Greentech Media: Cleantech Investing

The Boston Cleanweb Hackathon Rocked

• I was absolutely blown away by how creative and productive the hackers were at this weekend's cleanweb hackathon here in Boston.

  As a recap: Around 15 teams of programmers and other hackers came together at Greentown Labs to spend 30 or so hours creating new cleantech-related web and mobile apps from scratch. Most came in with ideas in mind, of course, but they had to write fresh code to compete. Many worked through the night Saturday, and then, bleary-eyed and over-caffeinated, they presented their work on Sunday afternoon to a panel of entrepreneur and investor judges. They were all scored on the categories of Impact, Originality, User Experience, and Completeness.

  I frankly wasn't expecting much, given such a short amount of time available to the teams. And yes, some were necessarily just a mock-up and some teams got a bit tongue-tied in their presentations. But overall, it was an amazing showing by all these teams -- one of those events where you can only have three winners and you wish prizes could be awarded to a lot more teams than that.

  The competitors included:

  • A mapping program tied to available wind turbine sound data and wind level data to help smaller developers estimate the sound levels over ambient from a wind turbine at a particular site
  • A mobile app to allow green-minded travelers to easily find green-rated hotels and restaurants
  • A site where registered viewers can review political ads (and this year, energy will play a big role in that) and vote on whether a claim is a lie or the truth
  • A cool presentation of available data on fracking activity matched with water data
  • A remote diagnostic and energy optimization tool for greenhouses
  • A couple of tools for helping homeowners identify energy-saving appliances
  • A tool for helping energy auditors more easily look up the energy consumption of devices they inventory in a building

  There was also a host of other entries. As you can see, there was a wide range of topics, speaking to the breadth of clean IT opportunities.

  For me, what was striking was how far these teams were able to push their ideas in only a short amount of time. Yes, this is totally an apples-to-oranges comparison, but some of these teams were able to push their ideas to more customer-ready results in 30 hours than many more science-based cleantech startups are able to tangibly demonstrate in 30 months. That's not to diminish the more hardcore scientific efforts out there at all, but it does speak to how powerful the combination of cleantech and IT can be in some ways.

  In any case, the winners came up with some fun stuff:

  Third place went to a team from Divya Energy that is developing an online comparison shopping calculator for residential solar customers.

  Second place went to a car-sharing app ("Ride With Me") that creatively included a customer loyalty program to entice repeat users.

  First place went to a team from WegoWise for their very fun, very clever way of bringing better visualization and competitiveness to get homeowners to focus on energy usage. Using Green Button data, your house's stats are randomly matched up against another user's house, and then you duke it out -- with awesome 1990s-esque video game graphics. "Michael Tyson's Punch House" was also voted the crowd favorite. You can see the happy team, plus a couple of the volunteers who made the whole event happen, in the obligatory "giant check" picture below.

  

  

  Speaking of which, many thanks to the great team of volunteers for making this terrific event happen, mostly from scratch. I can't name them all (but will list some of their Twitter handles below; please follow them), but want to particularly call out Matt Liebhold (currently independent) and Jason Hanna (Coincident). Based on the scrappy execution they demonstrated in pulling this off and bringing the community together like this, you could do worse than to get to know them and work with them in some way. Yes, consider this a recommendation.

  Others to thank / follow: @blakestar, @greentownlabs, @tallmatt, @matthewnordan, @markvasu, @fyietc, @dkarmano, @emilylreichert, and @CleanSuchi (if I missed any of you, ping me and I'll gladly add you in).

  These cleanweb hackathons are getting rolled out all over, apparently, so find one near you and check it out. Not only was it a lot of fun to watch, it inspired a lot of ideas for directions I'd like to take with my Lightzy.com experiment, if I can enlist some more expert help. Here's to the next one in Boston!

  

Greentech Policy: Back to the Drawing Board

• It's clearly political silly season yet again, and we can all expect that the rhetoric will continue to be dog-gone bad. We can also tell, unfortunately, that federal clean energy policy will be a lightning rod for a lot of that mendacious rhetoric this year. So I don't expect anything significantly good or bad to happen this year on a federal energy policy front. Just lots of shouting and lies, and maybe some small token legislative actions.

  So it seems like a good time to step back and reflect on the choices the cleantech sector has made, in terms of how we position ourselves with regard to policy. Thus, I've come up with four basic questions I think everyone should be asking themselves right now. These aren't rhetorical questions -- these are intended to prompt discussion. The first two questions are kind of complementary to one another. The final two questions are, at least on the surface, in conflict with each other. Do with this what you will.

   

  1. WHAT IF WE'VE BEEN TOO FOCUSED ON OURSELVES?

  The argument we've made as a sector so far goes like this: Clean technologies (or green technologies or advanced energy or whatever the heck is the latest punchless label du jour) are going to be big in the future, so clean technologists should be considered vital for America's economic future. Thus, governments (federal and state) need to support them at this nascent stage of development.

  I agree with this statement. But is the phrasing and perspective the right way to go about it?

  Critical question: Why should the 99% of Americans not directly involved in clean technologies care about any of the above? Because of somewhat vague and distant arguments about future climate change and future economic leadership? Perhaps that's not really compelling for most.

  But look at it this way: If we in the clean technology sector are successful, if we can bring everyday Americans solutions in their home and workplace that are economically compelling, what will that mean?

  Lower energy prices. Period.

  Cleantech leaders and our political allies keep talking about our own jobs, the "green jobs". But perhaps we should be focusing instead on what we can do for everyone else's jobs. 

  What would it mean if manufacturers in the U.S. had a near-zero marginal cost of energy input, because we (in a very targeted way) helped them get cheap distributed generation like solar, via capex or tax incentive support? It would mean a whole lot more manufacturing jobs, because our manufacturers would be more competitive. 

  What would it mean for commuters and small business owners if all these advanced biofuels manufacturers could succeed in bringing <$2/gallon gasoline substitutes to the American public? 

  What would it mean if homeowners had significantly lower energy bills, via better efficiency retrofit programs and easier solar financing?

  Beyond economic arguments, if we stopped being so focused on our own types of jobs, and started focusing our message on how our efforts put more money in the pockets of everyone else, it also becomes easier to bring arguments like energy independence into play. If we don't make it all about ourselves, for example, it's easier to see the domestic natgas revolution as an ally in bringing cheap domestic energy to the U.S. economy. Crystallizing our message in this less self-centered way also makes it easier to partner with others who can support the same message, even if they're not in 100% alignment with us on other things.

  Lobbyists don't get paid to serve the general public, I understand. Washington, D.C. doesn't work this way. But at least in how we frame the problem and our role in solving it, we in the cleantech sector might think about focusing less on what others can do for us, and more on what we can do for our country.

   

  2. WHAT IF WE'VE BEEN TOO FOCUSED ON PROMOTING PRODUCTION, AS OPPOSED TO PROMOTING DEMAND?

  I get it: VCs and other investors have mostly backed startups that are involved in the production of cleantech products. So when the industry lobbyists, backed by VCs and other investors, go to DC and ask for support, it ends up being an ask for support of production capacity and production-centric R&D. And certainly, there are cogent arguments to be made about how it's valuable to support the production capacity of strategic and nascent industries so that we don't get left behind in the race to dominate future markets.

  Is that the best way to attract political allies? To win general public support?

  Is that even the best way to build domestic markets and domestic production industries?

  It's certainly not the best way to grow generic "green jobs," if that's your ultimate goal. Jobs involved in the production of a commodity can be more easily automated and more easily exported. Downstream distribution and installation and service jobs are much harder to export, and the economic activities themselves are inherently more labor-intensive, and yet dollar-for-dollar result in even better energy- and carbon-savings results, anyway.

  It's certainly not the best way to avoid political backlash. Loan guarantees and state-level incentives given directly to cleantech manufacturers have, even if they've only rarely failed, quickly become political conflagrations, because they're easily characterized as handouts to very specific recipients. Meanwhile, ARRA block grants to promote energy efficiency retrofit demand have very quietly been a huge success, helping a lot of homeowners in communities across the country.

  And as important politically, if the investors drive the political ask to be supported for their production-oriented startups, that leaves a lot of the most likely allies among the traditional industries out in the cold. Yes, we saw positive rhetoric in support of clean energy policy from the CEOs of major utilities and capital equipment manufacturers. Well, I've seen how the lobbyists for some of those very same CEOs then quietly worked behind the scenes to gut clean energy legislation -- or at very least, didn't actively help. Why? Because they didn't really see how these policies would directly help their company's bottom line. 

  By focusing on production, we could very well end up sending mixed messages to Americans about how valuable we are to them. Solar is a prime example. The storyline right now is that the U.S. solar industry is in trouble, and along with the political scandals, mainstream journalists and most Americans asked would declare governments' support of the solar industry to have been a failure.

  In truth, it's been anything but. For the vast majority of Americans, the collapse of solar panel prices is a wonderful thing. The drop in ASPs, and supportive demand growth policies at the state level, have prompted the rise of a wave of innovation in solar financing that means a huge number of Americans can now get solar panels on their rooftop for zero or little money down, and get net savings on their total electricity bill. That is a wonderful outcome. Yes, individual panel manufacturers (and their investors, like me) have been very hurt, and probably unfairly so, by China's pumping of cheap capital into their domestic production capacity. But meanwhile, the end solar market in the U.S. is one of the fastest-growing sectors of the economy, there's significant job growth in installation and other supportive technologies, and homeowners are getting cheaper power.

  When we focus on production and how its been hurt by the booms and busts of capital cycles and political inconsistency, do we fail to make the more important point, namely, that the price declines are an inevitable result of the success of our efforts, and that this is a really, really good outcome for 99% of Americans? As a sector, we should be celebrating the collapse of solar panel prices, not lamenting it.

  The cleantech sector remains small and mostly populated by entrepreneurs who don't have a lot of cash to throw around on political donations -- as long as we define ourselves so narrowly, which focusing on ourselves, and especially on our production-oriented startups, really does. Perhaps it's time to place even more emphasis on demand-creation policies, and de-emphasize asking for policies that support production.

   

  3. WHAT IF WE'RE BEING TOO PURE?

  It's a simple fact: There is indeed an energy revolution going on in this country. And it's being driven by cheap natural gas, not by renewables.

  While certainly not universal, I continue to see many within the cleantech sector making political arguments based around aspirations of effectively zero carbon energy. It's the environmentalist side of the sector, as well as a reaction out of frustration that low natgas prices are lowering our price-competitiveness benchmarks.

  I'm an environmentalist who started my career at an environmental NGO. I've had a lifelong passion for these issues, and I know that those who work at environmental NGOs and foundations often don't get nearly as much credit as they deserve for taking low-paid, low-profile roles in their dedication to helping society and the planet. But I also know the environmental NGO community has always been fractious, territorial, at times ineffective politically, and generally not good at compromising in order to achieve a good outcome.

  The environmental community (and its foundation backers) has been the cleantech industry's best friend, among established political constituencies, and the one most relied upon to carry the water for the sector in the halls of Congress when it comes to specific legislation like cap and trade. But they haven't been a reliable ally. Nor should they be -- desert tortoises, etc. illustrate that the goals of an environmental NGO and the goals of a cleantech entrepreneur can't ALWAYS be in alignment. And that's as it should be. But when you rely upon an ally who often doesn't share your goals on specific issues, of course you won't be happy with the results.

  Furthermore, this alliance and this vocal dedication to a pure clean energy future alienates other potential allies, ones who are more powerful and also aligned with profit principles like we are. The purist positioning doesn't leave room for win-win relationships with more established and well-funded sectors' lobbyists. There've been some sporadic efforts made by some cleantech trade groups to reach out to the natgas community, for example, but I continue to see many people involved in the cleantech sector attack that industry and cheer every piece of bad PR it gets, so those outreach efforts go nowhere. 

  My argument isn't that cleantech entrepreneurs and investors should abandon our core principles or our aspirations to help the planet. Nor am I trying to take sides in any debate around natural gas regulations.

  But I'm asking if some more horse trading, and more strategic alliances with traditional energy players, might not help advance the goals of the cleantech industry net-net, versus the more purist stance that sometimes dominates our sector's political rhetoric. Again, remember that our sector is small, dwarfed in financial resources by the traditional players, and still learning how to effectively message our positions. I've now seen several specific projects by cleantech trade associations and similar groups to raise money for big PR campaigns, and they've all fallen flat, because our sector simply doesn't have the financial resources to support such efforts on our own. Within that context, can we afford to be pure, when it comes to the daily battles of policymaking?

   

  4. WHAT IF WE'RE NOT BEING PURE ENOUGH?

  Perhaps asking for realistic and incremental policy shifts hasn't done anything other than to politicize the issue and stonewall progress. Asking for small changes makes the same enemies just as mad as asking for big changes, after all. And short-term policy wins that engender long-term resentment may miss the bigger picture. 

  Most of the time when there has been a very significant policy shift in America, it has come about in one of two ways: either as a very rapid reaction to a very significant and disruptive event that forced immediate action, or as a result of many years of parallel exercise of all three levels of what John Gaventa calls "dimensions of power." To paraphrase:

  • First dimension: The ability to control a decision on a particular issue.
  • Second dimension: The ability to decide which issues are up for a decision.
  • Third dimension: The ability to affect the mindset and moral playing field upon which all these issues and decisions exist.

   

  A three-dimensional strategy has clearly been deployed, for example, to eventually create "critical political mass" in favor of small government and anti-tax perspectives, attitudes and policy in the U.S. And it relies upon really emphasizing the long-term strategy of that third dimension, as driven by repeated and insistent very purist pronouncements and aspirational mission-driven think-tank-type activity. If you win on the third dimension, you'll reliably win on the first two dimensions as a matter of course.

  The type of energy policy shift we need is indeed pretty significant. So according to this line of thinking, we can either hold our breath for that very significant and disruptive event (which I, for one, sure don't want to root for), or tackle this longer-term strategy.

  But if so, to be effective, it needs to be done with a consistent message. And audaciously. And without shame. And without compromise.

  Forget complicated cap-and-trade schemes designed to triangulate support from a sufficient number of constituencies to barely pass the Senate, with a lot of pragmatic horse trading involved. Instead, propose a very simple revenue-neutral, phased-in pollution (i.e., carbon) tax, described even more simply: "Make polluters pay, and send me the check." Something so simple in design that every cable news watcher can instantly understand it -- no more 1,400-page-long bills. Admit that it's going to fail to pass at the federal level. But make it a mission to get it passed wherever possible at the state and local level. Advocate passionately in the name of future generations and for our men and women in uniform. Enlist allies from the agricultural and tourism and re-insurance industries, and others directly affected by climate change. Pull no rhetorical punches. 

  This is not a strategy designed to "look clever" or make friends or (definitely not) to succeed in the near term. But it's designed to eventually completely change the terms of the debate. Can that work here? Can the cleantech sector survive long enough for such a long game to play out?

   

  Again, the above questions are just intended to prompt your thinking. Because it's time to rethink the sector's political positioning, in my opinion. This year, you'll see a lot of useless campaign rhetoric and a lot of rear-guard legislative battles trying to preserve one highly technical piece of policy or another. But if what we've seen so far is the best that this sector can do in terms of winning over the average American voter, and in terms of getting significant energy policy change to happen at the federal level, there's not a whole lot of room for optimism on this front. So let's take a step back and rethink all our political assumptions and strategies.

  

Some Thoughts on the Boston Cleanweb Hackathon

• Home Depot is terrible at selling LED light bulbs. Amazon is even worse.

  Have you had the experience yet of trying to buy LED bulbs at one of these places, realizing once you try the product at home that you hate: a) how it looks, b) how it fits; c) the light quality; or d) all of the above? And then you have to go through the trouble to take it or send it back for a refund. When you're paying $30 per bulb and making a 20-year purchase, these things kind of matter.

  I don't blame Home Depot or Amazon -- they're not really designed to be the places where people discover which new products are up to PAR (sorry, bad pun). But if they're not the answer, what is? Lighting distributors? They don't care about the individual homeowner.

  Seemed like a problem for the intertubes. So since, dork that I am, I was testing a lot of bulbs at home anyway, why not rate them and then put the results on a webpage? And thus, just for fun, I've started a new site called Lightzy. Check it out.

  I'm doing it more to learn and share learnings than anything else, and so it's thin. There's a lot more functionality I would want to add were I making a more serious effort to something like this. But I throw it out there as an example of the kind of real world (testing) + e-commerce (selling) types of solutions that haven't yet been done well in our markets, and yet that should be getting tackled more by entrepreneurs. With all of the new cleantech products available to end customers these days, there remain few effective channels, and instead there are 100-year old-calcified channels that often actively stand in the way of adoption, rather than enable it. The internet won't always be the answer and probably won't ever be a full solution to this physical challenge, but it seems like an opportunity ripe for internet entrepreneurs to do some cool stuff.

  And there are lots of other ways for internet and IT solutions to be deployed profitably and impactfully in energy, transportation, agricultural, etc., markets. We've talked about this before.

  But for these solutions to be launched, first web and IT techies and entrepreneurs need to get interested in these markets. And too often to date, any discussion of "cleantech" has been so skewed toward the MechE and ChemE, etc., world that there's been a real separation of the cleantech and web/IT entrepreneurial communities. It's almost as if a major part of the solution has been pushed away.

  This is fixable. So I watched with great interest from afar the first, very successful SF "cleanweb hackathon." And then attended the next such event, in NYC, and found it very impressive. Now the whole idea is taking off, and this weekend we're having Boston's first Cleanweb Hackathon. Should be a lot of fun.

  If you know someone you think would want to take part, send this to them and tell them to sign up.

  If this event is anything like the one I went to in NYC, I expect to find a good crowd of developers and designers, etc., with a passion for energy and environmental issues and who are seeking an outlet for them. What I hope they get out of the experience is an understanding of just how much these markets, being so far behind the times, are wide-open spaces for entrepreneurs like them to find something fun and productive to tackle. We need their entrepreneurial energy in this sector, but more importantly, we need their ideas. I'm looking forward to seeing some of them. I'm hoping some of them even turn into actual entrepreneurial efforts that we can then help get launched and funded via the Cleantech Open.

  Because it's time to blow up these outdated markets. And no one is better positioned to do so than good, solid web and IT entrepreneurs, in my opinion. It'll need to be done with depth and seriousness -- not just with a website about light bulbs, after all, but something more substantive -- but the best way to kick off any serious brainstorming is to have a little fun. See you there.

  

How to Interpret Q1 Greentech VC Numbers

• Over the past couple of weeks, various deal-trackers have come out with their Q1 tallies for cleantech venture capital dealflow, and it's a bit confusing this time around.

  The Cleantech Group came out with its totals (see the great slide deck here), showing that Q1 saw an increase in the number of cleantech deals (from 176 in Q4 to 185), even as dollar amounts went down. Interestingly, they talk up a rebound in early stage (Seed + A) investing, as well.

  DowJones Venture Source has a pretty different number reported in the overall tally reported today, showing energy deal counts drop from 30 in 1Q11 to 29 in 1Q12, of which 23 were in renewables. This isn't from the helpful special cleantech tally it always does, but that hasn't been seen yet, so it's just an incomplete data point to include for context.

  CB Insights also released its tally of deals, and it showed a different picture -- not only did dollars fall, as shown as well by the Cleantech Group, but further, deal counts fell from 69 in Q4 down to 56 in Q1. CB Insights also shows a significant decline in the number of early-stage deals in the sector, with Seed and Series A deals together falling from 40% of the overall count in Q4, to 17% of the overall deal count in Q1.

  What's going on?

  I always like to think about this kind of disparity in terms of three factors: geographic differences, definitional differences (i.e., inclusiveness), and thoroughness.

  Geographically speaking, a closer look at the Cleantech Group numbers is a bit revealing, in that the topline numbers above were global. In its North American tally the deal count actually went slightly down -- 118 to 116 -- from Q4.  Cleantech Group doesn't break down that region from an early stage vs. late stage perspective in this deck, unfortunately. But we can at least start to rationalize between the Cleantech Group perspective and the CB Insights perspective, in that part of the upward trend that the Cleantech Group saw was actually in other regions, like Europe and Israel.

  There's still a big difference between the Cleantech Group's 116 total counted deals in North America, and CB Insights' 56 total counted deals in the U.S. And I strongly doubt that's because of Canadian deals. Also, there's still the matter of the CB Insights tally showing a significant decline, while the region-specific Cleantech Group tally was pretty flat.

  Definitional differences could play a very large role here.  Looking into the sectoral breakdowns within the Cleantech Group numbers, one trend they describe is the increased activity in non-energy subsectors. The company saw a nice uptick in water sector deals, for example. Meanwhile, the CB Insights presentation suggests the company perhaps has a narrower definition of "greentech," not calling out water for example, albeit with a big catch-all "other" category. And as well, remember that being named the Cleantech Group means that organization has an incentive to cast a wide net and include a lot of venture-backed companies that, within a broader survey covering multiple sectors, might reasonably be put into other tech categories instead. The Cleantech Group might also have definitional differences around a "venture capital" round, as well. It wouldn't be surprising to see the Cleantech Group have a looser definition of what types of financings to include, again, because it's the company's mission to be inclusive.

  In terms of thoroughness, it's always impossible without going deal by deal to truly figure out if one of these professional organizations is just flat-out missing deals. But if CB Insights (the lower of the two totals) was really missing a lot of deals that the Cleantech Group was catching, you would expect CB Insights to miss more of the smaller (and thus less-reported) variety. Instead, looking at its tally of dollars ($763M) in greentech venture deals in the quarter, versus the Cleantech Group's $1.3B total for North America, it would have really needed to have completely whiffed on some really big deals if lack of thoroughness was the reason for the deal count difference. Most likely, the differences are due to the methodological differences described above. As for me, I think highly of both groups' efforts, having tracked their processes over the past couple of years.

  So: what do we conclude, meshing these perspectives? It looks like the first quarters saw venture capitalists shifting their focus a bit outside of the popular subsectors of cleantech (solar, energy efficiency, energy storage), and into subsectors that haven't gotten as much attention -- and that sometimes aren't even considered "cleantech" by some definitions. And maybe, an expansion of "non-VC" financings, counted by one group but not the other.

  If so, those are really healthy shifts, in my opinion.

  Unfortunately, we have less clarity around the idea of early stage investments making a rebound. While perhaps the same definitional differences are at work here, it's just too tough to parse that out. And if CB Insights is right and early-stage greentech took another step back, that's not good. Early stage is the lifeblood of the industry, because they are tomorrow's follow-ons, and also it's an indication of investors putting new money into the sector instead of just defending earlier bets.

  Here's hoping the Cleantech Group's perspective on this question -- that early stage is rebounding -- is the more representative one.

  

An Experiment

• Regular readers of this column will know that I often describe non-tech entrepreneurial efforts, like channel disruption and implementation services, as crucial to the next phase of development of the cleantech market. We still need technical innovation, of course, but it's not the limiting factor in this market right now -- actual implementations are. There are now lots of commercially viable, economically sustainable clean technology solutions available for customers, but we need to see buyers start to adopt and implement them. 

  Regular readers of this column will also know that I believe VCs have not yet done a great job of tackling this other type of business opportunity, at least in the cleantech sector. "The Next Great Patent" success story is still the typical cleantech venture capitalist's goal, often for good reason, and it's still what most people think about when the term "cleantech" is mentioned. So there's an unmet need to help out the unrecognized entrepreneurs out there who are taking on this big implementation and market shift challenge.

  Finally, regular followers of me on Twitter will know that I've been a big supporter of the Cleantech Open, both as a national board member, and as regional chairman of the Northeast program. It's a great accelerator program that every year helps dozens of emerging entrepreneurs get training, perspective, connections and visibility -- and it's also proven to be a great networking platform for more senior members of the cleantech entrepreneurial and investor community as well.

  This year, in the northeast region, we're going to try an experiment, tying all of the above together.

  We're still going to work with cleantech VCs and the entrepreneurs who want to meet them, of course -- that's been a primary historical aspect of the Open over the years, with Alumni companies having raised over $660M in venture funding to date. Speaking as a VC, it's been a great program to be a part of, quite valuable for the likes of me. For example, this year the national organization has been selected to manage NASA's Night Rover Challenge, and each year we run a Global Ideas Competition, just a couple of examples of how the Cleantech Open has become a great way for technical innovators to help take their ideas to the next level.

  But this year, in the Northeast region, we're going to additionally target helping those entrepreneurs who don't see themselves as necessarily being a fit for the venture capital model.

  This means that we're going to specifically recruit and highlight the best new "implementation-oriented" business in the region. We're going to change our training program to better suit the needs of these entrepreneurs, too, bringing in additional perspectives and making sure to address the different types of financing these entrepreneurs should be targeting. And we're going to bring in more angels, family office investors and corporate members of the cleantech community here in the Northeast, as mentors and judges.  

  There are lots of opportunities out there for engineering students to get advice on how to spin out technical inventions from a university lab and get venture funding. I'm a big fan of all that, and we'll continue to work hard to help those emerging entrepreneurs too, since we've seen great results doing so. But we also haven't seen enough community support, training, connections, visibility, etc. dedicated to helping the other entrepreneurs who are launching businesses that will eventually implement those inventions -- installing solar panels, doing energy efficiency retrofits, building anaerobic digestion projects, launching LED lighting distribution businesses, etc. So this year we're going to build additional features into our program try to start addressing that gap as well. 

  If you're an entrepreneur in the Northeast and this sounds like you, and it sounds like we could help, think about applying. This is one of the most effective nonprofits I've ever been involved in, and it's the centerpiece of a vibrant cleantech entrepreneurial community. We'd love to have you join us.

  

Sovereign Wealth Funds and Large Pension Funds: Stymied by Greentech VC

• Some very, very large check-writers have been getting bigger and more interested in private equity investments. Sovereign wealth funds and large pension funds don't get a lot of attention, but they're huge players in the investment world. And as I've been speaking with several members of that community, two points have come through fairly clearly: 1) many (especially those outside the U.S.) are interested in doing direct investments in the cleantech space, broadly defined; and 2) they feel stymied in trying to do so.

  They are interested in investing in cleantech markets for the same reason you are, Gentle Reader: because the macro trends are too obvious on a global scale to not eventually result in massive market shifts and the emergence of significant new profit pools.

  But when it comes to cleantech venture investments, they're largely sitting on the sidelines. Why?

  First, check size. Talking with these investors, even in their direct investments, they need to write really large checks compared to what most VCs are used to.  A $50M check can be perceived as too small of a bet to bother with. And so that significantly limits the universe of types of "venture" deals they can invest in.

  In other sectors, however, they can dabble in very-late-stage deals where the exit path is obvious and near-term (the so-called "venture rounds" into companies like Facebook at super-high valuations, for example). But of course, in the cleantech sector we haven't seen any of these. Sure, there have been some IPOs, but no obvious blockbusters. So their direct venture investments are flowing into sectors other than cleantech right now.

  These large investors also have a hard time getting involved in cleantech venture capital as LPs for largely the same reason. You'd think venture firms would love a $50M allocation from an LP, but many of these LPs have restrictions about being more than 10% to 20% of a fund, as well as about participating in the first close of a fund. Which means, therefore, that they need to be targeting funds that will be several hundred million dollars in size and get to a sizeable first close without them. But that's hard to find among cleantech specialist VCs right now.  And as well, it's not like the existing returns from cleantech GPs have been very impressive to date. So rather than desperately finding ways to squeeze an allocation into a cleantech specialist VC's newest, smallish fund, interested SWFs and large pension funds are instead settling for the cleantech activities of the generalist VCs (those with really big brand names) they've backed. 

  One other path would be for these funds to get into project finance investments. Some are, but that's also not easy. First of all, it's likely a different team and different mandate within that investor's organization. Second, there aren't a lot of large-scale cleantech-specialist project finance firms out there, either. So the same problem with cleantech venture capital presents itself: back lesser-branded developers' projects, or go with the traditional energy project finance firms that aren't making renewables central to their activities? And third and perhaps most important, the types of cleantech sectors they can get into through these activities are very limited, usually consisting only of large-scale powergen and production facilities. There remain very few large-scale ways to play energy efficiency project finance, or green agriculture project finance, or even water-related project finance. 

  What all this means is that, as frustrating as it might be for entrepreneurs and specialist VCs, there are some really deep pools of capital that are interested in playing the cleantech investment thesis, but that are currently sitting on the sidelines. Which says there will be a threshold effect. We started to see what this might mean in the 2007-2008 timeframe when some of the higher-profile cleantech sectors got frothy and started getting some of these dollars. The cycle's down right now, but it will come back. And when that threshold gets breached, the capital inflows into this sector will explode. 

  It's not an 'if' -- but the 'when' remains very much unknown.

  

A Greentech VC Bridge Too Far?

• I've been talking with a lot of fellow cleantech investors lately, and we all commiserate about how busy we have been so far this year.

  I think this is tied to a couple of things. First, as of the beginning of the year, it seems like just about every startup hit the fundraising trail. And secondly, the sector is maturing, and so a much greater percentage of these startups are investable as compared to in the past: strong management teams, good revenue prospects, attractive markets, etc. So it's a really good problem to have as an investor, to be overwhelmed with intriguing dealflow. It's a good sign for the sector, and a sign that it's a great time to have capital to deploy as an investor.

  But what's curious is that a lot of investors I speak with have been more busy with existing portfolios than with incoming dealflow. It's interesting, because it feels like cleantech markets and startups are on an upswing. So it's not like the spring of 2009, when cleantech investors were more focused on their portfolios than on new deals out of necessity, since the world had basically come to a crashing halt. That was damage control and triage time.

  Instead, I think the universe of cleantech investors is seeing a lot of progress in its portfolios, which is good. But because of the lean times over the past couple of years, their portfolio companies also need an infusion of capital to keep growing. 

  And right now, new outside lead investors are still hard to come by. We're seeing progress among cleantech VCs in terms of their own fundraising and fund closings, which bodes well for later on. But for now, there remain few investors with significant new capital, and thus few doing many new investments in the sector, and meanwhile, LPs remain highly skeptical. 

  So cleantech VCs see promising signs out of portfolio companies, but they lack outside lead investors because few are available. And so they feel like they should continue to support their startups themselves. Why stop backing a company that's making progress?

  The problem is, many of these investors are themselves out of capital. And even for those with dry powder, there's a healthy reticence to do internal-only fundraisings where no outsider prices are around. So they do a smaller-than-needed bridge round instead, kicking the can down the road, putting a convertible note into a company in the expectation of a new, larger round of financing in the second half of the year. It's a pretty standard and appropriate decision for such circumstances, where the company needs more financing, has made progress since the last round, but would have trouble pricing a round at the current moment. A textbook decision, if such textbooks existed.

  But unfortunately, I just see a whole lot of these bridges going on right now. So while each one is an appropriate decision under the specific circumstances of each company, I do fear that in the aggregate there won't be nearly enough new lead investors in 2H12 to support so many bridges. Will these be bridges to nowhere? And what happens to these companies if the bridge doesn't lead to a new outside-led equity round?

  Entrepreneurs that have taken in bridges in the first quarter should be looking at their existing investors and developing backup plans. Figure out which existing investors have dry powder and think about what an insider-led round should look like as a Plan B. Still, outside pitches lead in 2H12 as Plan A, but be prepared for it to be a crowded market chasing few outside leads. And plan ahead, in tight coordination with those inside investors who aren't themselves tight on capital.

  And for companies and investors still thinking about doing a bridge financing intended to lead into a new outside-led financing in the second half of the year -- be careful. It's looking like the second half of the year will be better than the first half of the year, so hope for the best. But there's a possible capital supply and demand imbalance looming as well, so plan for the worst.

  

Guest Post: Capital Efficiency and M&A Opportunities

• Today's guest post comes from Oliver Guinness of Clearpoint Ventures. In recent posts, we've talked about the need for re-examination of various venture capital investment models and how they've been applied to the sector. Oliver and his colleagues' take on the sector is an interesting version of the old "evolution vs. revolution" debate. As such, I asked Oliver to write up their investment approach in his own words. Enjoy!

  ***

  When we launched Clearpoint Ventures a couple of years back, we used Steve Blank’s “Customer Development” methodology to come up with an alternative strategy for investing in cleantech. We knew the energy and building sectors were extremely different from those sectors venture investors were used to investing in, so a different approach was probably needed. The notion that you can go way upstream, find cutting-edge technologies and rapidly bring them to market in these sectors was, and continues to be, extremely challenging!

  We made two tenets core to our investment thesis:

  1.       Innovations in the energy and building sectors tend to be adopted in a more evolutionary than revolutionary way; and

  2.       Customers are generally seeking solutions, not just products or technologies.

  Of course, the first tenet isn’t in line with the focus of a typical venture strategy because it lacks the word “disruption” or “revolutionary” and the second speaks to more of a “consultative” approach, something VCs tend to avoid as well. However, despite this divergence from typical venture capital criteria, we felt enormous opportunities existed for a different approach, and we feel they are even bigger today.

  We call our strategy “Clean Economy” as opposed to “Cleantech,” and based upon our core tenets, it is decidedly focused on the lower-tech, service and IT-enabled service companies operating in and around alternative energy, energy efficiency/management, and green building. While this segment of companies has largely been underserved by investors, if you look at the portfolios of many of the traditional cleantech funds, you’ll likely find one, perhaps two “Clean Economy” companies in each of them. You’ll also realize: 1) they are the ones gaining traction faster; 2) they are achieving incremental industry change with disruptive business models, as opposed to disruptive technologies; 3) they tend to be more capital-efficient; and 4) they generally have or had M&A exit optionality. (This last point is the primary area of focus of this post, and another criterion incorporated in our Clean Economy strategy.)

  Some examples of what we would call Clean Economy companies include: SolarCity, Opower, Airbnb, Clean Power Finance, and OwnEnergy (one of ours). (Note: another term being used for a subset of these companies is “CleanWeb,” which refers specifically to those companies operating at the intersection of IT and cleantech -- those that use the cloud, software and big data to enable an innovative business model.) Clean Economy companies operate in smart grid, project development, efficiency, analytics, recycling, water, green building, finance, etc.

  So, why is capital efficiency and M&A optionality important? Well, we all know that the IPO window is erratic, that less than 8% of venture-backed companies IPO (Dow Jones), and that M&A exits generally dwarf IPOs, both in total dollars and numbers of deals (though if you’re able to IPO, multiples can indeed be much greater). However, the below graph and tables point to another interesting point: not only do most “cleantech” companies (those that are big tech or infrastructure companies) generally require more time and capital, very early on, they have valuations that limit M&A exit optionality. It's IPO or bust! That is problematic so long as the IPO market continues to act as it has, and I’m not sure anyone believes we’ll ever “Party like it's 1999” again. That said, many of the mega-sized cleantech funds have specifically targeted companies in which they can plow tens of millions of dollars in hopes of achieving multi-billion dollar valuations at exit -- to make their return numbers go around, out of necessity, and because they’re looking for, and trying to build, the “Google of cleantech.” Good for them I say; however, optionality is still critical to achieving liquidity when needed. Yet the valuations of those companies generally preclude them from exiting in the cleantech “M&A exit zone” because at their B or C round, they’re likely already priced out of that market and/or because they are still far from commercialization (something buyers tend to demand in the energy and building sectors, while in other industries like IT or pharma, buyers frequently purchase pre-revenue tech or biotech companies).

  As Matt Nordan of Venrock outlined in his “State of Cleantech Venture Capital 2011,” the average cleantech company that IPO’d raised $120 million pre-IPO over five rounds over eight to nine years. That’s capital-intensive! The graph below (data from CleanTech Group) shows how that $120 million stacks up against the average and median cleantech M&A exit.

  

  Sources: CleanTech Group; Matt Nordan – Venrock

   

  Also note the sectors of the latest cleantech IPO filings and the amount of additional capital being raised.

  

  Compare that with the list of the most active buyers of cleantech companies, and their sectors of focus:

  Source: CleanTech Group

  Finally, why is this ultimately important? Time and targeted returns! A 2X to 3X multiple over four to six years (average M&A exit) has the same IRR as a 7X to 8X multiple over nine years (average time to IPO) (Dow Jones). Thus, in my mind: Clean Economy strategy + M&A exit focus = opportunity for strong, comparable venture returns, with less tech and time risk, and of course, less capital. And the added benefit of optionality. You can still swing for that IPO fence if you want to take on more risk… and try and “Party like it's 1999.”

  (Note: You may be saying to yourself, 'But those big infrastructure companies require that kind of capital, and we need to fund them in order to change the way we generate and consume energy.' Well, the big venture funds will thankfully continue to work at it, but they need more collaboration from strategics, governments and other investors to succeed. I’ll leave that topic for someone else to tackle.)

  

Some Examples From the VC Front Lines

• In the last couple of posts we first looked over the past 15 years of cleantech venture capital, and then we looked at the various ways to generate VC-type returns in the sector -- and concluded that some of those models are being over-applied and others are being under-applied.

  Within the sector, I'm starting to see some investors who get this kind of thinking and are building new types of efforts accordingly.

  This harkens back to some of what I laid out a while back in my presentation "Cleantech Venture Capital in 2015," particularly the theme-driven builders and the "lean cleantech" players. We're now starting to see them emerge.

  Here are a few examples I've noticed and am tracking:

  1. Scott MacDonald and Whitney Rockley are two long-time veterans of the cleantech venture sector, and it appears they're launching a new effort they're calling McRock Capital.  And given their backgrounds, it's interesting to hear they're really focusing in on one particular area within the sector, which they're calling "Intelligent Infrastructure." Basically, the sensors and M2M communications to make things like the smart grid and such work effectively. They are focused on building companies that make existing assets in established industries smarter. It’s about smart data and smarter systems. They are taking advantage of the data tsunami that is already migrating into established industry. These companies are scalable and capital-light. These two both were investors in RuggedCom, which was one of the early success examples of this kind of opportunity, so it's interesting to see them doubling down and focusing on a particular theme like this. And, per the last column, you can see how such investments can become standards and enjoy some positive network externalities when they work well.  

  2. Spring Ventures, led by Sunil Paul and Nick Allen, have been championing a "cleanweb" trend recently. If you haven't seen Sunil's slides from SXSW, it's worth checking them out, although they lose something without his voiceover, I'm guessing. But the "cleanweb" concept is pretty interesting, in that many of its examples speak to the lack of good channels in cleantech and seek to address them. Some of the cleanweb examples out there are a bit too "webby" for me, but then again I'm a curmudgeon when it comes to such things, and I'm open to being wrong on that point. I admit, when I first heard of Zappos, I thought it was a terrible idea, for example, so I'm eager to see how this develops. Certainly the recent wave of "cleanweb hackathons" have impressively brought out a lot of entrepreneurial passion among the web crowd that needs to be brought into the cleantech sector, and we're looking forward to doing one here in Boston soon.  

  3. It sure seems like the cleantech investment universe is starting to shift towards a place where SJF Ventures has been for a while now.  The firm has been investing in tech-enabled services in the cleantech sector, and avoiding capital intensity and upstream techs. It turns out that SJF Ventures has been able to generate some pretty decent returns while doing so, even though it hasn't gotten nearly the attention heaped on the bigger-named investors who are throwing a lot more capital at the "next big patent."

  4. Among investors who are going to continue to invest in proprietary technologies at early stages, they'll need to have some kind of special access to innovations and a strong focus on capital efficiency, particularly during the early stages of their investments. Along these lines, I've really enjoyed getting to work with the Israel Cleantech Ventures team as an LP.  As specialists in Israel, they see everything in that innovation-rich region. And I've watched as the team has carefully cultivated their bets to help them get to critical proof points without requiring nearly as much capital as such efforts seem to require in other more heavily-invested regions. This is an example of theme-driven builders of a geographic type.

  Will these efforts succeed? I can't say. But I'm watching them all with interest, as efforts resembling some of the ways I expect the broader cleantech venture capital community to evolve over time.

  

The Six Ways to Create Venture Capital Returns in Cleantech

• In my last column, I rushed us through my take on 15 years of cleantech venture capital history. Because if we're going to look at the path forward, we need to understand how we got here in the first place. I would also refer everyone to Matthew Nordan's great four-part take on the state of cleantech venture capital from a little while back, particularly Part 2, where he argues that cleantech has performed at par with the overall venture capital category.

  To which I would say: nuts to that.

  It's not that I in any way wish to slight Matthew's smart analysis; it's a must-read. But if the conclusion is that cleantech has been at par with other sectors simply because on average it has returned capital? We can do better than that. As an asset category, venture capital is supposed to be out at the end of the risk-reward curve, and thus should generate outsized IRRs. But just how to do that in cleantech -- that's the as-yet-unanswered question.

  So what will generate big returns for any venture capital investment? Growth, obviously. And profitability. And a high earnings or revenues multiple at time of exit. And a timely exit at that. Pretty simple, right? Buy cheap, grow quickly, sell high. Except all of us investors have seen plenty of good business ideas that don't fit this profile. And we've also all invested in businesses that we thought would produce this, and didn't.

  Looking at the history of venture capital and when it has made exceptional returns, I will overgeneralize and argue that those periods saw investments in companies and products that had the following "success conditions":

  1. Low customer acquisition cost. 

  2. Each new customer makes the overall offering even more valuable -- the so-called "virtuous cycle."

  3. High margins.

  These are all connected, and are tied to other aspects as well: big markets; solving customer pain points; customer economic value propositions; etc. But at the end of the day, it boils down to investing in companies that will grow quickly and be very profitable (at least on a gross-margin basis). This is what acquirers, including public equities shareholders (i.e., via IPO), will pay through the nose for.  

  Otherwise, the ball never gets rolling downhill. The technology being offered is one of many such options and doesn't stand out in any way. And thus customers have a lot of choices and won't buy quickly. Such customers also won't pay a lot for what you're offering. And an acquirer will have lots of choices and also won't be willing to pay up. It's not a recipe for venture success.

  So what kind of strategies can create the right type of situation? I can count at least six ways. There may be more, but here are the categories I've seen.

  1. Sustainable cost/performance advantage through proprietary IP, plus subsequent scale-driven cost economies

  This is clearly where most cleantech venture dollars have been deployed to date. It's basically the First Solar model of cleantech venture capital. Unfortunately, these types of situations appear to be quite rare. They require such a significant IP advantage, plus a fast-growing market that no one else was clued into in time, that you get a significant (two-year?) time window in which to establish a scale advantage and really press it home. It's clearly possible, but it's infrequently successful. More often, even if the technology does catch on as quickly as hoped, commoditization and margin compression happens more rapidly than expected. Thus, you get the current patterns we're seeing in upstream bets in biofuels, solar, LEDs, lithium ion batteries, etc. And VCs keep placing more such bets in these and other subsectors. Personally, I'm starting to despair of seeing venture-type returns anytime soon from the "next big patent" investment strategy in this sector. There would need to be many earlier and more lucrative exits for these companies for it to be successful. And, somewhat unfortunately, these efforts tend to be pretty capital-intensive even before it's clear whether the company truly does have a differentiated technology. Succeeding here will require a management team that is technically brilliant, and great at building hype and raising capital.

  2. Info centralization

  This is the idea that, by getting out into a marketplace early (perhaps as a media play, or via a SaaS-based model or some other way of controlling data flow), a company can become a central repository for market data (costs, customer patterns, etc.) and then the value will flow from there. One problem is that it requires grabbing market share very quickly. This means basically giving away value for free, unless there are other compelling reasons for customers to adopt the service or product ahead of it becoming that dominant info repository. And the problem with giving away value for free early on is that it's pretty much an Underpants Gnomes business strategy. It's tough to later convert the original offering into value that customers will pay more for, since they're used to getting it for free, and the other sources of value from the gathered information are promising but only hoped-for (in the web sector, they've basically settled on ad revenue as the answer). This is certainly one possible business model to create the previously cited success conditions, even if we haven't seen too many examples yet of it producing outsized returns in cleantech (until Greentech Media IPOs, that is!). And because it requires building out a loss-leader offering before getting into the value-harvesting opportunities from the gathered information, this can also be a somewhat capital-intensive play, albeit much less so than proprietary hardware technology development efforts, of course. 

  3. Becoming a standard

  This is also where a lot of cleantech venture dollars have gone. And it's been a successful strategy for hardware investments in the history of venture capital. The idea is that if you create a widget, component, product, etc., that becomes an industry standard within a larger business ecosystem, everyone will have to use you and thus you not only grow quickly, you also become an expensive acquisition for someone. It's the idea of creating a monopoly at one segment within a larger value chain. It worked for semiconductors, it worked for medical devices, it worked in some telecom bets. 

  Big challenge, however: It only works if it's either mandated from a regulatory standpoint, or if the customer base is homogenous and amenable to being standardized fairly quickly. The former scenario hasn't materialized as some had hoped in energy industries; the latter is possibly true for utilities, but many other customer types in cleantech are much too fragmented, and even utilities are slow and not as homogenous as you might think. Nevertheless, this is clearly the primary hoped-for source of returns in the smart grid, as well as other efforts built around controls and M2M communications (as well as efforts like Project Better Place). And there's some early evidence it can succeed, if the management teams are exceptionally good at building solutions for a particular market niche and using that as their initial beachhead customer sector, and if the market they're selling into is primed for rapid adoption.

  4. Building a valuable brand

  Venture capitalists backed P.F. Chang's and Jamba Juice. You can't patent a lettuce wrap or a smoothie. Cleantech VCs would never have made those bets. But outside of the cleantech sector, investors have realized for quite some time that successfully building a well-regarded brand can result in strong investment returns, simply because of the power of the brand itself to drive low customer acquisition costs and higher margins. But we haven't seen too many of these efforts in cleantech venture capital yet. I would argue that Tesla and Fisker are venture-backed efforts that have primarily pursued this strategy for venture returns (mixed in with some technology angles as well, of course, but still).  Nevertheless, it remains a relatively untapped business strategy in cleantech markets.

  5. Marketplace externalities

  I name this late in the list not because it's not a potentially valuable approach, but because it clearly builds upon a couple of the earlier strategies. But over the past two decades, it has become an obvious truth that if you can become a dominant marketplace, you can generate good returns by benefiting from the virtuous cycle of customers and vendors increasingly needing to come to you. And I would argue that, in many cleantech markets, being a "dominant" player doesn't necessarily mean anything close to >50% market share. Customers and vendors are both so scattered and diverse in many cleantech markets that even just being a standout marketplace would likely result in the virtuous cycle effect kicking in. Even still, the challenge of getting to the appropriate level of critical mass, however low it may be, has stymied every effort to create new cleantech marketplaces that I've seen.

  Even more challenging for "marketplace" efforts in cleantech, in my mind, is that we lack the necessary standard ways of relaying product performance in ways customers can use. Have you tried to buy an LED bulb on Amazon? It's a horrible experience. And looking at more commercial and industrial markets for LED lighting, I've now seen how many lighting fixture vendors really play around with (i.e., lie about) their product performance specs to a level where the average customer would find spec sheet comparisons, etc., to be a bewildering exercise, and thus something of a non-starter. We will see successful physical and/or ecommerce marketplaces established for cleantech markets. But to get there, we'll need to see someone standardize product performance info.

  6. Customer access/building a new channel

  As mentioned, these can be very fragmented markets. And the (often 100-year-old) channels in these markets, to put it bluntly, suck. They don't know how to sell the new innovations, nor are they incented to. The lack of good VARs in cleantech is something I've talked about before, and it remains a screaming unmet need in many cleantech markets, especially given the vendor disinformation factor I allude to above. The opportunity to build a new channel model in residential energy efficiency is one major reason we invested in Next Step Living a few years back, just to name one example. When they're now in thousands of homes each year as a trusted energy advisor, that opens up all sorts of opportunities to help bring these customers new innovative products and services. And at that company we're now seeing the proof of how valuable that access is, and how quickly it can scale. So without going so far as to be a marketplace, simply having access to a large number of customers has a lot of value in these markets where channel disruption is so badly needed.

  But a separate version of the same "capture the customer" dynamic is often being attempted in more hardcore B2B markets like biochemicals, where upstream tech innovators selling into concentrated customer clusters will attempt to lock them up early on, via JVs and the like. I didn't want to break this out as a separate item, because it's kind of a different flavor of both customer access and becoming a standard, but the theory is that if a startup vendor can gain early entry into several key members of an oligopsony (and fortunately, there are a few of these in cleantech markets), they can box out followers. Again, however, we haven't seen too much evidence of this eventually turning into venture returns in cleantech, unfortunately. But you can see the potential for it to happen -- just not very often.

   

  There are other ways to generate returns, of course, and these are not mutually exclusive categories, but these six approaches are the ones I see attempted by cleantech VCs that are clearly aimed at venture-type IRRs (versus lower-risk/lower-reward investment strategies). All of these six or so strategies are designed to build rapidly scalable businesses with valuable exits, and all are being tried in cleantech, to varying degrees. Unfortunately, what I see is that the strategies least likely to meet the three success conditions described above are also the ones being attempted most often. And despite scant evidence of high success rates in these strategies (such as the "next big patent" approach), cleantech VCs keep looking for those types of plays, and pouring huge amounts of dollars into them. All of these are valid approaches. However, it seems like the balance is out of whack. To date, it seems like the only real attempt at innovation by cleantech VCs in terms of their investment strategies has been to keep doing the same thing, just later and bigger.

  I think the industry is ripe for some significant change. In the next column, I'll mention a couple of specific managers I see out there who are attempting some different approaches. 

  

How the Heck Did We Get Here?

• Over the next few columns I’m going to talk about what I see as a critical set of lessons and paths forward for cleantech venture capital. But first, I thought it would be necessary to set the table by laying out my own vastly oversimplified version of how cleantech venture capital got to this point.

  Where to begin? In the 1990s, there were a very few venture investors tackling alternative energy and environmental technologies. They had small funds and invested mostly in hardware plays of some kind. Sectors like solar and electric vehicles certainly didn’t dominate.

  Then the dot-com bubble and IPO frenzy happened. This rising tide lifted a lot of boats, including in this sector. There was a one-year spike of venture investments by generalist firms into what would later be termed “cleantech." As the issue of global warming gained attention, and as hype built around technologies like microturbines and fuel cells, it became possible for some rather early-stage companies with high-cost devices and systems to IPO on the basis of some beta sales and a lot of loose talk about big company adoption and such. I still have some of the presentations from that period where the near-term inevitability of a distributed generation future was posited, and I still remember thinking that, as shares of Ballard Power dropped from over $100 to $20, it might be a good opportunity to buy into the hydrogen-fueled future (oops). When I review a presentation I pulled together in 2001 on the future of alternative energy technologies, it’s… entertaining.

  This period was very formative for a lot of investors. It established the expectation that the public would welcome IPOs from companies with a compelling vision of a changed energy future. It locked in the perception that the most value in this sector would be generated by innovative hardware solutions. And the collapse of many of these companies also taught investors that costs and customer economics do matter. And that many of these technologies were therefore not ready for prime time.

  In the early 2000s, even as the phrase “cleantech” started to come into currency, the number of venture capitalists putting significant investments into the sector shrank significantly. The members of this fairly tight “cleantech club” were either small-fund sectoral specialists, or gratefully welcomed individual partners at generalist funds. I found myself in cleantech venture capital late into this period, and I remember how it felt like a hugely valuable validation whenever a generalist VC would talk about being interested in cleantech... or heck, talk with me at all. It felt like most of the “cleantech club” of investors knew each other pretty well, and were always co-investing with each other (since they had small funds, or were partners at a generalist fund and needed to co-invest with a sectoral specialist to validate the technology they wanted to put money into). This small group of investors continued to focus on hardware business models. Why? Because market-ready hardware like cost-effective solar panels, etc., didn’t really exist yet. So a) without a base of hardware/infrastructure out there, there’s nothing to build other business models on; and b) the threat of commoditization of the hardware wasn’t very acutely felt, when no one had yet to pass the threshold of commercial viability. 

  The year 2005 marked a significant inflection point. It’s when many more investors started jumping in. I’m sitting here reading through my Q4 2005 Cleantech Group venture monitor, and it’s fun to look back upon that period where more deals were seed or first-round than follow-ons, energy generation technology was only in its second year of being more important than other investment categories within cleantech, and the West Coast was only then starting to be the dominant region for cleantech deals.

  Why did the inflection point happen then? Partly due to oil prices breaking through above $50 and heading upwards. Partly because the topic started to be written about more in the public media. And, relatedly, in 2004, energy investments had done well. Visible leaders within the venture capital industry, such as Kleiner Perkins, started to be more visibly active in the sector, with Alan Salzman of VantagePoint declaring that the next Google was going to come from cleantech. And the SunPower IPO certainly helped.

  But I think another major factor is that 2004 marked a doubling of the amount of money put into venture capital by LPs.  All of a sudden in 2005, big VCs had a lot of money to put to work. And cleantech seemed like a good place to be able to put it. Remember, VC firms typically look to raise funds in 2-year cycles, so when they raise a big fund, they need to put much of that money to work within the next 24 months. So when the VC herd started moving into doing deals in the cleantech sector, they weren’t going to do it in small ways.

  So the die was cast. Cleantech was a sector dominated by hardware plays, the few successful exits were perceived as being based upon proprietary intellectual property (as opposed to branding, customer bases, network externalities, or other sources of shareholder value), and now big money was looking to move in. What else could result except a high level of capital intensity as investors looked to develop highly proprietary equipment-based efforts to make commercially viable solar panels, biofuels, batteries, etc.?

  At this point, the sector continued to gain in presence and LP interest. From 2005-2008, venture investments continued to rise, several important cleantech markets started to see significant growth, we started to see some additional venture-backed cleantech companies IPO, and most importantly large corporations started to take these technologies seriously. More capital-intensive investments were made, and few of these big bets going out of business, as an even bigger follow-on was always possible. According to the Cleantech Group, from 2005 to 2008, the average size of a first round in the sector more than doubled from $5M to $13M, and the average size of a follow-on round rose from $8M to $26M.  Biofuels and some other sectors of course were huge recipients of venture dollars, but the real story was solar, which (again, according, to the Cleantech Group) rose from being 15% of venture dollars in 2005 to nearly 40% in 2008.  Several cleantech specialist firms were able to raise very large funds, and generalist firms established cleantech teams.  As the big firms started throwing their weight around, the smaller sectoral specialists stopped being so valued for their experience, and I even heard of some refusing to co-invest with each other anymore because of the stigma attached to being perceived as “just being a little cleantech firm” unable to do deals with the big-brand generalist firms.

  And then, of course, the global economy came to a screeching halt. This not only meant hard times for many cleantech startups’ revenue forecasts, it also meant a drying up of the LP dollars going into venture capital overall. The period 2009-2011 will be looked back upon as a real dry season for the sector. First of all, on the policy/politics side, it’s been a disaster here in the U.S.: Not only did the hoped-for climate change legislation get royally screwed up by Congress, but also the visible blow-ups by Solyndra and other government dollar recipients has very much chilled political support for the sector overall. And partly as a result, as LPs pulled back from venture capital overall, they particularly soured on cleantech. This means that many cleantech specialist firms weren’t able to raise their next fund, and many generalist firms sent their cleantech teams packing. Furthermore, some of the technology bets made earlier really did start to pan out. Whereas before, there were few commercially viable offerings in many cleantech sectors, now suddenly there were lots, all competing with each other, and driving down margins and prices. Thanks to that, and some significant public investment by China, 2009-2011 was a period of significant and rapid commoditization of many clean technologies.  

  Thus, there was a somewhat strange bifurcation of the cleantech venture dollar cycle. Seed and Series A deals were hard to come by, and were skewed toward the new watchword “capital efficiency,” which really meant software-based plays. And yet follow-on rounds, predominantly by insiders, continued to flow into the previous capital-intensive bets, so that overall the sector continued to look dominated by such types of investments. Without angels and family offices stepping into the early stage void, and corporate investors stepping into the late stage void, and government support at all stages, the sector might have seen a real collapse. Instead, thanks to these investors and supporters coming in, as well as VCs’ willingness to continue to back their own bets, the period looked like a “go sideways” period, at least from those outside looking at the data.

  For insiders, however, this has clearly been a rough shakeout period. Many startups, in the solar, biofuels and vehicles sectors in particular, have gone under or are in serious trouble. Many capital-intensive bets have run out of steam and investors aren’t there to help like they were before. And there’s even been a shakeout of the investors as well. Multiple smaller cleantech VC firms have gone under, and certainly there’s been a dramatic contraction in the number of cleantech-dedicated investors at generalist firms.

  What does 2012 look like so far? A simultaneous accelerated shakeout period, and yet also a rebirth. We’ll start to see more firms finally able to raise their next fund, albeit a smaller one. We’ll start to be able to discern which startups in the crowded sectors like solar and biofuels have staying power, and which ones are going to be crushed by rapid commoditization and price drops and the sudden withdrawal of government support. And we’re going to see the emergence of more new investment models.

  So there you go: 15 years of cleantech venture capital in one oversimplified column. Apologies for such a long column, but I wanted to post it all in one piece as a necessary set-up to columns soon to follow, talking about some of these new investment models that I see emerging.  I’ve been writing this column since 2005, and I sometimes lose track of how much things have shifted over that time, so it’s good to review before plunging ahead.

  And I hope you, gentle reader, take away one major lesson from the above -- namely, that the “inherently capital-intensive” nature of cleantech venture capital really isn’t so, at least not nearly to the level we saw it become. The uber-intensity of capital spending in cleantech startups was a result of several choices by VCs along the way, based upon perceived lessons and opportunities, and the incentives various investors had. Certainly, the cleantech sector needed to be hardware-focused as recently as five or so years ago. Because the hardware/infrastructure is a necessary precondition for many other business models to follow, just as we saw in the IT and telecom sectors. But by now, if an investor views cleantech as a capital intensive sector where patented technology is the most important source of value, that is their choice. It can be, and has been, but it is not inherently so. Many other markets dealing with the production and use of physical products have been successfully disrupted in non-capital-intensive ways, after all.

  More on this topic to follow.

  

What Is the Appropriate Role for Government in Cleantech Innovation?

• It's not a popular thing to argue right now, but yes, there certainly is a vital role for government in support of cleantech innovation.

  Let me start by acknowledging that I absolutely understand and quite often agree with the sentiment that government shouldn't be in the business of venture capital. Market-based policies are, to my liking, almost always preferable to policies where government employees select and fund specific innovators or companies. Thus, the most effective way for governments to support cleantech innovation would be to price in externalities like climate change and dependence on imported energy, and then let the market sort things out.

  But that's not likely to happen anytime soon in the U.S.

  So in the meantime, how should we view policymakers' efforts to promote innovation and startups that would otherwise languish in today's skewed pricing environment? It's a very complex problem, which I'll illustrate below.

  I would propose that an appropriate government effort to promote cleantech innovation will follow three core principles:

  1. Additionality

  Within the realm of desirable outcomes for the U.S. economy and energy mix, some are already being tackled by the private sector, and some are not.  As a rule, government efforts even in economically beneficial innovation areas shouldn't duplicate the existing efforts of the private sector. In this case, the government should be aiming to fill capital gaps.

  This is a lot easier said than done, however. First of all, how do you define a capital gap? It's hard enough to get reliable information about venture funding overall, much less get reliable data about what specific stages and sectors and business models are hard to get funded. Secondly, these capital gaps also wax, wane, and shift as investor enthusiasm for a sector ebbs and flows. Thirdly, in some of these capital gaps, there might be non-institutional investors who are interested in putting in money where the institutional VCs won't, and the capital gap is one of check size (angels writing $25,000 checks when $250,000 is what's needed), not one that's sector- or stage-driven. And finally, there might even be gaps across various efforts within an individual company -- for example, a research project at a venture-backed startup, where the research wouldn't have happened with VC dollars alone.

  You also want to avoid either having these government-directed dollars flowing into the hot new startup (because the program is under pressure to show some 'successes' early on), or a negative selection bias where government dollars are being directed away from the best innovative startups because VCs might become interested. But you do want to see leverage resulting from these efforts, where the government program helps to unlock follow-on capital from the private sector. In other words, VC dollars following government dollars is one indicative metric of a successful program. But government dollars following VC dollars is less so (with the caveat of the additional research project scenario as described above).

  How to prove additionality under such complex conditions? It doesn't make sense to attempt to codify a definition legislatively. Rather, the best approach is to to develop flexible processes that are outcome-oriented and provide opportunities for an evolution of the program over time.

  2. Flexibility

  One of the less-reported but damaging trends in U.S. policy right now is the shift in tactical control from the executive branch to the legislative branch. In other words, lawmakers are writing in too many detailed directives as to how programs should work, instead of stepping back. Because if there's one group of people you don't want designing your management process, it's Congress. Yet that's exactly what's going on. Many of the more public examples of failed energy policy recently were, at heart, driven by byzantine program designs dictated from Capitol Hill, not in the White House or inside the DOE. It's the equivalent of a startup's board of directors going around the CEO to specify how junior engineers in the R&D group should organize their daily activities. Lawmakers should establish goals, provide boundaries and oversight, and then let the implementers on the firing lines figure out the best way to accomplish these objectives.

  If lawmakers are to surrender some control over process, however, there does need to be sufficient oversight, as well as a forcing function to make sure the program really does evolve over time as market conditions change.

  3. The Voice of the Market

  To reiterate, I strongly prefer market-based policies to any effort to have government groups select some specific recipients over others. But if there are some areas where economic imperatives necessitate this latter type of policy, the next best choice is to at least give the voice of the market a major role.

  Peer review is one commonly used way to get at this. And if done the right way, it can be quite valuable. But if done wrong, of course, it's useless. A good peer review process will work hard to get a wide variety of knowledgeable technical and market viewpoints, control for potential conflicts of interest, and include force-ranking or other ways of making sure 'grade inflation' doesn't creep in. 

  What I haven't seen as much of, but what would also be valuable, would be to have additional reviews done by groups of end-users or customers. This is tougher, and won't be definitive, because quite often customers don't know what they've been missing until they see something in action. But still, for building energy efficiency technology (for example), there should be collective reviews by large building owners who could eventually be purchasing the technology, both within the government system (e.g., let's get the Navy helping ARPA-E select what technologies they'd love to have commercialized for use on their bases) and, of course, really including the private sector owners of buildings. It will be important to avoid inclusion of channel partners who seem like purchasers but really are biased distributors (sorry, ESCOs). It won't be a perfect process, but these programs shouldn't be "build it and they will come" by design -- they should be bringing in the voice of the customer right from the point of selection. And the input and perspective will help all participating startups, even those not selected by the program.

  Outside perspectives from market participants can, at least in a wisdom of crowds format, also help identify which areas are truly capital gaps and which aren't. Perhaps doing this on a case-by-case basis would be unwieldy, but at the very least, a large panel of advisors from the private sector could help evaluate the program staff's own identification and definition of capital gaps on an annual basis, helping to validate the strategy while keeping it somewhat flexible. It would have to be a large and diverse panel -- each advisor would absolutely walk in with their own biases in certain sectors and categories, so it will be important to flood out each bias with enough of a crowd of perspectives.

  Bringing this all together, I'll throw out there a vision of what this might look like:

  • A program given a concrete and ambitious but relatively broad set of mandates in terms of goals (such as $1.00 per watt installed solar cost), with an authorized budget and department home, and some basic parameters around types of activities (grants vs. investments, etc.) and a requirement to demonstrate additionality.
  • An oversight committee to review the program's activities on a quarterly basis and strategy/program design on an annual basis.
  • An auditor established elsewhere in the government to evaluate adherence and effectiveness of the program on an annual basis.
  • A strong manager out of the private sector with a mandate to hire a top-notch team, tasked with designing and running the program.
  • Peer review and market input processes so that as much as possible of the program's activities are guided by the voice of the market, while still giving the internal team latitude to use their experience and judgment toward meeting the goals of the program.

  Obviously, a fourth unstated principle, therefore, is that this requires a really sharp team. Not a bureaucrat-laden team, but a team of experienced managers with private-sector experience, leavened with smart young technologists and market analyst types. This is the single most important determinant, in my mind, between a successful effort like this and an unsuccessful effort. Groups like ARPA-E and the Massachusetts Clean Energy Center have had leadership like this, and it's a major reason why (in my mind, at least) they've been pretty successful to date. Effective, mission-oriented people have been brought on board by the leadership of each program, and they've found a way to make a positive impact.  

  But will that last? I do worry that the crushing nature of politics means that such people will eventually be driven out by partisanship-inspired attacks. I'm not sure that can be avoided (unless anyone has any brilliant ideas on how to remove party politics from energy policy in this country?). So we can only hope that effective businesspeople with tough hides will continue to agree to lead programs like this out of a sense of mission, and that they will be able to continue to inspire strong managers and analysts to come join these teams even though they will have to expect that it becomes unpleasant at times.

  In the meantime, we can hope to continue to see broader recognition of the need for market-based energy policies that will establish a more even playing field, so that all of the above becomes less necessary. Because right now, it's absolutely critical.

  

What’s Going On With Corporate Investors in Cleantech?

• Walt Frick posted a good rebuttal to the Wired "cleantech bust" article recently, in which he points out that venture dollars going into the sector remain high.

  This is true, but as one of my fellow panelists at the Kellogg PE/VC conference yesterday pointed out, a lot of those dollars are simply follow-ons into existing investments. And furthermore, corporate investors have really been filling the gap recently.  One lawyer I spoke with recently who sees a lot of cleantech transactions told me that over the past 12 months, most transactions he's seen have included a strategic investor as the predominant "new money" in the deal.

  It's clear that many large corporations have determined that there will be growth opportunities in emerging clean technologies, and at a time when many corporations have been hoarding cash they are thus able to put some money at work in venture investments in the sector. This is very encouraging for the sector, of course.

  But corporate venture investments have a history of piling on at the end of cycles. Does this current wave of investments portend bad things for the cleantech venture sector, given the lagging indicator they've often been?

  The alternative optimistic view says that "this time is different," because various clean technologies are reaching a point of maturation where they are "ready for primetime" -- and this just happens to be at a point in time where corporations have capital and VCs don't. And in addition, the generally horribly ineffective channels for clean technologies mean that large corporate partners do indeed have value to add, as opposed to other "bulges" in corporate venture investing, where they were just buying late into the party.

  At the risk of saying "this time is different" (famous last words), I do tend to believe this latter, optimistic view. Mostly because I don't see a lot of evidence that corporate venture groups are dramatically overpaying to buy their way into 'hot' companies. Indeed, I see a lot of bargain-hunting and serious evaluation of underlying technologies instead of just momentum investing among corporate VCs. I do believe that many large corporations have determined that clean technologies will be strategic growth areas for them over the long run, and that this is a buyer's market, so it's an opportune time to forge some relationships, investment-oriented and otherwise.

  But even if so, there's still a significant disconnect going on.  While these corporate venture groups are investing in growth opportunities, the operating units within these larger companies are adopting cost-saving clean technologies as slowly as ever.

  A long, long time ago, a colleague and I wrote about four different ways "sustainability" can be used to create economic value for large companies. The first is simply to help ensure "right to operate" -- that is, avoiding major environmental screw-ups. The second is as a means of identifying cost savings via waste reduction. The third is adding new products with resource-efficiency advantages, and the fourth is redefining the entire business. (You can learn more about this framework here.)

  Corporate venture groups are primarily concerned with the third of these opportunities: new add-on businesses. But there's a huge opportunity in the cost-saving category that is being missed by these same companies.

  I see a lot of industrial energy efficiency startups right now, for example, that are having a hard time getting large corporates to act quickly to purchase new lighting, controls, and other systems that would be relatively easy to implement and have compelling ROIs. You would typically think that a two-year payback period is a no-brainer for a corporate operating manager to pitch internally, yet I'm seeing even six-month paybacks not get the traction you would expect. Why? Mostly because these aren't strategic priorities.

  The corporate world has shifted a bit so that C-suites are often focused on executing on a top-three set of priorities. And rarely is "make our facilities run more efficiently" one of these top three stated priorities. Without a specific strategic mandate, the plant manager fights an uphill battle getting the CFO to pay attention, and the CFO doesn't want to spend time pushing these opportunities down on plant managers. And then there's the "all the other stuff" dynamic -- plant managers have three priorities themselves: production, safety, and all the other "stuff."  Energy (and other types of) cost savings fall into this distant third category.

  I found it ironic that our cleantech panel yesterday was held at the same time as a panel on how PE firms can create additional returns by driving operational improvements at their portfolio companies. Ironic, because we should have combined the panels. Indeed, thanks to efforts such as the Environmental Defense Fund's Green Returns project, PE firms are actually helping drive adoption of resource-efficient technologies pretty effectively within their portfolios.  

  That's because they've made it a strategic priority (because it's such low-hanging fruit with rapid returns). But too often I go out and talk with a corporate venture group, and we'll be comparing notes on investment areas of interest, and they make it clear that their mandate only covers revenue growth opportunities -- they have no ability to invest in technologies that could save their company money in terms of cost savings. Even at companies like Wal-Mart that are doing a pretty effective job of making a priority of resource efficiency in their operations, the venture group is forbidden from investing in companies that could become vendors to their facilities.  

  This is a major strategic disconnect -- and in my opinion, a mistake. The most direct way to add to earnings per share is to reduce the costs necessary to create the same dollar of revenue. But some of the very same large corporations now investing into somewhat risky cleantech venture capital deals aren't effectively adopting many of the readily available and proven technologies that could save their operations millions in costs. You, Gentle Reader, are a shareholder in some of these companies, no doubt, so how do you feel about that trade-off?

  If corporate leaders are indeed serious about driving future returns through investments in cleantech, they need to make sure that's an urgent priority for their Ops managers as well. Cost savings through adoption of new efficiency technologies should be a priority at every large firm.  

  If it takes your plant managers nine months to agree to purchase a system that has a six-month ROI, you're doing it wrong.

  

Large Corporates and Family Offices: A Need to Connect

• One thing many cleantech VCs are good at is connecting with large corporations' strategy and venture groups. They regularly chat to compare notes, discuss market trends, share investment perspectives, identify areas of needed investment, opportunities to work with the VCs' portfolio companies, etc. It's a win-win.

  I was surprised upon joining the family office community to discover that these groups are (with some definite exceptions) not as good at this. There are probably several reasons: 1) family offices are often already affiliated with some companies that the family owns, dampening the supposed need; 2) corporate strategic groups don't think about family offices because the FOs aren't asking them for money as LPs; and 3) family offices are generally not very good at networking to begin with. There are certainly some FOs that do have good outreach to corporate groups and vice versa, but it remains an untapped opportunity.

  I've been meeting and speaking with corporate leaders for the past few months, to argue for a need for much more regular communications between the two communities. The reasons for family offices to more regularly connect with strategics are the same as for VCs. And smart corporate teams are starting to recognize the unique and additive value to holding such conversations with family offices in addition to their existing conversations with VCs.

  Why?  

  First of all, family offices are much less limited in terms of the types of business and projects they can invest in. They can be more patient and more flexible. This means they'll often be looking at a different scope of opportunities than the VCs might be. Some FOs will be looking at very early, long-development, really-big-upside opportunities that would take too long for VCs to invest in, at least at that seed stage. This is especially true when one broadens the definition of FOs to include very wealthy individuals. Others will be more open to investing in different service and business models instead of the proprietary technology plays that VCs continue to favor (at least in this sector). Still others will be able to invest in project finance opportunities. In one of our investments at Black Coral Capital, we invested as project investors into a pool of capital alongside a venture-type corporate equity investment by a large corporation in the developer of the pool. These are the kinds of collaboration opportunities that corporates miss if they're not engaging with the family office community.

  Secondly, despite some instincts to the contrary, the fact that the family office is often tied to other, larger family-owned businesses means that there are other reasons to hold the conversation as a means of building broader relationships than just common investment opportunities.  

  Thirdly, that family offices aren't looking for LP dollars means they will be able to express a different perspective than many VCs will in the same situation.  No one ever provides a 100% objective perspective, but at least in these conversations the corporate team is talking with a professional investor who's not trying to sell them on investing in their next fund.

  So should corporate strategy teams start reaching out broadly to the family office community?

  Unfortunately, if you know one family office...you know one family office. No two are alike. There are an estimated 3,000 or so single-family offices of significance in the U.S. (BTW, here's a useful primer). But many aren't going to be as valuable a connection as they should be for the corporate team.  

  Most family offices aren't in the business of doing direct investments into applicable companies. Many have wealth preservation, rather than wealth creation, goals. When they refer to doing "alternative investments," they may simply mean they're allocating dollars into hedge funds in addition to mutual funds. Very few family office gatherings revolve around the challenges and trend-spotting involved in direct venture and project investing.

  Many family offices have simply been passive co-investors with big-name venture and private equity firms. I'm not going to criticize that strategy (in this column, at least), but for the purposes of this discussion it's enough to note that the corporate teams will get more insight from talking with the lead institutional investors these FOs are following.

  And fewer still family offices do direct investments into cleantech. Starting from 3,000+ applicable single family offices, the number of FOs doing direct lead investments into cleantech private equity is bigger than you might think -- but it's certainly a very small subset of the 3,000+.

  All of which is why we co-started the Cleantech Syndicate a couple of years ago (along with over a dozen other family offices, plus our friends at McNally Capital). We found it was best to aggregate a bunch of these rare entities upfront and build relationships across the teams, rather than wait until we had specific co-investment opportunities and then had to go seek them out in this opaque community on short notice.

  Which speaks to the need for corporate teams to be very targeted in their outreach to the family office community. My message to the corporate teams I've been meeting with recently has been, "You should do more to engage with family offices and high net worths. But you should do it selectively, using these specific criteria." There's no magic here, there's just some simple catching up to do to get conversations between corporates and FOs up to par with existing conversations between corporates and VCs. It's worth doing. But it's important to do it right.

  ----------

  Allow me to hijack this space real quick for something different.  An old colleague of mine reached out and is doing something very cool, so I offered to let him write a blurb about his efforts to share with all of you.  Enjoy!

   

  "I'm writing about an exciting education program my organization, The Keystone Center, runs around the country called the Youth Policy Summit (www.youthpolicysummit.org). We take groups of students to analyze a tough public policy problem, like water scarcity, climate change or childhood nutrition.  We teach the students to analyze the different facets of the problem, including the political, social, economic and technological, as well as different stakeholder views from industry, advocacy groups and government regulators. We provide the students with mediation and negotiation training.

  "Students meet with adults from these different stakeholder groups, and then assume the roles of these players as they work to find consensus-based recommendations. They take their suggestions back to their communities and to local legislators and business leaders. More importantly, we have worked with past sponsors to identify future interns and workers.  We truly feel that we are creating the leaders of tomorrow's workforce.

  "We have conducted 22 summits over the past eight years, and have found that students care passionately about sustainability, and are passionate about energy and water issues whether they are from rural Appalachia, downtown Detroit, or the Upper East Side of Manhattan. The program trained 125 future entrepreneurs last year, 80 of whom were non-white. They are now entering college with a newfound vision to make the world more sustainable, and to seek opportunities in science and technology to help us get there."

  Anyone out there who wants to get involved or support this effort should feel free to track down Jeremy Kranowitz at the Keystone Center (www.keystone.org).

  

“How Do I Get a Job in Cleantech Venture Capital?”

• Around this time of year, the amount of inbound requests for coffees and "picking your brain" chats is always pretty overwhelming, as business school students and others start thinking about how they would love to be a cleantech venture capital investor.

  I wanted to write down a few thoughts for such folks in case they would be helpful. Unfortunately, much of what I have to give is simply tough love. Because it's very, very hard to break into cleantech venture capital. When you account for the few specialist teams out there still actively investing in the sector, and then further account for the number of such firms that are hiring any new associates, I would estimate there are probably only one to two dozen new positions in the industry each year for anyone who doesn't already have deep experience. At most. Last year I think it was even less than that. There's at least 10 very interested job seekers for every one available entry-level cleantech venture job, and probably many more.

  So with the caveat that no matter how smart you are, the numbers are stacked against you, here are some suggestions:

  1.) Think hard about why you want to do this type of job.

  I know one of your b-school classmates spent their summer interning with a venture firm and has been quietly lording it over everyone else; don't fall for their swagger. It's not the most direct pathway to achieve your goals, whatever they are.

  If your goal is to make money, go into project finance or hedge funds or buyouts or Wall Street.  

  If your goal is to make a significant impact on the cleantech industry or on the environment or such, go into a large company and work to make them more green. There, even a small shift makes more of an impact than most cleantech startups ever do.

  If your goal is to find yourself doing a lot of exciting entrepreneurial things, go be an entrepreneur.  

  If you're looking for job stability and an easy work-life balance, you're definitely barking up the wrong tree.

  Venture capital is simply not the best way to accomplish any of those goals. Be honest with yourself about what you really want to do, and also don't fall for the Sunday New York Times-type hype about how VCs are heroes of the innovation world. That's a carefully crafted image some VCs have put out there, very much on purpose, but the true heroes are the entrepreneurs and the corporate managers who go out on a limb to work with entrepreneurs. They actually make stuff happen -- they're the ones to really be admired. There are lots of more impactful (albeit less heralded) ways to accomplish your goals than being a VC, I can pretty much guarantee it.  Don't get me wrong, it's a really fun job if you can land an opportunity in the field -- I love it with a passion that grows the more I time I spend doing it. But I can also tell you that if you want to be a cleantech VC for somewhat romantic and unresearched reasons, you probably won't be a good one anyway.  

  And don't think that if you get an entry-level job in cleantech VC your future is secured. It's an up-or-out type of industry, and for the most part, the associates end up going out instead of up. There simply aren't enough openings at the partner level to sustain even the number of justifiable advancements, and it's hard to do well, so there are a lot of folks who find they don't like it or can't cut it. It can be a good springboard into other things, often entrepreneurial endeavors, and can be a very educational experience, but don't fight for an entry-level VC position and then think you've pegged your career for the next 40 years. Heck, venture capital as we know it may not be around 20 years from now -- it's a broken model.  Do you really want to fight to get into a shrinking club?  

  In other words, don't go after a cleantech venture job unless you're deadly serious about it.

  2.) Network, network, network. But don't just do quick calls and coffees. Do something meaningful.

  Yes, there's no substitute for networking your way into a venture capital gig. VC firms typically don't advertise when they're thinking about hiring a new associate, so it's often a matter of right place/right time. One strategy is to watch for announcements of firms that have done first closes on a new fund. That often is a trigger for new investments, and perhaps some changes to the existing team (either up or out), and thus maybe they'll be looking for someone to bring on board. So start with such searches -- but don't be satisfied just talking to someone there.

  No one gets hired into a venture capital firm because they impressed one of the partners there over a coffee or during a phone chat. And disappointingly, VCs also don't talk to other VCs about how they're hiring a new associate or such. It just doesn't come up very often. So the idea that a VC you talked to will follow up with you, out of the dozens who chatted with him/her, to let you know about another firm that's hiring an associate is a pipe dream.

  The only way you get hired into a venture firm is by impressing them with your ability to actually add value, either to portfolio companies, or to the diligence process. Here are a few networking-your-way-into-VC dos and don'ts:

  DON'T try to impress a VC with a couple of general investment theses you've come up with. They've been doing this for longer than you have, they've seen several companies fitting that thesis already, and have already been all over it six ways till Sunday.  

  DO pick one subsector you're going to get super-smart about and dive into it. I still remember a b-school student I knew several years ago who decided he would become an expert on building-integrated PV.  He ended up in an operating role instead of an investing role (see point #1 above), but I still periodically catch up with him. If you want to stand out because of what you know and who you know, stand out as a specialist, not just a clever person.

  DON'T ask for "thoughts and advice."  It's often a waste of time for both of you.  

  DO ask for quick thoughts about specific companies you bring to the table, especially if they're in a subsector you're trying to become a specialist in. An investor is much more likely to give you tactically valuable information if you ask them for specifics instead of generalities.

  DON'T ask them to refer you or intro you to their colleagues if they don't already know you well. Venture capital is a reputation-driven industry. No one wants to get a reputation for having sent time-wasters to go bother other investors.

  DO ask them if they know of any firms that are about to close on a new fund but may not have announced it (as per the above).

  DON'T try to impress a VC by bringing them a startup they likely already know about. If you found out about the startup by reading about it somewhere, the VC already knows about it. If you bring them a stealthy or super-early effort, maybe that will elicit some interest, but it better be a really promising company and not just a fellow b-school classmate's whimsy.

  DO get to know VCs by putting significant time into supporting efforts they'll care about -- activities like the MIT Energy Conference that will be bringing in VCs. Even better is getting involved in nonprofit efforts that cleantech VCs are involved in, either professionally or on the side. Find any excuse to spend some quality time with the VC over a shared task, in other words, instead of just a quick coffee and some bland advice.

  DON'T criticize a VC's investments. If you really have something to get off your chest, do it with appropriate caveats.

  DO see if there are ways you can deliver some real value through a dedicated project. Offer to do a market map. Offer to do some specific biz dev research for a portfolio company. And best of all, intern. An internship is your single best pathway into VC, at least for young professionals.

  Show the VC how valuable you are; don't expect them to get that on the basis of a brief interaction and a resume, or to hire you based upon your unproven potential. The great thing about the DO items listed above is that they also position you for other fun roles besides VC, leveraging the same experiences and knowledge and networks you've built.

  3.) Expect contradictory advice.

  Aspiring VCs often go to established VCs and ask them for advice as to how best to become a VC. Since "don't bother" or "be lucky" aren't very satisfying answers, the VCs give advice as best they can, but it's often very contradictory, leaving the aspiring investors even more confused. Why?

  First of all, there is no standard path into venture capital. Everyone got there via a unique path.

  Secondly, since there's no right way to do venture investing, there's no right way to break into venture investing. VCs who are former entrepreneurs will tell you to go be an entrepreneur. VCs who are former investors of another type will tell you to go get some other investing experience. VCs who are former consultants will tell you to go prove your value by doing market maps or doing some specific business development research for a portfolio company.

  In general, I think former entrepreneurs do have a better shot at becoming VCs -- and then at being good VCs. So much of the role involves networking with entrepreneurs, knowing the challenges of being an entrepreneur, and being able to provide value to entrepreneurs. So an entrepreneurial background is a very useful thing, more useful than being a consultant or a banker.  

  And who knows, you might decide you like being an entrepreneur better anyway; who cares about going over to the dark side and becoming one of those meddling VCs?

  4.) Have a Plan B that you pursue just as actively, in parallel.

  Be prepared for your quest to network your way into a VC role to take a long time, and very likely to end without you getting such a role, since the odds are stacked so heavily against you.

  The smartest thing you can do is have another plan (or even more than one) that you pursue in parallel that you would also be excited about. Create options for yourself.  

  Many VCs find themselves in the career by accident, having stumbled into it along the way. In fact, that's what happened with me -- I started doing some project work for a cleantech venture firm as a way to get smart about what entrepreneurial opportunities I could identify in the sector, and ended up getting hooked by the venture capital work instead.

   

  So go out there open-minded.  Look for activities you can do that will build deep knowledge in particular areas, and rich networks across investors, entrepreneurs and experts And then you'll find a good way to leverage those assets one way or another. If by networking with and working with VCs you find an opportunity there, grab it.  But if you find a really rewarding entrepreneurial experience for yourself instead, grab that and run with it.  

  The twisting road may bring you back that way later on anyway.

  

12 Predictions for ‘12

• 'Tis the season for making year-end predictions, and even though I'm clearly not very good at it, I got dragged into doing them a while back. So here are some for 2012. Enjoy these with the appropriately sized grain of sodium chloride.

  1. Both dollar totals and deal totals for U.S. cleantech venture capital will be up more than 20% over 2011.

  I'm basing this on the hope of a bit more economic stabilization, allowing some of the currently fundraising venture funds in the sector to successfully close and start writing checks. Furthermore, more and more corporate and other large investors are putting money directly into venture capital type investments in the sector, and I believe this trend will continue. Also, I think the year will see a bit of a return of Series A and seed investing -- this would in particular boost the overall number of deals. So while I don't see 2012 as some kind of blockbuster positive year for the cleantech sector, I do think, for structural reasons, we'll see deal and dollar totals rise.

  2. At least one "brand-name IT entrepreneur" will launch or join a cleantech effort.

  One of the most encouraging trends that I see right now is the continued move of successful serial entrepreneurs into the cleantech sector. This shift did slow down a bit over the past couple of years, it feels like, what with the consumer web sector being so hot and the cleantech sector being somewhat out of favor. But even while it has slowed down, it continues. And I think there will be some big-name IT or web entrepreneur who very publicly jumps into this sector in 2012, bringing along a lot of hype into a well-financed play. As the sector matures, it looks more and more possible to figure out a way to be successful as an entrepreneur in these markets. What's more, the de-emphasis on proprietary, engineering-heavy technologies, plus the feel-good nature of many cleantech efforts, will entice entrepreneurs who previously thought there wasn't a play for them in this sector but see it as their next place to make a mark on the world. Hopefully, this will help to build the necessary but missing bridges between the IT/web and cleantech communities overall.

  3. There will be at least one additional major syndicate of family offices launched to target cleantech (or a synonymous label for the sector).

  One of the pleasant side-effects of publicly launching our Cleantech Syndicate collaboration group this year has been the opportunity to learn about others who have been working toward similar types of efforts. And over the past two and a half years as a family office investor, I've learned that the family office/HNW community is much larger than I'd thought it was, with a lot of latent interest in cleantech and related investments. Plus, outside of this sector, there is a general shift among such investors toward doing more direct investing, as a general rejection of "2 and 20" and as a consequence of the past decade's poor returns provided by VCs to their family office LPs.

  All of these factors point to the likely creation of at least one additional such official syndicate of such investors.  In fact I wouldn't be surprised to see more than one get launched.  Such collaborations help family offices and HNWs pool not only their knowledge and dealflow, but also their diligence resources and strategic relationships.

  4.  There will be no progress made on U.S. federal energy policy, and there will be a rollback of state-level policy.

  The unnecessary politicization of energy policy continues in this country, and not only does this (and an election year) mean it's unlikely we'll see anything meaningful happen in D.C., it also means that there is now an active "swiftboating" effort at the state level -- baseless (or at least greatly exaggerated) attacks on the state-level policies (like the Green Communities Act here in Massachusetts) that have helped the sector weather the storm of incompetence taking place on Capitol Hill. This will get even louder this year, and we'll see more of a rollback of good policies than a continued rollout of good policies. Don't comfort yourselves with the knowledge that such state-level policies have been cost-effective investments for taxpayers. Facts will have no real role in these attacks -- or in their political effects. This will be a year to prepare to fight hard at the state level if you care about energy policy.

  5. Significant and visible consolidation within the solar industry will occur.

  There is significant overcapacity among solar panel manufacturers right now, and even some inventory dumping, crushing panel ASPs. Some of the results have been a couple of obvious failures among high-profile startups in the sector. And this shakeout will continue, among both dead-ended technology developers and lower-tier manufacturers in places like China. But another result is that it's really cheap to buy a valuable solar manufacturer right now. There are rumors of First Solar being a potential acquisition target. Other next-gen manufacturers like MiaSolé (one of ours, by the way), Nanosolar, Stion and others are already actively in partnership talks with large corporate players and would make natural acquisition targets. Meanwhile, more and more such large corporate players are jumping into the solar sector, as the market continues to grow like crazy. My guess is there will be some high-profile acquisitions in 2012.

  6. 2012 will see the emergence of multiple "roll-up" efforts.

  With such a wild proliferation of technologies and startups across the various cleantech sectors over the past few years, many are plateauing as they face two major post-commercialization challenges: 1) long sales cycles, as customers don't have the attention or the resources to quickly investigate and decide in the face of all the now-available choices; and 2) low brand equity and small sales/distribution networks. This speaks to a potential wave of acquisitions that I'll talk about momentarily. But it also means that providing various specific customer groups with fuller, more heavily branded, and more complete solutions might make sense.  We've already seen a couple of such roll-up efforts in distributed water treatment, sensors, and lighting.  I'm guessing we'll see a lot more such thinking this coming year, resulting in multiple, visible "roll-up" plays.  Success in these types of efforts is a LOT more easier said than done, so no one tackles them blindly.  But now more than ever sure seems like an opportune time for them.

  7. New hybrid investment models will emerge.

  "I predicted this for 2010 [and 2011].  It didn't really happen.  But I continue to speak with both LP-backed and non-traditional VCs and PE players who see the need.  So I'll double down for the prediction for 2011 [and now 2012].  And what I'm talking about is the emergence of new models that combine project finance and venture capital; that take innovative approaches to the use of debt and equity combined; and/or investment into the kinds of business models (like services, etc.) that VCs have typically had a hard time backing."

  I took the above excerpt directly from last year's prediction column. Never wrong, but often early, right?

  8. 2012 will see a big wave of corporate M&A in the cleantech sector.

  I've never seen more interest among large corporate players in driving topline growth through clean technologies. Thus, there's been a wave of announced partnerships between Fortune 1000 companies and cleantech startups. This will continue, but with valuations depressed and the variety of available choices making for a buyer's market, a wave of acquisitions should be expected. In fact, it may have already started in 2011.

  Lighting, biofuels, solar, and building energy intelligence are all sectors where we might see a buying spree in 2012. Large corporates also appear to have keen interest in sectors like energy storage and transportation and water, but I'm not sure those sectors have enough mature venture-backed startups of sufficient interest to corporate buyers as to result in a major wave of acquisitions -- those would come later.

  Note that I'm not predicting anything about how lucrative such a wave of M&A would be for venture investors' portfolios. 

  9. A major geopolitical event will spike oil prices above $120/barrel.

  I predicted this last year as well, and sure enough, we had spikes because of geopolitical events, but in the end, the macroeconomic blues held down prices below $120/barrel for the entire year. As noted, I'm hopeful of at least some economic stabilization in 2012. On the basis of that hope, I'm willing to continue to bet on major price volatility for oil, one of the world's tightest and most easily manipulated markets. Until we finally figure out how damaging it is to our economy that we allow ourselves to be dependent upon such a headline-risk input, and start to wean ourselves off of Middle Eastern oil through smart policy and long-term capex decisions, markets will continue to be near-term price-inelastic and thus we will continue to see spikes whenever some crackpot somewhere around the world decides to make a stink.

  If China's economic expansion loses significant steam, or Europe fumbles and causes a global recession, this prediction will be wrong. But given even a halfway-decent economy in 2012, such volatility seems pretty inevitable. To borrow from Rick James, "Oil is a hell of a drug."

  10. Several "environmental markets" will collapse and shut down.

  In many markets around the world, prices of carbon credits and renewable energy credits are collapsing.  This is mostly due to the overall economic situation, which not only means less capital is sloshing around looking for innovative new bets to play, it also means many targeted emissions reductions are being met simply because of lower levels of production overall. Further, it reflects that many of these markets were established with prices intentionally set low at the beginning, and, increasingly, a lack of faith that policymakers will continue to let such markets exist and run as promised. One of the many ways reactionary politics creates uncertainty, which kills businesses.

  In any case, with prices collapsing, we're already seeing some such markets closing down altogether. I expect this to continue in 2012.  I am a believer in the emergence of such environmental markets over the long run -- but right now is their winter.

  11. There will be an overall pullback in non-U.S. cleantech venture capital deal counts, but an increase in project finance.

  With so many choices to pick from domestically, and also with less faith in the consistent, near-term growth of some emerging economies, I'm hearing fewer U.S. venture investors talk about their latest overseas investments. What's more, the U.S. continues to dominate the venture capital industry. Further, economic uncertainty in Europe is also stagnating interest in risky venture capital bets there. My pure guess is that 2012 will see a temporary pullback in non-U.S. cleantech venture capital deal counts. But meanwhile, as cleantech equipment prices get crushed, renewable energy projects pencil out better and better, even in places without generous subsidies or FITs. Project finance is low-risk and long-term, and clearly in demand. So I feel pretty confident that we'll see a continued strong growth in overseas cleantech project finance -- albeit with some likely significant shifts from some regions into others.

  12. The Redskins will have a losing record next season.

  It pains me to say it, as I think they actually made some good progress this year. But next year they'll probably be starting a rookie QB, and there's no way the rest of the NFC East can continue to be so lousy next year. Plus, it looks like they'll have to face primarily the AFC North and the NFC South in non-divisional matchups, which were two of the strongest divisions this season. So I'm guessing my football frustrations will continue, even if I see them improving next year in terms of quality. Here's to the 2013-14 season, I guess.

  

Looking Back on 2011 Cleantech Investing Predictions

• It's been a tumultuous year for a whole lot of folks, and the cleantech market has been no exception. As we near the end of 2011, I thought it would be good to look back on how our predictions from a year ago turned out.  

  Here's what I predicted last December:

  1. The cleantech venture capital shakeout will become more obvious.

  I'd say this has been true. At least to entrepreneurs seeking financing, especially early stage. A few of us in Boston were recently trying to figure out who's still actively investing in the sector in this region -- and it was a shockingly short list. I suspect the same is true in other regions as well.  Score: +1.

  2. 2011 will be the Year of Energy Storage.

  Turns out this was pretty correct. Energy efficiency still showed a lot of dealflow, solar continued to get a lot of dollars, but energy storage rose up to challenge both subsectors. Seems like this will be a longer-term trend as well, given all the companies at an early stage that have taken in funding over the past couple of years -- and are likely to be taking in even more dollars in the future.  Score: +1.

  I said the runner-up subsector would be LED lighting. Anecdotally speaking, feels like this was also about right. It's a hot sector that looks set to continue to heat up (no pun intended).

  3. 2011 will be a moderately up year for cleantech venture dollars and valuations.

  The dollars prediction was about right, at least through Q3, and I'm guessing Q4 will also be an up quarter when we see those numbers. The valuations prediction was very wrong, however. Tough to find data on this, but I've met with a lot of entrepreneurs who've talked about there being significant valuation downward pressure these days. Half credit only on this one. Score: +1/2.

  4. A major geopolitical event will spike oil prices above $120/barrel.  

  Nope, wrong. But that's because the global economy remained so bad. Certainly we had plenty of geopolitical excuses for oil price spikes this year. Score: +0.

  5. There will be an energy law passed in the U.S., but it will be very patchy and incomplete.

  Nope, not even that. The frustration continues. Score: +0.

  6. A couple of big venture-backed cleantech IPOs (valued over $1.5B) will happen, but still no blockbusters.

  Not so much. The cleantech S-1 backlog continues to grow. Score: +0.

  7. Family offices and other non-traditional investors will become a critical source of funding for cleantech private equity.

  This has turned out to be pretty correct. But while family offices have indeed stepped up with more activity and visibility, the true non-traditional investor "heroes" filling the capital gap have been corporate investors.  Score: +1.

  8. New hybrid investment models will emerge.

  Here's what I wrote last year: "I predicted this for 2010. It didn't really happen. But I continue to speak with both LP-backed and non-traditional VCs and PE players who see the need. So I'll double down for the prediction for 2011. And what I'm talking about is the emergence of new models that combine project finance and venture capital; that take innovative approaches to the use of debt and equity combined; and/or investment into the kinds of business models (like services, etc.) that VCs have typically had a hard time backing." Ditto this year. In particular, at my firm, we have started doing this, but nevertheless, it didn't really happen as a broad sectoral trend. Score: +0.

  9. "Tech-enabled services" will be the new hot buzzword among cleantech VCs.

  At the time, I noted that I shouldn't be predicting buzzwords, but that what I was really predicting was a rise of investor interest in alternative business and investment models in the sector that weren't dependent upon proprietary technology.  And given the rise of activity in IT-based cleantech plays, including the emergence of Sunil Paul's 'Cleanweb' model, I think I was essentially correct. And this trend will continue.  But no, I shouldn't predict buzzwords.  Score: +1.

  10. Among U.S.-based cleantech venture investors, they will devote relatively more dollars to international investments.

  I haven't seen a lot of data around this, so it's hard to say. But I haven't seen a lot of evidence of it, myself -- so let's put it in the "wrong" category.  Score: +0.

  11.  The Washington Redskins will have a winning record.

  D'oh. Score: +0.

   

  So looking it all over, a mixed bag of predictions. In such a chaotic year, that's not too surprising, but still: I scored only 4.5 out of 11. Where I missed, it was mostly by being too optimistic. I'll try to do better later this week when I post predictions for 2012.

  Congrats on surviving 2011, everyone.  And thanks for reading and for reaching out with your comments and feedback.  That's why I do this: to learn.  It's clearly not to demonstrate superior prognostication skills!

  

Quick Hits: Boston’s Super-Angels, Nordan’s Smart Thoughts, and More

• Been caught up in a number of year-end projects and thus am way behind on topics I've wanted to write about, so here's a quick set of thoughts on a few unrelated topics, Peter King "Monday Morning Quarterback" style:

  ***

  Had dinner last night with several of Boston's most active cleantech angel investors (thanks to Bic Stevens for the invite).  No, none of this went on -- just some thought-provoking conversation over a great Italian meal. One thing that struck me, though, was hearing that Boston-area cleantech VCs are now doing only around three or four Series A rounds per year, and yet at that table were angels who had done eight and six deals over the past year themselves.  

  This tells me that for cleantech entrepreneurs in this region (and I suspect it's the same elsewhere), angel funding is now the new-normal way to get started. A few cleantech startups here will take in VC dollars as their first dollars, but many more will have to make significant progress on smaller amounts of money before the VCs will jump in with their multimillion-dollar checks. I suspect this is doubly true for first-time entrepreneurs, as opposed to entrepreneurs who've already got a relationship with a VC or three.

  So for emerging entrepreneurs out there, don't automatically build a plan/pitch requiring a $5M or even $2M Series A to get started. Have at least an alternative plan in your back pocket that allows you to make progress with $250k to $500k. And start figuring out how you can network your way into the local angel community.  

  That isn't as easy as it should be, despite the good efforts of Bic and others like him. So one takeaway for me is that we need to work even harder to make the Cleantech Open Northeast a venue for regional entrepreneurs and angels to get to know each other.

  ***

  Matthew Nordan is one of my favorite cleantech VCs, not least because he's "wicked smaht," as they say around here.  If you haven't read his recent four-part evaluation of the current state of cleantech investing, do so.  

  I find myself largely in agreement with Matthew's points, and in fact have already stolen a couple of his charts for various purposes. So rather than go through the entire four-part series in detail with just a lot of "amens" from me, here are some quick thoughts and reactions, for what they're worth:

  1. This is one of the better illustrations of the decline in early-stage cleantech investing I've seen. It basically shows that Seed/Series A activity has fallen off by about half -- driven, of course, by the general retrenchment of cleantech venture capital and exacerbated by the continued shift to later-stage investing by VCs. Angels and even corporates are filling that void somewhat, so the picture must look even more dire for cleantech venture capital firms.  The pendulum may be starting to shift back, but still -- it's striking.

  2. I disagree with the illustrations by Matthew and others that extrapolate past patterns of capital needs to project future capital needs into later-stage investments in the sector and say there's a huge gap. I understand the logic of it, and it may end up being right. But we're seeing a real shift in the industry. Fewer of the early-stage companies will "graduate," and in some cases rightfully so. Just because all those companies will continue to burn cash, doesn't mean investors should continue to feed them more cash. I'm already seeing a decline in the number and amount of follow-on deals and dollars VCs are willing to put into their companies, except in the case of clear winners -- "pruning the tree" is happening more strictly and earlier in VC portfolios, somewhat out of necessity. Plus, there's a definite shift away from capital-intensive investing in the sector. So while Matthew's basic point is still right -- even as the VCs shift to later stages, there's still going to be yet more need for later-stage capital -- I disagree that it will happen nearly to the extent projected here. Matthew and others who do this type of projection essentially send an implied message: "Hey, there's lots of need for later-stage funding; jump in and fund a fab!" I would tell investors, "Hey, be really careful about being the 100th institutional investor to jump into late-stage cleantech investing, and be especially careful about funding construction of a fab and expecting venture-type returns." There is room for both perspectives alongside each other.

  3. Matthew compellingly illustrates that cleantech venture returns haven't underperformed returns for the entire industry, that there's no "cleantech returns gap."  I agree.  But what I really take away from his analysis is that venture returns have sucked across all categories, cleantech and non-cleantech. I don't find the cleantech fund returns he describes to be particularly compelling, as a group. The median IRR in that group he shows is negative.  And yes, that's on par with VC returns across all sectors over the past decade. Still, I wouldn't want to back an index of cleantech venture funds based upon this performance -- and that's essentially how many of the bigger LPs out there will view the question.

  4. Matthew's breakdown of the three trajectories is very well done.  In fact, it resonates with a similar analysis I did a couple of years ago that showed even more starkly that "last money in before the exit" rounds have rarely led directly to the anticipated exits, thus necessitating further funding, presumably often at down valuations. Common-holders, even founders who are still in the management team, can be the most hurt in such instances, as the preferred investors have various protections and options available for reducing their pain in down rounds.  And angels and founders no longer in the senior management team get crushed. Of course, in this scenario it's quite common for founders to no longer be part of the management team after that happens. So I think the real lesson learned here is that founders and angels need to be more wary of big upround valuations when times are good. Yes, dilution is a concern, and rightfully so, and so I wouldn't argue for artificially holding down valuations, either. But run really, really lean (i.e., smaller rounds needed) and don't over-hype your company. Because if you raise a really big round at an unwarranted valuation, there will be really big and probably unrealistic expectations -- and you will get crushed when they aren't met. At least, that's how I would think about it were I in their shoes.

  Great work by Matthew. Thanks to him for doing this and putting it out there.

  ***

  I think this is one of the most exciting times in cleantech venture investing that I've ever been a part of. Yes, there are some scary things lurking out there. But while we're seeing the "dabblers" back out of the sector, those investors and entrepreneurs still active in it are really committed to it. And at the same time, I'm seeing a next wave of investors like Nordan and Rachel Sheinbein who are willing to re-examine even core and hard-held assumptions about how cleantech venture capital should be done: in some cases (like Rachel) to re-affirm the existing model, sure, but it's still really healthy and energizing to see the examination being done at all.  

  And the dealflow has never been healthier, at least from my perspective.  It's a great time to be investing.

  Plus, I really do feel like we're on the verge of a wave of market reinvention that could finally unlock all the value created during the last decade's worth of technology reinvention. If we can finally start to see entrepreneurs introduce new channels and new business models out there, that could unleash a huge amount of latent growth for the sector.

  ***

  The federal government is incompetent and absent on energy policy, but the states have been stepping into the void.  I continue to hear about interesting new policies and programs being implemented at the state level to encourage implementation of clean technologies, even in states you wouldn't think of as being particularly "green" leaning.

  But what I'm also starting to see is a wave of attacks at the state level against these policies. There's some real "swiftboating" going on right now, even in states like Massachusetts that have been among the most solid leaders over the past few years -- misinformation campaigns and thinly veiled partisan attacks.

  Watch this trend carefully.  

  ***

  I'm headed to the Greentech Media holiday party tonight.  Seems a good excuse to thank them for continuing to put up with my shenanigans and for being a great partner over the past few years.  Thanks, guys -- looking forward to sharing a cup of cheer tonight!

  

Reinvent the Utility

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

  It's time to reinvent the utility.

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

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

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

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

  

What Is “Cleantech 2.0”?

• Here's a not-atypical venture capital story:

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

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

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

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

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

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

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

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

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

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

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

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

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

  

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