venture capital should check out the job posting here.

Warning:  Policy discussion ahead

Rob Day: December 16, 2007, 8:07 PM
That warning applies both to this column, and to the entire cleantech investing industry in 2008.  What with an election year, new agreements and critical choices due on climate change, and the aftermath of a compromise on energy legislation, expect policy discussions to dominate cleantech market headlines next year.  Regular readers of this column will know that we typically shy away from policy discussions, leaving that to those out there smarter and more informed on the subject.  But 'tis the season, and it was a quiet week in deals last week... So let's kick off the commentary by noting this interesting column by Jim Rogers, CEO of Duke Energy (on the always interesting Cleantech Blog).  In it, Rogers argues that under a cap and trade system for carbon emissions (which is the scheme envisioned by most proposed climate change bills in Congress), utilities and other emitters shouldn't be asked to purchase their credits at auction.  As he points out, that would be similar to a carbon tax, but with more uncertainty. While most of the proposed bills out there focus on cap and trade, and it's perceived as being more politically feasible (in a post-2008 timeframe, naturally) than a carbon tax, there's been a lot of chatter among the punditry lately discussing the relative merits of both policy schemes.  In other words, should we impose a uniform tax on all carbon emissions across all categories and let the market sort out emissions levels, or should we set a cap on the total emissions levels that could be allowed, and let market players trade between each other to find the optimal emissions levels for each within that cap.  (For a lot of wonk-y analysis on this general subject, I'd recommend my former employers, WRI) The best way to succinctly dig into such topics is often to delve into a new take on otherwise intractable problems, to help illustrate the contrasts.  So, here's a modest proposal -- What about a hybrid system, with a market-wide carbon emissions fee, and a cap-and-trade imposed on a few key industries. Here's the elevator pitch on how it would work: 1.  A carbon emissions fee would be collected, across all sectors.   It would be low for the first few years, ratcheting up to full levels at the end of a ten-year phase-in period.  This slow phase-in would allow businesses and consumers alike to change their purchasing habits (ie: to more energy efficient vehicles and appliances) in better accordance with the natural lifespans of their existing products.  In other words, you wouldn't have to rush out and trade in the SUV you bought just three years ago, but you WOULD consider the higher carbon emissions fees when making your next vehicle purchasing decision. 2.  For political expediency, and simply for reasons of tax system efficiency, a tax shift would be a potentially powerful use for the collected fees.  Under such a shift, all receipts of carbon emissions fees would be dedicated 100% to reductions in income (or payroll, etc.) taxes, with no discretion for Congress or others to snag the money for other uses.  There's a basic rule of public finance theory which says that if you want less of something, tax it.  And yet we tax income and (net-net) subsidize carbon emissions.  Perhaps that imbalance could be addressed... 3.   Establish a cap and trade system on key industries (e.g., utilities, cement, and the other largest emitting industries with centralized players), with the emissions credits auctioned off.  However... 4.  All fees paid at auction would be credited against carbon emissions fees that the credit purchaser would otherwise be obligated to pay.  This would set a de facto floor on the costs of such credits.  Optionally, in early phases of the scheme there could be price ceilings imposed during the auction, as well.  The auction values could also help revise the end-point carbon emissions fees levels, as an indication of efficient market prices. The concerns about cap and trade are a) market uncertainty due to volatile prices; and b) complicated management of scheme.  The concerns about a carbon tax are a) difficult to set the correct fee level correctly from the beginning; and b) political infeasibility of anything smacking of a new "Tax". The proposal above would be intended to address these concerns in tandem.  It would be a "belt and suspenders" approach that would mitigate the uncertainty impacts on the market from cap-and-trade, while also alleviating fears that emissions wouldn't fall to necessary levels under a tax.  It would also, particularly if done as part of a strict tax shift, potentially be more politically palatable ("polluters pay a fee, and your income taxes are lowered"). There's probably a fatal flaw or two in the above suggestion, it's primarily included to help briefly illustrate the key issues being debated around climate change regulation.  The bigger point is, get ready for a lot more policy chatter.  This is just one idea among many that are being thrown around right now.  Expect that in 2008, there will be a pretty robust (and probably, at times shrill) debate about all of these ideas in the midst of what is shaping up to be a big year for cleantech markets and a big year for politics.  However, this'll probably be the last policy discussion here in this column for a while... Not much happened this week in cleantech dealflow:
  • Energy and Power Solutions, a provider of energy efficiency and carbon-related services and solutions, raised a $20mm round of financing, provided by NGEN and Robeco.  It's interesting to note in the linked story that the bankers talked the management team up from their originally envisioned round size of $6mm...
More policy discussion:  Cluster-building efforts in Massachusetts, Pennsylvania, and the Bay Area...  Also, reactions from entrepreneurs on recent developments with the energy bill here and here (self-promotion alert:  these stories mention a couple of @Ventures portfolio companies)...  Speaking of the bill, here's a useful summary. Other news and notes:  An interesting discussion with Richard Swanson of SunPower...   A $200mm Earth Fund is launched, focusing on clean energy in developing economies...  An update on the water sector...  NGP Energy Tech Partners' Jason Hicks has been promoted to Principal...  An update from Tesla...  Interesting to see someone else also point out (along with a few cautionary words) that a few quasi- project finance deals tend to drive quarterly totals for cleantech venture capital...  Energy consumption and production forecasts aren't getting any more balanced...  Finally, here's a useful market map for clean technologies.

Technology-enabled services and cleantech

Rob Day: December 10, 2007, 7:37 PM
When you spend an entire weekend installing insulation in your attic all alone, it provides a chance to ponder a few questions. Such as "Can't somebody else do this?" And "Is there a venture-backable business opportunity here?" The answer to the first one is tough but clear if you live in New England, since the residential contractors up here seem to take it as their God-given right to charge you the equivalent cost of a decent used car for even the simplest home improvement project (no bitterness, no, none at all...). So no, getting somebody else to do it isn't the option it should be. But the answer to the second question is a bit less clear. Certainly, there have to be some good business opportunities here. Installing insulation, and other energy efficiency improvements, often make very good economic sense, even if you're paying someone else to do it. As opposed to distributed generation approaches like solar, energy efficiency improvements around the home can often provide paybacks measured in months and not years. And even when the paybacks are longer, it can still make sense for a homeowner, with long-term plans to stay in their property, to make the investment. So it's no surprise that there have been a few business plans going around recently with the idea of launching new takes on the ESCO (energy services company, or energy savings consultants) model that has been a decent service market in commercial and industrial building markets. These companies plan to provide various building owners with an energy audit, and then be the contractor for installing the new systems and equipment. Great idea. The challenge for venture investors is scalability. As we VCs often tell prospective entrepreneurs, don't forget that only 2% of startups get funding from venture capital investors. That doesn't mean that 98% of startups are bad ideas, by any stretch. All it illustrates is that venture capital financing won't be the right fit for most good business ideas. This is particularly true in service-model startups, where the company can only grow as quickly as it can add highly-skilled consultants/ engineers. Some VCs will fund companies with this kind of business model, but certainly the typical VC is looking instead to back a company that is developing a proprietary technology that can be rolled out much more quickly and fetch a high valuation multiple at exit. That's dictated by investment strategies and investment returns expectations. But it does mean there's often a huge difference between a new service business being a lucrative idea for the entrepreneur, and it being a good fit for venture capital backing. And it's particularly a challenge for investors in clean technology markets, where so much of the value chains are in downstream services (think about the costs of solar installation vs. panel manufacturing, for example, esp. as nextgen PV technologies get introduced to the market). The portion of the value chain directly attributable to any proprietary technology, on the other hand, can often be very small. So in cleantech, investors have often looked to start with a proprietary technology, and attempt to use it to capture downstream value. Back a proprietary sensor company, but sell the data services as a recurring revenue contract. Back a company with one proprietary component involved in biofuels production, but use it as a platform for building a full-scale production company using mostly off-the-shelf processes with the proprietary component included. Back that same proprietary component developer, but plan on generating value via licensing relationships with downstream producers. Or, in some cases, venture investors have stretched their investment models and simply backed non-tech services, where they see some other kind of sustainable competitive advantage and a market opportunity that's big enough to accomodate multiple winners. Another model to explore, however, is in technology-enabled services. That is, looking for the ways to use proprietary technology to make the downstream service sectors more effective, then selling to those downstream service providers. To use the residential ESCO example from above, imagine a company that developed a) a rich database of easily-performed energy efficiency metrics and checklists for home inspections; b) a rich database of visually-simple instructions for installation of the most effective energy efficiency improvements, importantly include what NOT to do; c) fulfillment relationships with major energy efficient equipment/ home products manufacturers; and d) handheld/wireless/back-end capabilities integrating a), b), and c). Then you could sell "ESCO in a box" information and product distribution services to wannabe residential energy efficiency consultants all over the country. Instead of requiring highly-skilled auditors and contractors to do the work, it could be done with semi-skilled (and thus lower-cost) employees. After all, if you trust a moving company to pack up your valuables and breakables and move them across the country using pretty low-trained workers to do the planning, packing, etc., then you should be able to trust someone's full-time, semi-skilled employee to deploy batts of insulation and a staple gun in your attic. The game-changing angle would be that, over the long-run, you would enable an entirely new class of regional service entrepreneurs to get started as residential ESCOs with a much lower cost structure. And in the near-term, you could help those general contractors add another lucrative line of business to their service offerings... This particular fiberglass-inhalation-addled vision may not work (bonding and licensing may be an issue...), it's just intended to be a tangible example of what I'm talking about.  Smart entrepreneurs are already coming up with better versions of this in other cleantech markets.  But the idea is simple: If the biggest parts of cleantech value chains are in services, then providing technology to the service providers (if it means a significant shift in their economics, and can mean a dramatic expansion of the market) can be an interesting investment opportunity. (As always, send your executive summaries and personal insulation installation horror stories to Deals from the past week:
  • VentureWire reported that small-nuke startup Hyperion has raised an undisclosed amount of financing from Altira Group.  For more info on Hyperion's approach, here's a good article.
Other news and notes:  It's not a venture deal, but it's worth noting Recurrent Energy's $200mm project financing from Morgan Stanley...  And last but not least, some good stuff out of NREL and the DOE:  An interesting interview with Paul Dickerson, and NREL attempting to walk the talk.