GreenGold

Becoming CEO of a Venture Backed Company: Are You Ready for Combat?

noreply@blogger.com (David Gold) — Tue, 05 Mar 2013 17:00:00 +0000

Years ago when I was much younger and contemplating starting my own dot com company, I sat down with a successful and experienced entrepreneur who had built more than one business from scratch. This particular entrepreneur was also a former Marine, so he had earned his grey hairs and steely look in more than one way. I shared my ideas with him and he gave me constructive feedback and asked thought provoking questions. Then, when we were wrapping up, he paused, looked into my eyes and said, “David, if you’re going to try to do this, I can’t predict what the outcome will be. But I can tell you something for certain. Being the CEO of a venture-backed company will be exciting like combat. The highs will be really f**ing high. The lows will be depressingly low… and you’ll be scared much of the time.”

It all seems so easy on the surface: You find a cool technology, raise money, hire great people, market and sell your product and—Voila!—you instantly have a fast-growing company that gets bought for big bucks or goes public. Being CEO of a company that is going to raise capital and attempt to grow at extraordinary rates seems so sleek and sexy, like becoming a Jedi Knight. Yet the process of achieving that success is tough, gut-wrenching, extraordinarily hard work. It is war and wars are not won by individuals but by teams with great leaders. And great leaders don’t do it only for the glory or the rewards they do it because of the challenge of proving to themselves and to the world that they can do it.

The reality is that most venture capital backed companies never see great success. Many successful CEOs often have had failures or flirted with failure more than once along their journey to success. And just like war, even with the smartest, hardest working people and the best leader, it still takes at least some luck to have truly wild success. The CEO’s job is always an uphill battle.

On top of this, what makes the job of a CEO so utterly challenging is that, unlike most jobs, which come with one boss to please, CEOs not only have multiple bosses (i.e., board members) but also have multiple constituencies. CEOs must think not only about their board members, but also their shareholders, creditors, employees and customers. Frequently the demands of those various groups are not completely aligned. They must balance those demands like a plate juggler in the circus—and they need to be running forward at full speed while doing so. Aspiring entrepreneurs and first time CEOs rarely understand or often do not think about the challenges of pulling off that balancing act.

The result is that CEOs often feel like the rope in a multi-directional tug-of-war between their various constituencies. Being that rope is stressful and even though people who want their time and attention surround the CEO -- it is a lonely as well. Everyone else is pulling on the rope, and while they may think they know what it is like to be the rope -- well, only the rope really knows how that feels and the last thing the CEO wants to do is show anyone the strain that they are feeling. As a VC who has been the rope, and now is someone pulling on the rope, at least I can empathize with the CEO’s tough job. While that is mostly a positive thing, it does make things more painful when it becomes necessary to let go of that rope and find a different one.

I have never been in combat, but I can’t recall speaking with any veteran who told me they were never scared. Fear is the normal response when faced with the risk of harm to yourself or someone you care about. The bravest people and the most heroic people feel fear--only the callous and insane do not. When faced with the prospect of losing your investor’s money, having to lay off your employees, creating unhappy customers or being publicly labeled as a failure, it is only natural to feel some fear. And the adrenalin rush that comes with it is part of the thrill of being a CEO.

So, if you’re dreaming of being CEO of a venture-backed company, just remember that being a Jedi Knight is a difficult path that only looks sexy from the outside. It will be lonely, brutal and gut wrenching and you’ll need the best team with you and some luck to succeed. And if you don’t believe you will be scared, like Yoda wisely said: “You will be… You WILL be!”

Networking or Nyet-Working?

noreply@blogger.com (David Gold) — Wed, 12 Dec 2012 22:25:00 +0000

As a venture capitalist, I end up attending my fair share of evening events and conferences. When my wife (who grew up in Russia) and I were dating, she asked me about what I do at these types of events. I told her that I spend most of my time talking with other business people and meeting new business people I previously didn’t know--you know, networking.

“Huh … is there food there?” she responded.

“Usually,” I said.

“And drinks and booze?” She asked.

Wondering where she was going, I responded, “Well, I guess so.”

She chuckled and shook her head, saying, “I get it, not networking but nyet-working!”.

Interestingly, some entrepreneurs--especially those who come from technical backgrounds--would often agree with my wife. They tend to view the inefficient process of rummaging around meeting “random” people at events as largely a waste of time. They often think their time could be better spent improving their technology, planning a budget or working on sales strategies.

But the reality is that in the age of social media, the importance of networking to an entrepreneur has not diminished; its value (specifically because of social media) is actually higher than ever. Raising money and doing business is a social sport. Serious business relationships are not built online but first on human contact and trust. As amazing and powerful as the Web is, it will never replace a handshake.

The great thing about social media is that it creates a huge multiplier effect on the physical relationships that are built between people. Even a brief meeting can turn into a long-standing relationship through the power of LinkedIn, Facebook, Twitter and other electronic media. The ability to leverage a relationship has grown exponentially because of the power social media brings. I have a rule on LinkedIn to connect only with people I have actually physically met. I do that because I know that if I need to ask them for an introduction to someone they know, they are much more likely to follow through if they actually know me. LinkedIn empowers me to see not only my 1,900 direct connections, but also about 500,000 other people to whom my connections can directly introduce me. That’s a huge multiplier affect… but it all starts with a handshake.

If one attends only random networking events, the outings probably won’t be very productive. But here again, the power of social media can enable physical networking to be more efficient than ever. Not only can you filter events by their topic, oftentimes you can actually see who else is planning to attend along with their photos and background profiles. Sometimes you can even see mutual connections you have with other attendees. So, what started as a random networking event can turn into a highly targeted tactical event with specific people whom you know would be valuable to meet.

When it comes to raising investment capital for your business, I can assure you that the best business plan in the world will be insufficient—because raising capital is most certainly a social sport. The same is true of most significant business relationships. If you think about networking as a horrible waste of time, think again. Nyet-working may be what you’re doing when you are sitting at your desk.

Now That the Cleantech Hype is Gone, the Real Venture Investment Opportunity Begins

noreply@blogger.com (David Gold) — Thu, 08 Nov 2012 16:11:00 +0000

The bubble has burst. The hype and euphoria of 2008 and 2009 is a distant memory. Fueled in part by the externality of the handouts from the stimulus package, and the (now fleeting) spike of natural gas and oil prices, cleantech has experienced its own mini dotcom era now followed by a dot bomb phase.

The politicization of Solyndra, the fracking revolution (that has dramatically increased U.S. fossil fuel reserves) and the realities of what it takes to build successful cleantech companies have all brought the cleantech venture capital space crashing back to earth. Available venture capital for cleantech companies has declined dramatically as some diversified funds pull out of making cleantech investments and cleantech-focused funds find it challenging to raise new capital. But this is not the beginning of the end for cleantech venture capital. Rather, it is the end of the beginning. While the cleantech hype has been fueled by a focus on global warming and the anticipation of government policies on carbon, the true underlying dynamics that will drive the explosion of clean technologies in a variety of sectors remain largely unchanged -- the impending extraordinary growth in demand for commodities of all types.

In the 1960s, there was a widely held belief that world population growth would lead to the demise of the human race. In fact, based on the thinking of those experts, many of us should be dead by now. Back then, experts believed the world could not possibly supply the anticipated population with the necessary food for survival. But a wonderful thing occurred -- the thing that separates humans from animals. The necessity of rapidly increased food supplies lead to the invention of disruptive advanced agricultural technologies. The result? In spite of population growth, today the world generates more food per capita than ever before.

It is that same type of dynamic that will be the true underlying driver behind cleantech innovation. Over the coming decade, the world will add about 1.5 billion people to the ranks of the middle class. That’s approximately a 75 percent increase from the number today. Such an increase will mean 1.5 billion more people who will buy cars, electronics, improved housing, higher protein foods, demand clean water and consume more energy. A Brookings Institute study estimated that this will yield a comparable increase in the world population’s overall consumption.

The authors of the doom and gloom books of the 60s would look at this and forecast extraordinary increases in the prices of all types of commodities, which would lead to global disruption and unrest. I do believe we will see increased volatility in a variety of commodity prices, but I also believe that this dynamic will drive innovation just like it did in agriculture. Rapid increases in demand for commodities, enormous markets and the ability for new technologies in certain segments to provide disruptive advantages will create an environment for compelling venture capital opportunities.

The New Global Middle Class:A Cross-over from West to East: Brookings Institute

Many cleantech venture capitalists have focused on CO2 as the driving force for innovation. But I have always looked at cleantech as way to drive increased efficiency, reduce waste and create less expensive alternatives -- the things that drive bottom line benefits in the free market. In other words, creating Gold by being Green (hence the name of my blog). The combination of the natural gas boom and the political reality of the unlikelihood of a price on CO2 emissions in the U.S. (or just about any nation that doesn’t already have one) has caused those with a CO2-focused investment thesis to face a very challenging environment.

If cleantech is viewed as synonymous with carbon emissions reductions, then the segment will be challenging from an investment perspective. But through the lens of GreenGold, where cleantech is about reducing the consumption of all sorts of non-renewable commodities, there will be many compelling investment opportunities yet to come. Undoubtedly the devil is in the details of which markets and areas of innovation will hold the best venture potential (ahh… fodder for a future post). But I believe that investors who run from anything remotely cleantech today will find themselves looking back and feeling like those who ran from investments in the Web in 2002. Now that the hype is gone we can focus on building real businesses. The next decade will be the one where real value is created in a number of segments of clean technologies and I, for one, plan to be making money by investing in some of those winners.

Fingernails on a Chalkboard: “Pivot” and Other Lame Business Expression Fads

noreply@blogger.com (David Gold) — Thu, 31 May 2012 03:23:00 +0000

As a venture capitalist, I am exposed to all the latest fads in business expressions. When a word or phrase is hot, I get to hear it over and over again in pitch sessions, at board meetings and at conferences. No matter where I am, the latest fad expression seems to pop up everywhere. Whether a particular phrase really applies to a situation or not, most people think it’s cool to use the latest lingo. For those of us who hear these expressions frequently, it starts to sound like fingernails on a chalkboard—especially when they are so obviously used just for the sake of using them. So, plug your ears and let’s scroll through some of the worst business expression fads over the past decade or so. It will be fingernail-screeching fun!

In the late 90s the word “synergy” was all the rage. Everything was synergistic. One plus one was always greater than two. There were synergistic businesses, synergistic people, synergistic policies, synergistic politicians (Does that mean we’ll have more of them?). I even had one employee talk to me about the synergistic relationship between himself and his spouse. I almost asked him if this type of synergy was akin to polygamy.

After synergy came “coopetition.” It was no longer good enough simply to compete or cooperate—you should do both at the same time. Coopetition didn’t just apply to the relationship between one company and another. There was coopetition between departments in companies, coopetition between co-workers, coopetition between neighbors, and coopetition with my sparring partner when I was practicing karate. Can’t I just focus on winning, please? Sometimes it’s just wrong when competitors don’t simply compete.

From there we all got ill with a virus: Everything was going “viral.” Most marketing plans I saw included a component described as viral. Yet few understood what the term really means. A truly viral business spreads rapidly because customers will often introduce others to the product or service during the action of using it for themselves. Examples of actual viral companies include Hotmail, Dropbox and Survey Monkey. It was so tiring being told for the umpteenth time that a business would have a highly viral affect of happy customers wanting to spread the word about its product or service. But that isn’t viral…that is just good old word-of-mouth! One thing was sure, I felt a bit under the weather after every outbreak of viral verbiage.

More recently, I found a rapid emergence of people saying “then a light bulb went off” to describe when they or someone else came up with an idea. This one is a particular pet peeve for me, because it’s just downright stupid. Since when has the little cartoon of the person getting a bright idea been drawn showing a light bulb over their head with the light off? I even heard the famous physicist Michio Kaku say this on a tribute show to Steve Jobs! I am almost certain that when Steve Jobs came up with his many brilliant ideas, it was like a light bulb turning on. Maybe this is part of the cleantech explosion representing our desire for increased energy efficiency? Come on, we have LED light bulbs now—turn the damn light on when you get a bright idea, will you?

And now we come to the latest business fad word: “pivot”. If a business hasn’t made a pivot, then it must not be up with the times, because they all seem to be pivoting! The word “pivot” is most commonly used by entrepreneurs to show that they have learned from their mistakes and adjusted the company’s direction as a result. But a pivot is, by definition, a fixed point on which a mechanism turns. So, when an entrepreneur proudly says that they have “made their pivot,” have they now stuck themselves in position never again to move forward? Are they rotating endlessly in a new direction? (We call those the “living dead” in the VC world—yikes, another fad expression!) If they break out of their pivot and move forward will they be penalized for traveling? Pivot shmivot! Why wouldn’t one just say that they had “redirected” their business … meaning that they are still moving forward but in a different direction? Because, using the word “redirected” isn’t cool or hip enough – it’s the latest fad.

Soon the pivot fad will fade to be replaced by the next hot expression. But each hot expression leaves a residual footprint that never completely goes away. So, if you come to pitch your company to me and you explain the great synergy amongst your management team, the coopetition you’ve demonstrated through your strategic alliance with a key competitor, your great word-of-mouth viral marketing, how a light bulb went off when you got your great idea or your beautifully executed pivot, I hope you will understand why I may be wincing a bit. All I will hear are fingernails on a chalkboard.

A Shining Star of Bipartisan Cleantech Support

noreply@blogger.com (David Gold) — Fri, 03 Feb 2012 17:51:00 +0000

Amid all the negative publicity that Solyndra’s failure has brought to the Administration’s cleantech efforts, one cleantech program has received broad bipartisan support: DOE’s Advanced Research Projects Agency – Energy (ARPA-e). In 2012, ARPA-e will receive $275 million, a 53% increase from the prior year with both the House and the Senate supporting significant funding for the agency’s third year of operations.

ARPA-e is modeled after the Defense Advanced Research Projects Agency (DARPA), which for over 50 years has funded early-stage research projects that show the potential to develop technologies that could yield disruptive advances for the military. DARPA’s projects have resulted in major leaps including, but definitely not limited to, the Internet, stealth technology and the Global Positioning System. Both agencies operate by soliciting proposals from companies, universities, and labs within broad thematic areas and select the most promising proposals for grant awards.

Readers of my blog know that I am not a big fan of some of the Administration’s cleantech efforts. ARPA-e is at least one exception. Authorized in the last year of the Bush Administration and initially funded through the Obama Administration’s American Recovery and Reinvestment Act (ARRA), the ARPA-e program may be one government program that can help seed the disruptive advances needed in our energy economy.

Why, given the negative publicity around government funding for cleantech projects, has ARPA-e been able to win bipartisan support?

Focus on early stage R&D

Government-funded R&D has long been an area of bipartisan support. Most members of Congress believe (as do I) that the government has a role in funding early-stage research and innovation in areas of public interest where the private sector is unable to economically justify conducting such R&D given the high degree of risk. Unlike the DOE loan program that funded Solyndra’s factories, the purpose of the ARPA-e grants are to fund high-risk, high-reward R&D projects that industry alone cannot support, but whose success could dramatically benefit the nation.

Grants (of reasonable size) not investments (of enormous size)

The bulk of the Administration’s cleantech investments were funded through the ARRA including the initial funding for ARPA-e. Since ARRA’s purpose was to stimulate the economy, government agencies, including DOE needed to get funds out the door as quickly as possible (unfortunately this failed). That led to many extremely large awards of both grants and loan guarantees. Just a few high profile examples -- $527 million to Solyndra (bankrupt), $465 million to Tesla, $249 million to A123, $76 million to Range Fuels (bankrupt), $43 million to Beacon Power (bankrupt) and $25 million to Amyris. Some of these awards were grants; others were loans where the government hoped to get a return on its investment.

Unlike many other programs handing money out for cleantech related efforts, ARPA-e’s awards have all been grants made with the clear understanding that they are for high-risk R&D that often will not work out. In no case is there an expectation of a financial return to the government. Anytime a government program expects to make a return on investment it is, in my opinion, likely to fail both because the government is inherently flawed at making good business decisions and because politics usually won’t allow for even a single failed investment.

ARPA-e grants to date have averaged $2.9 million and have gone to 180 different projects. As a result, ARPA-e largely avoids the minefield of government trying to play businessman as well as the negative PR fall-out from large project failures. In addition, while politics can play a role in any grant process, the smaller the awards the less potential for political influence to outweigh project merit.

Energy Independence & Global Warming

ARPA-e’s guiding legislative mandate is to enhance the economic and energy security of the United States through the development of technologies that reduce energy imports, reduce energy-related emissions including greenhouse gases, and improve energy efficiency in all economic sectors. By combining the goal of energy independence with reduced greenhouse gas emissions the program is able to appeal to a much broader array of elected officials. If the program only focused on reducing greenhouse gases, I strongly suspect there would be much less support from Republicans. By avoiding the polarizing nature of focusing only on global warming or only on energy independence, ARPA-e is able to appeal to a broad audience.

One of the best ways to help solve our energy challenges is through disruptive energy technologies. If ARPA-e can deliver for energy technology even close to how well DARPA has delivered for defense technologies it will ultimately have a large impact on the economy, energy security and the environment. To achieve this, ARPA-e must remain nimble and avoid being sucked into the massive DOE bureaucracy. If it is able to do so, I suspect it will continue to have bipartisan support and will be a long-term shining star in the Administration’s cleantech efforts.

(Note: ARPA-e will hold their annual Innovation Summit February 27-29)

A Cleantech VC Who is Unconvinced of Man-Made Climate Change

noreply@blogger.com (David Gold) — Thu, 15 Dec 2011 04:53:00 +0000

Go ahead -- call me a hypocrite. I claim to be a cleantech venture capitalist yet I tell you here and now that I am not convinced of anthropogenic (human-caused) climate change (aka global warming). And I will audaciously tell you that my convictions on climate change in no way run contrary to my strong belief in the need for a cleantech revolution.

Many supporters of clean technologies make it seem as though anthropogenic climate change is an absolute fact. To some of them anthropogenic climate change is almost like a religion where any debate or doubt is not tolerated. Some of them may call me a heretic just for writing this post.

At the same time, those on the other end of the spectrum are equally religious in their fervor and certainty that anthropogenic global warming is a fraud. They are certain that human emissions of carbon dioxide and other “greenhouse” gases could never impact our climate. And they may twist this post to use it as yet another data point against claims of global warming and added rationale to do nothing except increase fossil fuel exploration.

In both groups, it is my perception that most have read little about the topic other than the popular press. And I find both groups equally sad in their myopic viewpoints. If both of these camps would open their eyes, I suspect there would be much greater agreement on the need for action on clean technologies rather than the divisiveness that their polarizing views create.

There are solid scientific theories and extensive data, anchored by the UN Intergovernmental Panel on Climate Change Report, that indicate the possibility that over time man-made emissions of greenhouse gases could impact the global climate and may have already begun to do so. To dismiss them out of hand because there is some reasonable doubt is irrational.

Similarly, to speak about anthropogenic climate change as a certainty or to claim that there is no disagreement among scientist is simply incorrect. There are reputable climate scientists who remain unconvinced. The reality is that all predictions of global warming are based on very complex climate models. We can forecast the weather a few days out with reasonable accuracy but if you try predicting next year’s summer temperature -- let alone long-term global climate conditions -- things fall apart quickly. Long-term climate models are anything but accurate.

We know with certainty that past natural occurrences have caused significant changes to the atmosphere, resulting in climate changes. So, there is little question about whether changes in the atmosphere can cause climate changes. Rather, the question is whether man-made emissions are significant enough to cause a change on their own and to overcome the large natural forces on our climate that include sun spots, variations in the earth’s orbit, and volcanoes all of which have not been taken into account in forecasts of global warming.

Often there is a focus in the media on recent variations in climate as a source of evidence for anthropogenic climate change. Variations in climate over short periods of time are highly suspect as evidence. While most scientists seem to agree that there have been increased temperatures and other climate changes over the past century or so, what cannot be said with certainty is that the increased CO2 levels caused this as opposed natural climate change events that have and continue to happen regularly to our planet. Even the UN Intergovernmental Panel on Climate Change report, which is the backbone of support for anthropogenic climate change, found that its confidence in human contribution to such measured weather events (e.g., temperature, severe storms, sea level, etc.) could be as low as 50% for most of the events and 66% for the others (pages 23 and 52 of the Technical Summary).

Climate change is measured over extremely long periods of time – not a few years or tens of years. Some of the best long-term data on historic CO2 concentrations and temperatures is derived from glacial ice core data that spans back 400,000 years. This data shows that the concentration levels of CO2 in the atmosphere today are strikingly more than 20% higher than any level measured in the past 400,000 years (See Figure 1). The recent rapid increase corresponds well with the industrial age and temperature variations are in high correlation with CO2 concentrations. This is hard data to ignore or simply write-off.

Figure 1 – Data from Vostok Ice Core (400,000 years)

Figure 2 –Estimated CO2 and Temperature Changes over 500+ Million Years

But interestingly over longer periods, the level of CO2 today is far below the estimated levels during many times in history (Figure 2) raising the possibility that the current spike may have other natural contributors. And the correlation between temperature and CO2 that seems so apparent in the 400,000-year ice core data becomes much less clear when looking over many millions of years.

While most scientists seem to believe that, in isolation, increased CO2 concentrations create an increased “greenhouse” effect whereby the CO2 acts like a blanket, preventing more of the heat radiated by the earth from going back into space, at what concentration level and over what time period remains a point of uncertainty and debate. In addition, how other factors that may occur with warming such as increased moisture and clouds as well as changes in absorption of CO2 into the ocean at varying temperatures will affect the warming dynamic and other climate change is much more uncertain.

The bottom line is that we won’t truly know if man has caused climate change until after it has already occurred for a very long period of time.

And that’s the rub. The theoretical costs to the human race of global warming are high: rising ocean levels, decreased polar ice, increased severe weather and significant changes in precipitation patterns. If they occurred to a significant degree, all could have sizeable economic and health implications. But there is no certainty that we will ever pay such a price. More compelling is what we know with near-certainty:

· Fossil fuels are a finite resource and they do pollute. Reduction of pollution is always a good thing. And with booming energy demand in China and India, fossil fuels are a resource that will become scarcer and more expensive. You can argue about the pace, but few argue that it will happen. Even oil rich countries such as Saudi Arabia have begun to accept this fact.

· Increased sources of cost-effective energy and more energy-efficient consumption have and will continue to lead to increased standards of living.

· Nations with greater diversity of energy sources have greater economic and national security.

· The U.S. Defense Department believes that climate change will impact our national security.

· If anthropogenic global warming is real, by the time we start paying the price for the damage we have done it will be too late to turn things back quickly.

To claim with certainty that man is causing climate change or to claim there is no risk of anthropogenic climate change are both incorrect and both are polarizing.

While it is not certain, there is evidence that suggests that human emissions of greenhouse gases may be changing our climate in ways that could have dramatic impacts. We can do nothing and roll the dice that everything can be OK. Or we can take steps to diversify our energy sources away from fossil fuels and increase our energy efficiency, thereby not only reducing the risk of anthropogenic climate change but also increasing the robustness of our economy and our national defense.

Although there should be debate about the specifics of how to best advance the availability and utilization of cleaner technologies, support for cleantech innovation should be the ultimate bipartisan issue without the divisiveness created by talking about anthropogenic climate change as if it is a fact or as if it is fiction.

Feeling Blue About Green? Reasons for Cleantech Optimism...

noreply@blogger.com (David Gold) — Wed, 09 Nov 2011 18:00:00 +0000

There are so many easy reasons to be a pessimist today: the world financial crisis, the discord and dysfunction in Washington, and the almost certain doom that many scientists claim we are facing from global warming. With the first high profile cleantech company failures, the euphoria of the cleantech bubble has burst creating pessimism about the future of cleantech as a whole.

I say, hogwash! History says we have many reasons to be optimistic. Just because things look bad today doesn’t mean the world is coming to an end! We humans have a hard time stepping back and getting a perspective on things that span long periods of time and it’s easy to get lost in the fear and distress of the day. But as a cleantech venture capitalist, I am almost required to be optimistic. How else could I make high-risk investments in early stage companies?

With renewable energy representing only 8% of consumption in the U.S., no doubt there is work to do. But I prefer to look at the cup as 8% full. Consumption of renewable energy has been growing rapidly in the U.S. -- at an average rate of 7% the past several years. At that pace, renewable energy consumption would double less than every 11 years.

Pessimists will point to forecasts such as those from the Energy Information Administration that project significantly slower growth. The most recent of those very projections just three short years ago forecast consumption for 2010 that now, by EIA’s own numbers, are known to be about 17% low! The problem with forecasts of these types is that they systematically fail to account for future disruptive technologies or significant changes to market conditions.

In 2001 it seemed like the days of the dot com were gone as the markets crashed and company after company went out of business. Yet, the greatest value creation on the Web occurred after the dot bomb. I don't believe we are doomed; I believe that technology innovation will enable disruptive changes in our energy production and consumption and I believe the greatest value creation for cleantech companies lies ahead.

So, to cheer you up, here are just a handful of examples in which past forecasts of doom were way off and whose combined legacy says, " Don't underestimate the power of human innovation and spirit!"...

We Never Had to Import Liquefied Natural Gas

Just a bit over six years ago our nation was facing an extraordinary natural gas crisis. As utilities had shifted to gas-fired plants in the ‘90s to reduce consumption of coal, consumption of natural gas boomed. As the cleanest and lowest CO2 burning fossil fuel, natural gas was (and is) being used as a critical bridge from coal and oil to renewable energy sources. Yet natural gas production was on the wane because proven reserves couldn’t keep up.

In 2003, Alan Greenspan sounded the alarm to Congress about the potential impact on natural gas prices (which were already on the rise) if significant action to increase imports wasn’t taken. The problem, though, was that natural gas can only be transported by pipeline or by container and only in a liquid form, but the reserves were mostly overseas. So, in 2005 there were plans for as many as 55 Liquefied Natural Gas (LNG)-importing facilities. Only six were built, and most sit idle today. Disruptive horizontal drilling and fracking technology opened up enormous reserves of previously unreachable natural gas in shale. Production skyrocketed and prices dropped by over 60%. Current estimates place U.S. reserves at 100 years or more…without additional technology.

Disruptive Lighting

In the 1960s, Light Emitting Diodes began to come to market for niche applications. The concept that they would someday disrupt the world of lighting seemed far-fetched. They were dim, extremely expensive and incapable of generating pleasing white light. My, how the world has changed in just a few decades! The brightness of LEDs has increased more than five orders of magnitude while, at the same time, their cost per lumen (a measure of brightness) has dropped by about four orders of magnitude. And, to boot, pleasing warm and bright white light is now the norm. What seemed impossible just a short time ago is now more than possible – it is changing the way the world thinks about lighting, and the exponential improvement in LEDs shows no sign of slowing down.

The Population Bomb Didn’t Explode

In the 1960s predictions of world starvation by the 1980s were rampant in books like the best-selling The Population Bomb by Paul R. Ehrlich or theorists like Thomas Malthus. After all, back then world population was going to double every 30 years or so, meaning we should have had over 11 billion people in the world today! Yet, world population just reached 7 billion.

World population growth rates are now less than half what they were in the early ‘60s and continuing to decline. Based on today’s population growth rate and the continued forecasted decline, it will take about 100 years for human population to double again.

OK, you say, but that still means having 14 billion people on the planet in a hundred years! True, but in the 1960s another reason population doom was the rage was an assumption that agricultural production couldn’t keep up with the exponential growth. Yet, dramatic agricultural technology innovation that improved crop, soil, water, nutrient, and pest management has enabled the amount of food production per capita to increase by over 30% during that timeframe in spite of a more than doubling in population! Hunger still haunts parts of the world, but the pessimistic doom predicted in the ‘60s was far from today’s reality, in which the amount of food per capita has increased. One can only imagine where our technology will be in another century.

200 Countries, 200 Years…

Pessimists will surely find reasons to pan this article… for example, concerns about fracking fluids or the disparity in food distribution around the world. A pessimist sees these as reasons to stay pessimistic. An optimist sees them as new areas where we as humans will work to improve. So, if you are still feeling depressed and pessimistic, I will leave you with one of the more profound and optimistic views on world progress that I have seen. Hans Rosling is a professor of International Health at Karolinska Institute in Stockhom and his video 200 Countries, 200 Years is a sure cure for any pessimistic day.

Obama Cleantech Stimulus: Bad Policy, Bad Politics and Bad for Cleantech

noreply@blogger.com (David Gold) — Tue, 25 Oct 2011 22:49:00 +0000

The Solyndra debacle is no surprise to this cleantech venture capitalist. The inherent conflict between trying to get money out of the U.S. Treasury as quickly as possible to stimulate the economy and, at the same time, have government agencies that are ill-suited at making business decisions do just that was nothing other than a recipe for disaster.

Anytime a government program is giving money to the private sector with the intent of getting the money back, the program is doomed to failure. Bureaucracies, politics and the lack of a profit motive simply don’t allow government to succeed in business. Anyone who was surprised that politics played a role in the loan decision for Solyndra (and almost certainly other awardees) is very naïve.

Even if, by some miracle, the government could make good business decisions void of political influence, such programs are still doomed to failure because the public and media won’t allow for even one loan or investment to fail. In venture capital we make investments that don’t succeed and we fail often. Yet, we are still successful on the whole. Our successes more than compensate for our failures. The government has no ability to operate this way. Even if a program like the DOE loan guarantee could operate with an overall effective return (which I find unlikely anyway), its first failure would sink it. The government can give away money, but it cannot effectively invest money in individual companies.

Solyndra won’t be the last default from the DOE loan guarantee program. The huge amounts of money that will ultimately have been wasted in the cleantech stimulus – both in terms of loans that won’t be repaid and the stimulus’ failure to create any meaningful job growth when growth was most needed - is bad for tax payers. The negative PR and the future demise of cleantech policies that otherwise may have had broader bipartisan support is bad for cleantech.

In 2009, amid the euphoria of the Obama Administration’s cleantech programs, I wrote that the Administration’s cleantech stimulus was bad policy but good politics. I was wrong… not only was the cleantech stimulus bad policy, it was bad politics too. While the politics by which the Administration pushed through these ill-thought programs may have been deft, the ultimate political impact is clearly bad for both the Administration and cleantech itself.

Ultimately, we may look back at Solyndra as the dagger that burst the cleantech bubble. The hype and euphoria are officially gone. The long, hard work that will be required to diversify our energy base and increase energy efficiency wasn’t reduced when the government sent floods of money out the door to cleantech companies, and it won’t change now that the hype of those programs is gone. The good news is that, like the Web and every other technology bubble, the real value creation comes after the bubble has burst.

So, let’s get back to work.

Top 5 Things Cleantech Entrepreneurs Fail to Understand About Raising Venture Capital

noreply@blogger.com (David Gold) — Mon, 26 Sep 2011 19:00:00 +0000

After decades of venture capital investment, growth and exit, the traditional focus areas of venture capital (such as IT, web and software) have developed strong entrepreneurial ecosystems. A high percentage of start-ups in these traditional areas come to market with one or more experienced entrepreneurs, or with a strong and active network of investors/advisors who have “been there, done that.” They know what it takes to raise capital and to build a great fast-growing business. Cleantech companies, however, are much more likely to be led by first-time entrepreneurs who often struggle to create an ecosystem of experienced people around them.

As a venture capitalist, I review hundreds of business plans each year and physically meet with roughly a hundred entrepreneurs seeking capital. I have the advantage of doing this through the eyes of someone who has been on the other side of the table, having raised venture capital for my own start-up before becoming a VC. And while there are certainly numerous exceptions, there are themes I see across cleantech start-ups that are not specific to their technology or market but which nonetheless impede their ability to raise capital. Here is the top five…

Technology is necessary, but not sufficient.

Many cleantech entrepreneurs are engineers or scientists. Although not the result of a formal survey, my perception is that many more have PhDs than what you find in internet start-ups. I don’t know if it’s a symptom of having achieved such a lofty degree, but many seem to believe that their phenomenal technology and their outstanding technical skills alone should justify an investment in their company. It isn’t. Weak entrepreneurs can take the most game changing technology in the world and drive it into the ground. Conversely, outstanding ones can take a good, but not great, technology and make a world-class business out of it (anyone heard of Microsoft?). So… in scientific terms, having compelling technology is a necessary but not sufficient condition for entrepreneurial success. Human capital must always precede venture capital.

Your 50-page business plan is a waste of time.

Will someone please tell all the college business professors that the traditional business plan is a dinosaur! No VC has time to read such a tome. Nothing ever turns out completely as expected, so writing a long document as if it will prescribe the future is silly. And by the time you finish investing the time to create such a detailed document it is most assuredly out of date.

Conversely, too little time is invested into building a robust spreadsheet financial model. Not a static five-year P&L – that is almost useless. Rather, what an early stage company needs is a financial model that can be used to run “what-if” scenarios, e.g. “What if our margins are less?” “What if it takes us a year longer to get to market?” A tool like this accepts that the future is uncertain and that entrepreneurship is about taking risk. As an entrepreneur, which would you rather have, a 50-page wish or a model of your potential risks?

The thought process that goes into fleshing out the basic elements of a business plan (e.g, market, competitive advantage, go-to-market strategy, financial model, etc.) is what is paramount. Entrepreneurs that recognize this look at their business strategy and financial model as planning tools more than as fund-raising tools. And they realize that communicating the results of that thinking must be done concisely.

Eisenhower once said, “In preparing for battle I have always found that plans are useless, but planning is indispensable.” Start-up businesses are no different.

A real advisory board isn’t just a list of cool names.

Some cleantech entrepreneurs get advice along the way that they should form an advisory board: Get some people with cool experience and ask them if you can slap their names in your business plan. That’s not an advisory board – it’s just a list of cool names.

A real advisory board not only has relevant experience and business contacts but also is actively engaged in the business, albeit on a very limited basis. They meet regularly with company leaders, have provided concrete material assistance to the company and they have a specific personal interest in the company. Such personal interest can take many forms, such as a stock option, a direct investment, a future executive role, prior significant personal relationship with a founder or clear strategic interest for their current employer.

Volunteer advisors who have no economic, business or personal connection to the company are cute. They are like the parsley on your breakfast plate – they make it look nice, but add little substance and… at least for this VC… leave a bad taste in my mouth!

25% gross margins and growth to $20M in seven years aren’t exciting

At the highest level, there are three types of start-up companies. There are high-growth businesses with venture potential. There are downright bad businesses. And there are steady growth businesses, which are not “bad” businesses – they just aren’t great venture investments.

Venture capital funds are mostly 10-year partnerships. We need to target businesses that we believe can generate huge multiples (typically 10x or more) on our investment in less than that timeframe so we get both liquidity and sufficient returns to make up for those investments that aren’t as successful. That means companies that can use our capital to drive extraordinary growth, unfair competitive advantages and healthy margins yielding an exit return far beyond a simple discounted cash flow analysis on the business.

My second cousins are billionaires. They built one of the first mail-order office supply companies to a dominant leader in its industry over 40 years (you can read their story in this book). They never raised a penny of equity capital. It was a great steady growth business that made them extraordinarily wealthy. Steady growth businesses can lead to phenomenal personal wealth, but that doesn’t make them good venture capital investments.

Last, but by no means least…raising capital is a social sport.

Quick quiz: What is the single most important element of raising venture capital? Your pitch deck? Your technology? No, no… your management team’s experience, right? Wrong… it’s your relationships with potential investors. Who you know is often more important than what you know in business.

The classic fund-raising mode for most cleantech entrepreneurs is to send their business plan to lots of funds, pitch at various cleantech business plan events and then wait to see who pursues them. They let the VCs drive the process. Few look at this as the sales process that it is. Don’t spam slews of potential investors. Rather, identify the funds that should be your top targets based on the investment interest they describe on their website. Pursue them like you should a prospective customer: qualify them, identify their hot buttons and always be closing on a time-bounded next step with them. And, as all great sales people know, getting an introduction is infinitely better than a cold call.

So, does that mean that only entrepreneurs who already have VC relationships can get funded? No, but that sure as heck helps a lot! And in this day and age, if you can’t get an introduction to me or another VC, you then you aren’t a very good entrepreneur. There are almost 500,000 people who know somebody who knows me on LinkedIn and can get you an introduction. Many VCs are equally well-connected – it’s part of what we do. So, which business summary do you think I take more seriously -- the one that comes in from our website without an introduction or the one referred to me by someone I know?

And with that, you now have as a perk for reading my blog, a free roadmap for increasing your odds of raising capital from me!

If Energy Were Free and Unlimited…

noreply@blogger.com (David Gold) — Fri, 13 May 2011 17:58:00 +0000

As soon as gas prices rise, our nation becomes focused on energy. When they drop again, it falls off most consumers’ radar. Yet the importance of energy goes way beyond the cost of filling up your gas tank or paying your electric bill. In often-extraordinary ways, energy is interwoven into absolutely everything that we need to live or that we love to do. One of the most useful tricks I learned in engineering school is that to put any problem in perspective, it helps to ask what if things were at zero or infinity. So, to put things in perspective, let’s ask the question…

“What if energy were free and unlimited?”

· People would be able to travel at bargain-basement rates.

Yes, the cost of land vehicle transportation, which is so much of the focus in the press, would drop by 25%-35%[i]. But, in addition, airline costs would plummet as much as 50%. With this would come increased commerce and maybe even greater worldly understanding, as more people are able to travel.

· The world’s growing shortage of fresh water would largely disappear.

A huge amount of energy is expended on the conveyance, pre-treatment, distribution and wastewater treatment. Energy represents 30% or more of a typical municipal water facility’s expenses.[ii] With free energy, water could affordably be produced in abundance through the highly energy-intensive processes of desalination, wastewater purification or even direct extraction of water out of the air.

· Few in the world would go hungry.

Today, energy represents roughly 30-45%[iii] of the cost of the food we put in our mouths. Farming, transporting, processing, packaging and retailing all consume tremendous amounts of energy. The price of food would drop and the availability of food would skyrocket. With free and unlimited energy, food could be grown affordably just about anywhere, given that water would be readily available and, where necessary, climate-controlled growing facilities would become inexpensive to operate.

· Economic prosperity would reign.

The correlation between energy consumption and standard of living is strong.[iv] Everything that we use consumes energy to be produced and transported. For example, energy represents roughly 50% of ocean shipping cost and 40% of aluminum production cost. Impoverished people would have more food to eat and cleaner water, their homes would become more comfortable, and the price of almost everything they buy would go down instantly, boosting their quality of life.

So, the next time you hear complaints about high gas prices for our cars, remember that energy affects much more than just the cost of your ride to work or trip to the beach. With this perspective in mind, it doesn’t take much to figure out what things would look like in the opposite scenario, where energy becomes extremely expensive and scarce as fossil fuels diminish. It isn’t a matter of whether we will move away from fossil fuel consumption; it’s a matter of over what time period and with how much economic, national security and environmental pain along the way.

The free market will most assuredly create more alternatives as energy prices rise. If we could be confident that future increases in energy prices would be gradual over a long period of time and that global warming was not a concern, there would be little reason to take any particular action. But history has already shown us that changes in fuel prices are unlikely to be gradual. And the growing industrialization of major portions of the world such as China and India mean that world energy consumption is likely to grow roughly 50% over the next 20 years.

This leaves little doubt about the direction of energy prices in a world dependent mostly on fossil fuels. From a venture capital perspective, it is this type of disruption that makes cleantech a compelling area for investment. From a policy perspective, if we are faced with high energy prices for an extended period of time or if global warming creates environmental chaos, the negative impacts could be extraordinary and would impact virtually every part of our lives. But, on the positive side, an expensive gas tank fill up would soon be the least of our concerns!

[i] Transportation:

o Fuel costs alone are roughly 45% of airline operating expenses and that doesn’t include energy costs incurred for ground support vehicles or buildings used by airlines.

o Driving a car would cost 25%-35% less per mile. (@ $3.50/gallon gas cost).

[ii] Water:

· 3% of all energy consumption used to move, treat water. 30% of municipal water agency expenses are energy.

[iii] Food:

· 17% of all energy consumption goes to creating and getting food to the grocery story. http://www.p2pays.org/ref/08/07686.pdf

· As a result, roughly $240B per year is spent in the U.S. on energy costs related to food.

· This equates to roughly $2,000 per family unit per year http://www.bls.gov/news.release/cesan.nr0.htm

· Those same family units spend roughly $6,400 per year on food.

· Thus, if energy were free, food could cost roughly 31% less. Then there is the energy cost of getting the food home, preparing it, clean dishes and disposing of waste.

[iv] World Prosperity

· Correlation to standard of living.

· Shipping costs.

· Aluminum costs.

Renewable Energy Standards: Savvy or Silly?

noreply@blogger.com (David Gold) — Thu, 17 Mar 2011 19:31:00 +0000

State renewable energy standards have gained momentum over the past decade with 29 states having put in place various types of standard mandates and five more having implemented voluntary standards (34 total). Now the federal government is looking to get into the game with a bi-partisan bill (S. 3813) aiming to set a minimum national standard. Renewable energy standards certainly feel good, but do they really provide the best path for achieving their goals? The existing renewable energy standards are savvy in finding a way to reduce fossil fuel consumption and carbon emissions while simultaneously being politically palatable to a broad array of people. But they are a bit silly in their formulation.

The popular momentum behind renewable energy standards, I suspect, is driven by the fact that for most consumers, there is no obvious downside. There is no explicit tax or fee paid to the government as a result of such standards, and the actual cost to the consumer of such standards is far from black and white. It’s easy for a person to feel good about asking the utility company to generate more electricity from renewable energy sources, and most people don’t immediately correlate that with a cost to themselves.

But what goals are we trying to achieve with renewable energy standards? Many would quickly respond, “Reducing global warming.” Others would say, “Reducing our dependence on fossil fuels.” And those who deal with risk might say, “Diversifying our energy base.” In addition, politicians sometimes imply that such standards increase our national security. However, given that our nation sits on huge supplies of coal and natural gas that provide about 70% of our electricity production (vs. only 5.5% from petroleum, which we mostly import), connecting renewable production of electricity to national security is a bit silly. Case in point, the recent spike in oil prices will have little impact on the cost of electricity in most of the U.S.

Number of States Accepting Various Types of Energy as “Renewable"

*Hydro: Highly limited in most states to exclude new large-scale hydro
**Waste Heat Regeneration: Two states allow Combined Heat & Power systems only
***Nuclear is somewhat addressed in S.3813 where it is eliminated from the denominator in calculating the percentage of renewable energy generated.
Data compiled from various sources on state renewable energy standards

The way that virtually all the state renewable energy standards are structured is that they establish a minimum percentage of electricity generation that must come from specified renewable energy sources by certain timeframes. An energy source that is not on the list won’t count towards the standard. And this is where, while well-intended, current renewable energy standards fall short. The standards almost look like a popularity contest for the technologies with the most hype or longest track records. As you can see in the bar chart above, there are a large number of potential sources of renewable energy that would be acceptable under the standards of only a relatively small number of states. And this would be true irrespective of whether that technology might be a more cost-effective alternative.

Opponents of renewable energy standards argue that the standards will inevitably increase the cost of electricity, thereby hurting our economy and lowering our standard of living. There is merit to this thesis in the near-term, given that most of what the various standards define as renewable energy sources cost more to produce electricity than the fossil fuel alternatives. In addition, most renewable sources are intermittent and may not be available during peak load times, thereby requiring investment in energy storage, increased demand load management capabilities or other base load generation to effectively manage high percentages of renewable energy on the grid – all of which cost additional money.

Summary of State Renewable Energy Standards

(From U.S. DOE)

State	Amount	Year	Organization Administering RPS
Arizona	15%	2025	Arizona Corporation Commission
California	33%	2030	California Energy Commission
Colorado	20%	2020	Colorado Public Utilities Commission
Connecticut	23%	2020	Department of Public Utility Control
D.C.	20%	2020	DC Public Service Commission
Delaware	20%	2019	Delaware Energy Office
Hawaii	20%	2020	Hawaii Strategic Industries Division
Iowa	105 MW		Iowa Utilities Board
Illinois	25%	2025	Illinois Department of Commerce
Massachusetts	15%	2020	Massachusetts Division of Energy Resources
Maryland	20%	2022	Maryland Public Service Commission
Maine	40%	2017	Maine Public Utilities Commission
Michigan	10%	2015	Michigan Public Service Commission
Minnesota	25%	2025	Minnesota Department of Commerce
Missouri	15%	2021	Missouri Public Service Commission
Montana	15%	2015	Montana Public Service Commission
New Hampshire	23.8%	2025	New Hampshire Office of Energy and Planning
New Jersey	22.5%	2021	New Jersey Board of Public Utilities
New Mexico	20%	2020	New Mexico Public Regulation Commission
Nevada	20%	2015	Public Utilities Commission of Nevada
New York	24%	2013	New York Public Service Commission
North Carolina	12.5%	2021	North Carolina Utilities Commission
North Dakota*	10%	2015	North Dakota Public Service Commission
Oregon	25%	2025	Oregon Energy Office
Pennsylvania	8%	2020	Pennsylvania Public Utility Commission
Rhode Island	16%	2019	Rhode Island Public Utilities Commission
South Dakota*	10%	2015	South Dakota Public Utility Commission
Texas	5,880 MW	2015	Public Utility Commission of Texas
Utah*	20%	2025	Utah Department of Environmental Quality
Vermont*	10%	2013	Vermont Department of Public Service
Virginia*	12%	2022	Virginia Department of Mines, Minterals, and Energy
Washington	15%	2020	Washington Secretary of State
Wisconsin	10%	2015	Public Service Commission of Wisconsin

*Five states, North Dakota, South Dakota, Utah, Virginia, and Vermont, have set voluntary goals for adopting renewable energy instead of portfolio standards with binding targets.

Opponents also argue that the free market should be allowed to pick the most cost-effective energy sources. If one does not believe that any of the three aforementioned goals are critically needed, then such a pure free market approach would make sense. But the free market can fall short when there are externalities that have significant negative impacts on individuals or on the nation as a whole. If such externalities are not reflected in the economic incentives that drive company decisions, the free market will generally ignore the negative consequences. (For a related discussion, see my post “Cleantech Economics 101”.) Numerous historic examples exist such as acid rain, asbestos and lead paint. And our electrical infrastructure is more than just another industry; it is infrastructure as critical to our economic commerce as roads, airports and railroads – infrastructure that is used by every business and every consumer every single minute of every day. Thus, for those of us who do believe that the goals are very important, the basis for renewable energy standards is sound.

However, the restrictive and prescriptive nature of the established renewable energy standards serve to bolster opponents because they eliminate the ability of the utility company to utilize the most cost-effective alternatives. Going back to the goals of these standards, it must be asked why any specific technology should be named. If the goal is to reduce carbon emissions, reduce fossil fuel consumption and/or diversify our sources of electricity production, then shouldn’t any technology that achieves this goal be acceptable? Why should waste heat regeneration into electricity, gasification, and many other technologies that may ultimately be better solutions be excluded in so many states? Why would demand management (energy efficiency) not be an acceptable means in most states for achieving at least the first two goals?

And even in the light of the earthquake disaster in Japan, why shouldn’t nuclear as an option? It clearly achieves those three goals and, unlike most of the other options, can be used as base load. It would be easy to run from nuclear in light of the Japanese nuclear crisis that was caused by a record setting earthquake. But we should not forget that there is rarely a free lunch. Nuclear still has proven to be much less deadly than our most common form of electrical generation (i.e., coal plants), which releases more radiation than nuclear plants. In the end, I suspect that far fewer people will die as a result of radiation exposure in Japan than from the direct effect of the earthquake and tsunami themselves.

Beyond outright cost, one of the biggest challenges with most renewable energy is that it is intermittent and cannot provide base load. The world needs options for base load to bridge from where we are today to the (hopefully) disruptive break through in energy technologies of the future. Part of the reason we don’t have even safer nuclear power is the lack of significant demand for new nuclear power. This is as much an inhibitor of innovation of newer and potentially much safer designs (such as Thorium reactors and liquid metal cooled reactors which have the potential of fail safe designs, much lower half life of waste materials and low proliferation risks) as would be the lack of demand for solar or wind on those industries. All current renewable energy sources have negative environmental impacts and risk – none is perfect (more on this in a future post). Given that a perfect solution is likely out of our reach for the foreseeable future, our goal should be to strive for overall improvement in our energy base. To that end, utilities should have the flexibility to implement various energy production methods that achieve the goals as well as technologies that reduce energy consumption.

Allowing greater flexibility would decrease the near-term costs to businesses and consumers by allowing utility companies to choose the most cost effective solutions that meet the goals. In addition, it would further broaden the net of political support for such standards. One way this flexibility could be achieved would be by allowing utilities and businesses a clear path to obtain approval from their public utilities commission for new technologies under renewable energy standards. Any technology that achieves the goals of carbon emissions reduction, fossil fuel consumption reduction, and energy source diversification should be allowed. Renewable energy standards shouldn’t be about supporting a specific technology or industry. They should be about reducing the risk of global warming and increasing the robustness of our electric infrastructure in the most economical way possible.

*Author's note: Two weeks after writing this post, the Obama Administration announced their desire to push for a national Clean Energy Standard which broadens beyond traditional renewable sources and includes some attributes similar to those discussed in this post.

You Call This "Cleantech"?

noreply@blogger.com (David Gold) — Wed, 05 Jan 2011 19:34:00 +0000

Invest in a solar, biofuels, or LED lighting company, and nobody will question the company’s cleantech pedigree. Invest in a manufacturer of network switch upgrades for telephone companies, then call it “cleantech” and you’ll see a lot of raised eyebrows. I know, because we did just that.

We are investors in Aztek Networks, a company that makes replacements for the TDM switches that handle much of the phone traffic from standard landline phones. Telecom companies are excited about Aztek’s product because it enables them, for the first time, to incrementally switch out their old TDM switches rather than doing an extremely expensive complete system overlay. Aztek’s technology also enables them to provide IP-based functionality. Aztek’s switches are IP-based but can co-exist in the network architecture with both IP-based and “old world” GR303-based switches. Our cleantech company, Aztek, is enabling telecom companies to accelerate their entry into modern IP-based technology.

Eyebrows raised yet? Now, for the rest of the story…

Aztek’s switches also reduce energy consumption by 90%. How big of a deal is that? The roughly 16,000 TDM switches in the U.S. and Canada alone consume about 15,000 gigawatt-hours each year – roughly 0.4% of all electricity used in those two countries. Given that these switches run 24/7/365, they are a base load draw. That means that burning fossil fuels produces the vast majority of electricity utilized by them. The result is over 8 trillion tons of carbon emitted every year.

To put that in perspective replacing the aging TDM switches with Aztek’s technology is equivalent to installing over 42 million square meters of solar panels in Arizona where insolation is extraordinary (assumes insolation of 6.5 kwh/m2/day and 15% overall system efficiency). That would be almost 20 times the amount of electricity produced by all solar power in the U.S. in 2009.

What’s even more compelling about Aztek’s technology is that it also provides a phenomenal economic return to its customers. As an example, in California eliminating a pound of carbon emissions per year with solar costs roughly $3.50 or about $1.80 with all federal and state tax credits. Aztek eliminates a pound of carbon emissions each year for an equivalent cost of less than 50 cents per pound – without any tax credits. As much as 60% of the operating costs incurred by telecom companies for their TDM switches are from energy costs. With Aztek that cost is reduced by 90%. On top of this, those old TDM switches are huge and require extensive maintenance. Aztek’s technology is 90% smaller, yielding large real estate savings, and requires about 30% less maintenance. The overall payback on the technology can be as little as one year. And without Aztek’s technology, telecom companies would not be able to move as fast to replace TDM switches because of the complexities and costs of doing complete network overlays.

Now that’s what I call turning Green into Gold! Aztek is a cleantech company and the best kind at that – one that also delivers a huge return on investment to customers without any government subsidy. Our bet is that Aztek’s environmental impact will exceed many companies in more stereotypical cleantech segments. And that will raise some eyebrows as well.

Election Does Not Spell Cleantech Doom

noreply@blogger.com (David Gold) — Tue, 30 Nov 2010 20:22:00 +0000

With the recent “shellacking” (as President Obama referred to the election results) of the Democratically controlled Congress, much of the buzz in the cleantech space has been doom and gloom. Is cleantech doomed to a new dark age? I do not believe so.

Energy policy is one area where there is an overlap of goals between the parties. Members of both parties largely agree that energy is critical to our economic and national security. And most Republicans do not dismiss out of hand the risks of global warming.

I suspect that energy policy will be a topic where this Congress will get something done especially with the President’s increased desire to work across party lines. It won’t be exactly what the president wants and it won’t be exactly what the Republicans want. It will be an old-fashion compromise that may actually result in some policies and that will have greater long-term impact on cleantech than most of the short-term handout programs that were put in place under the largely ineffective cleantech stimulus bill.

So, where can the Democrats and Republicans potentially agree when it comes to cleantech?

1) Energy efficiency. Republicans and Democrats have demonstrated their ability to find common ground here. George Bush signed the law from a Democratic Congress that will end the life of the incandescent bulb and that increases the fuel efficiency standards for vehicles by 40% by 2020. Democrats like tax credits for installing energy efficiency improvements, and Republicans like reducing taxes. Reads like a match made in heaven.

2) Renewable energy standards. Many states have put in place such standards with support of both parties. Some Republicans in Congress have previously voiced their support. If the definition of “renewable” were expanded to include nuclear as an acceptable alternative, I suspect there would be broad support in Congress. A renewable energy standard is exactly the kind of long-term macro-economic policy needed to drive change and create more sustainable demand for renewable energy and energy efficiency. Utilities putting big dollars into development of renewable energy power sources and energy efficiency will drive much more industry growth and relieve issues around debt financing to a much greater degree than the government’s ineffectual efforts to play banker. And if the definition of “renewable” were expanded to include nuclear, then I suspect the base of support would broaden even more. Given that most renewable energy sources can’t serve as base load, it would be the right environmental and national security move to include nuclear in the energy mix.

3) R&D. Republicans have long been supporters of government R&D. Although there will be an issue around funding offsets for the R&D, I believe there will be broad consensus on the need to invest in our energy future. What will happen, I suspect, is that the focus of this R&D will shift more to early stage disruptive technologies rather than the late-stage grants and government loans which are already proving to be failures. Even the Administration has internally begun to question the effectiveness of these programs. If the scope of cleantech R&D is expanded to include clean coal technologies and next-generation nuclear, I believe the support base will broaden even more. The most effective way to ramp up disruptive R&D funding is likely through the new ARPA-E and possibly to the few federal labs that do not have their roots in our nuclear weapons programs (e.g. the National Renewable Energy Laboratory). By funding ARPA-E, most of the research would take place in our universities and private companies where the potential for real product development and technology transfer is much greater than in our defense oriented federal labs. The biggest challenge will be finding the funds given the need to reduce the deficit. One possible solution would be to take the funds already appropriated to later stage projects/loans that have yet to be awarded and redirect them to disruptive R&D. Another would be a…

4) Gas Tax. Cap and trade is likely dead. And given that such a program would have been a largely ineffectual mess (see my previous post, Cap and Trade: Right Debate, Wrong Solution) that is not necessarily bad. As I pointed out, the area where there is the greatest overlap between environmental, national security and economic objectives is with gas/diesel, which most cap and trade proposals largely wouldn’t have touched. The co-chairs of President Obama’s bi-partisan tax commission recently included a gas tax as a piece of its budget solution and two key Senators (one Republican, one Democrat) recently recently wrote the commission encouraging them to consider even bigger increases. A heftier tax phased in over time may be possible by using the concept of a “tax and dividend”, whereby a tax is levied to increase its price and much or all of the revenue is distributed back to consumers. If the money raised from this tax is largely given right back to the consumers in the form a rebate, then it’s not a tax increase but rather a tax incentive to reduce consumption of gasoline/diesel. Increasing the cost of gasoline/diesel to drive market demand for alternative fuels and energy efficient vehicles can help Republicans and Democrats achieve their desire of enhancing our national and economic security while reducing carbon emissions.

5) Government Procurement. The government is a large consumer of many items. One of the best ways to accelerate market adoption is by creating a market for the product/service. For example, the Federal government’s decision to require all new buildings to be LEED certified is accelerating a shift in the building industry to green buildings. The government purchases a large amount of energy for buildings, vehicles, airplanes and ships. Policies that drive increased purchases of domestic energy sources based on non-fossil fuels can provide a significant lift to multiple cleantech industries. The Department of Defense understands the critical nature of this issue, especially around liquid fuels. The Pentagon’s concern provides the nexus of an opportunity for collaboration between Democrats and Republicans on government procurement policies.

Even if you believe we will see a stalemate in Washington on cleantech, the global macro-economic trends will not change. Consumption of fossil fuels is accelerating as the world, especially heavily populated China and India, dramatically increase the number of automobiles, power plants and factories. It is a certainty that the price of these commodities will, on average, increase over time. The next spike in oil prices, I suspect, won’t be too many years away and, worst case, whatever lull in cleantech enthusiasm that may occur will be quickly washed away.

The essence of any government policy with the goal of accelerating cleantech is simply an effort to narrow the time between today and the inevitable day when fossil fuels become expensive enough that various renewable energy and energy efficiency solutions become compelling without any government involvement. If you’ve read my previous posts, you know that I do not believe that we will achieve our cleantech goals through massive grant or loan programs to the private sector. Policies that target the underlying macroeconomic environment will ultimately have a much greater impact than handout programs. Many of the policies that lie in the zone of potential cooperation between Democrats and Republicans such as gas tax, national renewable energy standards, and federal procurement policies can help drive steady long-term demand for renewable energy and energy efficiency. I am optimistic that these are areas where real progress can be made.

Meet the Rodney Dangerfield of Cleantech

noreply@blogger.com (David Gold) — Thu, 14 Oct 2010 19:59:00 +0000

Wind turbines stand tall and mesmerize with their motion. Solar cells bask in the sparkling sun. Meanwhile, hidden down in the dark dirty underworld, a compelling technology sits quietly and gets no respect. Once installed it largely goes unseen and, it seems, it’s equally invisible in the world of clean technology press, venture funding and government R&D funding. Yet this technology provides some of the most intriguing economic returns available for reducing a building’s net energy consumption and I would welcome the right opportunity to fund an exciting business in this category.

What is this Rodney Dangerfield of cleantech? Geothermal heat pumps, also referred to as ground source heat pumps or geoexchange. Anyone who has gone down a hundred feet or so in a cave on a hot day probably noticed how nice and cool it was down there. That is because in most geology, a zone of nearly constant 55-degree Fahrenheit temperature exists 50-200 feet below the ground we walk on. Even at shallower depths the temperature hovers within a much narrower range than on the surface. Geoexchange is technology that uses the constant temperature and huge heat sink that the earth represents to generate heat in the wintertime and to cool in the summer time. They leverage technology inside the house that has similarities to your refrigerator (which is, itself, a heat pump). (more detailed explanation of geoexchange here).

Much like solar and wind, this is not a new technology; it’s been around and used for decades. Although the economics of a geoexchange system vary from location to location based on geology, local energy rates, and the need for heating/cooling, in most places the payback on a geoexchange system for a home or commercial building beats solar or small-scale wind -- usually sizably. Whereas solar or wind generate electricity, geoexchange reduces the consumption of energy for space heating and cooling and also can be utilized to generate hot water. It has near year-round benefit, working when the sun doesn’t shine and when the wind doesn’t blow. It is “base load” energy savings for a building. A $1,000-$2,500 annual savings in energy costs for a middle class home is fairly typical, and the CO2 reduction is roughly equal to taking two cars off the road – permanently.

(Table from Climate Master)

In many markets, a geoexchange system can be installed with paybacks of 10-15 years without any government incentives. By comparison, except in the best markets (high sun, high electricity cost and high state tax incentives on top of federal incentives), solar still struggles today to provide 10-15 year paybacks with government subsidies.

And here’s where it get’s really exciting: The cost of installing the technology can pay itself back in as little as three years. A geoexchange system isn’t like that of a solar or small-scale wind system, which almost always has a 100% incremental cost because no existing system is being replaced. In most climates, buildings need either heat or air conditioning to be usable 365 days a year, and in many climates they need both. Those systems age and need to be replaced (a 20-year lifetime is typical). So for a building needing new HVAC equipment, the relevant cost is the incremental cost of the geoexchange system. Netting out the cost that would have been spent on traditional HVAC replacement equipment in most cases drops the payback calculation down to six-12 years. Add the current federal 30% tax rebate off the full system cost, and the buyers payback can be an incredible three to six years.

(Source: Cleantech Consulting Services)

27 Case Studies of Residential Ground Source Heat Pump Paybacks

(Oregon Institute of Technology)

So why is it that solar has received about 33% of all venture capital investment in cleantech and around $1B in government R&D funding over the past ten years while virtually no federal funding or venture capital has gone to geoexchange? There are several contributing factors:

· Each geoexchange installation is an “art” project. This is a challenge that the solar industry used to face, when every system required fairly extensive design, engineering and coordination of a potpourri of vendors. Solar has largely overcome this by better productizing their offerings and streamlining installation; at the same time, the number of solar-focused installation companies has proliferated. Geoexchange has yet to mature in this manner, and many of the companies in the space are largely traditional HVAC vendors that can do geoexchange.

· Out of sight, out of mind. One might think this is a good thing, but I suspect that it hurts geoexchange. Your neighbor who spent $25k on his solar system is proud to have it on his roof, advertising that he’s green. But no one knows about the neighbor who invested in a geoexchange; after the drilling rigs leave, nobody can see the good deed being done for the environment.

· Fragmented, unfocused installers. Geoexchange systems are installed by a hodgepodge of mostly small HVAC contractors. Because most don’t focus exclusively on geoexchange, there isn’t a strong marketing and sales engine to streamline the sales and installation process.

· A misconception that geoexchange is “low tech.” What technology advancement could there be in putting pipes into trenches or holes to capture or dissipate heat? The common view is “not much.” But the process of heat transfer is a complex engineering challenge that could include advanced materials, fluids and designs to enable increased efficiencies, reduced materials and reduced installation costs for a given performance level. I believe that technological advancements and economies of scale could result in a reduction in geoexchange system costs of 20-50% with a directly corresponding drop in payback time.

On the last point, it is truly a shame that there isn’t any federal R&D spending going to innovative technologies in this area. I would love to find an innovative geoexchange company with compelling technology advantages, innovative financing tools and a great management team that could build a large national business to invest in. If you know of any, send them my way. I promise I’ll show them some respect even if I can’t promise that we’ll invest in them.

Cleantech Stimulus Still Not Stimulating

noreply@blogger.com (David Gold) — Fri, 17 Sep 2010 17:16:00 +0000

The stimulus bill along with the $31B cleantech element focused on grants and loan guarantees through the Department of Energy was passed into law over 18 months ago. About a year ago I wrote about how the cleantech stimulus was not very stimulating to our economy. I suggested at that time that the goals of stimulus and of long-term investment are largely incompatible, and the evidence is bearing that out. At the time, I felt like a bit of an outcast for having such a critical view and yet being an ardent supporter of clean technologies and the need to wean our nation off fossil fuels. On the anniversary of my first post on this topic it seems appropriate to take a fresh look at where things stand.

While stimulus supporters and the press love to focus on the selection of award winners for grants and loans, funds appropriated but sitting in the U.S. Treasury have zero potential to stimulate the economy irrespective of whether a winner has been selected. As of September 10, 2010 and about 19 months after the stimulus became law, according to the Obama Administration’s Recovery Act web site, recovery.gov, the Department of Energy had paid out just over 23% of the $31B of funds appropriated to the department for various cleantech activities under the stimulus bill. At that rate it will take roughly six years for all funds to be dispersed. According to DOE’s more detailed numbers, in the past 12 months, the department has awarded (i.e. selected winners) for about $14B in grants. Less than 10% of that amount has actually been disbursed to date. In addition, there are over 730 awards representing $1.2B that were made in 2009 for which no funds have been paid out at all. Many of these likely still are trying to get their contracts in place, an often-arduous process that can take many months.

In the Smart Grid segment of stimulus, where stimulus actually slowed spending because utilities stopped work to wait and see whether they would win a grant, less than 8% of the over $4B appropriated has been paid out. People in the utility industry who have received grants have told me about calls from DOE staff “virtually begging them” (in the words of one source) to spend money against the grants that have been awarded more quickly. In other words, the government seems more concerned about optics of getting the money spent than having it spent wisely.

As stated on recovery.gov, the goal of the Recovery Act was to “… jumpstart our economy, save and create millions of jobs, and put a down payment on addressing long-neglected challenges so that our country can thrive in the 21st century.” It’s amusing that the recently released Administration Report on the Recovery Act emphasized that its focus would be only on “the ‘Reinvestment’ part of the Recovery Act” and completely avoids any comment on the stimulus’ impact on the economy or jobs. Seems like quite a testament to failure of the recovery spending to provide stimulus in any meaningful way.

If the focus of the cleantech “stimulus” was really on reinvestment, then the government would be careful and diligent about naming grant/loan winners rather than rushing to make awards as fast as possible (which is motivated by stimulus). Yet, while money has been slow to flow from DOE, award winners have been selected for virtually all of the $31B from the recovery program. As I said earlier this year in a Cleantech Forum debate with DOE Renewable Energy Grants Advisor Sanjay Wagle, the government is simply incapable of both getting grant/loan money out the door quickly and spending it wisely. I still maintain that programs like Cash for Clunkers and energy efficiency tax credits (whether you agree with the specific policy or not) have a rapid positive impact on the economy. The evidence on the government’s own recovery site seems to bear that out: by comparison, 77% of all tax-related stimulus benefits (only some of this cleantech-related) have been paid out to recipients in the form of reduced tax obligations. While one can debate the degree of impact those funds may have, funds awarded but not transferred from the federal treasury have no chance of stimulating the economy.

Much of the press focus on the cleantech stimulus has been on the Advanced Research Projects Agency – Energy (ARPA-E) funding into early stage cleantech technologies with “game changing” potential. The government has long played a role in funding early stage research and such a program has worthy goals. Yet, ARPA-E represents only about 1.3% of DOE’s stimulus funding with most other funding going to much less disruptive grant/loan programs in which the government is trying to play business person and has a notoriously bad track record of doing so. And ARPA-E’s appropriation for 2011 is likely to be less than 2010 with the House number passed at a 50% reduction.

The unfortunate reality is that by using the stimulus bill as a vehicle for pushing funds through the slow and ineffectual government bureaucracy rather than focusing on stimulative policies that would have had greater impact on the economy, the Administration may very well have lost the opportunity to enact macro-economic policies affecting the cost structure for energy that could have had much more far-reaching and long-term positive impacts on the goal of reducing our consumption of fossil fuels. I believe time will bear out that many of the grant/loan awards made in such a hurry will turn out to be a waste of money.

Conversely, the macroeconomics of energy are certain to change as finite fossil fuels continue to be consumed… it is only a question of over what time period. It is that reality which is driving the private sector investments that must be the backbone of any sustainable change in our energy economy. Careful federal policy around carbon-based fuels could have provided greater visibility into the time frame and degree of increase in the market cost of fossil fuels even if there was a very slow phase in of such a policy to avoid collapsing the economy. The result would have been greater clarity of when (and shorter time horizons for when) clean technologies could become cost competitive. This would have resulted in a corresponding increase in investment by the private sector in building those businesses to profit from the impending change. And that would have been extremely stimulative to our economy without needing to borrow a penny to fund it.

Cleantech is a Bunch of Hot Air!

noreply@blogger.com (David Gold) — Wed, 30 Jun 2010 20:39:00 +0000

While renewable energy often captures most of the cleantech headlines, if anyone doubts why energy efficiency must play a significant part in the cleantech effort – as significant, if not more so, than the role of renewable energy -- just examine the energy flow graphic developed by McCall and Bassett and reprinted in the June edition of Technology Review. At least half of U.S. energy consumption goes to nothing more than creation of hot air through waste heat. And, when one realizes that much of the 13.9% of electricity output from power plants shown in the graphic also ends up as hot air from our computers, lights, etc., the portion of energy consumption going up in hot air is actually greater than 50%.

Couple this with the following facts… According to the Energy Information Administration (EIA), on a worldwide basis renewable energy currently supplies roughly 10% of the energy consumed. Over the next 25 years the EIA forecasts worldwide energy consumption to grow by more than 50%. They also forecast a 100% increase over that period in the supply of renewable energy, which, in isolation sounds modestly impressive. But this would equate to less than 15% of all energy being consumed because consumption would have increased 50%. Worldwide renewable energy production would have to increase upwards of four fold to equal just about 25% of the energy consumption forecasted for 25 years from now. Meanwhile, with 50% growth in consumption, the other 75%, representing fossil fuel consumption, would still equal more fossil fuel than the world consumes annually today!

Energy efficiency not only saves on total energy consumption today but also is magnified as consumption increases because the additional devices consuming energy will consume less if they are more efficient. For example, increasing the average efficiency of all vehicles on the road an average of 50% (e.g., from 20 mpg to 30 mpg…not such a high hurdle) would reduce overall U.S. energy consumption by over 9%...that’s 9% of today’s consumption and tomorrow’s increased consumption because all the additional miles forecast to be driven would also be in more fuel efficient vehicles. To achieve that same impact with renewable energy would require about a 150% increase in U.S. renewable energy production and about a 225% increase to achieve the same offset in 25 years.

I’m not diminishing the role of renewable energy as an important piece of the long-term equation. Disruptive development of cost effective renewable energy sources will need to be a key piece of the long-term equation for removing our addiction to fossil fuels. However, energy efficiency often doesn’t receive as much press as renewable energy because it isn’t as sexy. Yet, energy efficiency provides leverage that renewable energy does not because the benefits automatically scale as consumption increases. To say it another way, if we can figure out how to clear up some of the hot air, we can have a tremendous impact on fossil fuel consumption!

(See Larger Image)

How to Build a Cleantech Company Without Huge Investment Capital: A Case Study

noreply@blogger.com (David Gold) — Tue, 27 Apr 2010 20:37:00 +0000

While many cleantech companies require very large amounts of capital in order to get to market, there is a quiet group of cleantech companies bucking that trend. Companies like Heartland Biocomposites (Green Building Materials), RealTech (Water Testing) and TerraLUX (LED Lighting) all built significant and growing businesses with compelling intellectual property and did so initially without multi-millions in capital from venture funds (let alone tens or hundreds of millions). Because TerraLUX is one of our portfolio companies and I therefore know them best, their story is one I am able to share.

TerraLUX boasts customers like Cooper Lighting, Phillips, GE Healthcare, Snap-On Tools and many others. It has six awarded patents and eight more filed. Dr. Anthony Catalano founded the company in 2003 and, with exceptional technology smarts, creative boot-strapping and some of his own capital, he built a business with significant revenues, exciting gross margins and deep intellectual property – all without a penny of outside investment capital. And now, only after all those accomplishments, has TerraLUX closed a $5.6M financing from Emerald Technology Ventures and Access Venture Partners.

How did TerraLUX pull this off? The story starts with an entrepreneur focused first and foremost on how to create revenues. Catalano, who has a PhD from Brown in physical chemistry and is a previous director of the NREL Photovoltaic (solar cell) Division, had the technical acumen to create a business in a number of cleantech sectors but he wisely chose the LED market. He did so because he saw the industry’s explosive growth. His dream was to create LED lighting for buildings that could have a disruptive impact on lighting energy consumption. But Catalano realized he couldn’t just create a science project; he had to be able to sell innovative products quickly to create cash flow.

Seeing that in 2003 the cost/benefits of LED’s were not yet compelling for the large general lighting market he knew he had to turn to a more ready market – portable lighting. While this market is an order of magnitude smaller than general lighting, it is still a multi-billion dollar market and, most importantly, the benefits of higher brightness, extended lifetime and increased durability have premium value for users of products like flashlights, work lights and surgical lights. The portable lighting market was (and is) willing to pay a premium for those benefits and, as a result, even with the high cost of LED chips in 2003, TerraLUX was able to create real products and real customers.

I suspect some entrepreneurs would have turned up their noses at the thought of launching a flashlight business when their goal was the much bigger general lighting market. But Catalano didn’t let his ego get in the way of doing what was needed to get the business off the ground. Instead, he went to market with LED drop-in replacements for existing flashlight bulbs and was soon off and running. From there the company grew into multiple portable lighting product lines and well beyond just flashlights. As it turned out, creating high-performing portable LED products is, in many ways, more challenging than designing for general lighting. Limited space, challenging heat sink options, and a non-constant power source (e.g. batteries) create a plethora of challenges. But Catalano together with his VP-engineering, Dan Harrison (brilliant Caltech guy), used their considerable technical talent to create innovations to solve these problems. The result has been the creation of a deep intellectual property portfolio around temperature control, optics and circuitry, and the ability of TerraLUX to deliver LED products with unparalleled performance.

Success begets success, and TerraLUX’s flashlight products created awareness in the market. A few years later, TerraLUX’s phone began ringing with calls from other portable lighting manufacturing companies desiring to create LED versions of their lighting products. These companies needed something they could plug or screw into their existing products to turn them into high-performing LED versions. TerraLUX was one of the few companies that could deliver such results, and virtually no competitors could do so with the brightness, lifetime and light quality that they were able to achieve. The company responded to this market demand by leveraging its core intellectual property to create LED Embedded Light Modules (self-contained modules that can be screwed or plugged into other manufacturers’ products) on an OEM basis for manufacturers of a variety of portable lighting products.

As the years progressed, LED chip prices compared to their performance continued to drop rapidly and began to open up the potential in the general lighting market. TerraLUX then got the call it had wanted for years. A key executive at a large general lighting company had bought a TerraLUX flashlight retrofit kit and was impressed with its performance and extremely compact size. That company had obtained LED products from numerous potential suppliers, but none could meet TerraLUX’s brightness, consistency and quality requirements. TerraLUX’s intellectual property around thermal controls, circuitry and optics that grew out of the portable lighting business gave them a fantastic edge. Since TerraLUX already had years of experience manufacturing LED Embedded Light Modules (albeit for portable lighting), the general lighting company had confidence in TerraLUX’s ability to deliver. And, with that, TerraLUX became the general lighting company that Catalano dreamed of when he founded the company.

Now TerraLUX was in a position to explode into the general lighting market. Although the company had built a growing business with compelling intellectual property, it lacked the polish that venture capitalists typically look for. At Access Venture Partners we have a soft spot for entrepreneurs that build companies by finding customers. We like to work with companies that have the foundation of a great business, but may have a few rough edges, to help them get to the next level. In late 2008, we saw the potential that TerraLUX had as a business and worked with Catalano to define the things that were needed to enable TerraLUX to raise the capital it now could use to further accelerate its growth. These included refining the go to market strategy, enhancing company operations, enabling professional accounting, implementing the company’s first financial plan and recruiting Jim Miller, (formerly VP-sales, Global Geographic Regions for Phillips Lumileds), to join the company as CEO. The last item was a step taken with Catalano’s full support, and he remains a key member of the management team as Chief Technology Officer and a member of the board. To accomplish this we made a modest bridge investment and with those tweaks, TerraLUX was in a position to raise a meaningful round of venture capital to even further accelerate its growth and did just that.

Now with $5.6M in growth capital, TerraLUX is able to invest in the sales, marketing and R&D that will enable it to take a strong growing business with deep intellectual property and grow it even faster. But this growth comes from a foundation built without the large sums of venture capital that get much of the cleantech press that we read about. Building a company by bootstrapping may not be as sexy as raising a large venture round right out of the shoot. But the discipline it instills to focus on customers and revenues can create some of the most exciting real businesses in the long run.

Cap and Trade: Right Debate, Wrong Solution

noreply@blogger.com (David Gold) — Wed, 31 Mar 2010 21:06:00 +0000

As we have seen in just the past few years, fossil fuel prices can vary dramatically over very short periods of time. Creating greater certainty regarding steady increases in fossil fuel prices over the coming decade would have an enormous impact on private sector investments in both alternative energy and energy efficiency. Cap and trade is the right debate to be having because it focuses the discussion on how to change the fundamental economics of fossil-based energy. But ultimately cap and trade is the wrong solution; superior means exist to achieve the results we need not only for the environment but also for national security and our economy. A better solution is a strategically targeted “ceiling” tax on carbon combined with a tax dividend.

Cap and trade sounds good on the surface. Seemingly it would allow the market the freedom to choose among implementing technologies that reduce greenhouse gas emissions, paying to use existing technologies that emit greenhouse gases, or paying for offsets from another entity. But cap and trade is inherently flawed in its complexity and the slow rate at which it can propel change. The potential for loopholes and corruption, both through the specifics of how the law is implemented and the trading markets that will be created, are enormous. If you have read my blog previously, you may be surprised to hear me come out against a seemingly market-based solution like cap and trade. Many assume that because cap and trade worked for acid rain, it will work for greenhouse gases. But for markets to work well there needs to be transparency around both price and what actually is being purchased. As the graphics shown help illustrate, the complexity of greenhouse gases are enormous compared to the simplicity of sulfur emissions from coal plants. The challenges around accurate and transparent accounting of how much carbon is emitted or “re-sequestered” through an offset is fairly daunting. There have already been significant challenges around carbon offsets with the European cap and trade efforts. So far in Europe, the impact on greenhouse gas emissions has been much less than desired upcoming book by Roger Pielke). Because of these factors, not only does cap and trade create risk of corruption because of the challenges around defining exactly what has been emitted or how much an offset has recaptured, but its ability to actually achieve the desired reduction in greenhouse gases also falls into question.

Efforts to implement a cap and trade system that would be truly comprehensive would treat all long-lived greenhouse gases as equal. To make any meaningful difference, the price of carbon must be set high enough to move the meter significantly on the cost of fossil fuels. Many experts estimate that price to be as much as ten times the current price in Europe. As a result, if a cap and trade system is actually going to result in a meaningful reduction in greenhouse gas it will have an enormous impact on the economy given the scope of activities that generate greenhouse gases. In addition, the sheer process of requiring businesses to account for their emissions would lead to significant wasteful administrative costs beyond the cost of the carbon emissions themselves. Such a requirement would, however, create a great jobs program for accountants, attorneys and even investment bankers who would get paid to navigate the complicated mess that would result. This reality is why many cap and trade proposals end up being limited to areas of highly concentrated emissions that are easy to track. This effectively means focusing on power plants, which represent about 39% of the impact-weighted greenhouse gas emissions (of which 85% is from coal-fired plants). And most proposals generally leave transportation -- which produces about 33% of the impact-weighted U.S. greenhouse gases – largely unaffected.

       “So what?” you say. Let’s focus on reducing the 39% that is largely from coal-fired plants, right? From an environmental perspective it does not matter where we reduce emissions – just that they are reduced. But from an economic and national security standpoint it matters significantly. The U.S. is home to roughly 25% of the world’s coal and supplies virtually all the coal Americans consume. Meanwhile, the U.S. imports the majority of petroleum that we consume. Reducing consumption of coal will not strengthen our national security, and the most immediate effect on our economy will be negative. Even if one doesn’t believe those are important factors (hard for me to fathom but I know some feel that way), I suspect that everyone would agree that the political ability to implement something that moves the meter is critical. And a policy that appeals to the left and right of the political spectrum holds the best promise.

       Tax and dividend, whereby a tax is placed on carbon and some, if not all, of the proceeds are distributed back to those who paid the tax, is a concept that has begun to receive discussion as a potential alternate solution. Such a system taxes based on consumption but the dividends are paid out without respect to specific consumption. So, the motivation to move to alternative fuels or implement energy efficiency remains because the dividend will still be received even if tax payment is reduced. Yet, the sting of the tax is reduced by receipt of the dividend. Tax and dividend eliminates many of the problems associated with the complexity and lack of transparency with cap and trade and it largely leverages systems already in place to tax things like gasoline, coal, etc. However, it still is flawed in that it treats all carbon as being equal. Again, while all emitted CO2 is equal from an environmental standpoint, it is not from an economic or national security standpoint. In addition, the greater the scope of the tax, the more interest groups it will upset and the less likely it is that it can ever pass Congress to become law.

         The better solution, both from an efficacy and political standpoint, than cap and trade or tax and divided is a strategically placed “ceiling” tax on carbon combined with a tax dividend. Our greatest opportunity lies at the nexus where greenhouse gases are reduced, national security is strengthened and our economy is at least not harmed. As a result, the first element of the solution should focus on petroleum consumption, which is predominantly consumed in vehicles and the first strategic place for a “ceiling” tax is on CO2 emissions from fossil-based transportation fuels used in automobiles and trucks. This is effectively a gas tax, except it would apply to gasoline, diesel and any future form of fossil-based fuel sold for ground transportation and would be based on the amount of non-renewable CO2 emitted upon combustion. In addition, the tax rate would be determined by the difference between the price the retailer/vendor pays for the fuel and a pre-determined fixed maximum charge to the consumer (individuals and businesses alike). If the ambient price of the fuel commodity increases, the tax that is charged would decrease. Thus, it creates a “ceiling” on the tax where there is an ambient price at which the tax would no longer be charged. Implementing the tax in this manner accomplishes several objectives:

It creates clarity, certainty and stability around the price that alternatives will need to compete with.
It sends a clear political message that this tax is not forever; it has a built-in mechanism to end when the ambient market price catches up with the artificial price created by the tax.
It puts a limit on the pain inflicted at the pump. If fuel prices spike, the tax will diminish and even go to zero if the maximum charge to consumers is exceeded.

Now, what to do with the revenue? We must ensure that the negative impact on our economy is minimized as much possible. In addition, we have to be realistic and create something that can fly politically. As a result, the tax revenue should be sent right back to the consumers who paid it. For individuals, the amount received could be based on the size of the family to reflect the likely increased transportation needs. Economically speaking, the dollars received by each family will be much more meaningful to a low-income family. Yet, the payment is not based on income – something for Democrats and Republicans to celebrate. For businesses, we must endeavor to avoid making specific businesses non-competitive. If a business has a transportation intensive business, the cost increase could be substantial. So, distribution to companies could be based on their fuel consumption for transportation over a multi-year period prior to enactment of the tax. That way, transportation-intensive companies will receive a much larger share than those that use little transportation directly in their business.

What about the impact on the oil industry? No doubt that such a tax would have an impact on oil consumption and therefore production. It may even be politically required to dividend some of the tax proceeds back to the oil industry. After all, democracy is the art of the possible. This would likely mean a smaller oil industry to the extent that the industry doesn’t redirect its efforts to other profitable business efforts (e.g., geothermal, solar, etc.). However, with a tax on transportation fuels, there would be a clear economic upside to the change. The clarity provided with respect to future prices of gasoline and diesel would provide significant impetus and support for private sector investments in renewables as well as vehicle energy efficiency. In addition, such clarity would spur significant economic growth in the automotive industry as consumers become eager to find energy efficient or alternative energy vehicles. One need only look at what happened with the sales of hybrid vehicles when gas prices spiked a few years ago. The auto industry would see a boom as consumers looked to switch to vehicles that consume less fossil fuels.

President Obama’s desired goal is a 17% reduction by 2020 from 2005 emission levels. If the tax is set at a high enough level, studies indicate it would drive significant change in buying decisions and driving behavior of consumers. A key to the success of the tax is that it creates long-term certainty with consumers regarding the likely price of gasoline and diesel. A Congressional Budget Office Study found that a 10% long-term increase in fuel prices would result in roughly a 4% reduction in fuel consumption (through a combination of reduced driving as well as purchase of different vehicles). If the ceiling tax were set based on a target price of $5 per gallon retail price for gasoline, this would create long term visibility into a price increase and would imply we could see a reduction in fuel consumption (and corresponding emissions) of 40%-50% representing a 13%-17% reduction in overall greenhouse gas emissions. The U.S. consumes more than 6x the gasoline per capital than Europe and one reason is that gasoline costs 2-3x as much at the pump than the U.S. What the CBO study did not take into account (given the challenge of doing so) is what happens to petroleum consumption when alternative fuel vehicles then become cost-competitive. I would suggest that the accelerated innovation that would occur in such vehicles once businesses knew they would be competing with a $5/gallon price would drive even greater reductions in greenhouse gas emissions and petroleum consumption well beyond 17% in 10 years.

Clearly, such reductions are much less meaningful from an environmental perspective if carbon emissions elsewhere were to increase. Given that electric vehicles are a probable future for some vehicles, we must address the emissions created by electricity production. Otherwise, we will simply push CO2 creation from the tailpipe to the smokestack. But rather than a complex loophole- and scandal-fraught cap and trade system, a strategically placed ceiling tax on CO2 emissions and corresponding dividend should also be used in the utility industry. The challenge here is that just like cap and trade, in order to have a meaningful impact regarding the business decisions made on utility plants, the price of carbon must be set fairly high. Because electricity costs impact every person and business in the nation, a carbon tax applied to power plants significant enough to be meaningful would have a broad-based negative impact on the economy. Everything would become more expensive.

Instead of a blanket tax, the ceiling tax on CO2 from electricity production should be much more strategic. First, the tax placed on existing plants should be fairly modest and intended primarily to generate tax revenue that would be utilized specifically to provide funding to the coal industry for clean coal and sequestration technologies. That is not only the politically correct move; it is economically smart given our vast coal resources. A tax of just $2 per million metric tons of carbon would generate roughly $5 billion a year in tax revenue (U.S. utilities generate roughly 2,400 million metric tons per year). Yet, it would add an average of about one tenth of a cent to the cost of every kilowatt-hour (U.S. total electricity production is roughly 4,100 billion kilowatt hours per year) or roughly a .01% increase in retail price. Second, the tax on new plants built after a couple-year grace period for those already being constructed, should be set at a much higher level that ramps up over time to a capped amount. An initial tax rate of roughly $30 per metric ton would equate into a cost increase of about 3 cents per kilowatt-hour for the worst offending coal-powered electricity generation. However, the specific amount of the tax should also vary based on the price of the underlying commodity (e.g., coal or natural gas). That way, if there were a spike in a commodity price (like with natural gas a few years ago), the tax is automatically reduced or eliminated, thereby eliminating excessive spikes in electricity prices.

To make a carbon tax on utilities achieve the desired goal of driving a change in decisions regarding which type of plants to build, it is critical that utilities are not allowed to work the tax into their rate base - they must eat the tax cost or implement new plants that emit less or no CO2. In addition, when plants reach a set time frame after the end of their depreciation period, they would begin to be subject to the higher tax on new plants. The incentive must be squarely placed on utilities to implement low carbon or no carbon means – all of which they can work into their rate base. That means implementing renewable, nuclear, sequestration and likely some additional natural gas. Given that the incremental plants will, by and large, create more expensive electricity than the base coal plants, utilities will have increased incentives to promote energy efficiency and implement the smart grid. Until technology innovation allows otherwise, most incremental electricity load above the current base will likely cost more to deliver. Such a tax, if set high enough on new plants, would likely create something akin to a cap on any increases in carbon emissions by utilities. As aging plants are replaced or retrofitted, reductions in emissions would begin. In 10 years, if the vast majority of new electricity production beyond what was currently being built has been low- or no carbon and if just 15% of aging coal plants are replaced with low or no-carbon emitting alternatives, we would see a reduction from 2005 utility emissions of 3%-6% on top of the at least 13%-17% reductions from action on transportation fuels but without a severe negative impact on the economy. And the clean coal and sequestration technologies developed from the R&D generated through the taxes would hopefully enable an acceleration in reductions as they are able to be implemented in the following years.

In making decisions about how to reduce green house gas emissions, as a nation we cannot and should not focus solely on the issue of global warming while ignoring the equally important goals of maintaining our national security and economic strength. We must implement a system that changes the economics of energy in a way that supports all of these goals. Not only will cap and trade be unable to achieve these three goals, but without an extremely high price on carbon that likely cripples our economy it won’t even have a significant impact on the single goal of reducing green house gas emissions. A system that does not focus first on our consumption of petroleum has little chance of strengthening our economy or national security. In addition, to be successful, we must create greater clarity over long-term fuel price that the alternatives must compete with in order to provide the impetus for private sector investment in energy efficiency and alternative energy. Cap and trade cannot give this clarity and the government cannot simply buy our way out of this problem. We must have the innovation, creativity and financial power of the private sector motivated to making the scale of change that is required. A strategically targeted ceiling tax on carbon with focused use of the dividends could create the log term clarity needed in the market and will motivate the private sector to dramatically increase investment in the type of innovation and change that is the source of ours (and the world’s) prosperity.

Cleantech Economics 101: Higher Fossil Fuel Prices; More Cleantech

noreply@blogger.com (David Gold) — Tue, 09 Feb 2010 18:49:00 +0000

With all the complexities of cleantech policy and technologies, there is only one simple thing needed for an explosion of competitive clean technologies – increased price of fossil fuels.

The amount of R&D expenditures that will need to be invested in clean technology in order for it to hurdle the bar into competitiveness is much greater with low fossil fuel prices. And, the lower those prices, the less appetite the private sector has for making such investments. This leaves a much-increased burden on the back of government through grants and subsidies– a back that is close to being broken from debt. While clean technology development is absolutely necessary, technology development takes time and, often, a long time. And technology development is fraught with uncertainty…nobody ever knows a priori whether such efforts will be successful and how long they will take. Believe me…every venture fund in the world would love to be able to know that! But they don’t. However, virtually every venture fund and researcher will tell you that significant advances usually take much more time and more money than expected. In an environment of relatively low fossil fuel prices with high price volatility, grants and subsidies for an amount of time and at a level that will make any permanent and meaningful difference are simply unsustainable. So, for all the focus on “cleantech stimulus” the most important thing that government can do is to affect change in the cost of the fossil fuel alternatives.

If we had higher fossil fuel prices or even just clearer visibility and certainty about future increases, the free market would make dramatic increases in investment in clean technology. When the free market sees an opportunity to make a profit, it moves extremely fast. Government actions that put in motion increases in the cost of fossil fuel alternatives, even if those increases are phased in over many years, can have an enormous impact on the money invested by the private sector in alternatives (and a corresponding decrease in need for government subsidies and grants). This, in turn, will further accelerate technology advances, leading to a more rapid convergence of the time when various technologies can competitively reach the mass market.

Given the reality that fossil fuels are a finite resource, it is a fait accompli that eventually alternative energy and energy efficiency technologies will become so compelling that they will dominate the market. But the future of fossil fuel prices in the relatively near term (e.g., the next decade or two) is far from certain as both general economic conditions and new discoveries such as those in Venezuela’s Orinoco Belt play a role. If we didn’t care about global warming, national security or economic security, there would be little need to do anything but let the market take its course. Unfortunately, irrespective of your personal policy hot button, most of us would agree that we do not have the luxury of the amount of time that this transition would likely take on its own.

The government has a role to ensure that externalities that are important to the public are accounted for in the market. But the government cannot subsidize our way there nor simply mandate that the market use a specific technology. Should it be surprising that the U.S. government “mandated” that 100 million gallons of cellulosic ethanol be produced this year and the EPA estimates that only 6.5 million will be produced? The government sank $150M into Range Fuels’ cellulosic ethanol plant expecting it to produce over 10 million gallons, but Range will only produce about 2.5 million gallons this year. How silly is it to try to “mandate” use of biofuels – did we not learn anything from the economic demise of the Soviet Union about government controlled economies? If oil had remained at over $100/barrel since 2008, I would suggest to you that biofuels production would be much higher this year without any government mandate.

The government does need to take action and do so in a way that does not crush our economy. There are important societal externalities associated with continued use of fossil fuels that are not accurately reflected in the price of the commodities in the market. Cap and trade is the right debate to be having… albeit likely the wrong solution. More on that in my next post.

Will 2010 Be the Year of Cleantech Revenues, IPOs and, Maybe, Even Profits?

noreply@blogger.com (David Gold) — Thu, 14 Jan 2010 18:22:00 +0000

As a “gearhead” (engineer) I must admit I truly enjoy looking at all the cool technologies being developed by cleantech companies. The promise of cleantech hinges, in part, on these innovations. So it is not surprising that so much focus in the blogosphere and the press is given to the funding and development of these new technologies. Much like the dot-com buzz in the mid-90s, today we celebrate the amazing innovations that are taking seed.

But for cleantech to avoid the fate of synfuels of the ‘70s or that of many of the early dot-coms, we must create real companies that generate revenue, margins and profit. In a tough economic climate some cleantech companies are showing such success. Demand energy management companies EnerNoc and Comverge had exceptional growth in 2009, and EnerNoc turned the corner to positive net income (see data below). Both are early venture funded cleantech success stories. LED manufacturer Cree continued its exciting revenue and profit growth. And while finances of the much more numerous privately held cleantech companies are typically held close to the vest, I can say that our own LED lighting portfolio company, TerraLux, not only had exceptional revenue growth but also showed its first period of positive cash flow.

2010 has the potential to be a breakout year for certain categories of cleantech. The IPO market is heating up and this could be the year where we see our first significant wave of cleantech IPOs. A123 blazed a trail with its successful IPO during the tough 2009 market. In 2010 we could see the IPOs of Tesla Motors (electric vehicles), Silver Spring Networks (smart grid), Solyndra (solar), Codexis (biofuels), as well as others. If we see a string of successful IPOs, momentum for cleantech venture investing should experience further pick-up, and we should see increased interest from institutions willing to back venture capital funds.

All of this plays out for 2010 to potentially be a big year for real cleantech businesses – those with exciting revenue growth, IPOs and, yes, some even with profits.

One major variable in the 2010 forecast: Legislation around cap and trade will undoubtedly be a hotly discussed item this year. The passage of any legislation that has the impact of increasing the price of fossil-based energy sources will provide additional market momentum and increase the ability of cleantech companies to compete in the open marketplace. Even if the provisions of such legislation do not go into effect for several years, I suspect the market will begin to react to the pending changes fairly rapidly. But more on this next time.

EnerNoc

Comverge

Cree

(Financial Data from Google Finance)

Feel-Good Government Grants Leading Cleantech Astray

noreply@blogger.com (David Gold) — Wed, 09 Dec 2009 18:32:00 +0000

Grants for smart grid projects. Grants for battery manufacturing lines. Loan guarantees for renewable energy project development. Grants to private companies for energy efficiency projects. And with each it seems that the cleantech world cheers. Yet for all our desire to create sustainability in our consumption and use of energy, this model of getting us there is not only unsustainable but is of questionable value.

I want to emphasize that I am speaking about government grants to the private sector where the government is not the end customer and where the grants are for implementation of projects that businesses may (or may not) have done otherwise as opposed to grants to conduct basic R&D. Projects like smart grid implementations, battery manufacturing lines, biofuels plants or industrial energy efficiency implementations that have represented the bulk of cleantech grants to the private sector this year. Instead of focusing on cultivating businesses that can sustain themselves via customers, government handouts have focused company time and money on lobbyists and grant writers. And if you haven’t noticed, the handouts are huge, with many in the tens of millions and even hundreds of millions of dollars for a single award. Some award winners, like ECOtality, are honest enough to admit that their efforts to secure government funding directly attributed to a drop in their revenues. For every company that wins a cleantech grant, there are as many as 10 times the companies that applied and lost. All those losers spent significant time and money chasing those funds and, in the process, neglecting their real business and real customers. Lately the discussion in board rooms often has concentrated more on how to win the next government grant and which lobbyist to hire than on how to build a successful and sustainable business.

At the most basic level, the goal of current U.S. energy policy should be to speed our transition to sustainable domestic energy consumption – a transition that would occur naturally as carbon-based energy sources declined but likely too slowly to avoid the environmental, economic and national security implications. Presumably, the concept behind hundreds of billions of dollars in grants to the private sector is to enable and encourage acceleration of this change. As such, it also must presume that government employees can select winners better than the private sector, do so without political influence, and that the projects being funded are absolutely ones that would not have occurred without government funding. Finally, those same government employees; 1) must be able to select projects that will help accomplish our goal and; 2) must either be able to continue to fund those projects or have effectively analyzed that a one-time grant will be sufficient to incentivize the private sector to take over from there. My Democratic friends may scream at me, but those are an awful lot of largely unrealistic presumptions that defy the history of government grant programs to the private sector. (Synfuels and the National Institute of Standards and Technology’s Advanced Technology Program are just two examples.) And to add insult to injury, large amounts of the recent cleantech grants will help the competitiveness of foreign corporations as it was awarded to U.S. subsidiaries or joint ventures of those companies (for example, hundreds of millions in battery grants involving LG Chem, Kokam, Itochu Corporation, BASF and Saft). While the government has long had a role in advancing basic R&D, the concept that the U.S. will jump-start, let alone build, a sustainable energy economy through government handouts for implementation of manufacturing plants, production facilities or enhanced utility grids is, quite simply, ludicrous.

Government grants to the private sector are great PR and make the cleantech public feel good. But they don’t provide quick economic stimulus to the economy (see Cleantech Stimulus Not Very Stimulating) and will not provide meaningful acceleration on the path to sustainable domestic energy consumption. In the end, the only way to have sustainable change is to have a change in the fundamental economics of energy – both in the cost of non-sustainable sources and in the regulatory infrastructure through which carbon based energy companies and utilities earn money. We all saw how quickly things began to change when oil hit $100 a barrel and how quickly they reverted when prices went back down. Reform the regulatory environment so that utilities can profit from conserving energy instead of from building power plants and watch how things change. In my home state of Colorado, wind turbine manufacturer Vestas just announced it is furloughing all 500 workers at the plant it built not long ago. Why? Vestas notes the challenge of natural gas prices being so low that wind turbines can’t compete. I guess we need to borrow more money from the Chinese and other foreign governments to further increase our grants to the wind turbine market…or, we can focus on a sustainable solution.

Nothing can provoke an economic transformation more quickly than the free market appropriately motivated by profit. That, in fact, is largely how we got to where we are today with our reliance on carbon-based energy sources. And the most sweeping and powerful thing the government can do is to influence the profit motive for the private sector by changing energy economics. But that is a topic for another blog post. (And now my Republican friends can scream).

Cleantech Venture Capitalists are Human Too

noreply@blogger.com (David Gold) — Mon, 02 Nov 2009 23:41:00 +0000

Sectors like solar, biofuels and smart grid have received a significant overweighting of venture capital investment compared to other sectors. Is this because they are better investment opportunities or because venture capitalists (VCs), being human, invest in what they know and who they know? While many entrepreneurs may not believe it, VCs are human, too.

In my last post, “Human Capital, Not Venture Capital, the Biggest Cleantech Need,” I discussed how the greatest challenge today to growing a successful early-stage cleantech business is the shortage of successful, experienced cleantech entrepreneurs. But finding the right human capital to build great cleantech businesses isn’t the only stumbling block: Human capitalists (VCs) have been limited by their own experiences and networks.

At the end of the day, venture capitalists almost always invest first in people. A great, experienced management team can make a business out of an average technology. A bad management team can destroy the most amazing of technologies. Over the past decade, as cleantech VC investment started to expand to more than a handful of specialized funds, VCs naturally turned to their business networks to learn about the sectors, identify opportunities and build management teams. Given that the largest categories of VC investments in the preceding few decades have been in software/web, semiconductors, information technology and pharmaceuticals, these are also the areas where the VCs’ largest network of experienced successful entrepreneurs resided.

As crossover entrepreneurs and crossover VCs started to explore or create opportunities, they naturally looked where their knowledge could be most applied. It should not be surprising that the lion’s share of VC investment dollars have been going into areas that have closely related technology foundations to the traditional areas of VC investment. Sectors like solar, smart grid, biofuels and LEDs have received most of the VC dollars and, as a result, increased press hype. The table below highlights the approximate portion of cleantech VC investments in some of these key areas over the past three years.

No doubt there are exciting investments to be made in these sectors. Our fund, Access Venture Partners, has invested in both an LED lighting company (TerraLUX) and a smartgrid company (Tendril Networks). But what about sectors like green building materials, industrial energy efficiency, geothermal and nuclear? They serve equally enormous markets (if not larger) and at least in some areas (if not most) have equal or greater potential impact on the economy and the environment.

Solar is a particular anomaly, receiving the single largest share of all cleantech venture capital. While sexy because of its elegance, solar is a challenged technology. The economics of solar must struggle against the triple confluence of very low efficiencies, very high costs and the fact the sun simply doesn’t shine much of the time (think night and clouds). No doubt that solar venture investments are targeted at changing those factors – except for the sun, of course. There are limits to what even VCs can accomplish. But even if the cost of solar cells dropped to zero, solar still would find itself challenged to compete with other renewables, let alone traditional energy, because at least half the system cost is outside of the cells.

Geothermal, which unlike solar can be used as “base load” (meaning that it is always on), is at the other end of the spectrum. There have been few geothermal venture capital investments, yet it has some of the most compelling economics at both the utility and home scale. I would highlight both MIT’s 2006 report on the huge potential of geothermal energy and, of more contemporary interest, the October 2009 issue of Consumer Reports, which showed how a geothermal heat pump’s potential economic return usually outperforms that of a home-based solar thermal system.

So why the VC investment preference for solar over geothermal? I’m betting that much of the bias has to do with the fact that not many VCs have strong networks of geologists, drilling technologists, heat pump engineers and steam turbine power generation experts to build great geothermal companies (myself included). While it is certainly important to be knowledgeable and comfortable with the people and technology of a company, VCs must challenge themselves to think outside their own box. If the cleantech market is going to fulfill its full business potential, VCs must push themselves beyond the normal human inclination to stick with what’s familiar. A comfortable investment may not be a great investment. Cleantech VCs need to take a peek over the side of our box. What we see and what we can learn may surprise us.

Cleantech Segment	Traditional VC Corollary	Estimated % of Cleantech VC Investment $’s 2006-2008
Solar	Semiconductors	33%+
Biofuels	Biotech	20%+
SmartGrid	Software, Web, Information Technology	14%+
LED Lighting	Semiconductors and Information Technology	5%+
Geothermal	None	<2%
Nuclear	None	<2%
Building Materials and Efficiency	None	<2%
Industrial Energy Efficiency	None	Not tracked… likely <2%

Data aggregated from sources including NVCA, PriceWaterHouse Coopers MoneyTree and Greentech Media. Data from these organizations use different sources that yield different totals and each has different categories they track with cleantech funding.

Human Capital, Not Venture Capital, the Biggest Cleantech Challenge

noreply@blogger.com (David Gold) — Fri, 16 Oct 2009 23:47:00 +0000

Building great businesses typically requires three key ingredients: phenomenal people, compelling technology and investment capital. Cleantech companies are no exception. While cleantech venture capital investments have expanded rapidly, averaging an annual growth rate of 65% over the past five years and now representing over 15% of all venture investments, the compelling technologies are mostly early in their development cycles and the human eco-system for early stage cleantech companies is in its infancy. There is much buzz about the venture capital and government funding that is being invested in cleantech companies, but the immaturity of the cleantech entrepreneurial ecosystem is overlooked as a significant challenge in accelerating the growth of successful cleantech companies.

In the more traditional areas of VC investment such as software/internet, life sciences, and semi-conductors there are a relatively large number of successful entrepreneurs who have had exit events that made them wealthy. These individuals are the most likely source of smart early angel financing for other start-ups in the same sector. I emphasize “smart” because angel investors who invest in companies within industries that they know well not only make wiser investments but also can add real value to those businesses. And they tend to be more prolific investors within those industries for just that reason. The reality is that the list of successful cleantech entrepreneurs, where success is defined by a healthy exit event, is very short.

Early stage cleantech companies struggle much more than companies in traditional areas of venture capital to find wise angel investors, or advisors and executives with both industry and entrepreneurial experience. While crossover entrepreneurs – those with success in a different sector who desire to get into cleantech – can be helpful and bring valuable wisdom, nothing can substitute for the valuable knowledge and experience gained by building a company within the same sector. Efforts like the Cleantech Open , some of the emerging cleantech incubators (like CleanLaunch, Austin’s Cleantech incubator and San Francisco’s incubator) and cleantech network groups (like Colorado Greentech Group, the Renewable Energy Business Network and the CleanTX Foundation) can assist in the tough challenge of bringing the right mix of entrepreneurial, business and industry expertise together for an early stage cleantech company. But, in the end, only time will fully cure this problem by generating experienced and successful entrepreneurs who can breed the second generation of cleantech companies. In the mean time, the challenges of growing and investing in early stage cleantech companies are as great as they will ever be. Fortunately, I believe, the rewards will be equally great.