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Where there’s smoke, there’s fire

Rob Day: February 24, 2009, 3:26 AM
So what happens when a venture capital fund is given a few billion dollars by the U.S. government to invest in greentech? I ask this question because it is clearly being discussed pretty seriously right now.  I've heard rumors for some time now that Kleiner in particular has pitched the administration on the idea, but pundits like Thomas Friedman have also been throwing it out there (in a couple of op-eds here and here), and it dovetails with a proposal Obama made during the presidential campaign for a government greentech venture fund. Where there's smoke, there's fire, so I'm therefore assuming it's being discussed at a high level. So what would it likely look like, and what would be the effect? I can't see this being a "Government as LP" process, where existing VC funds (note: funds, not firms) add on a couple of billion dollars of LP commitments from the DOE.  That would mess up existing fund structures and upset existing LPs. There may be some small component that could be done as government-managed seed grants/ loans, similar to the SEED Program here in Massachusetts ($500k convertible loans into early stage companies with good prospects for growth and subsequent venture rounds).  But hard to see that adding up to anywhere close to the billions of dollars being talked about. So the specific approach would likely be either a pool of capital allocated out for co-investments, and/or a pool of capital allocated to special purpose funds directly managed by VCs. In the former case, funds like Kleiner's Green Growth Fund (for example) would make an investment, the Government Co-Investment Fund would make an investment into the same round under the same terms, and then Kleiner's team would manage both, in exchange for some fees and some carry.  In the latter case, Kleiner (for example) would establish the "US Greentech Future" fund and simply run it as a traditional standalone fund, but with a single LP (the government). I could see either path being chosen.  Regardless of which one, here are some inevitable outcomes:
  1. It would have to be done by RFP, and the RFP process would be brutal.  Every firm out there would put in a proposal for some portion of whatever pool was available.  Massive amounts of lobbying (some of which is already going on, clearly).  Cutthroat competition to see what firms could claim jobs creation and wealth creation track records, which firms would be willing to charge less fees and carry, etc.  Every firm touting their own strategy over all others'.  My sympathies to the poor government staffers in charge of that process...
  2. Unclear what government body would manage it.  If it's energy tech only, probably the DOE, but it would likely be a broader program than just energy tech.  So there's the possibility of a big mess of government bodies getting involved in a huge cross-departmental exercise.  Thus slowing down the actual decisions pretty significantly.
  3. Much of it would go into later-stage investments.  Simply put, at the level of billions of dollars you either need huge staffs to manage scores of investments, or you need to put really big checks to work, which means larger rounds and thus later stage investments.  Those who read this column regularly will know that later-stage investing is already dominant in cleantech.  To put massive additional capital into that end of the market... Wow.  And it does call into question the match of the goal (fostering innovation and jobs growth) with the process.
I'm already seeing some VCs come out strongly against these ideas (a couple of examples here and here).  They argue that there's already plenty of money in the venture capital sector, and that any effort to pour massive additional amounts of capital into startups through that kind of financial asset class would end up with skewed results.  Indeed, only about 2% of all startups get their initial capital from venture capital firms, so it's unclear that this would be the most efficacious pathway to get startups launched and hiring. There's always a perception gap about what the role of venture capital is -- politicians seem to believe that the role of venture capital is to promote jobs growth and innovation, but most VCs promise their LPs that it's all about the financial returns and nothing else.  The great thing about venture capital is how often all those goals overlap.  But they don't always... I personally would like to see government figure out a good way to step into the seed stage gap in cleantech:  With technologies that would take a longer time to develop than most VCs would be able to stomach, government seed grants/ loans to help get the companies to a fundable point.  You wouldn't want to, or even have to, put massive amounts of money into each company.  At $500k per startup, you could get 2,000 startups off the ground with a $1B commitment.  I see great companies all the time that are too early even for my early-stage venture firm, and that really only need a small investment to get themselves to the next level.  Later-stage investing now has everyone across the venture and private equity landscape looking to put money at play.  It's unclear that pouring billions of additional dollars into that stage would achieve the hoped-for goals.  But seed stage funding remains a relatively unaddressed gap. If you want to promote green innovation and jobs growth, there are a number of different ways to go about doing it.  The government venture fund is the current one being discussed, and clearly is getting pushed pretty hard right now.  I just hope that whatever happens, we take care to specifically address the seed stage pre-VC funding gap.  Otherwise all those later-stage dollars eventually won't have anywhere to go. . . .

WRI: A great data and analysis resource

Rob Day: February 22, 2009, 4:00 AM
You may or may not have heard of the World Resources Institute before, but for anyone interested in environmental data, green business best practices, and policy analysis, it's a hugely valuable institution. Of course, I'm a bit biased, having had the privilege of starting my career there.  But I was reminded again of the value of WRI's work at a breakfast meeting here in Boston yesterday, where Jonathan Lash -- WRI's President -- gave a terrific presentation covering the top environmental stories to watch in 2009.  You can read and see some of the presentation here. A few points from the talk really stuck out for me: 1.  Climate change effects are being seen and felt even more rapidly than had been expected, emissions are growing faster than expected, and temperature changes are accelerating.  Taken together, these trends reaffirm that the situation is much more alarming than most public debate and news reporting would have us believe.  Jonathan pointed out that the significant effects already being felt are all the result of only 0.8 degrees C in temperature increase so far -- and even if we perform herculean efforts and achieve all our most aggressive goals for addressing climate change, expectations are that temperatures will rise another 3x or so before leveling off.  That's a best case.  And it's frightening enough by itself.  There's a reckoning coming, in other words, and our choices are about how best to manage it -- will we suffer a "climate crash", or do can we mobilize and do our best to contain the damage?  Remember this basic fact, when the Senate starts debating climate change legislation, and the inevitable horse-trading and watering-down start happening... 2.  Speaking of that, we've talked a bit here about some likely scenarios for climate change legislation in the Senate (and Jonathan mentioned that in the House, Waxman has promised to get legislation out of his committee by Memorial Day), and the importance of this being a "purple" legislation, to try to get to 60 votes.  I think it'll be important to provide carve-outs for emissions offsets from energy efficiency and international imports (ala Clean Development Mechanism projects under the Kyoto process), to try to get some of the southern senators on board...  But Jonathan points out that there is a "Gang of 16" Democratic senators who also have expressed reservations about climate change legislation (and they tend to come from the states where coal-based electricity dominates the supply mix).  Winning them over will also require some creative bargaining as well, likely around funding for "Clean Coal" for example.  Getting to 60 on any kind of aggressive climate change regulation is therefore a daunting task.  In my opinion, entrepreneurs and investors should hope for the best, but plan for a likely weak outcome... 3.  The stimulus bill had a number of great programs in it, from a cleantech and green jobs perspective.  One thing to note, however, is that while the DOE was given something like $40B to spend, it'll be an organizational challenge for the Department to get that disbursed productively and quickly.  After all, the DOE has historically been very slow at putting money out the door -- 24 months after Congress approved a major loan guarantee program to help build biofuel and other facilities, for example, not one dollar has been paid out.  Steve Chu and his team seem very committed to changing this... But it will still require a major change.  This dovetails with anecdotal evidence I keep hearing from across various states, where federal, state and local energy program managers know they're getting a big slug of money for "shovel-ready" infrastructure projects and energy efficiency programs, etc... but have no idea when, or what they're going to be able to do, much less how to put the money out there.  It's a great thing to see all these efforts getting ramped up, but entrepreneurs and investors need to recognize and plan around a likely slow process for getting money out of these programs. 4.  Jonathan talked about a pretty interesting use of advanced technology for monitoring illegal logging and then, in conjunction with a revison of the Lacey Act to allow prosecutions of mills that take in illegal wood.  It's an interesting development for the forestry industry.  But even more important from my perspective is the demonstration of how advanced monitoring technologies will be increasingly enabling more effective environmental regulations in the future.  For a great example on a completely different set of environmental issues, see Planet Hazard, a potentially powerful tool -- it allows easy access to Toxic Release Inventory data for air emissions in your hometown (if you live in the U.S., of course).  Take a look at the major emitters in your area, and think about what your neighbors might think about that information.  Technology innovations and smart regulations can be very effective together, and information itself can be a really powerful tool.  We need a TRI for carbon emissions... Those were just some of the important take-aways for me from Jonathan's talk.  WRI tracks a tremendous amount of environmental data from around the world, and does a lot of really innovative work to develop innovative policies, to work with the private sector on key issues, and to address environmental challenges all over the world.  Innovative efforts like the Global Impact Fund, an internal venture fund to develop new programmatic activities, help the organization stay at the forefront of policy and engagement efforts.  Their publications are great educational resources as well.  So I encourage readers to check them out. . .

What if energy was free?

Rob Day: February 14, 2009, 11:23 AM
Readers be forewarned, this is going to be a bit of a different (ie: useless) post from the usual... I was reading an Andrew Revkin column today, where he poses the question about what unintended consequences might result if the energy tech revolution succeeds in making "solar panels as cheap as paint," or to paraphrase:  "What happens if energy is virtually free?" Talk about your deep thoughts, it sounds like the premise of a Neal Stephenson novel, not your typical NYT type of thing.  But at the risk of pontificating outside of my investment horizon, I thought it was an interesting question, hearkening back to my days at an environmental economic thinktank (way back before cleantech was cool, even before it was "cleantech"). What Andrew is asking is, what would go WRONG if energy is no longer a limiting factor for human population growth?  Would we somehow end up worse off? The obvious answer is to simply look at the last couple of centuries, when for much of the developed world energy really hasn't been the limiting factor.  As we've bled off our global stockpiles of non-renewable energy sources, we haven't had free energy, but it's been artificially inexpensive, to be sure. With artificially cheap (ie: prices not incorporating all externalities such as damages from climate change, etc.) energy, the U.S. in particular has seen dramatic population growth, expansion of population into new territories putting significant pressure on species and habitats, and significant withdrawal of non-energy natural resource stocks. So with artificially low energy prices, that's what happened.  Thus, to be flip, if we have artificially low energy prices, that's what what will happen.  But what Revkin is really asking, I suppose, is what happens if energy is even LESS expensive than that historically suppressed level. But I would argue that it's a flawed question.  Energy will never be free or close to it.  Revkin mentions the possibility of synthesizing food.  If energy is cheap enough, we will use it to address scarcity of other natural resources.  We already have learned just how much all of what we consumed is in reality some other form of consumed energy.  Corn-based ethanol isn't very net-energy-positive because of all the energy-derived fertilizer we pour into the ground to grow the corn.  The entire "Green Revolution" in some ways is really about the use of cheap energy to grow food.  Same story with water -- the embodied energy in water (the energy used to withdraw it, purify it, and transport it) is huge. Food is mostly embodied energy.  Water is mostly embodied energy.  By the time we consume them (factoring in extraction, treatment, transportation, etc.) just about all materials are mostly embodied energy. Walk through the logical chain here:  If virtual energy is free, Revkin's fear is the potential for dramatic population expansion, putting more pressure on natural resources.  But if natural resources are under pressure, they will get more expensive.  Given the inherent interlinkages between all the material we consume and the embodied energy, over the long run we would find new ways of supplementing those resources with some solution that would essentially be a huge consumption of energy transmogrified into supplied demand for materials.  And so we would end up with what happened over the last two centuries -- a significant increase in Earth's carrying capacity for humanity, a dramatically expanded population, but nothing like a crash in standards of living, etc.  Energy almost always has been, and almost always will be, the limiting factor for human population growth.  The second law of thermodynamics says so. EXCEPT:  That's a very long-run, economics-education-based perspective.  The problem with the long-run is that it ignores near-term inefficiencies.  To whit:  If there is a time gap between the provisioning of virtually-free energy and solutions to turn that surplus into substitutes for other material resources, during that gap (which, as we're seeing in the painfully slow transition from the Oil Age) we could expect very dramatic impacts on natural resource stocks and non-human habitats.  And, based as well upon history, that's likely what would happen. So is there a scenario where all our efforts to find ways to make clean energy dirt-cheap end up having negative unintended consequences?  Of course!  And the above is just one path where that might happen, there are others (more concentrated wealth among the energy "Haves", more economic power clustered in places where renewable resources are more readily available, etc., to name a couple). But look, that's a really long-term question, the answer of which is effectively moot for you and me.  Energy is not going to be virtually free anytime soon.  It takes energy to make solar panels.  It takes energy to make paint!  Basically, because it's so central to EVERYTHING, the cheaper energy is, the more we will consume it, thus bringing back up prices in a typical economic cycle.  And we're definitely an awful, awful long way from any period where clean energy generation technologies are significantly cheaper than the subsidized fossil fuel based energy prices we're already used to. But we can dream, can't we?  Solving climate change, and then having unintended problems because of a surplus of clean energy supplies... Boy, that would sure be nice.

Whistling past the graveyard

Rob Day: February 10, 2009, 10:56 AM
Happened upon a very sobering account of the economic crisis today on PoliticalWire, well worth reading:
On C-Span, Rep. Paul Kanjorski (D-PA) explained how the Federal Reserve told members of Congress about an electronic run on the banks "to the tune of $550 billion dollars" within "an hour or two" last fall. According to Kanjorski, on September 18, 2008 the Fed tried to "stem the tide" by pumping money into the financial system but it didn't work and decided instead to announce an immediate increase in deposit insurance to $250,000 per account to stop the panic. Said Kanjorski: "If they had not done that, their estimation is that by 2 p.m. that afternoon, $5.5 trillion would have been drawn out of the money market system of the U.S., would have collapsed the entire economy of the U.S., and within 24 hours the world economy would have collapsed. It would have been the end of our economic system and our political system as we know it."
And then there's this (admittedly simplistic) argument from that the economic recovery won't be quick... So with that unhappy news in mind, let's celebrate the cleantech venture deals that have been announced recently:
  • How did I forget to mention this one???  Luca Technologies raised a $75.9mm Series C led by JP Morgan's One Equity Partners and Kleiner's Green Growth Fund.  ASF Group and Oxford Bioscience Partners also participated in the round, which appears to have been done at around a $175mm pre-money.  The deal was done a while back...
  • Israel-based AORA has raised a $5mm Series A led by EZKlein Partners and including L&Q Solar.  The money will be used to commission a hybrid solar thermal gas-fired generation installation.
  • Sweden's Xylophane has raised a $4.3mm round of financing to support biopolymer manufacturing.  New investors SEB Venture Capital and Capricorn Venture Partners from Belgium, via its Cleantech Fund, joined existing investors KTH Chalmers Capital and Innovationsbron together with Hans and Ingrid Wallstén in the round.
  • Israel's BrightView, a solar PV startup, has raised a $6mm Series A co-led by Israel Cleantech Ventures and Hasso Plattner Ventures.
  • VentureWire reported that stealthy carbon sequestration startup C12 Energy has raised $4.5mm in venture financing, reportedly from Sequoia and possibly others.
  • PE Week Wire reported today that SolFocus has raised $19.28mm in additional Series C financing, bringing to total to nearly $67mm.  Investors include Apex Venture Partners, New Enterprise Associates and NGEN Partners.
  • VentureWire reported last week that Seven Seas Water has taken in a $15mm insider round.
  • PEWW (I guess soon to be called PE Hub Wire) also reported that EV and hybrid vehicle developer Bright Automotive has raised $11mm of a targeted $17mm Series A, with White Pines Partners and Duke Investments participating in the raise.  (I think VWire may have actually had the scoop here, I can't keep track)
  • VWire also reported that Pump Engineering, a desalination pumps/etc. vendor, took in an undisclosed amount of equity financing from Plymouth Management Co.
Other news and notes:  Here's a good overview of the launch of REBN's newest chapter, in Philly... A good profile of Reed Benet, the new head of the Austin Technology Incubator...  The New England Clean Energy Council's very good Fellowship Program is rounding up new recruits -- get your applications in!...  Cleantech at TED...  Go get'em, ultracap innovators!...  Steorn is back -- with proof...  Carbon credits for buying biofuels...  Finally, get ready to hear me beat the drum again and again in favor of energy efficiency and smart grid in 2009 (as if I hadn't been doing that already for the past 5 years or so).

Two great links

Rob Day: February 10, 2009, 4:53 AM
If you want to get a great download of data on water trends and challenges, it's worth spending a few minutes watching Prof. Hermanowicz's presentation here. And if you want to understand why it's a bit misguided to say that cleantech as a whole is unattractive in a low oil price environment, see the below oldie-but-a-goodie chart.  And notice how little oil goes into any energy consumption outside of transportation.  (It's also always fun to note how much "Lost energy" there is in the system)  Yes, there are linkages to pricing throughout the system, but despite what the TV may tell you, oil isn't the only price-setter in the energy world.

Energy Efficiency needs a better lobby

Rob Day: February 7, 2009, 3:46 AM
There are two critical roles for energy efficiency in upcoming 2009 federal legislation.  But you almost never hear about them. First of all, energy efficiency is shovel-ready.  In other words, if you're looking to have an immediate impact on both green-collar jobs creation and cost-effective carbon emissions reductions, you absolutely have to include energy efficiency retrofits into the equation.  For example, look at commercial building energy efficiency retrofits:  The technology is available already; The nature of the work is service-oriented and building controls and HVAC and lighting are readily "trainable" for new recruits; and the economics often make perfect sense, if only regulatory support would help address the upfront capital cost hurdle. And yet what I hear from folks battling inside the Beltway right now is that energy efficiency support has been one of the items on the chopping block in all the Stimulus Package horsetrading.  Apparently the CBO came out with a report saying that much of the energy efficiency incentives put into the bill wouldn't have an effect until 5 years out?  I haven't had a chance to review the specifics, but I would find that hard to swallow if true. And while I'm also a big supporter of renewables, it's hard to make a case that regulatory support for solar panel manufacturing (for example) would be something that would have a 2009 jobs impact, and in fact much of that market will eventually go overseas.  I'm not arguing against support for solar panel manufacturing, we have technology leadership reasons for wanting to pursue that as well, and good green manufacturing jobs should be encouraged in any case.  But if your metric is jobs creation in 2009, it's tough to make the argument that renewables should be prioritized over energy efficiency.  And yet, apparently, that's what the pencil-pushers are doing. Secondly, energy efficiency could play a critical role in any climate change regulation that comes out. To begin with, from a "wedges" perspective we cannot afford to ignore the role energy efficiency must play in any comprehensive climate change effort.  It's not sufficient, but it sure is necessary. Also, from a timing perspective, once again energy efficiency shines versus alternatives like sequestration and renewables.  It's reductions we can do immediately, not after further waited-for innovations. Finally, and most tactically, energy efficiency based carbon offsets may be very powerful in bringing key Senators "onsides" with carbon cap-and-trade regulation.  As we all watch how critical it is to reach 60 votes in the Senate, it's important to recognize that major regions of the country consider themselves to be at a severe disadvantage in a cap-and-trade scheme, because (rightly or wrongly) they feel they lack the renewable generation potential (solar, wind, geothermal, etc.) of other regions.  Specifically, the US southeast feels disadvantaged versus the west or northeast.  It would be very easy for regional blocks to stand in the way of effective cap-and-trade regulation. But of course, one potential "resource" that the US southeast has is lots and lots of inefficient air conditioners.  It's an easily mined source of offsets to help them meet their requirements -- if energy efficiency-based offsets are included as a key source. Energy efficiency does face some technical challenges (for example, establishing accurate baselines and proving "additionality") if it's to be included effectively in any scheme.  It gets complex quickly. We'll talk another time about these complexities and possible ways to deal with them. But it's worth wrestling with these details, because otherwise it's tough to see how we get to 60.  And without that, the political efforts of a lot of people who are currently ignoring energy efficiency may be wasted anyway.