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Lessons From the Past Ten Years: Overreaction

Rob Day: July 25, 2012, 8:41 PM

It would be easy to be pessimistic about the current state of the cleantech innovation sector. We’re under attack by politically motivated facts-and-patriotism-be-damned foes; there’s clearly a shakeout happening in several sectors such as upstream solar; and more and more VCs are abandoning the sector (just over the past week, I heard of two more cleantech-specific VC firms that are shelving plans to raise new funds). These are not fun times, to be sure, and these are very hard times for early-stage entrepreneurs in particular.

But it’s important to recognize what this period really represents: the inevitable period of investor 'over-pessimism' following an innovation-driven period of irrational exuberance.

Whether it’s the Gartner Hype Cycle or Shiller or this Federal Reserve Board newsletter, experts in innovation-driven investments have spotted a recurring pattern in which investors often overreact to periods of innovation and expect unrealistic (and ultimately unachieved) levels of return on investments. "This will change everything!" they decide, and pour capital into it with the anticipation of future investors hopping on the bandwagon after them, rewarding them handsomely for having been earlier on the scene.

This is clearly what happened in the past decade of cleantech venture capital. The amount of capital put into various upstream solar, biofuels, battery, automotive, etc. startups was unprecedented and, in retrospect, was never going to result in consistent sector-wide returns (how many billion-dollar solar panel manufacturers can there be this decade, realistically?). Fueled as well by expectations of federal climate legislation finally passing, irrational exuberance was in full effect.

And what happens in such cases? Even in the best of times, results can't match such high expectations. And when the dawning realization also coincides with the worst macroeconomic correction in nearly a century, phhhhbbbbbttttt. (That sucking sound you just heard is the sound of most limited partners withdrawing their support from the sector, followed by a mad dash for the exits by generalist VCs.)

But that doesn't mean huge value wasn't just created. Look at the history of other such innovation-driven bubbles -- railroads, radio, automobiles, television, and of course telecommunications in the 1990s. In all of these cases, there was a period of correction where investments fell off dramatically, but then over the long run, these innovations became a platform for dramatic additional innovation and economic growth. In other words, the buildout of next-gen infrastructure has tremendous long-term benefits for follow-on investments and innovation, even if those who funded the initial pulse of infrastructure build-out might not have prospered themselves. Today's internet riches wouldn't be possible without the investments made in computing and communications in the 1990s, for example. "This will change everything!" is in fact correct, but that doesn't mean the investments in whatever "this" is will create strong direct returns.

So what happened in the past decade's solar and biofuels bubbles? The stage was set for dramatic cost reductions and production capacity. Ten years ago, we were thinking about how revolutionary it would be to see solar panel prices as low as $2 per peak watt. Today we're seeing thin-film vendors making large volumes of panels for less than 80 cents per Wp -- and falling. 

The investments made by we overexcited investors worked, in other words. Oh, not for us and our LPs, in many cases. But certainly for the markets. Now, from solar to lighting to energy efficiency to batteries, we're seeing low-cost offerings that have compelling economic value propositions for customers, and are ready for primetime.

What does history suggest is about to happen, then? A renaissance downstream that drives an inflection of growth in demand.

These periods of irrational exuberance in technology innovation are followed by periods of investor over-correction and pull-back. It typically lasts a couple of years at least. And it's not unhealthy: Clearly, just doing more of the same type of investment as in that first wave won't generate returns, and as those sectors get somewhat saturated with innovation and/or overcapacity, it's unclear there's a compelling near-term market need in any case. 

But then what happens is a rebound as a next wave of innovation -- typically market innovation, not technical innovation -- builds off of all this available innovation and capacity. Solar panels are cheap and plentiful? Great, how can I take advantage of that? LED lights are ready for primetime? Great, how can I sell them more effectively? This is why large corporates have gotten much more serious about diving into the sector, even as VCs have backed off: they see this pattern too, and selling stuff is what they know how to do.

In other words, after a significant pulse of technical innovation happens, there must be a period of overcapacity that drives down prices (and thus, investor returns) in order to enable the downstream demand growth that leads to a market revolution.

I know it's a hard period for early-stage cleantech entrepreneurs right now, as sources of capital have dried up. But I firmly believe that such downstream businesses -- be they services, or applications -- built on the increasingly cheap and plentiful upstream innovations will launch the next wave of really productive market traction for the cleantech sector, and be very profitable besides.

Investors overreacted with irrational exuberance to a wave of cleantech innovation seven years ago. They built the platform for the next wave of profitable business model innovation. Now these same investors are gun-shy, and are overreacting pessimistically. But that next wave is upon us. And I am confident that within a couple of years, those same investors will be rushing back in to fund next-gen applications ("cleanweb" and other) and scalable services built off of the infrastructure they lost money on originally. Owning access to the customer and low customer acquisition costs will be the next success metrics, not cost per Wp or per gallon or per kwh.

This is why I so soundly reject those who describe cleantech as necessarily being capital-intensive and hardware-oriented. That's the last phase. That's backwards thinking. That's narrow-minded. The next wave won't be tech-oriented. It will be commerce-oriented and application-driven. And it will make a lot of money for those with the foresight to anticipate this historically inevitable renaissance.

Lessons From the Past Ten Years: Youth

Rob Day: July 24, 2012, 10:50 AM

Had a lot of good feedback from my earlier post about teams and evaluating skills gaps; we even used a version of this as a self-assessment tool for the Cleantech Open Northeast semifinalist teams, which seemed to be helpful.

Since then, however, I've gotten approached by a number of younger entrepreneurs who are worried that, as they look at their relative inexperience, this skills-gap analysis means generally pessimistic things for them.

To be fair: Yes it does.

But not prohibitive things. In fact, a good skills-gap analysis is probably even more important for first-time entrepreneurs than more experienced entrepreneurs, even if it shows a lot of gaps. Every entrepreneur has to be a first-time entrepreneur at some point. Those who succeed are more often those who show a strong commitment to self-awareness and a willingness to objectively identify and embrace challenges. It won't be easy, but it's entirely possible to do.

So for younger entrepreneurs, a few thoughts:

1. Just because you haven't done something before doesn't mean you haven't demonstrated aptitude for it in analogous situations. Any good skills-gap analysis is designed to help you objectively identify mission-critical tasks that will be a special challenge because they're a gap or an outright weakness. But emphasis on "objectively identify". Think about college or grad school experiences that stood out. Early career experiences where you demonstrated a strength in one type of activity and got frustrated by another type of activity. Try your best to extrapolate to this new effort.  Youth doesn't prohibit excellent performance or preclude strong skills, it just makes them more raw and harder to discern. Also, this kind of assessment should help prioritize the next hires the team will need, which is important to acknowledge and plan for. So it's important to focus in on relatively near-term (18 month) deliverables when doing an inventory of the current team, because I bet you'll find narrowing down the definitions of the key roles in this way will help you feel better positioned to successfully tackle critical tasks with your current team and with a plan to augment that team going forward.

2. That said, if you or a team member haven't done a task before, acknowledge that there will be a learning curve before they're proficient at it, even if they have the core necessary attributes to succeed at it eventually. Build consequent delays into your plan. Find ways to learn by doing lower-pressure dry runs and such before you have to go after the most critical "wins". And most importantly, find advisors who can help mentor on those specific mission-critical tasks where you've identified the starkest gaps on the current team.

3. Assign responsibilities. Early teams (especially those formed out of b-school collaborations) tend to have a bunch of founders who all vaguely look alike in their backgrounds, and have a seemingly instinctive need to have their startup be a democracy where everyone does a little bit of everything. That won't go far. Assign specific deliverables to specific individuals. Have a CEO (even if interim) who everyone agrees has the final decision (at the Cleantech Open event I mentioned above, when asked who their CEO was, one team just kind of shrugged and looked at each other). If no one is individually responsible for a deliverable, too often it won't happen. If that means someone on the team must take responsibility for a task they don't have a comfort zone for yet, see the first two points above.

As you can tell, I hate thinking that the last post on team dynamics might scare off younger entrepreneurs. In fact, I think young startups will play a crucial role in the reinvigoration of this sector. Especially as I believe the next wave of cleantech innovation will be more about market reinvention and value chain disruption than just hard-core tech.

Who better to think creatively and to have the courage to try to blow up these calcified channels in the face of deeply-entrenched incumbents?

Who better to bring 21st century business and channel strategies to these 20th century industries?

The next generation of cleantech entrepreneurs will be the ones who break through and revolutionize the energy market, in the U.S. and elsewhere. If they can execute. And the best way to overcome potential gaps in execution is to acknowledge gaps in existing skillsets and address them head-on.


Also, in case you have insomnia, here's an opportunity to cure that, thanks to Scott Clavenna and my friends at GTM.

This Quarter in Cleantech Venture Capital investing

Rob Day: July 13, 2012, 12:00 PM

The various deal-tracking groups continue to step up their game, doing a better and better job each year. Looking forward to seeing additional takes from CB Insights, Ernst & Young and others, but just reviewed the Cleantech Group's Q2 media presentation (as reported on by GTM here) and had a few additional thoughts and reactions to lob in:

1. It really feels like 2012 is a shakeout year.

Remember that the way these numbers get reported, and given the paucity of exits in the sector, there's a fundamental momentum to see deal counts always go up over time. Every quarter's new deals will require multiple follow-on rounds, so as new companies are added to VC firms' portfolios (and especially when, as the Cleantech Group's data suggests, existing portfolio companies are not being acquired out very rapidly), you would expect a cascading effect, where over time a lot of follow-on financings would mean more and more deals, even if the industry isn't really attracting a lot of new VC interest.

So when you see a clear trend downward over the past few quarters in terms of deal counts, that suggests a lot of follow-ons aren't happening. And that suggests, unfortunately, that a lot of companies aren't able to get the capital they need to continue soldiering on.

This isn't necessarily so; there are some other potential explanations at work. It could be that early-stage dealflow is what's dropped off and making the overall deal counts look low (although the Cleantech Group's data appears to show that later-stage deals have also declined). It could be that there are follow-on rounds that aren't being reported (and anecdotally, the big number of insider bridge financings I saw in 1H12 would suggest this is indeed a factor). It could simply be that cleantech startups are getting better at managing cash burn and maybe even getting to cashflow-positive more than they used to!

But when matched up against what I'm seeing on the ground, unfortunately, I think this data does reflect that a lot of cleantech startups have been getting shaken out and will continue to do so. And meanwhile, early-stage deal counts have also declined. Meh. The positive news? LPs finally appear to be slowly getting back into the habit of funding cleantech venture capital firms. So I think we'll see a pickup in dealflow in the second half of the year. But probably not enough to forestall the ongoing shakeout.

2. VCs' interests are very sector-specific.

Deal counts dropped again in the solar sector, and dollar amounts remain way below where they once were. And this is for all solar, upstream and downstream. What I can tell you is that downstream solar (key BOS components, financing, installation) remain of interest to investors, so that must mean that upstream solar (panels and cells, etc.) venture activity is really falling off a cliff.

Similarly, energy storage investment activity remains down from its highs. This is a bit more curious, simply because some big-name VCs like Khosla continue to appear to be actively seeking solutions in this space. But the data suggests it's not turning into a lot of new deals.

Interestingly, smart grid deals were down, but energy efficiency deals continue to be favored. What does this mean? My theory is that VCs are down on investments in utility-side tech (both powergen and smart grid) because of their capital-intensity and the utility sales cycle, but they continue to like the economics of energy efficiency and the fast growth in areas like energy data and lighting, so they're looking for those opportunities on the customer side of the meter. In any case, even while the overall cleantech sector is in a down period, it's clearly still an exciting time to be investing in energy efficiency and related plays.

Defying the "capital-efficient" trend, biofuels and biochemicals continue to plug away. There were only a third as many deals as in energy efficiency, but they're much bigger deals. Some of this is just follow-ons into the last wave of biofuels startups, of course, but there's already been a bit of a shakeout there, and from what I can tell, there's been renewed interest among VCs in biochemicals in particular. Partly, I think this is because the large chemicals giants have shown a willingness to provide project finance and other support for the capital-intensive "first project" phase of these companies, which gives VCs hope. And partly, I think it's because we continue to see some fairly strong management teams jumping into this sector in particular; I'm not sure why. But these underlying fundamentals are allowing VCs to continue to be interested in these plays, even after the recent attempts at IPOs out of this sector have been underwhelming, to say the least.

Curiously, the Cleantech Group's press release specifically calls out the transportation sector as having "continued strong support" and then in its own presentation, it says that the sector is "still getting some love." Not sure where they are getting that, but it's not from their own data. Yes, it was one of the larger sectors in terms of dollars attracted. But the company's own data shows transportation deal counts falling by >50% from Q1, and at the lowest levels seen since 2Q09. And even while the ten deals did take in more than $250M in funding, even that total is a far cry from some of the previous quarterly totals for the sector. My hope for you, Gentle Reader, is that you would never be subjected to such "love" and "support."

3. What about the downturn in corporate M&A?

The Cleantech Group data of tracked M&A deals suggests that Q2 saw relatively few such deals, as well as a general trend downward in deals since the middle of last year.

That doesn't match what I'm seeing in the field, where I see corporates ever more interested in these types of technologies. In fact, our own portfolio has had more inbound corporate interest so far this year than in any previous year. 

Maybe my narrow scope of the cleantech universe doesn't reflect the underlying trends and the Cleantech Group's data better reflects overall conditions. But I have an alternative theory that 2011 was the 'opportunistic' M&A year and now large corporate players are getting serious and getting strategic. And so we see in the data indications of the average size of M&A deal going up, even as reported deal counts go down. It just looks to me like last year corporates were presented with a fair number of smaller opportunistic, cheap bolt-on opportunities and grabbed them, but now they're tackling M&A with more strategic intent, figuring out which cleantech startups are worth paying up for. Because what I'm seeing is, across a handful of sectors at least, a competitive dynamic developing where large corporates are figuring out which pieces they need to add to the puzzle, instead of just fishing for bargains and capitulations. Thus, we're also seeing a lot more corporate venture capital investments, as well. Corporate cleantech M&A activity is in a transition from an opportunistic period to a strategic one.

Wishful thinking or just a small and anecdotal data set, perhaps. But whether I'm right or wrong on this dynamic, I would expect to see an uptick in M&A dealflow going forward. I'm getting pinged by more and more large corporates looking to get active in some way, and where there's smoke, there's fire.

4. Two more analyses I'd like to see the Cleantech Group (and others) provide:

Every quarter we are always given a list of "Most Active Investors!" for the quarter. This means squat. All it basically shows is which firms had previously built up a large portfolio and then had to do a lot of follow-ons this past quarter. What would be much more useful for cleantech entrepreneurs would be to see which firms were most active in terms of deals (either early stage or otherwise) where it was the first time they were listed as one of the investors. It's not bulletproof, but generally speaking, the "first-time" investors in a round are listed as such in press releases. And even if not, a very simple cross-check per follow-on deal could reveal whether the investor had been in on earlier listed rounds. Activity in new deals vs. follow-ons is much more actionable for entrepreneurs than what's currently provided, so it would be great to see someone list this subset.

Similarly, the Cleantech Group and others typically breakdown deal counts by a) stage and b) sector. It would be awesome to see someone just break down (and report!) early-stage deal counts by sector. Again, that would likely be a better indication of where VCs' heads were at in terms of likes and dislikes than having to try to extrapolate that from overall sector deal counts across both new deals and follow-ons.

Those are my wish list items. But no doubt, cheers to the Cleantech Group for another valuable quarterly analysis. I'll tweet about anything interesting out of subsequent Q2 data releases from them and the others.


UPDATE: Ask and ye shall receive -- after posting this I got a nice follow-up from the team at Cleantech Group including the following breakdown of early stage deals by sector.




# of Deals

Energy Efficiency

$              56,633,524



$              23,330,000


Water & Wastewater

$              16,843,724


Energy Storage

$              14,326,141



$              12,901,739


Recycling & Waste

$              12,874,700



$                8,097,000



$                5,050,000


Biofuels & Biomaterials

$                3,691,185



$                2,136,669



$                                -  


Air & Environment

$                                -  


First of all, it reinforces what I was saying about the level of activity in energy efficiency versus other sectors, especially solar. 

And it also helps explain the stated "love" for Transportation -- it was, after all, the second-highest dollar total sector for early-stage deals. However, I would point out that that's from only five deals. But still, this helps me understand why the Cleantech Group team had a more positive view of VC activity in the sector.

And finally, this picture makes water technology stand out more positively -- more early-stage deals than solar and transportation combined. Great to see!

Thanks for the follow-up, guys.

Lessons From the Past Ten Years, Part Four: Gaps

Rob Day: July 3, 2012, 10:28 AM

I had the opportunity to address a group of foundation managers, investors, entrepreneurs, and DOE staff at a roundtable at MIT last week, discussing the subject of capital gaps in cleantech.

That there are capital gaps -- parts of the cleantech innovation, commercialization and adoption cycle where more capital is needed than is available -- isn't a surprise to any readers of this column. But I continue to see lots of conflicting takes on where exactly the gaps are and what causes them.

As I described to the group, we've spotted not just one or two, but five different capital gaps affecting the cleantech market. Some are more obvious than others. For a couple of these gaps, government has a role to play. But for others, a relatively small amount of foundation capital could go a long way toward getting the private sector to fill the gaps.

The first gap that I think is obvious is at the very early stage.  This mostly affects innovations based upon physical sciences, like advanced materials, etc., because the reasons why not enough capital comes in early enough are that there is a lot of technical risk, it's a long gestation period, and the capital needs can be anticipated to be pretty significant over the course of the commercialization of the investment. Here's a terrible column I wrote on the subject four years ago if you want to be bored to tears.

The confusion on this issue comes from the fact that these kinds of opportunities do get funded sometimes! Some of the biggest-named venture firms have gone out there and backed very early stage science experiments across almost every cleantech sector. Seed-stage investments in cleantech wax and wane, but they do exist. So this isn't a "gap" in the sense that nothing gets funded at this stage. But it doesn't happen consistently. Some pure research doesn't get funded by the private sector to the optimal extent. VC interest in seed-stage cleantech investments was hot a couple of years ago but is suffering a bit right now as the generalists back away from the sector. And even when VCs are funding seed-stage cleantech ideas, they're not going to fund some kinds of ideas -- such as impactful innovations that are destined to be components rather than complete systems. If the VC doesn't see a way of making a billion-dollar company out of an innovation, they won't sign up to fund it at a very early stage. And there are lots of brilliant hundred-million dollar ideas.

Thank goodness for the efforts of groups like ARPA-E and the MassCEC which will fund innovative early-stage research. This early-stage gap is a critical one, and these groups play a vital role in addressing it. We also need to see more work done to help seed-stage management teams bootstrap and improve themselves, via accelerators like the Cleantech Open and others.

On the other hand, we also see too many pundits and idealists who seem to think this is the ONLY gap worth addressing -- that somehow if we just see the right early-stage innovation, everything else will work itself out. That if we see a sufficiently breakthrough idea, the world will grab hold of it quickly and efficiently. When have we seen any evidence of this in the energy or other cleantech-related markets? I would love to see it, but there's also plenty of evidence to suggest that even the oft-maligned "incremental" innovations can help push energy markets over price thresholds that lead to rapid adoption (think fracking for natgas extraction) in existing markets. And there's plenty of evidence to suggest that new markets take a lot more than just innovation to achieve rapid adoption (the need to see new channels, new financial models, etc.) if consumers are being asked to change their existing patterns.

So we move on to the other gaps.

The second obvious one is, of course, the "first project" gap. Getting that first commercial-scale project or plant built, to prove out the economics and performance well enough for project finance professionals to come in and do what they do. This gap is real. For example, at one point I was pitched by a gasification entrepreneur seeking a $30M Series C round. Why so much, I asked? "We need $10M to support our efforts, but $20M to build our first commercial-scale plant." I asked the entrepreneur if he would rather raise a $10M Series C and then a $20M project finance round instead. "Of course!" he replied, "But no one will do that." I would suggest, however, that taking in expensive venture capital through the corporate equity stack to fund putting steel in the ground is a misapplication of LP capital, and one of the reasons why venture capitalists in this sector are reeling right now. And this is a much bigger problem when that first commercial-scale plant costs not $20M, but $200M.

The private sector has run a gamut of attempts to find funders for this gap, all with limited success. Hedge funds, then large corporates, then Wall Street, and now large corporates again have all had their turn to try to make money funding these things. The DOE Loan Guarantee program and other government programs have been designed to address this gap. And the jury is out as to how effective such governmental programs can be. But even if they are effective, it's a lot of capital concentration. It requires a difficult mix of both technical and financial skillsets that we don't see very often. At my firm, we've looked at a number of opportunities to tackle this by taking on a simultaneous venture capital and project finance role, in essentially two parallel transactions. We think this hybrid approach may hold promise, but we haven't deployed it against this particular gap yet.

One model that I haven't seen tried quite yet to address this gap would be an OPIC-style approach to providing capital to funds that purposefully address this gap. Most likely, this would be a special situations fund from a project finance firm with some experience with relatively new technologies. The OPIC model is to provide matching funds in the form of leverage that makes the overall return profile to equity-providing LPs more attractive, thus enabling funds to be raised that otherwise wouldn't be. It leaves the actual specific investment decision-making in the hands of the fund managers, and by investing in portfolios as opposed to specific projects, it minimizes the chance of a binary outcome for government funders. And thus, OPIC is able to be self-sufficient as an independent, quasi-governmental body. It would be interesting to see a model like this attempted, as opposed to asking government officials to put on project finance hats and choose winners themselves.

Now we move to the less obvious gaps.

The third gap is a second project finance gap that isn't specific to cleantech, but hits it hard: funding for small (i.e., distributed) projects. Project finance transactions cost a lot. The legal work alone often runs into the six-figure level. Thus, project finance firms will mostly just look at projects of a certain minimum size. And distributed generation or building energy-efficiency projects definitely fall below this size.

This is a gap the private sector should be able to address, and rooftop solar financing has shown the way: pooling projects. It requires a different way of selecting projects, using standards and risk metrics borrowed from real estate and other financial innovations. But it can be done. The problem is that, beyond rooftop solar, it hasn't been rolled out yet. There's a need for the big capital providers to be shown for each of these types of projects that there is a market, a good financial model, and good returns to be made before they will feel comfortable putting significant capital into any of these gaps. In rooftop solar, we achieved that point. Next, I predict, will be building energy efficiency. And other distributed generation projects will roll out from there.

These financial innovations, I believe, will unlock a big inflection point in the adoption of these technologies and will presage the next big wave of cleantech. In the meantime, at my firm we're seeing opportunities to play that aforementioned hybrid role (simultaneous VC and project finance investments) by providing sponsor equity for first-time pooled project funds, to prove the model and get them to their second fund (when the big banks can step in and take over for us). We've already done one and will do more.

A fourth gap is less obvious. I describe it as customer/channel finance. This is primarily a B2B problem but can also be B2C in some circumstances. I'm still wrestling with how much of the gap here is structural, versus just an education issue. Many cleantech innovations provide lower operating costs for customers, but have higher upfront capital costs. Many customers lack budgets for this upfront cost. Financing (to support leases versus purchases, for example) can help address this issue. Confusingly, vendor financing does exist. Several of my startups have been able to identify sources for it and provide lease options to their customers. But it tends to be expensive capital, and thus the value proposition breaks down for the customers, who often end up deciding in the end that they'd rather just free up capital budget somewhere. I believe the high returns these smallish vendor financing providers are charging indicates there's a capital gap. But I don't know why it should be inherently so. I just know that the high rates of return these financial players charge startups results in dampened customer enthusiasm and thus slower adoption.

The fifth and final gap we see in the marketplace is somewhat related but I consider to be separate: Balance sheet support for startups. These markets are dominated by big vendors with big balance sheets. This skews the expectations across the entire industry. Utility payment cycles are often 90 days. Why? Because they can get away with it. But if you are a startup waiting for rebate checks or other receivables from utilities, that presents a heck of a working capital demand.

One place this hits is lines of credit and other forms of venture debt. If you are a startup that has an institutional venture capitalist on your board and you have patents, Silicon Valley Bank will happily provide you capital under lots of restrictions but at a reasonable rate. Many venture-backed companies avail themselves of this opportunity. But what about all the service companies we keep saying are critically needed, either to reinvent the dysfunctional channels or to accelerate implementation of emerging clean technologies, but which can't get VC dollars and don't have patents? SVB and its competitors are much less keen to work with them. And they can have significant working capital needs, as well. I've seen some very high rates be charged for such working capital from alternative sources. Such high rates tell me there's a capital gap, and while that may mean it's lucrative for such capital providers, it's inhibiting to the growth of such industry segments.

Here's another example: One of our portfolio companies is involved in the construction industry. The company won a couple of multimillion dollar contracts as part of a couple of green housing projects. Congrats, right? Except that the general contractors demanded that this startup provide "bonding" (or, essentially, parking capital in an escrow account until the product was delivered) that also amounted to millions of dollars. This startup was being asked to park most of its slim cash balance in a bank account for several months. There are bonding agents that will cover this capital, but they demanded significant deposits from the startup -- in one case, a bonding agent told the startup that for a first such project they would require >100% coverage! So simply to get a bonding relationship going, the startup was going to have to pay margin to a bonding agent and get no capital relief in return. Feh. Fortunately for this company, we had the flexibility at our firm to address this directly, so we just took care of it. But many other such startups won't be so fortunate.

As with the customer/channel finance gap, I don't see any real reason for the private sector to fail to address this balance sheet support gap. In fact, I've seen examples that suggest addressing this gap can provide compelling risk-adjusted returns, at least in the near term. Eventually, community banks can and should fulfill this need, if they could just get comfortable with playing that role again. Foundations or supportive policies could show them the way. But for now, the gap is inhibiting growth of the implementation side of many cleantech markets we all would like to see grow more quickly.

For many of these gaps, there's only a limited role for government or foundation support to play, but albeit limited, it can be a vital role. Particularly in the areas where there's no inherent structural reason for a gap, a small amount of foundation support or a well-designed local government incentive could go a long way to proving out the financial models that would then be rapidly scaled up by following private sector capital. Simply encouraging community banks to start lending to clean energy service firms would make a big impact, for example.

I'm therefore optimistic that these gaps will be addressed and, as a result, we could see another big wave of cleantech adoption. A little bit of capital deployed against these gaps, if matched by a lot of education to the banks about it, could go a long way to accelerating the growth of cleantech in the U.S.

Have a great Fourth of July, everyone! If you get the chance, take a moment to thank a veteran for their sacrifice.