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The “what if” factor

Rob Day: July 28, 2009, 4:48 PM

Perhaps the single biggest difference between cleantech and other venture sectors is the "what if" factor.  As in, what if something comes out of left field and blindsides an entire investment thesis.

Last week Earth2Tech profiled 13 different lithium ion startups, most of them venture-backed, all vying to make a big dent in the market for the batteries that are presumed to end up powering future cars and other vehicles.  Each has a different technological solution that they think will give them an advantage on cost or performance or both versus other lithium ion batteries.

But what if EEStor is for real?  If you haven't read it yet, read the highly entertaining transcript (Tyler swears it's real) supposedly of EEStor's CEO giving an interview on what the company is up to.  I'm personally a bit skeptical of the company's prospects, for a number of reasons, and the UL certification effort that bloggers are going ga-ga over really doesn't validate anything.  But if you believe Weir, the company's products will soon obviate all other energy storage options, including lithium ion.

I'm not trying to either slam or boost EEStor (so direct your flames elsewhere, people), it's just a really vivid example of the "what if" principle I'm describing.  What if EEStor's products are for real and as ready as promised?  What would that mean to lithium ion investment theses?  Or other energy storage investment theses?  After all, there are a million different ways to store or regenerate electricity.  Even if EEStor's technology isn't all it's promised to be, what if there's some other breakthrough waiting in the wings?  VCs have backed any number of battery chemistries, after all.

In areas like biotech this "what if" factor appears to be a bit less of an issue, because there's more openness about what people are working on, and the research tends to take place in more well-known places.  There aren't a lot of biotech entrepreneurs working on a new drug discovery platform in their garage.  But there are lots of garage inventors in energy tech, and even with the more well-known research institutions they can either be very close-lipped (like corporate R&D shops), or the substitutionality described above might mean that the "killer app" comes from an entirely different discipline, so simply knowing everything going on in the world of chemical engineering (for example) might not be enough to mitigate the "what if" factor.  Or it might not even be a new technology; as in solar, where an expected flood of really cheap "Gen 1" panels out of China might obviate a whole lot of "Gen 2" efforts...   All of which makes it just about impossible for investors to know everything that's going on that could blindside their investment theses.

This is also driven by the fact that most clean technologies are, in the end, involved in the production of a really basic commodity like kwh, drinking water, energy storage, etc.  There are so many different ways to accomplish the intended goal, that a mono-disciplinary approach will leave out many otherwise unanticipated competitive threats.

The only solution as an investor is to be deeply, deeply networked across a very wide range of markets and disciplines and geographies.  And to be really disciplined about valuations and capital efficiency (so that even ancillary markets can yield good outcomes), due diligence, and most importantly the need for strong execution. 

Good management teams need do their best to know everything that can be known about potential competitive threats (and don't just trash the competition), and understand that it's not always the best technology that wins...

Here are deals from the past week or so -- we're starting to see the return of some bigger deals:

  • FRX Polymers, a developer of more environmentally-appropriate flame retardant additives, has raised a $6mm Series A co-led by Israel Cleantech Ventures and Capricorn Venture Partners.
  • Smart home startup iControl has raised a $23mm Series C, with participation from new investors ADT Security Services, Cisco, Comcast Interactive Capital and GE Security, alongside existing investors Charles River Ventures, Intel Capital and the Kleiner Perkins Caufield & Byers (KPCB) iFund.

Other news and notes:  CleanLaunch, a new cleantech incubator in Colorado...  Interesting take on a secondaries market for privately-held cleantech shares...  This sounds like a relatively soft landing...  Finally, who do you believe, the Nobel laureate or the politicians?




That big sucking sound you hear…

Rob Day: July 22, 2009, 11:21 PM

... is the sound of China deciding to become a big player in solar project installations, overnight.

It's clear that China is going to be a dominant force in cleantech in the coming decades, starting immediately.  But what that will mean for cleantech VCs remains very much unclear.  What is clear is that cleantech VCs need to start getting smart about that factor, asap.  And thus, so should their LPs.

But should cleantech VCs start investing in China?  It's not apparent that US-based investors do very well investing in China, at least without having a local presence on the ground.  Since most cleantech-specialist VCs don't have that, are they vulnerable to being left out?  There are specialist funds (albeit very few) focused on cleantech in China, are they better-positioned?  Or are the markets themselves so specialized (US firms having trouble selling into China, Chinese firms having trouble selling into the US) that they really are totally separate questions?

It will be fascinating to watch how this dynamic continues to develop.  Solar and coal-related techs will be where it gets felt first.  Every coal-related startup CEO I know is paying a huge amount of attention to China.  Many solar CEOs already are, too.  Wind and LEDs and industrial efficiency techs will also need to pay close attention.

China has the potential to radically change the way we think about cleantech venture capital and private equity.  But I'm not yet smart enough to figure out exactly how...


Tidbits from the past week

Rob Day: July 19, 2009, 4:35 PM

It continues to feel like things are picking up a little bit in the cleantech venture world, but if so, just a little bit.  I continue to see lots of cleantech startups that are having a surprisingly hard time raising capital, given decent internal progress and good market prospects.  What deals are happening appear to be pretty small ones, some smallish Series A rounds, some smallish follow-ons, some extensions of previous rounds: deals done simply to pad out cash reserves or add a strategically valuable investor.  Not a lot of "inflection point" deals, ones where the capital is intended to dramatically accelerate a company's internal development and growth.  Entrepreneurs would do well to continue to focus on lean growth plans and capital efficient operating models when approaching investors over the near term.

With that in mind, here are deals and other items of interest from the past week or so:

Other news and notes: 

Here's a great follow-up on the NECEC's inaugural class of Clean Energy Fellows... 

Here's a good perspective from Joel Makower, who always is worth listening to -- but I do disagree with his concept of energy becoming cheap and plentiful anytime soon.  While we are bringing cost curves down on new energy sources, the scale disparity versus incumbent energy techs, and the continuing challenges, mean that even as alternative energy sources start to get close in some cases to incumbent energy benchmarks, we're still a long way from achieving "grid parity" with these new resources.  And crossing that threshold is a long way from energy being virtually free.  Basically, information is a virtual good and energy is a physical good, and as such requires a lot of capital expenditures to produce even when the "fuel" (photons, sugars, etc.) is free, so it'll always be costly.  If anything, I would expect energy prices to go up over the coming decades, not go down.  But others are encouraged to disagree.  What I do agree with is that diversifying our sources and virtual sources (ie: automated efficiency and demand response) of energy may well launch a period of amazing entrepreneurial and innovative efforts even outside of the energy industry, just like the internet has helped usher in a period of "creative destruction" across many different markets... 

Finally, I'd love to chat with any entrepreneurs working on biochar-related businesses -- just drop me an email if you are one.

The hidden dealflow:  Secondaries

Rob Day: July 14, 2009, 8:24 AM

While we discuss the numbers being tracked around new venture capital dollars into cleantech, in the background there's a totally different type of deal that goes on, and especially right now. 

In a "Secondary" transaction, a new investor buys the existing equity of a current investor in a startup.  It can be done in conjunction with a new funding, but often doesn't bring any new capital into the company at all.  It can be a specific acquisition of a company's equity from an existing investor to a new investor, or it also can happen more indirectly as an entire venture portfolio gets sold from a VC firm to a new institutional investor. Typically the seller of the equity or portfolio is facing a liquidity crunch and needs to sell off some of their holdings, even if at a discount, in order to raise some cash.  But it also can happen at the tail end of a VC's fund, in order to give their LPs some near-term finality and close out a fund even if some of the investments haven't exited.

And we'll never know just how much of this is happening in cleantech venture capital.  Because it doesn't get talked about very much, for obvious reasons.

But from all reports, it's happening quite a bit right now, especially as VCs continue to have trouble raising new funds.  There are some hints of the secondaries taking place, in such news as Daimler has already sold off 40% of the stake they recently bought in Tesla Motors.  But we're not hearing about the vast majority of secondary transactions that are taking place.  Nor will we.

Just something to keep in mind as we discuss the talked-about deals:

  • Speaking of Sail Venture Partners, I missed reporting last month that they invested in Xtreme Power, as part of a $5mm round that the CEO of Xtreme describes as "not that big of an event for us".

Other news and notes:  WHEB Ventures has held a 3rd closing on their second clean tech venture fund... Overall, however, fundraising by VC firms is way down, which is bad news for many startups since that means fewer checkwriters...  Finally, can a VC-backed startup cause earthquakes???

Back in the saddle

Rob Day: July 7, 2009, 4:12 PM

Over the past week or so, we've gotten the initial Q2 cleantech venture tallies from GTM (85 deals, $1.2B), the Cleantech Group (94 deals, $1.2B), and NEF (note: link opens pdf) ($1.4B), and the picture is that investors are starting to get back into activity again.

Granted, in terms of dollar amounts the activity remains below the pace of a year ago, but the number of deals is comparable to that from 2008, with GTM's Eric Wesoff counting 85 deals around the world in Q2 2009, compared with 350 deals for all of 2008.  In GTM's full Greentech Innovations Report for the quarter, Wesoff notes that while investment activity is rebounding, the quarter didn't see any huge $100mm solar or biofuels deals, which is why the dollars haven't caught back up to where they were. 

The NEF data is a bit dissonant, in that it shows a slight decline from their Q1 2009 total VC dollar tally of $1.8B, but we've talked a lot here on this site about the compounded challenges of trying to get consistent data across different analysts' methodologies and dollars vs. deal counts.  So if nothing else, it's somewhat gratifying to see all 3 tallies somewhat in sync for at least this one quarter, even if their Q1 to Q2 trend lines are a bit off from each other.

Interestingly, both GTM and the Cleantech Group show signs of a bit of tempering of VC enthusiasm for solar, although as always the data is tough to compare without full details (GTM pegs the sectoral subtotal at >$300mm, while Cleantech Group puts it down at <$150mm).  Still, in both cases, the dollar totals slipped a bit for the sector, while sectors like smart grid, transportation and energy storage saw increases.

We'll check back in and do a full comparison after the other tallies come out in a few weeks, but the overall story for Q2 appears to be that cleantech VCs are still being cautious, but are slowly starting to get back into the game.

Speaking of which, I am excited to be taking on a fun new challenge of my own, starting this week.  Thanks to the many of you out there who've sent kind messages over the past couple of days since the news came out...  Looking forward to digging into deals and once again rolling up my sleeves to help clean energy companies grow, in this new context.  Cheers!