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The Energy-Data Nexus Could Be the Next Big Thing for IT Industry

Rob Day: March 31, 2014, 9:00 AM

First, I’m very happy to share that the 2nd annual NextWave Greentech conference, produced by Greentech Media, will be held on August 5th in Menlo Park. After last year’s conference sold out, and was so much fun, the GTM folks asked me to chair the conference again and I am pleased to do so. So save the date!


After the recent Facebook/Oculus announcement, I was struck by Fred Wilson’s blog post on the subject. Essentially, Fred argues that this deal, along with the acquisitions and explorations by Google (such as Nest, driverless cars, etc.), is a sign that these big cash-rich tech giants are looking around for what’s next after mobile. He describes it as “call options on the next big thing.”

I always love Fred’s insights on tech and venture capital. And I have some news for these big tech companies -- they’re already engaged in the next big thing: the energy-data nexus.

You may have heard of the energy-water nexus, which is the idea that water use and energy production are so intertwined that they can, to a significant extent, be thought of as two sides of the same coin. The same thing is happening, in remarkably similar ways, with energy and data. Energy (supply and consumption) and data (gathering, analysis and automation) are so increasingly intertwined that if you are in the IT industry, whether you realize it or not, you are already deeply engaged in the energy industry.

While it’s been suggested that the Google Glass has a lousy battery life on purpose, we all know that battery life is a major obstacle to maximizing the use of mobile devices. Anyone who’s ever tried to live-stream an entire March Madness game on their phone knows that the way it sucks your battery dry is one of the biggest reasons why you can’t yet untether from your TV and cable box the way many in the IT industry would like. The talk of Facebook using drones to push higher bandwidth around the world raises similar questions. Powered how? Without energy innovations to further reduce the energy consumed per device function, and/or to extend battery life, energy is a severe limitation on what the IT industry wants to do next.

And at the cloud level, while there have been significant improvements in power usage effectiveness at data centers, the increasingly large consumption of data still means increasing reliance on energy by our IT infrastructure. Carbon emissions related to data center operations are projected to grow 7.1 percent per year through 2020, and that’s inclusive of further PUE gains. While that’s phrased in terms of emissions, one can extrapolate the energy consumption growth that represents. With energy availability (and reliability) a growing challenge for a voracious IT industry, is it any wonder that leading firms like Google and Apple are getting more involved in doing their own power generation?

But that’s the evidence that data consumption requires energy consumption, and thus is limited by energy consumption. What about the optimistic side of the nexus? In my opinion, this is the really exciting part of the story. Energy data is big data. Just look at the Y2E2 Building at Stanford and its 2,600 data-gathering points. One thousand buildings like that, measuring those data points at one-second intervals, would create 6 petabytes of data every year, according to AutoGrid. What else could that data be used for? Well, ask Google and Nest. What else can you do that could be revenue-generating with data indicating occupancy at a granular level, energy consumption at a granular level, etc.? A lot.

Even more exciting, at least to me, are IT-enabled negawatts. Once you have all that data, you can reduce energy consumption, the equivalent of increasing energy production elsewhere. That can be done as a reaction to conditions on site (just to reduce the electricity bill) or as a reaction to conditions on the grid. Add in advanced real-time grid analytics, networked energy storage for discharge on demand, etc., and up to a pretty big extent (while obviously not 100 percent), you start to see how data can be a substitute for energy production -- and therefore a big revenue generator in its own right. Data for energy can unlock significant wasted capacity and, as our friends at Noesis have recently shown, it can unlock a lot of dollars along the way. Such big market potential, given the significant overlap between data and energy, won’t be ignored by the world's biggest IT companies.

As Christian Belady of Microsoft put it: “Data is really the next form of energy. Instead of distributing power, we should think about distributing data. It’s far easier and more efficient to store data than [it is to store] power. I view data as just a more processed form of energy.”

So if the big IT giants are looking for the next big thing, I’ve got news for them: They’re already in it. The energy-data nexus can be that “platform that can plausibly be the next big thing,” as Fred puts it. Out of necessity, if nothing else. But I think, based upon the recent moves at Google in particular, the IT giants will be tackling the energy-data nexus as an opportunity.

How to Succeed as a Cleantech Startup? Transcend the Category

Rob Day: March 24, 2014, 11:00 AM

Was Nest a cleantech startup? Was Waze?

To be blunt, who cares? From the standpoint of returns-maximizing VCs, it's a little bit irrelevant how you found the investment opportunity, if you were lucky enough to be a backer of Nest. The efficiency benefits? The superior design? The bigger home automation/security strategy beyond thermostats and smoke detectors? A strong-executing management team? Probably for most of the company's investors, it was some kind of a mix of all of the above, with varying degrees of emphasis.

Cleantech/greentech is not truly a category, although it is often treated as such out of necessity when tracking dollar amounts, describing investment strategies, getting written up by journalists, being used as the title of a blog, etc., etc. But I've yet to see any mutually exclusive, collectively exhaustive taxonomy of the cleantech category that isn't a big mess and which settles more questions than it raises.

Cleantech investing and entrepreneurship is about finding great business opportunities by viewing the world through a natural-resource-scarcity lens. It's a lens that is educated by clear long-term macro-trends, but one that shouldn't be myopically applied to only a narrow set of industries. The opportunities one finds when viewing the investment universe through such a lens may fit strongly or weakly into existing cleantech categories. But from the returns potential standpoint, I don't think it matters much. 

Many of the stronger-performing startups in this next wave of cleantech investing do in fact transcend the category. That's because they're built on technology platforms or utilize business models that are attractive to tech investors who might not care about cleantech, but who do like big markets. Or because the core technology, perhaps even invented by entrepreneurs who didn't really think about resource efficiency when doing so, nevertheless presents some resource efficiency benefits in its application. Bilal Zuberi of Lux Capital recently wrote a blog post in which he claimed that 3-D printing, cheaper space satellites, and drones offer resource efficiency benefits and thus should be considered to be types of cleantech. Some cleantech purists may roll their eyes at this contention; I do not. Even if these technologies aren't inherently resource-efficient, they certainly could be applied via downstream business-model innovation to achieve some significant resource efficiency gains. (I can't wait until my Amazon Prime membership includes a 3-D printer with spec-download service.)

My point is this: Investors arrive at good ideas from very different directions -- and that's OK! Increasingly, tech investors and cleantech investors are arriving at the same place, it would seem. Many of these tech investors are among those who are busy declaring to all LPs, "We don't do cleantech!" -- and yet they keep investing in companies which proponents of the cleantech sector would like to claim as one of their own. I recently had dinner with a senior partner at a mainstream VC firm that had just declared it was no longer going to be focusing on cleantech -- and yet he proceeded to excitedly tell me all about a recent energy efficiency deal the firm had done.

So, entrepreneurs, here are a few points to keep in mind.

1. If you're building a cleantech business, make sure to broaden your offering so customers get a lot more benefits than just resource-efficiency. I've spoken with several such smart entrepreneurs recently who are building smart energy-saving technologies, and yet who already know that they're going to need to offer additional customer benefits in order for people to want to give them a healthy chunk of what's in their wallet. Too many cleantech startups offer one thing, hang their hats on ROI, and fail to realize that ROI derived from a relatively small base may work out on paper, but rarely grabs customers' attention by itself. The line between cleantech markets and other tech markets are already blurred -- take advantage of that by actively transcending and combining into a truly winning solution.

2. If you're a cleantech entrepreneur, don't be afraid to pitch mainstream VCs who've signaled that they're not interested in cleantech. As long as your offering transcends the category per point No. 1 above. (Also, you might consider not calling yourself a "cleantech startup" in your initial pitch -- at least right now, when it's out of favor.)

3. If you don't consider yourself a cleantech entrepreneur, but your innovation offers significant resource-efficiency benefits, don't be afraid to hit up cleantech investors. To use an example from our own portfolio: Austin, Texas-based Noesis was founded by entrepreneur Scott Harmon, who was looking for smart ways to apply big data and web-based business models in fragmented markets in need of more efficiency (in the business sense). He hit upon the intersection of buildings and energy, after looking at several other non-cleantech markets. Noesis was then backed by Austin Ventures, which doesn't have a particular cleantech focus, but which recognized the business value of applying modern market-making solutions to a behind-the-times but huge market. Scott and the team at AV didn't get into this business because it was cleantech; to them, it's just a web-based startup aimed at a particularly attractive market opportunity. But we were glad when then they approached us as a potential investor, because we saw the fit and recognized that we could bring some additional market expertise to the table. And beyond pitching VCs, you will also find additional advantages from thinking about your resource-efficiency benefits when recruiting employees and when selling to customers. 

As the line between "cleantech" and "tech" blurs, embrace that. These aren't separate categories. Describe what you do through the appropriate lens for the particular audience you're talking to. Use the different lenses to identify new sources of value and growth. Now is a particularly valuable time to transcend the category, instead of sticking yourself into one artificial silo or the other.

Can ‘Impact Investors’ Save the Day for Cleantech Entrepreneurs?

Rob Day: March 3, 2014, 11:59 AM

I am writing this column while en route to a meeting of LPs on the subject of “impact investing.” Last week, I also attended a meeting of family office investors on the same subject. Impact investing is a growing trend and discussion topic. Can it make a difference for cleantech entrepreneurs and markets?

First of all, what is impact investing? As always, different people have different interpretations and uses. But at its most general level, it’s the idea of directing investments into projects and startups that are expected to generate positive returns and (wait for it) impacts on some key issue or another, such as habitat preservation or climate change, to pick two examples, but also in non-environmental domains like education, health, gender equality, etc.

Different people in the impact investing community have different expectations about what the financial returns of such investments should be. Some seek risk-adjusted returns at or even above market benchmarks. Others view impact investing as likely generating sub-market returns, but still preferable to a grant in many cases, because the money deployed does largely flow back to the investor, and because of other factors.

Importantly, from the perspective of many investors, the impact investing concept is differentiated from other related concepts like ESG (environment-social-governance) in that it involves proactive investments designed to make a positive difference. ESG and other approaches often got interpreted primarily as “negative screens,” taking some investment areas (arms manufacturing and tobacco are classic examples) off the table, but otherwise leaving most of the investment portfolio the same as before.

So there’s something in all the vagueness of "impact investing" to interest and/or turn off just about anybody. But can it make a difference for cleantech entrepreneurs?

The answer is that it can, but only if done with an eye toward scalability, and if done collaboratively with the broader private sector. And right now, this is a rarity.

Impact investing could play four very powerful roles in cleantech markets.

First of all, as many often point out, there are lots of clean technologies that necessarily require a long gestation period from lab to commercialization -- for example, small-scale fusion power, to pick just one among many. These days, and probably on an ongoing basis, the long holding periods necessary for the early-stage investors in such technologies is a big turnoff. And the capital requirements are too great for angels alone. Government grants can fill some of the gap, but there’s still an early-stage funding gap for such long-gestation, capital-intensive efforts. If and when successful, however, such efforts could end up being huge financial winners. Impact investors with more patience and risk tolerance than today’s VCs could fill that gap and see it pay off over time.

Another oft-discussed capital gap is the “first plant” for such capital-intensive technologies. More precisely, the first few commercial-scale facilities are often too capital-intensive to be appropriately funded with venture capital, and yet not proven-out enough to be appropriately funded with project finance. Some corporate dollars have gone into this gap, but it’s clearly not enough. The risks at this stage can indeed be managed fairly well, however, if the investor is good enough at their diligence processes. Impact investors with flexibility and knowledge to play an “early-stage project finance” role here can not only address this gap, but can also generate pretty attractive returns by doing so, at least as compared to traditional project finance.

Clean technologies are often released into markets that are mispriced in favor of incumbents. And furthermore, the new technologies are initially more costly because of disadvantages of scale. As the experience with solar and wind power have shown, over time the “experience curves” of new technologies drive down costs significantly, and winners end up beating out the incumbents on an even-playing-field basis. However, that early period of cost disadvantage is very tough for early entrants to survive. Impact investors could play the role of promoting implementation in early phases, by both providing working capital for the initially low-margin producers and directly funding implementation projects that may start out justified via other impact metrics (putting solar on rooftops at disadvantaged schools, for example) so as to kick-start the scale-driven cost savings. This would require a flexible hybrid approach in some cases.

The fourth role is in simply unlocking follow-on capital into new business models by funding the “prove it” phase. This is similar to the “first plant” role discussed above, but with more of a services/ financing bent. Big banks would love to find opportunities to put lots of relatively low-cost capital into new financing platforms, similar to what’s taken place with rooftop solar, but only once the specific platforms have proof points of success. Growth-stage investors would love to find compelling expansion-stage companies they can back, but only once such companies have shown they can successful expand into new territories and/or new offerings. So there’s tons of capital just waiting for proof points to give them the permission to jump in and scale up really impactful efforts. Impact investors could fund the proof points -- and again, generate compelling returns when successful in doing so.

So, great, impact investors are going to solve all of our problems! Except that a lot of what’s happening under the “impact investing” banner right now doesn’t accomplish much of the above.

In my opinion, to truly have impact, such investment activities should be designed to be highly replicable, collaborative, and therefore scalable, ideally by the larger pools of purely financially-motivated investors waiting in the wings. If you want to fund an early-stage tech development effort that VCs will eventually back, you need to build a VC-style company in terms of management, IP, structure, governance, etc. If you want to fund the first commercial plant and have project finance types fund subsequent plants, you have to make sure Plant 1 looks just about identical to Plant 2 through Plant 20. If you want to unlock Wall Street dollars to fund the next, much larger implementation pool for financing distributed wastewater treatment systems, for example, you need to make sure that a) the overall market will be big enough to justify billions of dollars in implementation; and b) the financial structure, operational plan, etc. are identical to what Wall Street will be asked to fund.

Instead, right now “impact investors” are too often doing a lot of one-off, disjointed efforts, from what I’ve seen. They are often well-meaning projects done by individual investment entities, across a highly scattered set of “priorities,” with insufficient effort put into designing the projects so that private-sector dollars could easily replicate them -- and would want to. A big reason for this gap, as far as I can tell, is that the cleantech entrepreneurial/investor community and the impact investor communities actually rarely get together in person to figure out collaborations. The VCs and entrepreneurs often dismiss impact investors as too scattered and naive and slow-moving. The impact investors often don’t seek out the company of rapacious venture capitalists and the aggressively ambitious entrepreneurs they work with. They’re all wrong and they’re all correct -- it’s simply a clear culture clash, and I often find myself suffering severe cultural dissonance as I go from one such group to the other.

I think cleantech VCs, cleantech entrepreneurs, and impact investors (foundations, family offices, university endowments, and a few forward-thinking pension funds) should get together in specific topic areas of interest (cleantech/ climate change being just one of them) -- on purpose, and frequently -- in order to identify where there’s overlap that could be pursued. It would have to be made a safe setting for the impact investors, who understandably shy away from situations where shameless VCs and entrepreneurs can track them down and treat them like dumb money, which happens far too often.

But some initial brainstorming sessions to discuss meshing the traditional VC/startup model with the goals of impact investing with the shared objective of changing the world for the better might yield some really cool and impactful collaborations, hopefully providing some replicable models for future collaborations as well. So it would be great to see more events that specifically seek to bring these overlapping and yet disconnected worlds together.

Venture Capital Deal Counting: What’s Really Going On Behind the Numbers?

Rob Day: February 7, 2014, 12:47 PM

The latest PwC Cleantech MoneyTree report came out this week, and kudos to the team there for pulling together a helpful deal tally tracker.

That resource, and the other tallies, provide a lot of useful insight on the current state of cleantech venture investing. It's especially valuable when a group like PwC that tracks venture deals broadly across all sectors does a special tally for cleantech in a cross-sectoral way. So my thanks to them for continuing to do so.

Once again, we learn why it's important to pay more attention to the deal counts than the headline-grabbing dollar totals.

The cover blurb reads: "In the fourth quarter, cleantech industry venture capital funding reached its highest level in 2013. It was also the first time in five consecutive quarters that a region received more funding than Silicon Valley." That region being, in this case, Texas.

Wow, cleantech venture dollars are significantly up, and Texas is a cleantech powerhouse!

Actually, these statements are both based predominantly upon eRecyclingCorps' $105M Series C financing from back in October. The Texas-based company raised one of the biggest venture rounds of the year, and by itself made up a quarter of all the cleantech venture dollars PwC tracked in the quarter. That's great, but as often happens, one big deal dominates the dollar-amount storyline and thus isn't representative of what most cleantech entrepreneurs are experiencing out there.

So what actually is going on, according to the PwC data? For the second consecutive year, deal counts fell significantly. In each quarter of 2013, PwC saw fewer cleantech venture deals than in the same quarter in 2012, and each of those quarters saw fewer deals than in the same quarter of 2011. This is not a healthy story.

There's an interesting graph, shown below, where you can clearly see cleantech venture deal counts dollars (rd note: corrected), which had roughly kept pace with overall venture capital industry activity, starting to diverge in the back half of 2012. Here is the quantified evidence of what we all already know: that sometime over the past couple of years, venture capital shifted significantly away from cleantech and into other sectors.

It's not surprising. Earlier this week, I spoke at a conference for venture capital limited partners, and while everyone was polite about it, it was very clear that cleantech was very out of favor (or at least just very out-of-mind) with most of the attendees. There was a cleantech panel which was very sparsely attended (even though it was very entertainingly moderated by Greentech Media's own Eric Wesoff), and whenever I described Black Coral's focus on the sector, it was generally met with an "Oh, really? Huh" reaction.

And this is right after the big Nest acquisition headlines, which many in the room were very excited about. "Oh, but Nest isn't really cleantech, is it," said one fellow participant.

So with the LPs ignoring or pulling back from cleantech for a variety of sound and unsound reasons, it's no wonder the VCs aren't doing deals. But this has a number of important impacts on cleantech entrepreneurs.

Another graph in the PwC report tells the tale starkly: There is almost no early-stage investing in cleantech right now. Anecdotally, we're seeing lots of capital available for growth-stage startups (i.e., those with significant revenue), but Series As and Series Bs are increasingly hard to find.

Just this week, we saw DFJ make official what was already widely known: they're not going to do much in cleantech anymore. I also heard of two other firms that are known to be active still in the sector, but are actually not doing much because they're mostly out of dry powder ahead of raising their next fund. This is part of the typical cycle for venture firms, but it seems to leave only a really short list of actual, active check-writers in the sector right now.

However, it's not all gloom and pessimism out there. Cleantech may be having a rough time getting attention at the moment, but a lot of other stuff is doing just fine: big data related to buildings, transportation, agriculture; financial platforms related to solar and energy efficiency; and just about anything related to cleanweb. VCs currently love those.

So as always, don't sweat the labels. Tell investors what you do and how you're kicking butt. Leave it to us and to the PwCs of the world to spend time figuring out what to call it.

Some Lessons From Early Successes of the Next Wave

Rob Day: January 30, 2014, 12:00 PM

As we see increasing evidence of a "next wave" of cleantech investing and entrepreneurship, we're starting to see some early wins emerge. What lessons can we learn from the experiences of recent demonstrated successes like Nest, SolarCity, rumored upcoming IPOs (we see you, Opower), and earlier examples like Tesla?

People will draw their own conclusions, but as I've been mulling it over during the past few weeks I've come up with the following (incomplete list of) success factors I'll be looking for going forward when reviewing investments. This list isn't very original or deep, admittedly, but it's an early attempt to start trying to piece together a blueprint for big wins in our sector.

1. Own the customer experience

A lot of cleantech innovations and entrepreneurial efforts over the past couple of decades have been upstream of the end consumer, either components (i.e., advanced electric motors), commodities production (i.e., biofuels), middleware (i.e., utility smart grid software), or infrastructure (i.e., advanced batteries). Those can certainly be successful efforts if tackled the right way.

But when you look at the really big success stories over the past couple of years in our sector, not only were they well executed (more on that below), but they also all had some kind of direct delivery of experience to the end consumer. Tesla and Nest as the most obvious examples, but SolarCity is also directly marketing to homeowners and sending crews to their houses. It's not a coincidence that those businesses, when they exited, were granted really high valuation multiples versus some of the more "industrial" (i.e., lower) multiples that upstream companies have been able to garner. The underlying business has to be attractive, that's a necessary condition, but the big rewards are granted to the big brands with big lists of already-engaged customers.

That's because the acquirer (whether it's a Wall Street trader or a big strategic company) sees the existing customers not only as proof of the economic value proposition, but also as big opportunities for further sales, and the brand and direct customer experience are seen as the point of leverage with which to make that happen.

I don't believe, however, that this suggests B2B models can't drive such big exits. I've had colleagues tell me that they believe B2C is the best way to tackle this sector, and there's probably some truth to that -- certainly it's a common feature of some of the best exits over the past few years. But B2B companies, if designed correctly, can also build that deep customer engagement that is so highly valued, and leverage well-built brands to project strong continued growth prospects via positive network effects.

But whether B2B or B2C, building direct relationships with the end customer is very strategically valuable, and capturing as much of the customer's attention by building a robust experience (not just having a one-off transaction) unlocks this value.

2. Execution trumps clever ideas

OK, yes, it's best to have both.

But there were plenty of smart thermostats on the market before Nest came along. There had been various EVs before the Model S. Putting benchmarking data on your utility bill isn't the most breakthrough concept. These aren't out-of-left-field concepts that the world hadn't heard of before.

These startups succeed not because of their breakthrough concepts, but because of their superior execution. They developed better tactics than those who had tried this before. They pushed through barriers to entry and barriers to adoption with technical innovations, business model innovations, design innovations, better access to capital resources, and brute force.

This is a bit obvious, right? "Winning startups have great execution, duh," replies the blog commentariat. But I continue to see lots of evidence of low-execution management teams getting venture dollars because they have a fascinating technical innovation. The theory there is that the execution can be bolstered over time by topgrading, etc. But what I'm arguing is that you start with identifying the great team (or at least the core of such), and they'll figure out the tactics they need to succeed with ideas others have failed with before them.

Sand Hill Road gets this. This is why (as it's now coming out) Tony Fadell was basically offered venture capital to start a smart thermostat company simply because he was Tony Fadell. It's an unsurprisingly successful investment strategy to back proven winners.

But there are lots of high-execution entrepreneurs out there who aren't already known commodities to the Sand Hill Road network. And that's especially true in cleantech, which continues to be more geographically diverse than some other venture capital sectors.

I believe (and am actively betting) that new methodologies for identifying high-execution entrepreneurial teams can unlock a lot of the promise of the next wave of cleantech venture investments, even outside of Sand Hill Road denizens.

3. The convergence of IT and cleantech is powerful

I've expounded upon this many times already in this column, but the convergence of IT and cleantech isn't just exciting because of the specific "intelligent energy" business opportunities it's enabling. The convergence is also making other cleantech business models more viable as well, when it's used correctly.

Nest is best thought of as an "intelligent energy" play, but Tesla? It's a car company. And yet the Model S is more like a computer with wheels. The advanced use of IT enables the advanced battery management, the superior driving experience, that wicked-cool display, etc. That's just one such example.

There's magic to the convergence of IT and energy, particularly when it's used to bolster the customer experience. It can be a powerful tool to enhance the adoption of solutions that on paper should have been attractive without it, but which needed an extra push. And it can enhance the strategic value of the company when it comes to a point of exit -- all that data, and all that interconnectedness with customers. Superior ability to execute on IT is increasingly a success factor for cleantech entrepreneurs even when they don't think of their core business model as being at the point of convergence of IT and energy. We're going to see this play out in non-energy sectors of cleantech as well (water, food, etc.).

4. Momentum matters

This is venture capital 101. Momentum, or at least the perception thereof, is what modern venture capital is all about. It drives venture capital fundraising, it drives customer interest and zero-cost PR, it drives corporate interest, and it drives Wall Street interest.

The good news is that, from my vantage point, I see an increasing number of cleantech startups with such momentum. Some don't call themselves "cleantech" because they don't want to even raise the question, but they're companies that I would broadly consider within my mandate as an investor in this sector. Some are just kick-butt cleantech startups proudly claiming the moniker. But the labeling really doesn't matter. What I'm seeing is a lot of really strong growth out there.

I do think, however, that many of those growing companies are starving themselves of perceived momentum because they're underinvesting in marketing and awareness campaigns. This is especially true when they don't have high-profile investors lending them a halo effect. I know several cleantech startups now generating tens of millions of dollars in revenue that don't get nearly the attention from business journalists that the latest pre-revenue social networking app gets. And that, unfortunately, does have business and valuation impacts.

I know many entrepreneurs in this sector are being prudently cautious about spending money on PR and marketing given the lingering fundraising challenges and the need to prioritize where constrained capital is spent. But for those who are indeed growing quickly already, it might be time to spend a bit more on making sure everyone knows about it. This continues to be an underreported sector, and the headlines won't come to those who don't ask for them.

5. Start small, think big

There continues to be a false dichotomy in the minds of many investors and entrepreneurs around the magnitude of an idea. Is reinventing the residential thermostat "big enough"? Is building an electric sports car for high net worths "big enough"?

It's not where you start, it's where you end up.

Starting small can be pragmatic, it can focus early efforts, it can reduce capital needs, it can enable early market penetration into "unsexy" or "unscalable" market niches that are otherwise relatively ignored. It can help establish that all-important early momentum. These big successes started with small immediate targets.

But if you think these entrepreneurs ever set their sights low, that's wrong too. Great outcomes require great aspirations. So I guess the lesson here is that these early wins show that in this sector, entrepreneurs with huge dreams should be open to starting small, as long as they have a plan for how to build very quickly upon those early pragmatic efforts. Starting small can be a springboard, if done correctly.

Anyways, those are some of the lessons I'm taking away from these early successes. Others will draw their own lessons as well. We're all still learning how to develop replicable models of success in this sector, but it feels like we're closer than ever to being able to show what they look like.

Cleantech Investing: 10 Predictions for 2014

Rob Day: January 13, 2014, 2:55 PM

The sun is shining, the Boston snow is mostly melted away, and dilettante "news" programs have moved away from talking about cleantech to talking about doping in baseball. And my 2013 predictions weren't so bad for once (although still not great). So why not throw some 2014 predictions out there?

Overall, I'm expecting the rebound in the sector to start to become more apparent. The next wave of investors and entrepreneurs should start to see some concrete results out of their efforts, and with luck, the overall economy will continue to revive, which would help our sector (and all other sectors). So that's the context for the following predictions (and I'll note once again -- my track record isn't great with such predictions, so don't rely upon them for your own investment activities, naturally).


1. 2014 will be a slight "up year" for for both deal counts and dollars, in terms of U.S. cleantech venture deals.

2013 was essentially flat in terms of deal count, and down in terms of dollars. But I'm expecting a slight rebound in 2014. There are more active corporate investors interested in the sector (at least as broadly defined, and often unlabeled as "cleantech"), and a growing sense among generalist VCs that it's okay to make smart bets in the sector -- as long as you don't describe or rationalize them as "cleantech." And with some new success stories to point to out of the sector, that tends to bring back the interested investors. Anecdotally, I'm seeing more growth-stage investors interested in the growing number of revenue-stage startups out there (so that'll drive the dollars), and more early-stage investors with strategies that overlap with the natural-resource-scarcity investment thesis.

That said, LPs still aren't streaming back into the sector, so the rebound can't be too strong. If LPs don't give VCs dollars to invest, the VCs can't invest. So that's why it probably won't be any better than a slightly up year.

Once again, I'm only referring to U.S. tracked deals. I still find the deal tallies outside of the U.S. to be particularly squirrelly, and there are always other factors at work that make it impossible for me to guess what's going to happen in various other regions.


2. 2014 will show signs of a rebound in cleantech private equity LP activities.

This is a tough stat to track. VC fundraisings aren't well reported, and it's tough to categorize who's a "cleantech" VC these days anyway.

That said, there are some resources out there, such as this special report by Preqin from a year ago (PDF). And it wasn't a pretty picture at that point in time, with both fund closings and dollar amounts way down in 2012. I expect when and if we see similar figures for 2013, it'll be much of the same.

But I think there are too many reasons for certain types of LPs to want to tap into the macro thesis here, and too many emerging signs of successful GP strategies, for the LPs to remain so sidelined for a third year in a row. The 5 trillion dollars sitting in sovereign wealth funds will want some exposure to resource innovations. Family offices and high net worths and corporates continue to be very interested in the long-term cleantech opportunity. And while the word has been out until now about a "cleantech crash," I fundamentally believe that such thinking is increasingly stale. It won't be an opening of the floodgates. But I'm expecting a slightly better fundraising environment for cleantech VCs in 2014 -- although they may not label themselves as such.


3. We will start seeing even the most stalwart defenders of "cleantech" migrating away from the phrase.

I've alluded to it a couple of times above, and it's already obvious: "cleantech" as a label is increasingly out of favor. The shame of it is that there's no readily apparent replacement. But to too many people (see: 60 Minutes) the "cleantech" label basically just means solar panels and biofuels and electric vehicles.

"Cleantech" has best described not one sector, but an overall investment thesis based upon more efficient use of a wide variety of natural resources. What's going on right now is a clear broadening of the sector to the point where trying to apply just one label can feel overly constraining. It's why some proponents of "cleantech" can claim with a straight face that it includes a multitude of LOHAS (lifestyles of health and sustainability) and cleanweb (i.e., sharing-economy apps) deals, even while many entrepreneurs in those sectors would be shocked to hear themselves described as "cleantech." I've seen Waze claimed as a "cleantech success story," for example, but I would be very surprised if the founders, investors and acquirers of the company ever publicly described it as such.

At my firm, we increasingly describe ourselves as being in the business of "resource innovation." I've seen dozens of different such phrases out there being used by my peers in the investment community. In fact, as "cleantech" remains a bit of a toxic phrase in some circles, there's an imperative for investors to want to clearly differentiate themselves from some of the visible failures of the past by coming up with some other way of describing their focus areas.

I don't expect we'll see this coalesce into one single favored phrase. In fact, this branding confusion is in one way a very healthy indicator of both a) a necessary broadening of the areas where we all invest; and therefore b) an even stronger blurring of the lines between this sector and other tech investment sectors.

A couple of years ago, it was popular to predict that "cleantech" was going to make itself irrelevant as a phrase because of successes, where these approaches would just become integral to other sectors. After all, it's just an investment thesis that intersects with all these other sectors. Well, whether because of success or simply to get that bad Solyndra taste out of the mouths of the uninformed, it's probably time.


4. 2014 will be "the year of large format electricity storage" but...

I was way off with my prediction last year that we would start to see some visible flame-outs in the big batteries sector.

Basically, I was seeing solar panel manufacturing redux in the wave of credible -- but ultimately substitutable -- high-cash-burn storage startups that were getting ready to come to the market. I still see that. Big batteries are now being commercialized across a wide range of approaches, from chemistry-based to gravity-based to kinetic-based to...well, you name it. And they're all still ultimately competing with natural-gas-based peaker plants, and demand response and ancillary services (after all, the cheapest way to meet peak power demand is simply to reduce it, instead of expensively making and then storing the power). That is just an awful lot of substitutionality which speaks to some strong commoditization looming.

That said, the wind is definitely at the back of this sector right now. I continue to speak with many investors who see the potential for valuable tech breakthroughs, Bill Gates can't stop writing checks into the sector, and the California regulatory support for initial rollouts is justifiably boosting the spirits (and in some cases, the early revenues) of many entrepreneurs. I have a hard time believing this momentum will wane in 2014. In fact, as some of these very credible efforts start bragging about their initial sales and installations, and if Bloom can ever IPO, it'll seem like the hottest subsector around.

But -- I still believe in that looming wave of commoditization, which doesn't tend to treat capital-intensive startups well. So I'm expecting a great year for the subsector in 2014. Beyond that, I'm holding my breath.


5. This will be a significant up year for exits, both IPOs and M&A.

A lot of startups in the sector have quietly grown to revenue levels that make them credible acquisition and even IPO candidates. The IPO window is open at the moment (only a crack, for now), and stock prices are on the rise. Large corporates have never been more serious about these innovations, and the range of such corporates has broadened a lot as well. This should be a year for putting some runs up on the board.

But how to define it? After all, 2011 and 2012 weren't bad years for M&A, at least as tracked by the Cleantech Group, with "total deal count" and "total value" both much higher than in, say, 2007 before the Great Recession hit. But would any of us really point to the past few years as being great for exits? I, for one, wouldn't. So I think there are some methodological challenges in defining what a great year for exits is.

So I'll go out on a limb and get overly specific (an approach which never seems to serve me well in these annual predictions, but oh well), and predict that 1) disclosed (not total) VC-backed cleantech M&A will go up more than a third, to get above 40; 2) disclosed value of those deals will grow above $8 billion; and 3) IPOs of VC/PE backed companies in cleantech sectors will go back above twenty, and total raised proceeds will go above $3 billion. That's strong enough growth in all three areas that, if met, it should overwhelm any methodological challenges and show strong exit trends for the year.


6. Some Democrats in the U.S. Senate will get vocal about climate policy, but nothing significant will result in 2014.

Forecasting little forward progress in federal climate policy in 2013 was a really easy prediction. This one probably is as well.

Some Senate Dems have apparently gotten buy-in from Reid to get more vocal about climate policy again, and perhaps to push forward some legislative proposals. We all know they won't go anywhere.

Speaking only for myself, I'm glad for any federal lawmaker who talks loudly about the need for progress here. It's too important to let another year just go by with radio silence from Capitol Hill, with the implied lack of any momentum at all. That said, having Senate Dems flap their gums about this issue without seriously engaging any emerging conservative-born policy solutions seems like a recipe for more partisanship on climate policy, rather than really moving the ball forward. Even if it's to ultimately not propose any legislation in the "silly season" that is an even-numbered year in American politics, it would be much more promising to see these Senate Dems proactively engage with proposals from the likes of E&EI for carbon tax shifts. I'm not arguing for Dems to just buy into someone else's policy agenda, or vice versa. Just suggesting that vocally highlighting the issue while also visibly engaging with the (admittedly still very few) voices on the other side of the aisle also calling for policy solutions would set up a serious policy development effort a lot sooner than just talking about it as a partisan issue would. Let's regain that sense of inevitability, rather than build more entrenched, polarized positions.

Many will disagree with me. Whatever. My prediction stands: there will be increased talk but still no real progress, at least legislatively. And I also remain unconvinced this is really a priority issue for the White House. So another nothingburger of a year in terms of federal climate policy. State-level policies, however, might be a different story once again.


7. Meanwhile, the decentralized solar boom will continue.

Installed system costs keep falling (even as panel prices rebound a bit), the policy environment doesn't look to shift significantly in 2014, and third-party capital has figured out how to scale up financing for these distributed assets. The market looks great for another year. New models like community solar will provide more impetus for continuing to expand the market as well.


8. The lessons learned in financing distributed solar will be applied to energy efficiency project finance, which will see a breakthrough year.

There are just a ton of efforts out there right now, trying to figure out how to scale up energy efficiency project finance. Third party capital is still on the sidelines, for the most part, waiting to see what those scalable models look like as specifically applied to building energy efficiency projects instead of rooftop solar.

I think a couple of these efforts will break through in 2014. I see emerging M&V and origination platforms coming together. Early sources of capital (similar to the role US Bank played in third-party solar) will engage with such platforms. Consultants, contractors and equipment vendors will be increasingly interested in utilizing such platforms. The necessary pieces of the puzzle are engaged and actively getting early efforts underway. It should be a great year to be in EE project finance.

There's an overall macrotrend around project financing for distributed assets that's part of the ongoing "next wave" in our sector. I expect energy efficiency to be the next such story, based around the level of activity I see there in particular.


9. The "Big Four" sectors in cleantech venture capital will total less than 50% of tracked venture dollars.

Historically, solar, energy efficiency, transportation and biofuels/biochem have dominated the cleantech sector's investment activity, at least in aggregate. It's been a decidedly energy-focused bunch of investors up until now. I think this will be the first year when those four categories add up to less than 50% of tracked venture dollars.

As mentioned above, sectoral definitions have broadened and become more vague/overlapping. And I see a lot of my investor peers in the sector spending a lot of time looking at areas like food, water, recycling and waste, etc. Already, in 2013, we saw the "Big Four" pushed down to around 57% of the dollars tracked by the Cleantech Group, and that's including some big shifts within subsectors, such as the shift within solar to business model innovations downstream instead of hardware manufacturing, and the shift toward cleanweb plays within the "transportation" category. These shifts will continue.

10. I'm soon going to owe some joke bet to my Seattle-based friends at Powerit Solutions.

Yep, staying far away from making any predictions about D.C. sports teams this year. But here's a sports prediction anyway: Seattle over New England in the Super Bowl, in an easy win. Charles Barkley is right, New England friends: "Y'all take the winning for granted." Well, enjoy one last Peyton Manning choke-fest while you can. Seattle looks unbeatable. But I'm sure I'll get sucked into a Boston vs. Seattle bet anyway, if it comes to that.


Have a great 2014, everyone!

Looking Back at 2013’s Cleantech Investing Predictions

Rob Day: January 8, 2014, 10:36 PM

It's that time again! Time to look back on my predictions from a year ago and see how the year turned out. It's also a good excuse to take our minds off that horrible 60 Minutes "news" story from this past week.

Whatever. The cleantech revolution may not be televised, but it's already powering your TV.

Anyway, here are the predictions and how they turned out.


1. U.S. cleantech deal counts will be flat in 2013 (within 10% plus or minus) of 2012 levels, and dollar amounts will be down.

Hey, nailed one! Even a stopped watch is right twice a day, I guess.

My reasoning at the time was simple. LPs weren't jumping back into the sector, so VCs didn't have more capital to put to work. That said, the numbers for 2012 were already down, so it seemed unlikely they would fall further in terms of deal counts, while dollar amounts would probably continue to go down as bigger deals fell out of favor.

And as it turned out, deal counts were flat in the U.S. (638 in 2013, vs. 644 in 2012) according to the Cleantech Group. And as it turned out, dollar amounts did fall, from $5.7B down to $4.3B.

Interestingly, however, I've seen other tallies that show a significant decline in both deals and dollar amounts. But these were energy-specific counts. I think what we saw in 2013 was the beginning of the real convergence of "cleantech" with other sectors (especially web/IT), and shifts within the "cleantech" category from energy into other areas. And that all plays havoc with the various tallies, since definitions of "cleantech" continue to vary widely. One thing is clear, however: A couple of the more popular subsectors from a few years past (e.g., upstream solar, biofuels production) are now very much out of favor. And if that's your image of what "cleantech" is at this point, then you probably think 60 Minutes did a good job this past Sunday.


2. Agriculture-related investments will be the next "new new thing" area for venture investments.

I'm going to give myself partial credit on this one. As I explained, everyone already saw cleanweb as an exciting new area, but meanwhile, I was hearing a lot about agriculture from VCs, but not seeing it talked about much by cleantech journalists and others.

Well, agriculture-related venture investments did rise, from 68 in 2012 to 82 in 2013, according to the Cleantech Group, which described agriculture as "trending." But it wasn't a massive shift, and there were certainly hotter subsectors. So perhaps I was a bit early, but regardless, I can't give myself full credit for this one.


3. There will be a wave of consolidation and shakeout in solar financing.

Being early looks an awful lot like being wrong. There has certainly been some vertical consolidation, but not the horizontal consolidation I expected. I still expect that the multiple financing platforms out there will have to combine efforts, and now, as some are increasingly well capitalized, they should be in a better position to do so. But it didn't happen in 2013.


4. Large corporates will continue to play a vital role in keeping cleantech entrepreneurship vibrant -- but there will be a shift from oil/chemicals to consumer products, IT and industrial equipment/controls strategics, in terms of level of activity.

This definitely happened. And especially at the intersection of IT and cleantech (be that web + data + efficiency, or industrial controls + energy), we saw a lot more seriousness in applications relevant to the sector -- although I'm not sure these corporations would ever say they were interested in "cleantech," just the specific applications of interest to them. Regardless, it was a big year for corporates stepping into the sector with clear strategic intent, for M&A and venture investments and partnerships. I expect this trend to continue.


5. There will be no significant progress on U.S. federal energy policy.

This one was a short putt to begin with.


6. 2013 will be the year journalists (and thus everyone else) figures out that U.S. cleantech entrepreneurship has become driven as much by family offices and other non-VCs as by VCs themselves.

Again, being early looks an awful lot like being wrong. I'm starting to see some hints of this dawning realization, but just hints.


7. Large-format (e.g., stationary) energy storage will be the next sector to see multiple high-profile flameouts.

Being early looks an awful lot like being wrong yet again. And right now, with big batteries all the rage, it looks very wrong. I still think this looks a lot like upstream solar panel manufacturing did, and we should expect a serious price commoditization wave sooner rather than later. But boy howdy, that didn't take place in 2013, which was actually a really positive year for the subsector.


8. At least two well-known cleantech-focused venture capital firms will publicly shut their doors or at least acknowledge they won't be raising any future funds.

Why did I make a point of saying "publicly"? No one ever does such things publicly. We saw several cleantech-focused firms, and cleantech-focused teams at generalist firms, effectively shut their doors and shed their teams. But not many would make a big point of announcing it, now would they? Dumb prediction.


9. Natural gas prices in the U.S. will spike at least 50% at some point during the year.

Note that I wasn't talking about an end to the current period of low-cost gas. Just pointing out that demand spikes and limited storage often means price spikes in this industry.

During the year, prices rose from $3.30 a therm up to $4.52. Which is a 37% jump, not 50%. Oh well.


10. The Redskins will make it at least to the NFC semifinals round of the 2013-2014 season.

Wow. I mean... wow. Was this the jinx of all time, or what?

I'll post some 2014 predictions in a few days. And they will not include any predictions about any D.C. sports teams doing well next season. Yikes.