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Nikola would be proud

Rob Day: June 29, 2010, 8:37 PM

Tesla went out to IPO today quite successfully.  I was very glad to see the offering do well, at least on the first day. I've seen complaints about it going out too early (as yet unprofitable, and mass market car not due until 2011), but it does seem from the outside like a relatively well-run company with a compelling story. Low risk? Absolutely not. But I'm hoping they do well. Especially because this sector needs more success stories.  LPs have been waiting very, very patiently for more big visible stories like First Solar... will Tesla prove to be one of them?  Time, and stock market investor patience, will tell... 

I reiterate my long-standing tongue in cheek offer:  If the company would simply give me a roadster loaner for, say, two months, I promise them a glowing product review on this website!

But more seriously, I just hope cleantech VCs realize that stories like Tesla, big capex and somewhat still risky at exit, will be exceptions, not the rule. Not to tar Tesla with this brush, but too many VCs have been hoping that their cleantech companies can IPO early, before they're profitable. This isn't 1998.  And it won't be anytime soon.  Then it was sock puppets and eyeballs. This time it's fabs and negative gross margin beta units.

The age of hunter-gatherer cleantech venture capital is over.  When I started out in cleantech venture capital six years ago there were still plenty of unexamined subsectors, but by this point I don't know many subsectors that haven't been at least studied by multiple investors.  We're now deep into the age of both cultivators (ie: those who look for steady, if unexciting, returns) and big game hunters.  As always, big game hunters get the visibility (ie: press coverage).  But to over-extend the analogy, over time the farmers provide most of the nutrition, er, returns.

But seeing Tesla do well does help the exit window for others, including the many less sexy companies out there tackling our many energy problems. Today's performance is proof that investors are still hungry for compelling cleantech stories to back.  Of course, A123 did well immediately after the offering as well.  But I, and most other cleantech investors, are hoping that we see a nice sustainable story from this one.  It certainly is a fun one.  As a sector, not just as individual investors, we need to put some numbers on the board.

Some random cleantech VC thoughts and aphorisms

Rob Day: June 25, 2010, 8:43 PM

Been away on a major travel binge, so apologies for a download of a bunch of randomness that has accumulated over the past few weeks.  So, in no particular order:

1. Selling even millions of dollars' worth of a Gen 1 product at zero or negative gross margins doesn't count as "Commercialization".  It's just a large beta test.  ...Yes I'm talking to you, thin film solar and solid-oxide fuel cell industries. 

2. Tom Pincince, President and CEO at my portfolio company Digital Lumens, is also a former Forrester Research analyst.  And he has some pretty interesting predictions on LEDs.  Definitely check them out.

3. VC/PE funds often pass on great deals.  And know it.  Constantly-shifting internal firm dynamics often mean they just can't write checks to a company they like, for reasons having nothing to do with the potential worth of the investment.

4. The U.S. Senate advocates of climate change legislation continue to place the wrong emphasis, imho.  They have attempted to craft a law that would have significant near- to mid-term climate impact but still be politically and economically palatable.  But the (short) history of market-based environmental regulations suggests that timing isn't nearly so important -- people get out ahead of regulatory impacts as soon as they see a clear signal.  So pass a law this year to significantly price carbon... in 2020.  The net-positive economic changes will start hitting much earlier anyway, and the painful economic changes will be pushed out beyond most politicians' career half-life. 

5.  I talk about venture investment decisions for the most part on this site.  But that's different from career decisions.  Were I someone looking to choose a career right now, becoming an expert in building energy efficiency commissioning and retrofits would top my list.  So much latent demand, and much of it will have to be labor-intensive... and impossible to outsource overseas.

6. The single biggest missing need in cleantech?  Great sales leaders.  I've been searching for them for a while now, and yet have found very few.

7. The cleantech IPO candidate pool continues to look weaker and weaker.  Strong hype can't overcome negative margins and high cash burn -- at least in the absence of a pre-existing stock market bubble. But I do think there are a lot of great companies waiting in the wings for a second wave... if the market conditions allow it.  And if the market forgives this decade's first batch of cleantech IPOs for having a few belly-flops.

8. If you care about climate change, stop conflating natural gas and oil.  Yes, they both often come out of the same holes, and have the same players.  But not really.  There are "oily" and "gassy" producers (to borrow the parlance of Wall Street), and the communities are fairly separate as far as I can tell.  And as this great MIT study shows, any serious effort to combat climate change will need to embrace the substitution of coal and oil with natgas, at least over the near- to mid-term.  Yet environmental rhetoric and federal legislative proposals around climate change continue to significantly subsidize coal but treat natgas production the same as oil production.  That's a mistake.

9. The more time I spend driving up and down the east coast, the more I appreciate the train.  And the more I appreciate crowd-sourced real-time traffic applications for GPS navigation devices...

10. To anyone who was attempting to take a late-morning nap in my hotel in DC on wednesday, my apologies for undoubtedly waking you up by screaming so loud when Landon Donovan put that ball in the net.  Go USA!



More on the Massachusetts innovation gap

Rob Day: June 13, 2010, 9:30 PM

I got a lot of feedback on my last post comparing Massachusetts with California in terms of Research, Innovation, and Commercialization of clean technologies.  One respondent, my friend Jay Fiske of Wakonda Technologies, was so knowledgeable and thoughtful in his take that I asked him to write it up as a guest blog post.  So... Enjoy!


In his most recent post, Rob Day asks why the West Coast seems to be better at commercializing cleantech research than the East Coast.  

It's a great question.

As a former cleantech venture investor with the Massachusetts Green Energy Fund and as Vice President of Operations for Wakonda Technologies -- a company developing high-efficiency, flexible, low-cost photovoltaics for the mobile power and building-integrated solar markets -- I have been privileged to meet and work with a wide variety of scientists and engineers developing clean energy technologies.  

Perhaps one of the biggest differences between the East Coast and West Coast is cultural.  In my experience, there are many university professors who have no interest in commercializing their research.  The knowledge gained from their research is the goal - they are pure intellectuals: "a person who places a high value on or pursues things of interest to the intellect or the more complex forms and fields of knowledge, as aesthetic or philosophical matters, esp. on an abstract and general level."  Thanks to for that one.  

Academia -- at least the East Coast version with which I have the greatest exposure -- is a different place than business.  Many academics seem to compete on who is smartest, who has the best paper, and who was published in which prestigious journal.  Money rarely comes into the credibility equation for academics, unless you're speaking with business school professors, and typically, one doesn't find innovative energy technology in business schools.  

Maybe the difference between the coasts stems from the fact that many universities in the East came into prominence before the industrial revolution when intellectualism was the goal, while many universities in the West came into prominence after the industrial revolution when commercialization was the goal.  

Clearly, I'm stretching here.

Frankly, the "East Coast vs West Coast" debate is an interesting discussion, but the bigger concern I have is US vs India vs China.  

Which regions will thrive because they are continuously developing innovative technologies and forming companies around them, and which regions will struggle to build or maintain a robust economy because innovative firms are formed elsewhere?  

When I was recruiting for a senior scientist position at Wakonda, I reviewed about 130 resumes from PhD's from various prestigious universities.  An astounding 70% of the candidates I reviewed were born in India, China, or Russia.  I guarantee you that not all of these highly-qualified individuals will find jobs in innovative materials science firms in the US such as Wakonda.  Many will go home and start or join innovative firms there.  

In addition to the incredible labor pool being developed in India and China (and to some degree, Russia), much of the manufacturing base has shifted to these regions, which greatly facilitates innovation.  If a company's manufacturing line is housed in the same facility that houses R&D, their "clockspeed" for implementing innovations will be much greater than firms where those capabilities are separated by 10,000 miles.  

So, is it time for Rob Day to move to Shanghai?

Maybe not quite yet.  I think there will still be opportunities to build great companies from East Coast research -- the amount of scientific talent in the Northeast focused on energy is indeed incredible -- and I am hopeful that we will see more efforts to fund the bridge from basic research to commercialization.  However, I agree with Rob's implied point that perhaps we in the East Coast shouldn't be beating our chests too hard and should be a bit more paranoid about the competition.  However, I would shift the focus of our paranoia to China and India and not worry so much about California.  

Massachusetts’ cleantech challenge: Turning Research into Innovation

Rob Day: June 6, 2010, 12:38 PM

Apparently, June is Innovation Month in New England.  So I thought I would write a bit about one of the perplexing things about cleantech investing in New England.

Now, every region ends up being a bit self-centered at times, and New England is certainly no exception.  But it's a commonly-held and oft-stated position among those involved in energytech innovation in this region that "Massachusetts is THE world-class center of research in energy and clean technologies".

If you are one of those who takes this kind of statement literally, then it probably comes as some surprise to then see that California typically attracts significantly more cleantech venture dollars than Massachusetts, and even New England overall.  I've been part of meetings with investors and other industry participants here in the Boston area where the goal is put out there that Massachusetts should -- especially given its primacy in energy R&D! -- be able to top or at least equal California in terms of cleantech entrepreneurial activity.  And for lack of other trackable statistics, the disparity in cleantech venture capital spending is then lamented as a sign that Massachusetts is "falling behind."

I've been one to say such things myself at times.  Being here, surrounded by so many great researchers in so many varied energy and clean technology fields, really does give one the sense of being in a world-class research cluster that is second-to-none.  And then, as an investor, when I find myself inevitably investing on the west coast, I start wondering "Why?"  

Why do I seem to generally find California a better place to invest in (when I'm wearing my VC hat, versus my other private equity roles), when there's so much innovation around here?  Is it that that's where the dominant amount of cleantech venture dollars are sitting, and therefore more entrepreneurs go there?  Is it something about a disparity in entrepreneurial culture in general between the regions?  Is it just that MIT researchers hate venture capital while many California researchers seek it?  In other words, is there something "wrong" with Massachusetts (from a self-centered VC point of view)?  Or is it simply that California is so much bigger than Massachusetts, in terms of people and economy, so research cluster or not is a moot question?

I decided to take a really quick look into the question.  Starting with cleantech patents.  I wanted to test the theory that innovation is just as prevalent here as it is in California, and started naturally with patents as a proxy.  I couldn't find anyone who had already done this analysis the way I wanted it done (there are some cleantech patent tracking efforts out there, but I can't really get a tangible understanding of their methodologies, and they don't have the state-level breakdowns the way I wanted it), so I went to an online patent search engine and started searching for all published patents from 2007 to the present, with at least one inventor in the searched-for state (CA, MA, and NY).  I didn't scrub the results at all, because I wasn't looking for 100% absolutely accurate totals, I was simply looking for comparisons across regions.  Here's what I found:

As you can see, not only does it appear that California dramatically outpaced Massachusetts in terms of published cleantech patents over the past few years, but MA is even mostly behind New York state as well.  This is pretty damaging to all those Mass-philes out there who claim that this is the dominant place for cleantech innovation.  To put it another way, if you're a cleantech VC, looking at the above tallies, would you rather be in Massachusetts or California? Or even New York state?

Now two big caveats:  First of all not all patents are created equal.  This is just an unscrubbed tally of patents based on very simple search terms, and it might be that the 3 most important photovoltaic patents during this period, from an investor standpoint, were all in Massachusetts.  Or perhaps in NY, for example, a higher proportion of these patents were claimed by large corporate research arms (ie: GE) and therefore aren't accessible to venture investors.  So the above tallies might not tell the full story.  But even still -- there's a wide gulf between the number of cleantech patents published in California and Massachusetts.

Secondly, patents aren't a full proxy for innovation.  They're just a proxy of applied innovation.  For the most part, basic science research results in papers, not patents.  

In fact, I would argue that there's an important distinction between Research and Innovation.  Let me propose a taxonomy of sorts:  "Research" helps uncover basic principles, or invent entire new technology innovation areas.  "Innovation" is the application of those principles to the development of new, commercializable, patentable technology.  And then "Commercialization", the productization of that innovation and the introduction of those products to the market, is where venture and corporate capital is supposed to plug in.

So the answer might be that Massachusetts is indeed a dominant center of excellence for energy research -- but fundamental Research, not patentable technology Innovation.

This is, in fact, what I believe to be happening.  For instance, in the 2007 US Department of Energy budget, California universities and colleges received $100M in DOE support (mostly grants from the Office of Science, very basic research), whereas Massachusetts universities and colleges received $78M, a much closer amount (NY state, btw, received $84M).  And if you could map that out, I bet a 100 mile radius centered around Boston would end up being the top academic research dollar garnering area of comparable size, compared to California and New York state where the research institutions are much more spread out.  It's just one small slice of the cleantech research picture, but it does start to lend some credence to what I and others are sensing anecdotally -- that Massachusetts really is a world-class center of basic academic cleantech Research.

But basic Research.  Not Innovations ready to be Commercialized within a venture capital type time period.  

So let's go back to the original question about cleantech venture capital... In light of the above analysis, New Englanders should celebrate the fact that the region is receiving almost as much attention as the west coast in terms of early stage cleantech venture capital.  I looked it up, and thanks to the Cleantech Group's new data format for members (really a terrific job of data presentation, I absolutely love this new sortable format, kudos to them), I was able to look only at "early stage" (ie: 1st round) financings within each region:

In terms of dollars tracked by the Cleantech Group, the Northeast is only about half of the West Coast, but in terms of number of deals they're actually pretty comparable.  And as long-time readers know, because of the really broad range of capital-intensity across sectors and business models within cleantech, I always say that the number of deals, and not the dollars, is a much more accurate indicator of venture investment activity.  So the Northeast overall is right up there with the West Coast in terms of venture investments in cleantech innovation.

So Beat L.A.! and all that...  Massachusetts can declare (near) victory and walk away happy from this analysis, right?

Sort of.  I actually think what I may have identified is an unsustainable trend in the region.  If the patent-level innovation shows such a wide disparity, but the venture investments and research dollars look much more similar in number, one of three things is happening.

1. New England innovations, on a per-patent basis, are much more valuable than West Coast innovations.

2. New England cleantech investors have been harvesting available patentable innovations at a comparable rate to West Coast investors, but with a shallower pool to work from, so are going to hit diminishing returns much sooner.

3. New England cleantech investors have been more eager than West Coast investors (on average) to put venture dollars into more basic research efforts that are further away from commercialization.

The first one is probably nonsense.  And the second two possible scenarios (which aren't mutually exclusive, btw) are unsustainable.  When coupled with the fact that, anecdotally at least, the Boston cleantech venture capital community is rapidly shrinking and spending a lot of time on airplanes right now, it paints a picture that's less happy looking forward.

In other words, those who want to see a continued vibrant cleantech innovation-based economy in Massachusetts should be pretty pleased with how the region has performed to date, in comparison with California and other regions.  No doubt greatly helped by strongly supportive government policy at the state level. And they should be proud of the world-class energy technology research being undertaken here.  But they should also be concerned about the fact that there appears to be a possible disconnect between the large amount of brilliant basic energy Research being done here, and a relatively low amount of commercializable Innovation development being undertaken.  

To put it another way, there's an important R&D step between fundamental Research and venture-backed or corporate-driven Commercialization of new clean technologies, and in Massachusetts there's some evidence that this Innovation step is a relative weakness, at least when compared to some other top regions (it's not like Massachusetts is an absolute laggard or anything, but you get my point).

Massachusetts needs to be thinking about how to better hand-off all this fundamental science Research to the engineering-based Innovator community (which could be either internal or external to the research's academic setting) that can drive it closer to actual Commercialization.  

Or else the research will go elsewhere for commercialization -- or worse, go nowhere.