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There are no more good solar deals

Rob Day: May 29, 2008, 3:28 AM
OK, gross overstatement in the title for this column, admittedly intended to grab attention. But something that's been becoming clear for some time now, and was reinforced for me at yesterday's fun Greentech Media PV vendor showcase, was that the innovation backlog and the overwhelming VC interest in the sector over the past few years have made it a very challenging sector for venture investors now. The market for solar generating systems is big and growing attractively. Much of it looks like semiconductor technology, and there have been some successful IPOs in the sector, so it naturally draws VC interest. A lot of VC interest. The Cleantech Group tallied up around $4.6B $440mm in investments made over the last 3 quarters in thin-film solar alone.  [6/6 update to reflect a clarification I got from a representative of the Cleantech Group] What this has meant is that there are now scores -- if not hundreds -- of startups in this sector, each vying for a piece of that market. No matter how attractively it's growing, the market will have a hard time providing "home run" returns for all those investments. The investments from a few years ago in promising system vendors still haven't turned into exits yet. And as an active investor I see more solar investment opportunities cross my desk all the time. It seems that venture capital solar investment opportunities increasingly fall into one of three categories: 1. The component or incremental improvement developer, with a smart efficiency improvement on an existing technology... but not a dramatic improvement that necessarily lends itself to major differentiation versus other smart incremental improvements being developed, or a component that would end up being a major part of the eventual PV system cost. Thus making it hard to capture significant revenue over time. To try to capture more value, they may attempt to form a full-scale manufacturing effort around these incremental improvements, but with so many competitors out there with a head start and deep pockets, and the capital intensity involved, tough to see the path to world domination, as it were... Thus, it's a challenging bet for an investor to make. 2. The "later stage" solar company that may or may not have some early revenue, but is far enough along and visible enough that the "venture round" they're looking to raise doesn't look much like traditional venture capital -- we've recently heard of several ongoing raises right now with valuations in the hundreds of millions or even over a billion dollars. Some of these startups will undoubtedly turn into winning companies with long-term prospects, but as an investor it's always entirely possible to overpay for a good thing, so these deals are also challenging. 3. The "third generation" solar startup with some exotic ideas in development that sound really promising, but are several years away from commercialization -- and the lessons learned from earlier such efforts suggests that they're even further away from commercialization than these companies themselves expect. That long timeline makes it a challenging type of play for most investors. There absolutely are exceptions to the above over-simplification. As an investor, I definitely haven't written off the potential for finding a promising investment in the sector. But overall, while the solar market is booming, ironically the resulting amount of entrepreneurial and investment effort in the sector right now means that the market is full of niche plays, over-visible plays, and patient-capital plays... Not ideal venture capital plays.

Some scattered thoughts on a Friday

Rob Day: May 22, 2008, 4:11 PM
First of all, comes the news today (from Jonathan Shieber at VentureWire) that Element has done a first close on their latest fund at $270mm, and that it's likely they'll "fly past" their $400mm stated target. A very good example of how the sector continues to shift toward later stage: One LP (LACERS) reports that Element plans to allocate only 20% of the fund to early stage investments, with the rest going to expansion stage and later stage. They're far from alone, and this news is proof of the continued strong LP interest in the sector. Secondly, on the topic of biofuels and food prices (headline stuff these days), stay tuned for an upcoming report from New Energy Finance on the subject... As a preview, there's the following passage:
New Energy Finance has analysed food price increases between January 2004 and April 2008, breaking them down into their constituent drivers: input costs, dollar depreciation, supply-demand factors and speculative activity (see Figure 2). We conclude that increased biofuels production has been a meaningful driver of food price inflation, particularly in certain crops and geographies, but it is far from the dominant factor. Increases in input costs have played a much larger role, as have changes in consumption habits and increases in global population which, for the first time in decades, have not been offset by increases in agricultural yields, particularly in grains (see Figure 3). Furthermore, where biofuels have had significant impacts, this has been due to overly-rapid application of support schemes and protectionism, rather than to the impact of production on land use itself.
Thirdly, I thought this passage from Tim Healy's (EnerNOC) Chairman's Letter was also worth quoting:
I believe that energy is one of every company’s five basic inputs, along with land, labor, raw materials and tools. (Information Technology, the realm of the CIO, is a subset of tools.) But in most cases, energy is the only one that is not actively managed. Corporations invest time and talent in assessing and developing land; in managing and motivating labor; in forecasting and negotiating the price and supply of raw materials; and in sourcing and procuring equipment and tools. Energy hasn’t normally received a similar level of senior executive attention. For example, US corporations spent an estimated $129 billion per year on telecommunications in 2007, and all of them also invest in advanced products and services to actively manage these systems. But less than one per cent of companies make a significant investment in advanced technology to manage electricity, even though electricity spending was greater at approximately $194 billion per year.
Are the above three notes sobering? Encouraging? Readers will judge for themselves. Deals from the past few days:
  • SmartSynch, a smart meter technology developer, raised $20mm in expansion funding from Credit Suisse. This follows on their $10mm insider Series D last year.
Cleantech investors in the news: Other news and notes: Jeffries reports that the cleantech IPO backlog is starting to build... Bill Aulet has some pretty interesting thoughts about decoupling energy and water... Also worth checking out, a good interview by Neal: Marc Stuart on the REAL story of carbon offsets... For those who may have seen the VCJ's kind write-up about this blog (and its author) in the latest issue, a couple of small corrections -- no, I don't live in Connecticut and drive to Boston every day; and no, M2E Power isn't putting flashlights into cell phones, they're developing innovations to power the cell phone (and other devices) altogether. But yes, this site does lack in personality at times, it's true...  Finally, this will be fun to watch.

FloDesign, BrightSource, and GreenFuel

Rob Day: May 18, 2008, 7:50 AM
  • Solar continues to be on a roll, with BrightSource Energy announcing a new $115mm round of financing., BP Alternative Energy, Statoil Hydro Venture, and Black River all signed on as new investors, while existing investors VantagePoint, DBL Investors, DFJ, and Chevron Technology Ventures all also participated.  [5/22 edit: moved VantagePoint in the list to acknowledge that they were actually the first institutional investors in the company]
Other news and notes: An update on ARPA-E... DOE funding opportunities in solid state lighting... Building the western Pennsylvania cleantech cluster... Finally, no joke, here's the "Photovoltaic-Powered Bra."

Greentech Media, Gevo, and Genomatica

Rob Day: May 13, 2008, 4:29 AM
Three interesting deals announced today:
  • (Self-promotion alert) Congrats to Greentech Media on their $2.75mm Series B.  EGORA Holding and the MA Green Energy Fund co-led the round, which also included existing investors Lightspeed and Northpoint Private Equity, and with new investor King Hill Capital also joining in.  Have to say, I'm impressed with the progress the company has made since launching last year -- and no, they didn't pay me to say that.
  • VentureWire had the first mention of two big deals today:  Gevo, a developer of biobutanol, raised a $17mm Series C from new investors Burrill and Malaysia Life Sciences Capital Fund, as well as existing investors Khosla Ventures and Virgin Green Fund.
  • Also, Genomatica, which is "working to transform cells to produce chemical products" capped off a $20.4mm Series B, of which most was raised last summer.  MDV led the round, which also included Alloy Ventures and DFJ.

“Hokum” and the decline in early-stage cleantech VC

Rob Day: May 12, 2008, 2:05 PM
Ran across this interesting article on full of useful tips for investors who "know that human-caused global warming is hokum."  I'm pretty sure it's the first time I've seen the word "hokum" written this century.  The best line refers to the "clueless U.S. venture capital community"... "throwing their investors' money at futile chimeras based on the idea of a climate crisis." Apparently either we VCs really are clueless or we fundamentally disagree (or, I suppose, both).  Because according to recently released numbers, cleantech was one of the few areas to see increased VC spending in Q1. Ernst & Young/ Dow Jones VentureOne announced their tally for Q1 last week.  While overall VC spending declined 7% yoy to $6.5B, cleantech totals grew 18% from Q1 '07 to $571.6mm.  Solar and biofuels (once again) led the pack, although energy efficiency showed a bump as well.  These numbers are significantly lower than numbers from other groups like the Cleantech Group, but as we've discussed before, the differences are largely methodological and the overall trends remain consistent across surveys.  Here's GTM's coverage of the E&Y totals. A couple of things to take note of in particular:  a) while it's impressive to see cleantech grow while other sectors declined, those totals suggest cleantech remains less than 10% of all VC spending; and b) while the dollar amounts grew, the number of deals DECLINED by 11%. Meanwhile, Moneytree/NVCA released their 2007 cleantech VC totals, which they pegged at $2.2B.  And yes, solar and biofuels led the pack there, too.  They also noted that the highly-anticipated first big wave of cleantech exits is expected this year and next. So what's going on?  A storyline appears to be coming together that (as we've talked about recently) as cleantech venture firms raise much bigger new funds, they're having to write bigger checks and shift into later-stage investing. One of the most interesting factoids in the E&Y data was on deal stage, where they note that early stage deals accounted for 37% of cleantech financings in Q1, down from over 50% a year ago. This also mirrors a trend spotted by some observers (and discussed here as well) that while some cleantech sectors are getting a lot (perhaps too much) attention, others aren't getting nearly as much attention.  Well, of course -- as investors move later-stage, they have to double-down on sectors that have already gotten a lot of attention.  And as generalists move into this complex and varied sector, the simplest decision on where to focus attention is on the "proven" subsectors... where others are already investing. It's a good time to be a small, flexible, disciplined early-stage cleantech specialist.  Unless, of course, it's all hokum... Deals from the past week: Other news and notes:  Neal shares five investment strategies to play in cleantech...  The promises and challenges of solar power...  CNet's top 10 cleantech companies (6 are in solar, and none are in water -- really?)...  Lux Research points to the strong links between nanotech and cleantech, but has some cautionary words...  New England area VCs are starting to look far and wide...  Finally, where's my checkbook?

Israel Cleantech, Firefly and Range Fuels

Rob Day: May 6, 2008, 3:16 AM
  • Pleased to note Israel Cleantech Ventures' announcement that they have reached a final close on their first fund at $75mm, above the original target of $60mm.  Robeco Private Equity and Piper Jaffray joined other institutional and family fund LPs in backing the group.  Good guys over at ICV, so it's great to see.
In other news:  A good column in the Economist on the management challenge facing cleantech, highlighting (albeit not by name) the New England Clean Energy Council's new Fellowship Program...  The X-Prize is expanding into other cleantech areas...  Finally, Tesla Motors has a new competitor!

Fun with headlines

Rob Day: May 2, 2008, 6:32 AM
Pleased to point folks to the first of a regular series of columns I'm going to be writing for Mass High Tech, Boston's leading tech business paper.  Should be a good way to share a bit more about what's going on in this region in particular, as the local cleantech cluster grows quickly.  But a little tip to everyone:  Be careful when someone else edits a headline for you, the original headline was supposed to be "New England needs more experienced entrepreneurs in cleantech".  A positive call to action to all those experienced entrepreneurs out there to come join us in the sector.  It was NOT "New England clean tech needs more experience," the headline actually used, which could probably be read a number of different, arrogant-sounding ways...  Oops.  Sorry. Guess the editor of this column you're reading right now (me) has been spoiling the author of the column (me) on such things up until now... Anyways, on with today's deals and news:
  • VentureWire is reporting that new, Midwest-focused cleantech venture firm Clean Wave Ventures is seeking to raise a $100mm first-time fund.  They'll be focusing on Indiana, Michigan and Ohio.
Other news and notes:  NPR's take on the current challenges facing ethanol policy -- the striking thing is how the policymakers seem to have honestly been blindsided by all this controversy.