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Reinvent the Utility

Rob Day: November 18, 2011, 9:12 PM

In the last decade, cleantech venture capital was about reinventing the electric generator.

It's time to reinvent the utility.

Utilities, as currently structured, exist for one reason: wires.  Wires connecting consumers to generators are a natural monopoly, so rather than expecting a competitive market, the market is heavily regulated and overseen by PUCs representing the public's interest. It's true in electricity, just as it's true in wireline communications. Yes, that skews the market, but there's no good alternative in the face of a natural monopoly.

But wires are less important, as distributed generation (so far primarily in the form of rooftop solar, but in the future via other means as well -- Bloom Box, anyone?) catches on. So now retail deregulation plus DG increasingly offers that alternative. Wires are still important, but less important than they once were.

Centralized utilities, as they exist today, are ultimately doomed, as DG and IT will inevitably cannibalize their currently insurmountable advantages. Someone will maintain the wires and connect remote loads and sources, so utilities as we know them won't disappear altogether. But over the long run, today's utilities will have to dramatically shift what they do -- leaving some huge economic rents to be captured by others.

I wish I saw more entrepreneurs focused on driving that shift.  You want to reinvent the energy industry?  Reinvent the utility.  It's an incredibly tough challenge -- but one worth taking on.

What Is “Cleantech 2.0”?

Rob Day: November 14, 2011, 1:27 PM

Here's a not-atypical venture capital story:

An early-revenue (or sometimes even pre-revenue) stage venture-backed startup with promising early results wants to make a big splash and run really quickly, so they look to raise a large-ish "growth round".  

To identify a significant new lead investor for the round, they turn to investment bankers with their deeper rolodexes.  The i-bankers only take the assignment because the round will be big enough to provide large enough placement fees to justify their doing the work, versus some other larger transactions they could be working on instead.  For this reason, very few sub-$10 million venture capital rounds get big-named investment bankers placing them.

The i-bankers want to go to the types of large institutional investors in their rolodexes who typically cannot do direct investments into venture capital rounds, because of their check size requirement and other factors. Sovereign wealth funds, "growth equity" funds, pension funds, hedge funds, certain family offices, perhaps an aggregation of individual investors into a special-purpose vehicle, etc.  The i-bankers thus argue for an even bigger round, because then they can potentially bring in these very large check-writers who need to individually write (for example) a minimum of a $20 million check in order to get interested in any direct investment opportunity.  They also usually talk up the company as the best thing since sliced bread, naturally.

Now the round starts to look much larger than the company really needs at that particular point in time.  But that's okay to management and early investors because with these larger check-writers often comes a higher valuation.  If the round size doubled, it wouldn't be surprising to see the ultimate valuation also double, so that dilution for insiders remains roughly the same.  It's not justified that way overtly, of course.  But the existing investors and i-bankers and entrepreneurs all push for this outcome ("no way are we giving up more than x% of the company!"), and the outside larger investors mentioned above often aren't subject matter experts or well-positioned to do a lot of independent valuations and risk assessments of venture-stage companies. And of course, a company with such high growth aspirations must therefore have tremendous exit potential.  The valuation justification follows.  Sometimes the valuation is even established by the i-bankers instead of those actually writing the new checks.  Sometimes it's just that more bidders means a higher winning bid.

Either way, such a high valuation means investors' expectations are sky-high for the company's near-term growth and exit execution.  And they have the additional capital to deploy, so it's time to spend it toward acceleration.  Cash burn goes up.  And yet, not everything can be accelerated by simply spending more money.  Something along the way -- a technical challenge, a scale-up delay, slower-than-expected market adoption, a slammed-shut IPO window -- causes the startup to fail to hit their milestones even with the additional capital deployed.  Suddenly this high-profile company needs more cash, and is in a higher cash-burn situation with a weakened or "sidewise" story to tell.

Time to call in the i-bankers again.  And to start gathering as much non-dilutive government support as possible.  And to push a PR campaign.  And maybe to file an early IPO, as a financing event even if not a liquidity event.

Some such startups work through it. Others don't and flame out quite publicly.  Either way it certainly represents a potential negative selection bias in terms of which companies get the headlines, the big financing rounds, etc.  

This isn't a "good vs. bad" argument, I'm not suggesting that capital intensity never generates returns or is inherently evil, I'm not trying to invalidate i-bankers' roles or certain investment strategies; there's some good justification for a select few companies getting the above-described treatment. Certainly there are some great companies who get attention, government support, high valuations, etc, deservedly.  But there are also many who don't deserve it, as well as great companies who don't get this high profile treatment and its resultant press attention.  Some investors seem to drive their companies into this type of "hype-capital cycle" as a matter of course.

This cycle is what I believe people are implying was "Cleantech v1.0" when they talk about "Cleantech v2.0", as many are these days.  Nevertheless, I have yet to see any consistent definition out there of what Cleantech v2.0 means, other than "not Cleantech v1.0".

But understand -- the "hype-capital cycle" is a venture capital phenomenon.  It is not a cleantech phenomenon.  It happens in any number of venture sectors, to varying degrees.  

In the cleantech sector is where some of the more obvious examples of this cycle have occurred, especially a few years back.  But that should not in any way be used to argue that venture capital investments in the cleantech sector must necessarily look like any version of the above.  If the sector looks skewed toward capital intensity, in large part it's because the financial model applied to the sector has been skewed toward capital intensity, not because of some inherent underlying factor applying universally across the sector.

Cleantech is not capital intensive.  Some cleantech is capital intensive, but not all of it is.  Don't judge the entire sector by the fact that the above type of venture capital story gathered lots of headlines and dollars over the past few years, there are other stories to tell.  And in fact, "small cleantech" may ultimately get much bigger and provide better investor returns than any of the above story.  In other words, it may turn out that "Cleantech v2.0" actually looks a lot like "Venture Capital v1.0"... 

It's encouraging to see so many investors and industry participants actively seeking to develop a model for Cleantech v2.0.  But to date, it's mostly been defined by what it is not, than what it will be. 

Get Involved

Rob Day: November 7, 2011, 11:10 AM

Today, the Clean Economy Network announced a merger into the Advanced Energy Economy, a network of cleantech business leaders and regional organizations. It's been a fun ride to get to this important transition point.

Four years ago, Andrew Friendly and I launched a "Renewable Energy Business Network" chapter in Boston, borrowing from a successful model we'd both seen work on the West Coast, for informal and event-based networking-with-a-purpose among cleantech entrepreneurs and innovators. It caught on very quickly, and we found strong demand for similar efforts across the U.S., so we officially co-founded REBN as a nonprofit, and built up an eventual network of 15 regional volunteer-led REBN chapters in the U.S. and Canada, with thousands of members. It grew so quickly and successfully that we and our thin staff of two part-time, underpaid heroes (thanks, Laura and Helen!) were overwhelmed, and we saw an opportunity to deploy this network for even greater purpose, so we merged REBN with the Clean Economy Network, a D.C.-based nonpartisan organization that had been launched in 2009 to represent the cleantech industry at a national and regional level.

I continued on as co-chairman of the board of the Clean Economy Network Education Fund (a c3), and have spent the past couple of years working with CEN staff and the other CEN board members to help continue to build up that organization and work (sometimes successfully, sometimes not) on clean energy policy. With the launch of the AEE, a well-funded new platform bringing together regional clean energy nonprofits like the New England Clean Energy Council and others, it made sense to combine forces, and so after several months of hard work by a lot of folks in both organizations, today we see CEN and AEE joining together to take the next step. 

My congrats and huge kudos to all the volunteers and staff of REBN and CEN today.  Thank you!

I learned and re-learned a lot over the past couple of years. Regarding federal energy policy, it was a fascinating time to watch the sausage being made (or more accurately, not being made, at least in recent years). I come away more convinced than ever that congressional energy policymaking is deeply and fundamentally broken. Americans overwhelmingly want cheap, clean and domestically sourced energy, but the system isn't putting forward any such long-term solutions. The most logical and straightforward ways to positively shift energy policy have been needlessly politicized and/or overlooked. Egos and a desire for individual visibility too often trump the need for collaboration.

Environmentalists, sometimes claiming to speak for the cleantech community, often pick the wrong battles and pit themselves against the natural political allies of pragmatic cleantech policy, letting the perfect be the enemy of the good. Individual cleantech sector trade associations undermine the overall cleantech industry by fighting over portions of a dwindling pie, rather than banding together to push for effective, broader change. Powerful incumbent energy interests successfully counter any efforts to push for fundamental change, with campaigns of misinformation and overwrought rhetoric. When the U.S. military is saying greater energy independence is a core strategic imperative, and Congress effectively ignores them, you've seen all you need to know about congressional incompetence and impotence on this issue.  All of which is why the role of CEN, and now AEE, is so important for the long run.  There must be a voice, even if for now it often remains drowned out amidst all the noise. 

But more positively, I came away with a great appreciation for the nascent stage of development of our sector, from a basic community-building perspective. Partly because the wave of cleantech entrepreneurs is such a recent phenomenon, partly because cleantech entrepreneurs and innovators are more scattered geographically than you see in software and web entrepreneurship, and partly because "cleantech" is just an umbrella label for a lot of disparate sectors and innovation areas, our sector is only now coalescing.

Cleantech entrepreneurs, be they new to entrepreneurship or just new to the sector, still don't enjoy the same fundamental networking, hiring, visibility, and customer-connection resources that entrepreneurs in other sectors often have access to. Pattern recognition across entrepreneurs and investors, which I believe to be key to the virtuous cycles leading to the success of web entrepreneurship, is hindered by lack of connections and learning opportunities, as water-tech entrepreneurs don't know what solar entrepreneurs are doing, and neither are kept aware of what's new in energy efficiency startups, for example. This is to be expected for such a fairly new and fragmented sector, but it's a challenge that needs to be addressed.

This is what I found so gratifying about co-founding REBN, and why I'm excited to be part of efforts like the Cleantech Open, helping bring entrepreneurs together, and bringing them resources to help build their chances of success.  If you are going to invest and work in the cleantech sector, you need to recognize that this sector is still at a nascent stage of development where we all need to get involved to help build core platforms and community assets that will enable future success for all of us. For one thing, getting involved is the most effective way to build out effective networks and rapidly learn lessons from others' experiences. The most effective networking is done when you're collaborating on something, not just bumping into someone at a single event. It's worth the investment, therefore, to dedicate time and attention to some such effort.  

And there are lots of such non-political opportunities regardless of where you are.  Across the U.S., many states are making clean energy an economic development priority.  Yes, in places like California and Massachusetts, it's pretty visible. But in just about every state I'm seeing these efforts, often in a completely non-political fashion. From North Dakota, to Utah, to Alabama, to Nevada, to just about all over, efforts to promote renewable energy and energy efficiency jobs and innovation are being put in place, and thus are creating opportunities to plug in.

Outside of economic development efforts, the communities are coming together as well -- here in the Northeast, we had a phenomenal regional Cleantech Open program this year, with several dozen startups getting to work with nearly 100 experienced mentors, with the support of forward-thinking organizations like the Massachusetts Clean Energy Center and others, all geared to helping these emerging cleantech entrepreneurs maximize their chances for success. All of this was done via volunteers and sponsors that were coordinated by only one full-time staffer (thanks, Karla!). That's a heck of a community effort; I was deeply impressed to see so many get so deeply involved.  No matter where you are located, something interesting is going on.

So there are lots of opportunities to plug in.  From just easy networking, to active mentoring, to supporting smart regional economic development efforts, to adding your voice at the national level. The most important thing is to pick one or two such opportunities that are interesting and important to you, and then to get involved. I know it's asking an awful lot of overwhelmed entrepreneurs to ask them to devote some of their precious little time to such side efforts. But now's an important time to do so, for the cleantech sector, and also to help build out your own networks and improve pattern recognition -- and to maximize your own chances for success.  One way or another, get involved. It'll pay dividends in the end.  


Speaking of which, the Cleantech Open Northeast is looking for a new CEO / Regional Director.  If you're looking for an opportunity to work with a lot of cleantech entrepreneurs here in the northeast, and gain visibility and experience as a springboard to being a cleantech entrepreneur yourself, check it out.