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Angels are more important than you think

Rob Day: November 28, 2008, 11:17 AM
I'm referring, of course, to angel investors -- individual investors who put money into startups, typically at a pretty early stage.  Here on this site, and even more so in the media, the heavy focus is on venture capital inventments from institutional investors.  But that ignores the critical role angels often play in getting the VC-backed startups off the ground in the first place. As the attached Center for Venture Research survey results show (note: link opens pdf), angels are a major player in the financing of entrepreneurs in the U.S.  In the first half of this year, CVR estimates that 23,100 startups received funding totaling over $12B.  Compare this to the $14.9B and nearly 2,000 venture deals tracked by Moneytree in 1H08.  Roughly comparable amounts, but more than 10x the investments -- as reflecting the CVR survey's conclusion that 46% of angel investments were in seed and start-up stage. Let's make this more specific to cleantech -- the CVR study indicated that 10% of the angel investments in 1H08 were made into "Industrial/Energy".  So we can roughly estimate that about 2,000 cleantech startups received angel funding during the first half of the year, of which about half were seed or startup stage.  Meanwhile, E&Y tracked 29 seed and first round VC investments into U.S. cleantech companies during 1H08.  I would argue that most VC-backed seed rounds are left stealth and unreported, so the E&Y figures are undoubtedly low.  But even still, the difference in number of investments by each type of investor is significant. Now, many of these angel investments will be made into enterprises that look very different from the technology development efforts typically backed by VCs.  Anyone who's perused the listings at Investors' Circle, for example, will know that a majority of the investment opportunities posted with that angel group are for service or retail or other efforts not related to proprietary technologies. But even still, the number of angel investors backing technology development efforts is impressive. In our portfolio at @Ventures, for example, more than half of our cleantech portfolio of startups were first backed by angels during their formative seed stage. And in my conversations with various angels here in the Boston area, it's clear that there are many individual investors on the prowl for game-changing inventions. We'll talk another time about the special challenges facing such investments at such an early stage, and how some sophisticated angels go about addressing those challenges.  But regardless of the investment profile, it's clear that angels are an important -- arguably, more important than VCs -- source of financing for bringing cleantech innovations to market. Reported deals from the past week:
  • ISE Corp., which provides hybrid drivetrains for heavy vehicles, has raised a $17.5mm Series D round of financing from Siemens Venture Capital, Macquarie Clean Technology Fund, DTE Energy Ventures, and existing investors NGP and RockPort.
Other news and notes:  In the category of "no kidding" analysis comes the Cleantech Group's forecast of a shakeout followed by continued growth in the sector...  Here's an interesting argument for the "evergreen fund" format in venture capital...  Merrill Lynch says cleantech is the Sixth Technology Revolution...  Finally, congrats to Michael! . . . .

Remember when?

Rob Day: November 24, 2008, 7:45 AM
Overdue to provide an update on deals and such, but in the meantime I happened to run across this listing of venture capital and angels groups involved in cleantech... Three years ago. A nice, tidy, short list, huh?  Figured I'd rescue it from the memory hole, so I'll also cut and paste the list below. It would pretty much be impossible to do such a list today, when just about everyone at least SAYS they're investing in the sector now. The Energy Priorities list from November 11, 2005:
Firm Focus Web site
Angels with Attitude See Soundpoint Ventures
@Ventures (part of CMGI) 2 clean tech investments; tech focus
Battery Ventures 2 energy investments; tech focus
BASF Venture Capital 1 energy investment; materials, sciences
BDC Venture Capital 5 energy investments; life sciences, technology
Blackwolf Partners New firm expects to make some alt energy investments
Braemar Energy Ventures 18 energy investments (4 current)
Chrysalix Energy Management 7 energy investments; fuel cells
Draper Fisher Jurvetson 3 energy investments; tech focus; CalCEF partner
Easenergy (part of EDF) Makes non-cash energy investments
EnerTech Capital 20 energy investments; clean tech
Expansion Capital Partners 1 energy investment; clean tech
Firelake Capital Management 3 energy investments; energy & water focus
Fort Washington Manages state-owned New Mexico Co-Investment Partners
Frazier Technology Ventures 1 energy investment (Neah Power)
Hydro-Quebec CapiTech 21 energy investments
Inverness Capital Partners 1 energy investment; industrial
Mohr Davidow Ventures 3 energy investments; materials, internet; life sciences, semiconductors
NGEN Partners 4 energy investments; materials, infotech
Nth Power 20 energy investments; CalCEF partner
OPG Ventures (Ontario) 10 energy investments
Odyssey Venture Partners 1 energy investment; software
Pangaea Ventures cleantech
RBC Technology Ventures science, biotech
RockPort Capital Partners 4 energy investments; materials
Rustic Canyon Ventures software
SJF Ventures 1 energy investment; cleantech
Sound Point Ventures 4 energy investments; sustainability
Taproot Ventures industrial, materials
Technology Partners 4 energy investments; life sciences, infotech
VantagePoint Venture Partners IT & healthcare; CalCEF partner
Yaletown Venture Partners software, materials
Yellowstone Capital manufacturing, life sciences, interested in alternative energy
Zero Stage Capital 1 energy investment; infotech, life sciences

Deals from the past week

Rob Day: November 14, 2008, 1:13 PM
"It was the best of times, it was the worst of times; it was the age of wisdom, it was the age of foolishness; it was the epoch of belief, it was the epoch of incredulity; it was the season of Light, it was the season of Darkness; it was the spring of hope, it was the winter of despair; we had everything before us, we had nothing before us; we were all going directly to Heaven, we were all going the other way."
  • Silver nanoparticle ink producer NanoMas raised a $3.2mm Series A, with $1.5mm from BASF.  Earthrise Capital Partners and NanoMaterials Investors LLC also participated.
  • Second Rotation raised a $6mm Series B led by RockPort and including existing investors Venrock and angels.  There's been a little mini-wave lately of these e-waste recycle/ barter plays.
  • VentureWire reported that waste heat capture developer ElectraTherm has raised a $2.6mm Series A round, led by Interlaken LLC and friends and family.
  • PE Week Wire reported that Solexant (a "well-funded startup") has raised $18.17mm in Series B financing from Trident Capital, Firelake Capital, Medley Partners and X/Seed Capital.
Other news and notes:  Water markets to rise quickly...  I hereby extend the same offer to Fisker that I made to Tesla -- give me a loaner for a while, and I'll write about my test drives in what I promise will be very glowing terms!...  Here are your California Clean Tech Open winners...  Here's a really good overview of angel investing and investors...  Finally, as if you needed any more reason to watch Jon Stewart. . . .

The challenges and hopes for a U.S. carbon trading market

Rob Day: November 7, 2008, 6:10 AM
We've been digging even deeper into carbon trading topics lately, for obvious reasons (self-promotion alert).  And then I had the pleasure of participating on a "cap-and-trade vs. carbon tax" panel yesterday sponsored by the New England Clean Energy Council (and very well executed by Panel Intelligence).  So I thought it might be useful to put down a few thoughts on the subject. Conventional wisdom says that we should be expecting a cap-and-trade scheme sometime during Obama's first term in office.  We discussed this possibility in a post on Wednesday. In thinking about how such a scheme might impact U.S. cleantech startups and investors, it's important to look at the examples of existing trading markets:  EU ETS, US regional markets, and voluntary markets like the Chicago Climate Exchange (CCX).  The devil's of course in the details, but if a U.S. federal cap and trade system is enacted we can draw a few operational conclusions: 1.  Any system is likely to overtly encourage energy efficiency adoption, but with unknown effectiveness. There is general agreement around the concept that encouraging energy efficiency is a good thing, naturally, and we've heard discussions about "carve-outs" for energy efficiency as a source of offsets in a U.S. cap and trade scheme (see Karla Bell's great blog for good discussions on these and other related topics).  And even if it does, the administrative overhead associated with getting carbon credits validated and acknowledged as financial/ regulatory instruments can be quite costly, if not prohibitive.  At least the way it's done right now, concerns about "additionality" (ie: was the energy efficiency improvement really in addition to what would have been done under "business as usual") and the need to validate and verify actual carbon emissions reductions from a lot of small energy efficiency improvements is difficult even at the utility level. That's one of the reasons we like CarbonFlow, as they're developing scalable solutions to this challenge, so that energy efficiency gains can more easily and cheaply be accredited for trading. As it stands right now, cleantech startups would really have to partner up with bigger players (ie: utilities, or oil refiners) in order to gain any advantages to their value proposition as a result of a high-level cap and trade scheme.  That's somewhat daunting... 2.  Something's gotta give in the current carbon offset accreditation process. In a system like RGGI where it's basically just utilities trading emissions credits with utilities it's less important.  But in Europe, the inclusion of carbon offsets from overseas ( for the most part, the so-called Clean Development Mechanism, or CDM) has allowed for very economic emissions reductions and significantly reduced the negative economic impacts associated with limiting carbon emissions. So you want to include CDM-like elements into a U.S. system.  But then you're bumping up against a very labor-intensive, expensive, and time-intensive process to get such projects approved.  A typical landfill gas capture project in an emerging economy, for instance, might take 7 months and $100k in fees (mostly to consultants, etc.) to gain validation as a "credit" -- and only then can the project developer sell those credits. There's been an entire industry that has grown up around the creation and selling of these kinds of credits, whether into official systems like the EU ETS/ CDM, or just for voluntary markets.  Everything from growing trees to fuel-switching projects to growing plankton for deep ocean carbon sequestration is being planned with strong dependency, at some level, upon this value creation path.  I've seen numerous business plans where entrepreneurs are counting on gaining such credits as an important part of their future revenue streams.  But for this to be feasible, the bottlenecks and high transaction costs associated with accreditation have to be greatly alleviated.  That 7 months and $100k can be hard to make work for a number of these opportunities...  That's another reason we like CarbonFlow, because they're working directly with leading validators to come up with smart solutions to these challenges. 3.  In an ideal world, these carbon offsets become highly liquid, fungible commodities. If you're an energy trader, you love the concept of trading carbon offsets, because they become another way to play around geographic inefficiencies.  Think about it -- carbon is a global issue, not a local issue.  So a carbon offset from one place is the same as a carbon offset from another place.  But meanwhile, energy traders are used to working in a market where energy supplies are very geographically determined.  The interplay between, say, temporarily turning off a power plant in one place, getting carbon credits from that, and applying them toward turning on a peaker plant somewhere more capacity constrained, is just one example of how commodities traders might find a lot of arbitrage opportunities... if we can create a truly global carbon trading market. However, for this to happen, for offsets to be readily traded multiple times per day, we need to have a strong understanding of where each credit came from.  After all, it's not like other commodities -- it's the ABSENCE of a negative, so it's tough to prove the asset is real unless there's a lot of transparency around where it came from, how it was derived, how it's being verified, etc. And not all carbon offsets will be created equal.  To the consumer product company seeking "carbon neutrality" for marketing purposes, it might be worth paying more for a carbon offset created by protecting a wildlife preserve, than for a credit created by capturing previously released coolants at an obscure chemical plant somewhere unphotogenic. In all these cases, we need a lot more information about the credits, and this information needs to follow the credits around as they change hands over and over again.  Industry participants like New Energy Finance will typically project a "churn" per offset of around 4x (meaning that each credit will change hands an additional 3 times per year after its initial sale), but I suspect that would really be on the low end if we can figure out answers to all of these challenges. If we can figure out solutions and put in place a cap and trade system that encourages simplicity, transparency, and inclusiveness, then such a system could be very encouraging to the growth of the cleantech industry in the U.S. and elsewhere.  If we design it to be too onerous and limited, however, not only will we find the system to be costlier than hoped, we'll also not see much positive impact for young startups and small businesses where most of the jobs growth is typically seen. So get on it, Obama team! . . .

Well, that was quick…

Rob Day: November 6, 2008, 4:50 PM
It seemed a couple of weeks ago like there might be a bit of a pause in cleantech VC deals, probably due to the economic crisis. Well, if there was a pause, perhaps it was in the issuance of press releases announcing deals.  Because over the past week or so the deal announcement volume has been off the charts.  Makes sense that companies wouldn't necessarily want to issue press releases when the financial journalists were otherwise occupied, but there's no evidence (yet) that the economic situation has negatively affected cleantech dealflow... ...With one important exception, and that's the evidence that several of the announced deals appear to be bridge loans (ie: convertible notes) from existing investors.  This will often [but note: far from always] mean that the company has either run out of cash sooner than expected, or is having a harder time raising funds than had been expected, so the existing investors (and sometimes some new investors) have passed the hat to quickly put more cash into the company, structured as a loan that will convert into equity when the next full round of equity financing is raised. So there's some early anecdotal evidence that things are a bit slower out there.  But meanwhile, here's a really long list of announced (or scooped) deals from the past week-plus:
  • Ice Energy has raised a first $33mm tranche of a Series B financing, led by Energy Capital Partners.  Additional project financing could add up to $150mm.  Existing investor Second Avenue Partners also participated in the round.
  • VentureWire reported that Philadelphia Renewable Energy, an algal biofuels developer, has raised an undisclosed amount of financing led by EnerTech.
  • Tesla took in a $40mm convertible debt package, as GTM had mentioned was likely to happen.  In a VWire article, Elon Musk confirmed that the company's cash had gotten down to $9mm, but also said that the new financing (provided by most of the existing investor base) is designed to get the company to profitability.
  • PE Week Wire reported that Xtalic, a nanomaterials company with corrosion-resistant alloys, has raised an approximately $10mm Series B, from Matrix Partners and North Bridge.  The company had previously raised $5.1mm.
  • PE Week Wire reported that Miles Electric Vehicles has raised $13mm of a targeted $40mm Series B from the Angeleno Group, which had previously led a $15mm Series A round.
  • PE Week Wire also reported that Recapping, Inc. has raised a $500k Series A from Khosla Ventures.  It appears to be headed by Khosla Ventures partner Alex Kinnier, who's tasked with cleantech on their team.  Not much else has been yet revealed.
  • Kleiner, Sherpalo Ventures and Applied Materials have invested $8mm in Indian solar company Kotak Urja Pvt Ltd.
  • New Delhi-based D.Light Design has raised a $5.5mm Series A.  The company offers solar powered LED lights.  The round was led by Nexus India Capital, along with Draper Fisher Jurvetson, Garage Technology Ventures, Mahindra & Mahindra, Acumen Fund (at $1mm of the round) and Gray Matters Capital.
  • CalCEF Angel Fund released some details on rounds they participated in, for HID Labs, Allopartis Biotechnologies, and an unnamed 3rd company.
  • Kashless, a barter website ("reduce, reuse, recycle", right?) has raised a $5mm Series A led by RRE Ventures.  The company was founded by Imperium Renewables founder Martin Tobias.
Other news and notes:  A good article on the current status of Israel cleantech...  An interesting article on project finance for clean powergen...  A map of the San Diego cleantech cluster...  An article on investing in water...  And finally, an update from the 8th Annual World Toilet Summit and Expo.

What it means for U.S. cleantech venture capital

Rob Day: November 5, 2008, 11:08 AM
With the election now behind us and a Democrat-controlled Washington, DC to be installed next year, I thought I'd share some quick non-linear thoughts on what this may mean for cleantech VC.  Just one investor's thoughts, to be taken for whatever they're worth: 1.  Overall, this is probably a very good thing for the U.S. cleantech venture capital industry.  While private equity overall is likely to come under greater scrutiny by policymakers (see below), there seems to be emerging consensus in D.C. that in general cleantech markets, green jobs, and early-stage investors should be supported. With some important caveats (also see below), hard to see many of the likely supportive policies for cleantech being filibustered... 2.  There are cogent arguments to be made on both side in the general debate about divided government vs. unified government.  But since there's been a stalemate on energy policy issues for some time now, and a consensus around policies that are generally supportive of alternative energy, some impetus and lined-up legislators to get ANYTHING done is probably a good thing for our industry in particular, at least in the near-term. 3.  I expect to see an economic stimulus package as one of the very first moves, perhaps even during the lame-duck period before new congress and president are sworn in.  And I expect to see incentives in support of "green collar jobs growth" in there. 4.  I think there's a decent chance that carbon policy is one of the major policy initiatives that could be tackled by Congress and the Obama Administration in 2009.  I admit this thought flies in the face of Conventional Wisdom (CW) right now, which says that such things might be pushed back given current economic crisis and other challenges.  But the new Administration will be looking for early "wins" that can be bi- or at least non-partisan.  Reaching out to McCain to co-lead the drafting of a carbon policy initiative fits the bill for a "purple" issue that cuts across party lines (and is in fact geographically-driven).  Any such 2009 carbon policy I would expect to be pretty toothless and incentive-laden in order to keep southern and midwestern Senators onsides.  For example, it wouldn't be surprising to see a cap-and-trade scheme proposed with aggressive long-term emissions reduction goals, but lacking an auction for the initial allocation of credits, and with a generous allocation for the initial phase (as happened with EU ETS Phase I).  Also, likely generous carve-outs for ways (like energy efficiency as a source of offsets, and a Clean Development Mechanism type way to import inexpensive offsets) that southern utilities could more easily meet their needs.  Such a policy would mean that offsets would be low-value during the initial phase and trading volumes would likely be somewhat light.  But proponents of cap-and-trade would point to putting it in place as accomplishment enough, and regional legislators opposed to "taxing our consumers" would see some of their concerns mitigated.  ...We'll talk more about carbon trading, etc., soon... 5.  Obama has in the past proposed some kind of a government-funded early stage clean energy VC group.  I don't see that happening, but the concept of federal funds going to such activities may be re-purposed toward an enhanced ARPA-E or similar effort. 6.  Also, while Dan Primack and other observers of private equity policy expect to see some changes to the ways private equity returns are taxed, Obama campaign advisors and others have talked about somehow protecting early stage investors, or otherwise providing incentives for investments in startups below a certain size, as part of "small business creation" efforts. 7.  Will we see a national RPS be proposed?  Probably.  When will it be tackled?  No idea.  Probably not right off the bat, for reasons mentioned in #4 above. 8.  I hope we see better incentives for energy efficiency, the oft-neglected but cheapest and cleanest energy source.  I'm not sure this quote (language warning) gives me hope that'll it'll be elevated above green power generation investments, however... 9.  This sea-change in Washington, DC should mean an even greater interest among investors for putting money into cleantech.  It clears up one of the biggest sources of uncertainty that might have left GPs and LPs on the sideline until now.  But here's hoping it also means less volatility in the capital markets overall, so we can start seeing some cleantech exits again! 10.  I can't wait to see who's tapped for DOE and EPA roles...