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NextWave 2013: A Sign of a True Turning Point for Our Sector?

Rob Day: September 16, 2013, 9:09 PM

So last week's NextWave Greentech Investing conference ended up being pretty amazing. 

The conference was completely sold out, and there was a waiting list. The crowd was a great mix of investors and entrepreneurs of all stripes. And the feedback we got afterwards was just wonderfully positive, about both the networking and the content itself. If you're interested in checking out some of the presentations, you can find them here.

Many thanks to the Greentech Media team for organizing the event and for giving me a chance to get involved; it was a lot of fun.

Clearly the message of an emerging "next wave of greentech investing" resonated with a lot of people out there. And I think the conference gave a lot of evidence that the next wave is now ready to be talked about in positive terms. 

There were presentations from a number of investors with new, often very different approaches and different targets, but all had several features in common: a) Still aiming for big upside opportunities in these huge potential market disruptions; b) Pragmatic approaches to doing so with realistic expectations about timeframes, and ways to minimize or at least manage around capital needs; and c) Some kind of special advantage or specialization being brought to bear. And many had early successes to point to from these approaches. 

We heard from entrepreneurs who are developing new business models and new approaches to commercializing a wide variety of innovations, from hardware to biofuels to new marketplaces. This next wave of greentech isn't about abandoning certain subsectors or market opportunities; but it's about expanding our solution set to include previously underappreciated parts of the sectoral value chains, and about smart new ways to build successful companies in the face of the economic and non-economic challenges entrepreneurs must overcome in these sectors.

And we heard from several large corporates who are now getting very strategic and purposeful about their plans for growth and acquisitions in these markets -- even as many wouldn't call what they're doing "cleantech" or "greentech" or whatever. 

The exits are starting to take place out of this next wave, and my guess is we'll see more of them over the next eighteen months. But during that same time period, we'll also see continued shakeout from the last wave. Hopefully last week's conference helps better set expectations and provide the necessary lens through which to separate these two trends. Because the need for these solutions isn't going away, and the market opportunity remains huge. It's time for investors to be getting more active here, and to stop backing away. Last week's conference and everyone's reactions to it give me a lot of optimism that this shift is indeed underway.

A Hybrid Approach to Greentech Returns?

Rob Day: August 28, 2013, 9:05 AM

Ahead of the NextWave Greentech Investing conference (if you haven't signed up yet, you're missing out on what's turning into a great networking event!), we've been looking at some of the innovative strategies out there for generating strong financial returns from investments in the sector.

One approach that's not exactly new, but has certainly been underutilized to date in the sector, is to pair investments in public equities markets with private equity investments. Several groups including Generation Investment Management, Firelake, and a few others have tackled this strategy in a variety of formats, but while many venture firms will say they are open to doing PIPEs (private investments in public entities) that's typically as far as it goes for most VC firms. So GIM's approach is, to me, pretty differentiated in this and other ways.

Colin Le Duc of GIM will be presenting at #NextWave13, so I asked him to share some of his perspectives on this and other topics...

1.       How and why was GIM launched?

"Generation was launched with the mission of mainstreaming sustainability into capital markets. We wanted to establish the core principles of long term sustainable asset management as the basis for generating superiour investment returns in public and private equity and debt markets. Our core belief is that sustainability is a core driver of long term financial performance.

"Seven partners came together in 2004 to establish the firm, including David Blood as Senior Partner and Al Gore as Chairman. We brought together traditional fund managers with leaders from the sustainability research field to found our firm. We're a private partnership with an exclusive focus on sustainable investing. Generation manages assets of $10B on behalf of institutional investors globally. We are headquartered in London where all the investment professionals are based. Generation has 60 people."

This "sustainability" focused approach is an interesting one, I think. I've been hearing more of that phrase in our sector lately, but a few years back it was really out of favor as VCs and others attempted to differentiate the "cleantech" sector from triple-bottom-line thinking and such. But "sustainability" remains a very salient concept, both to the corporate partner/buyer community, and from the perspective of addressing global markets. The pendulum now seems to be swinging back a bit in favor of viewing business and innovation opportunities through a sustainability lens -- something I'm obviously a fan of as well.


2.       What's unique about the GIM structure that helps you find compelling investment opportunities where others might not?

"Our long-term horizon is a critical advantage. For example, in our Global Equity Fund which invests in listed equities, we are explicitly incentivized to perform on a three-year basis. Generation also has a long primary research history and pedigree in sustainable investment. In the private equity and debt markets we believe our dedication to climate solutions sectors is a competitive advantage.

"Within our growth equity fund, the Climate Solutions Fund, we invest in growth stage private and listed small caps in NA & Europe.  This flexibility to invest in the best growth climate solutions businesses, be they unlisted or listed, is a major differentiation of our fund."

As a private equity investor, I do have to grin a bit at the idea of a three-year basis being a "long-term horizon," but in a public equities context these days, it actually is a differentiated approach.

What Colin describes here is the heart of their dual-track approach that I alluded to above. One thing I would love to hear more about from Colin when we're out in Menlo Park in a couple of weeks is how to manage the interactions and overlaps between these approaches. The flexibility to invest in the best solution regardless of public vs. private status makes sense -- but setting up the structure to enable that is easier said than done, and I'm interested to learn more about how GIM has been able to do that successfully.


3.       Why do you think the greentech sector has fallen out of favor with LPs, and was it a fair reaction?

"Many LPs backed managers who didn't have the expertise to execute in green tech. It has been a fair reaction given how much capital has been lost. However, some funds have performed very well and shouldn't be tarnished by the poor efforts of various first generation greentech funds that are now out of business."

We all obviously have to do more to publicize the successes in our sector where they've happened. And there's still a lot more work to be done before we can start to show a consistent pattern of successes through NextWave approaches -- but it does feel like we're on the cusp of being able to do so. I'm hoping we can use the #NextWave13 conference to start to make this case.


4.       How is the GIM team applying the lessons of the past ten years?

"Deepening our commitment and focus. Our sense is that the opportunity for great climate solution businesses is better today than ten years ago and that sustainability is an even more important long-term catalyst for value creation."

So basically, GIM is doubling down. Love it.



I'm looking forward to hearing more from Colin and other innovative investors at the conference in a couple of weeks. We'll be hearing about how some of these various approaches are starting to yield good results. That's why I'm increasingly excited about this event really marking an inflection point for the sector. Not just a one-day thing, but a start to a longer-term, crucial conversation.

Can Philanthropists Fill the Gaps?

Rob Day: August 19, 2013, 2:21 PM

The NextWave Greentech Investing conference is coming up soon -- September 12th. And the crowd that's already registered is a nicely diverse mix of types of investors (LPs, VCs, corporates, family offices, etc.), in addition to entrepreneurs and others. One type of potential "investor" that doesn't get talked about as much, however, are the philanthropists who've traditionally played a small but important role in backing innovation, particularly in this sector.

Sarah Kearney (who'll be speaking at NextWave) thinks they can serve a much bigger role. She serves as the Executive Director of PRIME, a nonprofit that encourages philanthropic efforts in the energy sector. I asked Sarah to share some thoughts on what the role can be for philanthropy, and in particular "Program-Related Investments" (PRIs), which have been getting a lot of attention lately.

1. What are PRIs?

PRIs are a type of grant that can take the form of equity, loan or loan guarantee to for-profit companies – a way for grantmakers to get a tax deduction, make an impact, and get their money back to grant again in the future. PRIs have been around since the 1960s, but unfortunately have been used infrequently across charitable sectors and have almost never gone to energy-related causes. However, they could hold enormous promise for filling financing gaps in energy efficiency, innovation, and deployment – grantmakers are becoming increasingly interested in “impact investing.” Here’s how PRIs work:

Foundations -- pools of capital that receive tax exemption -- can be formed by corporations, families, or communities. These groups receive tax exempt status because they promise to do charitable things -- the IRS is the agency that holds them to that promise. To be specific, foundations have to give away 5% of their assets each year to “charitable purposes,” which the IRS defines as:

• Religious
• Educational
• Scientific
• Literary
• Fostering amateur sports competition
• Preventing cruelty to children or animal
• Environmental conservation
• Charitable
    o Relief of the poor
    o Advancement of religion
    o Advancement of science or education
    o Lessening the burdens of government
    o Lessening neighborhood tensions
    o Eliminating prejudice and discrimination
    o Defending human rights
    o Combating community deterioration and juvenile delinquency

As examples, the Walmart Foundation gave away over $175M in 2012, the Gates Foundation gave away over $3B in 2011, and the Silicon Valley Community Foundation gave away almost $175M in 2011.

There is a strict set of rules that governs what these foundations can do with the money they do NOT give away every year (their endowment or corpus), including no “jeopardizing investments” – in other words, they can’t do risky stuff with 95% of their money because they would be putting the “charitable purpose” of the assets at risk.

On the 5% side, most foundations grant money to public charities (501c3 organizations), to make an impact and comply with the 5% minimum expenditure requirement. But they could grant that money as PRIs and get it back to grant again and again! The jeopardizing investment rules do not apply because Program-Related Investments are grants – money already intended to be given away for impact, specifically designed to be jeopardizing.

Unfortunately, less than .01% of total grantmaking the United States went to energy innovation in 2011 and less than .01% of PRIs made between 1998 and 2011 went to anything related to energy.

Why is this important? There’s $600B that sit in U.S.-based foundations. We’re observing venture capital funds and LPs fleeing from early-stage cleantech. And we desperately need patient capital to step in and support the type of technology innovation that can scale our world to 10 billion people. Our conclusion? PRIs are an unexplored solution to fill this gap.


2. What are examples of gaps that PRI capital could fill in the energy sector?

There are many ways PRIs could make an impact on our energy sector; it is capital that has a very long-term view (intergenerational impact!), high tolerance for risk (it’s a grant!), and company-building capacity. It can do things no other capital source can do - venture capital can’t accept opportunities that take longer than 10 years, long-term investors in instruments like municipal bonds can’t take high risk, and governments can’t invest in companies for fear of “picking winners.”

Here are a few examples of groundbreaking PRIs in the energy sector:

  1. DBL Ventures, based in San Francisco, recruited PRI makers as early LPs. DBL only makes investments into companies with positive social, environmental, and economic impact in local communities.
  2. The Clean Energy Trust, a nonprofit dedicated to accelerating clean-energy businesses in the Midwest, is constructing a fund that will live inside the public charity to invest in its own accelerator program’s companies. This fund is ripe for PRI investment; the charitability argument is strong for both environmental conservation and regional economic development.
  3. PRIME, my nonprofit effort, is constructing a fund thesis that could support transformational energy companies that may take longer than a traditional 10-year venture fund cycle. Imagine a PRI-backed ARPA-E commercialization fund.
  4. Next Step Living, a Boston-based residential energy efficiency company, recently added the RISC Foundation as a PRI investor to its Series C. The foundation is helping Next Step Living bring jobs and energy efficiency to New Haven, Connecticut.


3. What are the policy and human resource barriers that currently prevent more PRI-makers from entering the energy space?

I would group barriers into two categories: 1) policy barriers and 2) human resource barriers. Here’s what’s currently preventing PRI making in energy:

Policy barriers

Energy is not a charitable purpose per se in Tax Code 501c3 language. Although existing charitable purposes such as environmental conservation, lessening the burdens of government, or economic development often apply to investment opportunities in energy, foundation representatives are largely uncertain if energy PRI opportunities do or should qualify as charitable. Here are their current choices:

  • Avoid creative energy PRIs altogether (the easy way out)
  • Pay expensive fees for legal opinion to quell uncertainty (very few lawyers have PRI experience)
  • Go for it and risk excise taxes as penalty (very few foundations are testing the boundaries)
  • Apply for a private letter ruling on a case by case basis (expensive and lengthy process, not practical)

Our field could benefit from more clarity around what, exactly, should be considered charitable in the energy space.

Human resource barriers

Within foundations, there are quite a few people-related barriers that are the most insurmountable part of increasing PRI making in energy:

  • No champions

With very few exceptions, there is no institutional home for PRI-making inside most foundations, leaving us with no internal advocate arguing for PRIs versus other grant options.

  • No experts

There are no energy investment experts embedded in private foundations’ grantmaking staff, so there’s no process for deal sourcing, due diligence, structuring of terms, value-added board membership, etc.

  • No point of contact

For a variety of reasons, potential PRI-makers are inaccessible to PRI-seekers. If I’m an early-stage entrepreneur, I have no idea how to learn about the rules that govern private foundations, how to get in the door, pitch my business, or argue for the opportunity as PRI-qualified.

  • No existence proofs

Very few PRIs have been made to the energy sector. This limits PRI makers and PRI seekers in forging ahead with new transactions because there is so much uncertainty around what is allowed.


On September 12th, Sarah will be talking about why she's optimistic that the pieces are coming together for PRI makers to step up and bring a significant new source of capital to the table to support greentech innovation. I'm a big fan of her efforts with PRIME and am looking forward to hearing more about what progress she's seeing out there in the sector. As the barriers Sarah mentions are overcome, there's a lot of capital sitting on the sidelines that can and should be put to good use here.

Cleantech and Predictable Irrationality

Rob Day: August 13, 2013, 8:35 PM

Ahead of the NextWave Greentech Investing conference (early-bird registration rate ends Wednesday, btw), I'm taking a look at some of the shifts in thinking and strategy that are underlying this next wave of investors.

One of the more important shifts, I believe, is the abandonment of the quaint idea that buyers of clean technology are inherently rational decision-makers.

I mean "rational" in the economics sense, of course, I'm not intending to be disparaging of anyone. But during the past decade there was too often a sense that it all came down to unit economics for customers. That a compelling economic value proposition (a production cost for biofuels well below the market price of oil, or a two year payback period for an energy savings solution, etc.) was sufficient to have the world beat a path to your door. Unfortunately, that didn't happen often.

I've been a big fan for a while of the writings of professor Dan Ariely, on the subject of irrational decision-making. His behavioral economics based approach to thinking about why people predictably make "mistakes" (from a simple economics calculation perspective, at least) in situations like purchases and investments can offer a lot of useful lessons for cleantech entrepreneurs, I believe. I highly recommend his books for anyone trying to figure out how to start turning clever cleantech ideals into actual successful revenue growth stories... Mandatory reading for cleantech entrepreneurs.

So I was very glad to get a chance recently to pick Dan's brain a bit on cleantech-specific topics. I asked him a wide variety of questions -- and I thought folks would enjoy hearing what he had to say:

First, I asked him for his thoughts on why so often we see customers take a long time to adopt "no-brainer" economic value propositions in the cleantech sector. I mentioned a recent episode where a cleantech startup I knew offered a customers a 6 month payback period, and it took the customer 9 months to say yes. And I asked Dan if he had any thoughts on why this long sales cycle problem is such a pervasive problem that so many cleantech entrepreneurs deal with -- one that often leads to slower than anticipated growth for cleantech startups.

"Of course," Dan said, "it's very tough to move people to do lots of things; people don't like to change. And a big part of the problem is regret. If you keep on doing what everyone else is doing, there's no way to regret it. But if you switch, all of a sudden you have made a particular decision. It could of course turn out badly, and you can regret later making that decision.

"Imagine if you bought a stock today. If the stock goes down, you can really regret it, but if you don't buy it there's nothing you can regret about it, particularly today. Of course, the stock market can go up and you can miss out on gains, but you're not going to have a specific action, a particular day you can regret, if you don't buy the stock.

"On top of that, we should think about the no-brainer as not just about the new versus the status quo. There's a question of whether or not something better will come along in the future. So the moment you have an environment that keeps on changing, people need to have confidence that this is not only better than the alternative, it's also better than what will come in the near future."

So what this means for cleantech entrepreneurs is that they have to stop trying to sell solely on the basis of the benefits of the solution they're offering -- they need to do a lot more to signal to prospective customers that they won't regret making the decision. That probably doesn't mean citing statistics about reliability, etc., as much as it means having "champion customers" give testimonials about how happy they are, to talk about how it'll make the buyer's life easier, and so forth. Not performance stats, but happiness anecdotes.

It also means figuring out how to "future-proof" customers against further advancements or other new tech. I think in many ways, in fact, cleantech entrepreneurs have been a victim of their own success over the past decade. The rapid proliferation of compelling new solutions not only makes for a more complex purchasing decision, it also raises the specter of yet more compelling new solutions soon to come -- so why buy now? Future-proofing is as important, I believe, as solving the infamous capex-opex dilemma so many are focused on right now.

Next, I asked Dan about the importance of having good channel partners in light of the above-discussed regret dynamic.

"Channel partners basically help reduce the perception of risk. They make it seem like somebody's there to take care of you, someone that you know, that you're familiar with. Somebody whose business is more involved in this particular area than yours is, and therefore that through them you're more connected than you would be."

The problem in so many cleantech sectors, of course, is that the channel partners are as unfamiliar as the customers are about these new solutions, or even that they may be downright averse to them because of structural constraints and mis-incentives. This is one reason why I believe channel disruption is such a key investment opportunity in cleantech right now -- but Dan's comment also points out that new channel partners must work hard to establish customer trust as a first priority.

And on the general topic of trust, I also asked Dan about the recent results which suggest that clustering within neighborhoods has been an effective sales accelerator for residential rooftop solar. 

"We can think about a rational and a non-rational reason why it works. The rational reason is that clustering provides information. If I see that my neighbors are doing it, I can reason that the solution will work for me. The devices work, the sun is strong enough where we live, it works okay with the utility company, and so on and so forth. And basically I get the feeling that it's a good deal.

"The non-rational interpretation is that this is something akin to herding behavior, where we have this instinct of doing what other people are doing. And the moment we see the other people behaving together in a certain way, we take this as being the right standard of behavior. We adopt it, we take it in, and then we continue acting in this way going forward."

This works for rooftop solar and electric vehicles -- now, how can we get it to work for less visible purchases such as energy efficiency improvements?

Finally, I asked Dan why he thinks clean energy investment dollars have been drying up even as the macro need for new clean energy, etc., has become so much clearer over the last few years. 

"I think it basically has to do with the impatience of investors. Investors have been used to thinking about maybe ten year windows in the past, then it became a five-year window, now it's even shorter. And they're basically thinking that this is what they should aim for, this shorter time horizon. With clean energy, it's very hard to imagine something paying off within a time horizon of five years or even ten years. And I think because of that it's very tough to convince them to invest in this sector."

Well, Dan, that's one thing we're going to be talking about at NextWave -- how we can now see the path to nearer term returns from investments in the sector, done in new ways. We're going to be hearing from some of these next wave investors how they're seeing success from new approaches. And we'll be hearing from some of the next wave entrepreneurs who are tackling big problems in smart new ways.

Because Dan's right -- we need to start putting some runs on the board. No matter how much LPs may agree with the logic of the long-term investment opportunity in cleantech, this needs to start to look like a near-term win before anyone will want to come back in.

Lessons From the Past 10 Years: Focus

Rob Day: August 1, 2013, 12:11 PM

First off, if you haven't registered yet to attend NextWave Greentech Investing, go do so. The agenda's really coming together, for example Schneider's head of smart grid strategy will be there to tell everyone why they keep acquiring cleantech companies, and what that means for the next wave of exits. And the room's starting to fill up with investors and entrepreneurs, so I'm really looking forward to a good conversation. So go ahead and go register now, I'll wait.


OK, we're back. 

Speaking of B2B cleantech startups such as those Schneider and others increasingly want to acquire, I wanted to remind everyone of this crucial lesson from the classic book Crossing the Chasm by Geoffrey Moore (a highly recommended read or re-read for all cleantech entrepreneurs):

"Cross the chasm by targeting a very specific niche market where you can dominate from the outset, force your competitors out of that market niche, and then use it as a base for broader operations. Concentrate an overwhelmingly superior force on a highly focused target."

I think this lesson, to focus your market entry on an available niche, is too often forgotten by cleantech startups. And I've seen firsthand what a difference it can make.

One company I've gotten to know pretty well over the past decade is a B2B startup with an absolute no-brainer economic value proposition for industrial customers like manufacturers and processing facilities. It's a broadly applicable solution, which is one reason the company was able to raise venture capital. And with the investors' blessing, the company set out to sell to a wide range of customers. It's understandable -- with venture dollars in hand and a great solution, why not grow quickly both in sales and reputation by getting into as many verticals as possible from day one? 

But of course, that also means diluting the message, and diverting efforts away from giving one particular customer type exactly what they need in terms of a fully-developed solution. The company did end up with a bunch of sales and installations, but scattered across a wide range of customer verticals. And that meant that, within any given customer vertical, they weren't able to achieve the critical mass that would lead to sufficient visibility that leads to new customers seeking them out instead of the other way around. They also weren't able to easily enlist channel partners who serve those various verticals, nor hand them an easily sold product (since they were selling something pretty generic, the full installations required some customization). And thus revenues grew very slowly and the company ended up needing even more venture capital to survive some "going sideways" periods.

Another company I've gotten to know pretty well took the opposite approach. Notably, this B2B startup also offered a compelling economic value proposition to industrial customers. But they purposefully set out to target one relatively obscure niche within that broader market. It's a niche where existing vendors had only a tenuous hold, and existing channel players weren't strong either, so via both direct selling and in partnership with just a couple of forward-thinking channel partners, market entry faced fewer obstacles. And despite the typical limited resources of a startup, the focus on this key initial niche allowed them to design a product that was exactly what those customers wanted, and nothing more. No wasted capital developing capabilities that ended up not being used.

And the strategy worked great. The company has been able to not only successfully introduce product into that niche and grow sales, but then have used the visibility and scale and learnings from that initial market foothold to develop additional offerings suitable for other customer types as well. This startup has consistently grown, with none of those "go sideways" periods the first company has seen, and is now perceived to be an overall industry leader.

In the early days of this second company, however, they were often passed on by venture investors because they were perceived as being "just a niche play," and not a very sexy niche at that. Venture investors always want to go big quickly, and taking the time to focus on a niche for market entry often doesn't resonate with them. But I've seen that it sure can work.

And as Moore's admonitions illustrate, failure to focus can be quite damaging, as startups get stuck on the "early adopter" side of the chasm. Fortunately for the first company I've described above, their investors gave the company time to plug away and make changes, and now they've found some of those verticals where they have eventually built critical mass and are able to resume a growth path. At least within a couple of those verticals, they're across the chasm. But it took a lot longer than many investors would have had patience for, so many startups wouldn't have been able to survive through all of that.

At least for B2B cleantech startups (and I believe quite often for B2C as well), it's worth the time and effort to focus market entry on giving one niche of customers exactly what they want, and driving most marketing and sales efforts at that niche. It's important to also plan for success and lay the groundwork for exploiting that foothold to eventually go after the broader market as well. But start with focus.

What Is “NextWave Greentech”?

Rob Day: July 20, 2013, 7:11 PM

When the folks at Greentech Media asked me to chair their upcoming "NextWave Greentech Investing" conference, I immediately said yes. The chance to have many of the more active and innovative investors hang out together for a day, talking about how they're trying to reinvent the sector, is just simply going to be a lot of fun -- and hopefully pretty informative for entrepreneurs in the sector. Certainly it'll be a good place to look for funding!

But it still begs the question: What exactly is this next wave all about? How do you define it? We've touched upon this question a bit in past columns, but mostly by talking about what it's not. The concept is clearly about creating new approaches to generating strong returns in the sector, and acknowledging past underperformance, but again that's not really a guide to what these new approaches look like. So I thought it might be helpful to describe how I'm thinking about the next wave of greentech investing:

1. NextWave Greentech Investing is about new investment models, not necessarily new investors.

It's tempting to start talking about new investment models and quickly start focusing on the emerging new investors deploying them. But as I wrote about a few weeks back, one of the more encouraging things I've gotten to witness recently was a room full of very smart and very experienced greentech VCs all brainstorming about new models.

I'm seeing a lot of this. Experienced VCs like Raj Atluru who are launching smart new efforts like Silverlake Kraftwerk. Personal conversations with great VC leaders like Josh Green of MDV, where we excitedly compare notes on the huge potential for information-driven investments in the sector. Even high profile firms like Kleiner Perkins, for all of the grief folks have been giving them lately for their greentech investments that haven't worked out, have in my humble opinion a bunch of really smart investments in their greentech portfolio that will end up doing very well for their LPs -- investments that often clearly demonstrate new ways of thinking about value creation in the sector.

The next wave of greentech investing is really being driven by many of the existing leaders of greentech venture capital. It's about new thinking and new models, not new firms. (Okay, also some new firms, too!)

2. There is not one new approach to NextWave Greentech Investing. It's about a variety of new, sometimes specialized, approaches.

At the conference, we're really going to be highlighting what a healthy and fascinating diversification of investment models there are right now in the sector. From investors focused on business model innovation and near-term revenue like my firm, to investors focused on finding returns-generating pathways for deep technical innovation with long gestation periods, and everything in between, there's no one "right" way to generate returns out of this huge megatrend around natural resource scarcity.

This diversification, of course, makes it correspondingly difficult to come up with a single concrete definition of what this next wave is all about! But I think that's healthy. It speaks to the maturation of the sector, that we're now seeing a variety of pathways to returns.

3. NextWave Greentech Investing is about pragmatic approaches to generating returns.

We all carry the battle scars now from the past decade's efforts. No more wishful thinking! 

This next wave we're engaged in acknowledges and plans for non-economic barriers to market entry and adoption. It's no longer just about getting costs down to a certain target.

This next wave doesn't plan for a price on carbon or other major policy shifts, no matter how inevitable they may seem. 

This next wave takes practical approaches to managing capital needs -- with a variety of creative non-dilutive sources and financing and partnership structures.

This next wave doesn't assume that Wall Street will reward us just for the social benefits we're creating, or for our audacity. Building good solid businesses that are likely acquisition candidates is the focus -- and by the way, some of these are ending up as IPOs even in this tough market!

4. NextWave Greentech Investing is about capital efficiency.

Gone are the days of raising a ton of capital and throwing it at a technology development effort. A lot of the more interesting efforts as part of the next wave are web-based or are service models and thus require a lot less capital to get to a proof point.

And even when a next wave investor is instead backing an early-stage technology development effort, these days they know to run as lean as possible for as long as possible. 

That's not to say there won't still be some really big later-stage venture rounds. But these will look like really big later-stage venture rounds in any other VC sector: They will be growth equity rounds supporting companies that already have significant market momentum, not just a lot of hype. 

5. NextWave Greentech Investing is about solutions, not technologies.

I have to watch what I say carefully here, I've found, since a lot of folks read sentiments like this as me being anti-technology. Nothing could be further from the truth. 

But even when a startup is pursuing deep technology innovation, next wave investors know that such innovation by itself won't be enough. If you hand a customer a new technology, you really are handing them a problem in the guise of an answer. They have to figure out how to evaluate it, how to implement it, how to integrate it into their other existing processes... It's clear when you look at the number of "good ideas" that haven't seen the market adoption they deserve, that there's more to it than just the innovation itself. The customer needs to be handed a full solution that is just really, really easy for them to adopt, not just economically advantaged.

If you look at the companies we now think of as being leaders in the greentech sector -- companies like Tesla, Nest, SolarCity, Digital Lumens, Harvest Power, EnerNOC and others -- they provide full solutions to their customers. They didn't just innovate a technology and then go see who wanted to buy it. They integrated that technology into a solution that makes it easy for customers to say yes.


The past few years have been a period of introspection and reinvention for the greentech venture sector. We're now seeing a variety of answers come out of that exercise, and early positive results. That's what the next wave is really all about. It's time to put some runs on the board. And how smart investors are doing that is what we'll be talking about in September. 

A Conversation With Limited Partners, Part Two: Comparable Returns

Rob Day: July 15, 2013, 4:46 PM

In the last column, we discussed the divestiture movement's pressure on limited partners, and how it represents an opportunity and not just an obstacle to returns, even without using it as a negative screen.

This is all part of a broader conversation I've been having with other limited partners and fiduciaries lately, all leading up to the NextWave Greentech Investing conference in September, for which I'm told a few dozen LPs and GPs have already signed up. Which is great to hear.

Nevertheless, despite that happy news, for today's column let's start by acknowledging two uncomfortable facts for LPs.

First, that even the most discerning negative screens for LPs will indeed be a hindrance to returns unless there are comparable returns opportunities available elsewhere. In other words, if an LP is forced to get out of one type of investment, they really want to find another type of investment they can go into that provides similar risk/reward.

And second, that cleantech returns have been underwhelming to date. Which, given the first fact, kind of hurts.

Let's take the venture capital part of cleantech first. The best analysis of returns I've seen came recently from Cambridge Associates in a special cleantech-focused report. In it, they found that cleantech venture investments in their database from 2000-2011 resulted in a 6.6% gross IRR... but then they note that the management fee burden would subtract an average of 4.4% from that for an implied net IRR of only 2.2%. Compare that to the most recent 10-year NVCA/CA estimated net IRRs from venture capital overall: 6.87%.

On the public markets side it's an even sadder story. According to BNEF, the NEX Clean Energy Index has fallen by around 30% since January 2011 even while the NASDAQ and S&P500 have gained around 30% during the same period.

So the two most visible asset categories of cleantech investment have not performed well over recent years.

Put these two uncomfortable facts together, and another unfortunate story around divestiture comes into focus for LPs... That they're being asked to get out of some strong-performing "bad" assets, while the most visible alternative "good" investment areas they could shift funds to have underperformed.

So yeah, I rather sympathize with the lose-lose situation many LPs find themselves in on this issue.

But here's today's important takeaway: The returns picture is not nearly so bleak in cleantech as this makes it sound. Not for the next wave of cleantech investing, at least. Forward-looking LPs can already see evidence of how to put money to work in this sector in ways that provide at least comparable returns and -- for those who buy the long-term natural resource risk and "externalities will eventually be priced in" thesis -- possibly present even more upside at lower risk than the assets they had previously been backing.

On the venture capital side, to demonstrate these emerging good results we have positive anecdotes... and data! Actual data, hey! That same Cambridge Associates report on cleantech venture capital did a very helpful thing -- the team broke out cleantech VC investments into four categories. And then tracked returns for each of the categories. What they found was illuminating.

  • "Resource Solutions" (ex: Waste and recycling, water and wastewater, advanced materials, agriculture solutions, etc) = -2.9% implied net IRRs
  • "Renewable Power Manufacturing" (ex: solar panels, biofuels manufacturing) = 0.2% net IRRs
  • "Energy Optimization" (ex: smart grid, energy efficiency, lighting) = 4.5% net IRRs
  • "Renewable Power Development" (ex: financing, installation, and ownership of renewable powergen) = 7.0% net IRRs

So in at least two of the four subcategories within cleantech venture capital, this analysis found somewhat comparable results as for the overall venture capital industry during the period. And that's during a decidedly rough period for the sector. And it also doesn't account for emerging new alternative investment strategies even within certain subcategories. For example, we're now seeing investors like my firm Black Coral Capital, like Silverlake Kraftwerk, and even (quietly) Kleiner Perkins direct our cleantech investments as much at business model innovations as hardcore technical innovations of the type that dominated the last decade for the sector. These kinds of shifts are happening and producing early, good results.

So cleantech venture capital can actually produce comparable results as found in other sectors, especially with these new strategies.

This result is also found (albeit much less satisfactorily) in the public equities. As mentioned above, since 2011 the clean energy indices have fallen significantly. But remember: Those indices are dominated by the exact same kind of biofuels and solar manufacturing plays that also dragged down the venture capital returns in those subcategories. This is not a coincidence.

Just to illustrate, solar stocks fell by around 64% during the period. Biofuels stocks have fallen by over 50%. With these anchors, how has the NEX Clean Energy Index even managed to avoid even more losses?? There must be other, less visible parts of the cleantech market other than solar panel manufacturing and biofuels production that's preserved more value. Unfortunately, I haven't seen any analysis that would break out where those returns are (indeed, most hedgies I've spoken with about cleantech stocks just indicate that they made money shorting solar panel stocks), other than just the companies Elon's founded... But in any case, as with venture capital above, it's generally the same story: Some parts of cleantech have provided really crappy returns, but that's not universal across the entire category.

And btw, we've forgotten about a really important part of the story so far: Project finance. Renewable energy project finance has been charging ahead in strong fashion even while the cleantech public equities and venture capital categories have had their difficulties. Unfortunately I also can't find good analysis of any comparison of returns between renewable energy project finance vs. non-renewables, but I strongly suspect the results would be comparable. The energy project finance firms we've backed ourselves, for instance, have done both renewables and non-renewables investing, and have done well in both categories. There's also much more of a directive selection bias at work in project finance, because it's a category with much less variability of results (by design). These firms want to get their low-risk basis points one way or the other. When they find them in traditional energy, they do that. When they find them in renewables, they do that. Since renewables project finance remains a >$100B/yr global industry, we can conclude that this hasn't been a charitable exercise for these project finance firms.

As we discussed last time, focusing on divestiture arguments with professional LPs just sounds like they're being asked to sacrifice returns on behalf of the common good. But on the other hand, to feel justified shifting capital into cleantech venture capital, project finance and/or public equities, limited partners need simply to see that they can get at least comparable returns than they could in other verticals within the same asset categories.

As you can see above, we're now starting to see this actually happening.

And in September, we'll be hearing from some of the investors who are leading this next wave and pushing it even further. Because I personally am not satisfied with just comparable returns. With a long-term investment thesis this clear, we can and should be achieving superior returns in cleantech. That starts now.