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Reader feedback:  What value-add?

Rob Day: March 27, 2008, 8:53 AM
I received an email from a frustrated colleague in financial services the other day, and with his permission I thought readers might find it interesting to take a look at some of what he had to say:
99% of VC’s are looking for the same thing...a later stage company where they can get lucky with a near-term liquidity event at an inflated price without doing a lot of work.  I do appreciate the drivers for this reality:  VC’s are typically woefully understaffed and are usually  managing more money than they can effectively put out unless they participate as relatively passive players in bigger deals where they can ride the coattails of others.  The key limiting factor is time...not money.  I also appreciate that the gestation cycle of Cleantech companies is long and, unless you stumble across a terrific early stage opportunity, you will do better betting on a later stage company and “flipping??? the deal to the public. The end result is that very little is actually produced by the process, and what is produced is done so very inefficiently.  I submit that there are two ways to make money in the VC business...1) build a company and 2) anticipate a fad.  The first is very hard and very few VC’s can actually pull it also takes a long time and the whole VC system does not reward waiting around for 4-5 years while you build a company...your LP’s wouldn’t stand for it.  90% of all VC gains come from investing ahead of a “public valuation fad???.  The name of the game is to get in at a relatively late stage and flip the deal to the public at a ridiculous price...then sell out, having done very little for the world. You probably don’t remember the early Cleantech euphoria...Plug Power came out at $15.00 per share, and went to $150 in 6 months...the investors in the deal congratulated themselves on their good work and their wonderful “value added???...of course, Plug went to $10 per share six months later and it was amazing how quiet the brilliant VC’s were...the same thing happened with Capstone and with many well as with the over-priced ethanol and solar deals of recent history.  The only thing that was accomplished was that a lot of money was wasted in the process...but, if you were lucky as a VC to get in and get allowed you to raise your next fund and keep going.???
So what do readers think?  Is this spot-on?  Partially right?  Or way off base?  Comments (add them to the site below, or email them to cleantechvc [at] are welcomed -- and if you want them kept anonymous, just let me know. As for me, I don't know whether to be flattered ("hey, I'm in the 1%!") or just to shake my head. For many investors I know (and certainly including myself), we're in the business of maximizing returns by helping to build companies for the long haul.  Yes, exits need to be visible within a certain time horizon, but those exits for investors aren't the end of the effort, they're just the beginning of the next stage of growth for the company.  As the examples given in that email, and plenty of others as well, have shown, it's often not a winning investment strategy to rush a company to exit before it's ready.  But build a world-class company around a winning product or service offering, and the exit opportunities will be there (well, it's not that simple, but you get my point).   This is all speaking very generally, of course -- sometimes the appropriate exit path will be short, sometimes it will be longer.  But the important thing is that either way, the truly value-added VC will be working hard alongside the company's management team to build a company, not to "flip" anything.  So while there may well be some VCs like this email describes, it's far from 99% of the community. The gestation period comment is also interesting -- yes, in many of these technology areas, the time to market from time of invention will be longer than in other venture sectors (think Web2.0, for example), this is something we've talked about before.  But that doesn't necessarily mean that going all the way to later stage is the winning approach.  It just means that early stage investors have to be very knowledgeable about the wide variety of markets we're evaluating opportunities in, and it means staying disciplined about not getting in TOO early.  This longer gestation period is a special challenge for seed and angel investors in cleantech, which we've discussed before, but it's not what's driving the big trend toward later-stage investing in the sector.  That's probably being driven, instead, by the lack of comfort felt by many of those investors who have been very recently jumping in, and the overall trend across all VC sectors toward later-stage investing. So there are a couple of key points here where I strongly disagree with this email.  But there's also a lot of food for thought... What do YOU think?

Will soot improve the prospects of cleantech efforts in the developing world?

Rob Day: March 27, 2008, 8:19 AM
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.
  • 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?

More on the economic turmoil and cleantech

Rob Day: March 20, 2008, 8:10 AM
A couple of months back we discussed the potential impacts on cleantech venture capital from a possible recession. Since then that "possible" recession now seems to be hitting in full force, with a lot of pessimism out there at the highest (well, not the VERY highest) levels. So does that mean the picture's gotten clearer for those in cleantech venture capital? Nope. If anything, opinions are even more widely cast at this point, showing that no one really knows anything. In the past few days, we've seen arguments all over the map. Here's a column which argues that green technology could be recession-proof. Then there's consultant Rob Enderle, whom I heard this morning on NPR, arguing that green technology could be the hardest hit of all tech sectors because green techs are "feel-good" only, with poor economics. Finally, Eric Janszen hopes that cleantech could be the "good bubble" that floats the rest of the economy through the coming rough times... We still don't know how it will turn out. For yours truly, it's still looking "third scenario" out there in the industry, at least so far. In 2008, it looks likely that exits will be harder to come by, and that'll have a negative impact on some existing portfolios (esp. those with big cash burn), as well as a dampening impact on all the generalists still on the fence about whether to jump in or not. And while debt markets sort themselves out, project financing could be harder to come by. But the dealflow remains healthy, cleantech VCs so far remain active, large corporations are still very eager to get into the market, and for clean technologies that DO have strong economic value propositions (Mr. Enderle's learned opinion notwithstanding), customers seem very eager to capture cost savings. So, we'll stick by the "third scenario" (2008: down but not disaster) forecast... at least for now. Speaking of cleantech venture activity not slowing down, here are deals from the last few days:
  • Environmental Operating Solutions, which has technology for the removal of nitrogen from wastewater, has raised a $2.5mm Series A, led by Stuart Mill Venture Partners. The company had previously been backed by angels.
  • CleanFish, a distributor of sustainably-harvested seafood, raised a Series A (VWire reports it at $4.2mm) led by TBL Capital, and including Mindful Capital and individual investors.
  • Cleantech investors in the news: A cleantech hedge fund gets launched... Speaking of TBL Capital, Clean Technology Investor reports that they now have six portfolio companies in their $50mm fund... And VentureWire reports that Masdar will no longer make any LP investments in cleantech venture capital firms, instead they're going to focus on direct investments.
The AIChE's Boston chapter is going to be holding a Clean Energy Dinner Meeting in Boxboro, MA on April 3rd, check it out. Here's a suggested ice-breaker topic: Mr. Ozzy Freedom's fantabulous homemade automotive electrolyzer and hydrogen injection "water burning hybrid" system (thank you, Google AdSense, for bringing this one to my attention). Over dinner, you may enjoy discussing the following topics: a) "Do you think Rachel understands basic thermodynamics?"; b) How can I enroll at the "Water4Gas University", and are there scholarships available?; c) Mr. Freedom, thank you for the vote of confidence: "Anybody with NO MACHINES, with two broken pliers and half a brain, can build a jar with some wires inside. And get results."; and last but not least, d) does the recycled Bell jar come with the kit, or do I have to supply my own? This cleantech stuff is pretty easy, I guess. Other news and notes:  Advent Solar announces re-tooling program, with workforce reduction and plans to re-launch production next year [note: Advent is a portfolio company of @Ventures]...  Finally, still waiting on my loaner...

Oorja, Range Fuels, Luminus Devices, RecycleBank and others

Rob Day: March 18, 2008, 4:44 AM
  • Jonathan Shieber at VentureWire reported this week that cellulosic ethanol producer Range Fuels has raised $100mm.  Khosla Ventures put in $25mm, and another investor led the round with another $25mm, with the rest of the funders not noted.  This round size suggests that the post-money valuation these investors put on Range Fuels may have been about the same or more than JP Morgan's price for Bear Stearns...
  • RecycleBank, which sets up systems where residential recyclers get discounts from companies like Coke and Whole Foods, raised a $30mm round of financing led by Kleiner Perkins, according to VentureWire.
Other news and notes:  Business Week says clean energy is getting affordable...  Meanwhile clean energy markets continue to grow like gangbusters, according to CleanEdge and other coverage like SolarBuzz...  Just thought this write-up of Stion was pretty in-depth, so thought I'd provide a link...  "Green Construction Red-Hot with VCs"...  Meanwhile, here in Massachusetts, some very interesting efforts to encourage the implementation of "zero net energy buildings", as well as more effort on Beacon Hill to promote clean energy adoption...  Paul Dickerson of the EERE summarizes how they're looking to work with VCs...  Finally, could the Bear Stearns situation impact cleantech venture markets?

Cleantech is in a “virtuous cycle”

Rob Day: March 11, 2008, 4:47 PM
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.

Cleantech Venture Forum wrap-up and other news

Rob Day: March 5, 2008, 6:40 PM
Thanks much to Eric W. for filling in while I was off the grid for over a week -- I hereby BOTH denounce AND reject his "snark"...  but hope everyone enjoyed it. Also regrettably missed the Cleantech Venture Forum out in San Francisco last week, which sounds like it was a pretty good one.   Some media coverage on major developments at the event: Deals from the last week or so: Investors in the news: Cleantech cluster-building updates:  Massachusetts thinking big, the Rice Business Plan Competition looks like it will be very strong, New York's renewable energy task force says the state should put $400mm into cleantech, and the Bay Area may enact a carbon tax (hope they checked out my last post on the topic). Finally, it's well worth checking out GTM's 9 big solar trends.