Year end thoughts: Why good technologies don't get funded

As with the previous year-end thoughts column, this post will depart from the usual relayed news updates to provide one man's conjecture, and thus should be read with a lot of caveats attached...

One common complaint from entrepreneurs is that their compelling technology isn't getting the attention it deserves from the venture community. They have an advantaged technology, a strong management team, and huge market potential -- so why is it proving difficult to raise VC funding?

Amidst all of the increasing capital flowing into cleantech, and talk of finding the "next Google," it's easy to forget that there are some significant differences between many clean technologies and traditional VC-backed tech areas. Some of the differences are gaps that are quickly narrowing, if not already bridged: Strong entrepreneurial leadership, significant M&A activity, etc. Cleantech already has developed, or is rapidly developing, these and other key success factors.

One feature that is unlikely to change, however, is the industrial-equipment and project-based nature of many clean technologies. In contrast to technologies such as software, Internet services, biotech, etc., many clean technologies are material-intensive mechanical devices (or their components). Successfully introducing such devices requires significant inventories, right-sized manufacturing capacity, and appropriate sales models. Even in comparison to other similarly manufacturing-intensive VC-backed tech areas such as hardware, telecom equipment, medical devices and semiconductors, the heavy industrial nature of clean technologies such as water treatment equipment, electricity generation and transmission equipment, etc... is distinctive.

Furthermore, unlike those other manufacturing-focused traditionally-VC-backed industries, in many cleantech markets the major buyers of the technologies haven't yet demonstrated rapid adoption when presented with an innovation that is "evolutionary, not revolutionary." So that investors can't be assured of very fast penetration of a winning new technology throughout the target market, even if eventual market adoption appears likely.

This is, of course, an over-generalization. There are plenty of clean technologies that are not capital intensive, there are plenty of rapidly-adopting customers of clean technologies, and certainly there are innovations in cleantech that all would agree are revolutionary, not evolutionary. But as a generalization, these two factors (capital equipment, and less rapid adoption) help explain a few key unique challenges for both cleantech startups and cleantech investors.

There is a lot of venture-backable dealflow in cleantech, and it appears to be increasing over time, just witness the statistics that show the capital is flowing in. However, what I want to address is why I have also seen compelling clean technologies that have had trouble attracting venture capital investments.

First of all, venture capital and capital equipment manufacturing, regardless of industry, are often a difficult fit. Venture equity is very expensive. Thus, VCs need "scalable" investments -- ie, if a VC is looking to achieve targeted returns from their investment, they need to see a company that is poised for stratospheric growth. For software, once the code is written, every incremental sale comes at a low marginal cost. So the scalability is limited only by the company's ability to sell and implement product. Additionally, recurring revenue is a standard part of the industry's business model, through annual fees. So the very expensive VC capital can go primarily into R&D and sales and marketing, and (if the company and their product are successful) drive strong growth. Even for a hardware company, if the industry is one where rapid adoption of new innovations is commonplace, then the anticipated growth may warrant using venture capital for other purposes as well.

Contrast this with a company that has developed a new water filtration technology and is looking for capital to sell equipment to slower-adopting end users. Assume it is a clearly advantaged new technology, targeting a very large market, with good exit potential, strong management team, etc., so management feels they present a strong investment opportunity. They are planning on deploying some of the capital toward the classically "scalable" sales and marketing and R&D efforts. But some will go to parts and other inventories so as to be in a position to supply increasing demand for the equipment. And if the company is looking to develop a recurring revenue stream from their equipment, by for example leasing the equipment to customers instead of a one-time sale, then they'll need even more working capital to build up and carry a fleet of assets as well.

In a few cases the growth potential will be strong enough to warrant venture equity financing of all of the above. But for many cleantech innovations, even if they are compelling technologies with strong value propositions, VC may not be the right fit for 100% of financing needs. Thus, it's important to remember that there are other forms of capital potentially available as well (emphasis on "potentially").

• Depending upon the stage of the company and technology, angel and/or strategic partner funding may be attractive.
  
• Venture debt (sometimes called "technology lending") may be available.
  
• For proven technologies going into large projects, project financing can be tapped.
  
• Customers may be willing in some cases to supply financing or pay up-front fees.
  
• Also, and increasingly used, it may be possible to do a go-public move through a reverse merger with a shell company that is already listed (or through a similar process). Feelings are mixed about this approach, which is a topic to be addressed in another post.
• There are other forms of financing that can be tapped as well.
  

The key point is that venture capital -- specifically, equity -- is not necessarily the right fit for a lot of great innovations. Venture equity financing is perhaps the single most expensive form of capital available to companies. And yet, companies with new innovations tend to look to VCs first. And then there is frustration when there isn't a fit -- financing the effort with pure venture equity doesn't provide the requisite returns, so the company finds doors closed to them, even when there is a strong underlying technology and business.

My personal thought is that there is a need for more technology lending in cleantech. In the above example of the water filtration company, a combination of venture debt financing (convertible, and secured via assets and inventories) and venture equity financing may be a good fit, if the technology has been proven. There are a few emerging such lenders, including GE Technology Lending and Blue Hill Partners among several others. Some VCs are even starting to look at doing convertible debt financings themselves. But from my perspective, it still appears to be a bit of a gap.

The venture debt and equity bundle is not a perfect solution, and there is no one-size-fits-all. Many VCs wouldn't want to invest in any transaction involving debt, which would subordinate their own investment. The specifics of the technology and company may not lend themselves to venture debt. And in almost all cases, such a transaction would require a company which had already largely proven out its technology, it is not a "beta stage" vehicle.

So take this for what it's worth. But in an era when the pundits are lamenting the available opportunities for private equity investing, and when clean technologies are in the ascendency but remain unique in certain respects, it is not surprising and very welcome to see the emergence of clean technology lenders to work with clean technology equity funders. The more types of funding available to cleantech startups, the more likely there will be the right fit for each financing need.

Year-end thoughts: Solar and the long tail

In the next few days we'll try to provide some year-end thoughts on various cleantech investing topics. Importantly, unlike many of the other notes on this site, these are conjecture and opinion and not the usual passed-along news updates, so read them with all due skepticism.

First and foremost, we pretty much have to start with solar.

According to numbers from an AP/ Dow Jones report (with figures from the NVCA), solar VC investments reached $67.7M in the first three quarters of 2005, as compared to $31.4M for all of 2004. The AP and Dow Jones also report that solar made up more than a third of all energy VC investments so far this year. Regardless of the specifics of the numbers, solar is without a doubt the hottest cleantech investment area right now (if you'll pardon the pun).

Relative to the billions-of-dollars-per-year market that solar power is fast becoming, the amount being invested is still a small amount. But it's important to recognize that almost every investment in solar technology (with some rare exceptions) is someone making an investment in a proprietary generation technology, all from the same basic source of energy - the sun. A natural assumption would be that for any given energy-generation situation (ie: rooftop panels), there will be one single most economic technology. With some solar investors declaring that they are "looking for the next Google," it is tempting to think of solar technology as a zero-sum game, with one winning technology (perhaps already invented, perhaps not) and a lot of lesser approaches that will either be subsumed or that will outright fail.

Consider that this year there were at least 10 different solar-technology venture fundings (probably a lot more, just did a quick scan), plus other IPOs, plus the presence of well-established major players such as GE and BP Solar, etc. If solar is indeed a zero-sum game, it makes it a bit tough to understand the level of investment in solar right now. Is there going to be one "home run" and a lot of money-losers in the segment? Is there a bubble in solar?

First, let's examine the idea that solar is truly a winner-take-all market. We tend to think of solar as being a uniform market -- solar panels on rooftops, whether commercial or residential, whether new-build or retrofit. But in fact, there are a number of differentiating factors that can mean different technologies are best-suited for different niches.

For example, the standard economic measurement of efficiency for solar technologies is cost per peak watt. One would assume that the "winning" technology would simply be whatever achieves the lowest cost on that measure. But installation and application are key variables that can affect the answer, and in fact create different needs.

For a residential system, the end user often has a relatively small energy load, is usually unable to feed excess power back into the grid, and doesn't have storage. Thus, the load is the limiting factor for the size of the system, and there is often more than enough space on the rooftop for a number of different technologies to be used, including technologies that achieve low cost per peak watt, but also lower amounts of energy generated per square foot. In other words, it can sometimes be more attractive to go with a cost-efficient technology that requires a lot of square footage, because you have the space.

However, in speaking with installers who target large commercial buildings, you often hear a different story -- the limiting factor of the system isn't the load, it's the available roof space. In which case, these installers argue, it's often best to go with a higher cost-per-peak-watt system if you can squeeze more watts on a roof (this can also be affected by the specific form of any subsidies).

The real-life trade-off here, currently, is thin-film versus high-end silicon-based systems. No unconcentrated technologies beat high-end silicon in terms of watts per square foot. But many emerging thin-film technologies, because they avoid the use of silicon, can achieve significantly lower costs per peak watt. Which one will be best-suited will thus depend upon the specifics of the situation.

And so we can already see that the market environment which may seem monolithic in fact has different niches that different technologies can best address. Other similar market schisms are created by trade-offs such as:

• Centralized grid power vs. decentralized off-grid power
  
• Building-mounted versus other uses (portable systems, electronics, LED lighting, etc.)
  
• Cost of system versus lifetime of system (for your rooftop system you probably want at least 20 years of warranteed lifetime, but for your solar-powered radio you can probably be happy with a more rapidly-degrading 5-year lifespan if it means lower cost)
• Form of mounting (rooftop panels vs. concentrators vs. BIPV)
• Power only or co-generation (ie: solar heating and/or hot water)

Investors are often focusing on specific market niches when they invest in specific technologies. They are looking at the market niche for which the technology appears best-suited, and evaluating the size of that niche, rather than seeing solar as one huge monolithic market.

Perhaps one way to think about this is to borrow the much-overused phrase from other venture investing areas, the "long tail," which is really just another reincarnation of the old 80/20 rule. The concept here is that, if one is to think about an overall market for solar, there will be some large key segments that make up the lion's share of the market (e.g., 20% of niches make up 80% of total market demand), and a multitude of much smaller niches that fill out the rest of the market (e.g., the other 80% of niches make up 20% of total market demand). True long-tail thinking says that the ratio may actually be 80/30 or 80/40 (and available market data suggests that for the solar industry it's probably pretty concentrated in the big grid-connected rooftop markets, so our original guess of 80/20 may be most appropriate), but the basic concept still holds regardless.

In other technology markets, the idea is to invest in technologies that enable efficiently tapping into the long-tail market opportunities (ie: eBay, Amazon.com, etc.), because the larger market niches have already been somewhat saturated, but if you can aggregate all those individually tiny niches you can add up to a pretty big market as well. The same phenomenon appears to be happening in solar, albeit at an early disaggregated stage.

Secondly, the other factor at play is the timing question: What will win today, versus what will win in ten years. Silicon-based technologies are well-understood and well-warranteed. But as silicon prices continue to rise along with demand, and emerging second- and third-generation PV technologies continue to mature, will non-silicon technologies achieve pre-eminence in the coming years? Investors are playing both sides of this question.

Finally, even within specific niches and time-to-market windows, there is always room for more than one player to potentially succeed -- in some niches it will be winner-take-all, and (more often) in other niches there will be several permanent players. The management team's ability to execute thus becomes key -- technological advantage is not enough.

This is all a long way of getting to a very basic conclusion -- that there is a lot of room for a lot of different bets in solar, it will remain a very un-concentrated market for some time. Silicon-based solar saw a wave of investments a few years ago, recently thin-film technologies have seen a lot of bets, and perhaps third-generation nanotechnology-based PV and solar concentrators will see the next wave, but the biggest conclusion is that there is room for all -- at least for now.

There are some other conclusions investors should draw as well:

• Investors need to be aware of whether the technology they are backing is an "80%" technology or a "20%" technology. Does the technology only address specific niches in the long-tail, or in the main market? Is it a platform technology that can address multiple niches, or is it really just suited for a couple of specific applications?
  

• Very soon, the market is likely to see significant consolidation. Right now, there is so much demand that everyone has as much business as they can handle, and the focus is on simple execution. But during the inevitable slower parts of the growth cycle, core competencies such as branding, distribution, etc. will drive companies to try to aggregate niches by aggregating technologies, and thus achieve economies of scope and scale. Some companies, for example Carmanah, are already targeting the long tail by aggregating different applications and market niches. Others will find the advantages of being able to "single-source" for installers a full suite of technologies addressing their different needs, and will look to acquire those technologies.

• Given the above, we are probably passing from a period where investors will be funding startups with an IPO exit in mind, and moving into a phase where trade sale is a relatively more likely exit. This should affect valuation expectations accordingly.

• While never unimportant, the quality of the management team and other aspects of execution are going to be increasingly important relative to the specific technology being developed.

None of the above should dampen any enthusiasm for the solar market for investors, and they are just one person's (likely mistaken) perspective. However, since it has been seeing rapid market growth and high interest from venture investors, the solar market will probably end up being a model that other clean technologies will follow as they mature and develop as well. So even for investors who are not investing in solar right now, it will be an important industry to follow and learn from.

Recent articles of interest

The articles of interest have built up a bit with the time away. Here are some that may be of interest to cleantech investors:

• Bob Bellemare of Utilipoint provides a succinct overview of the various government subsidies in support of solar power installation, discusses the likelihood of their continuation and their likely evolution, and generally points to continued growth of the industry.

• MIT Technology Review discusses the efforts Siemens is making toward a vision of ubiquitous sensing, a technology we've discussed here before that is a good example of a cleantech "enabler".

• The LA Times discussed how the Kyoto Protocol treaty, even if not ratified by the U.S., is still having a significant impact on U.S. businesses and clean technologies. The increased role of London's AIM exchange is also mentioned...
  

• Here's a terrific overview of the status and economics of fuel cell technology. Bookmark this one, if this is a topic important to you.
  

William McDonough joins VPVP

William McDonough, who for years has been a thought leader for green and clean technologies in his roles as architect and pundit, is becoming a venture capitalist. According to VantagePoint Venture Partners' website, he has joined the firm as a "Venture Partner." As someone who has been involved in green and clean technologies for many years, I can attest to McDonough's expertise and visibility in the field -- this is a strong addition to the VPVP team. To find out more about his role and outlook, see this interesting transcript.

Catching up: Agrilink, H2O Innovation, Tubel Technologies, XsunX

Apologies for falling behind a bit lately on the posts, as a new addition to the family has been requiring complete attention in recent days... That hasn't stopped news of various cleantech fundings, however:

• Agrilink, an Australian developer of automated irrigation systems which optimize water use, announced an A$3M raise from British venture firm WHEB Ventures. The claimed savings reach 50% of water usage. Agrilink's approach is comparable to that of US firm Hydropoint and others.

• H2O Innovation (TVX: HOI), which is developing clean water technologies, announced the final C$1.55M round of a series of private placements (the prior C$1M round was in November), as well as a recap. Total investment in the private placement to date appears to be around C$6M. The press release has many details about the recapitalization.

• Tubel Technologies, whose hydrocarbon extraction optimization technologies fall squarely in a big grey area for cleantech investors (some would say it is resource efficiency, some would say it isn't), closed a second round of venture financing of an undisclosed amount. Chevron Technology Ventures' CTTV Investments arm joined existing investor Altira in the round. "Downhole" sensing technologies, part of Tubel's approach, have been seeing a lot of entrepreneurial activity in recent years.
  

• XsunX (OTCBB: XSNX) announced a $5M raise of secured convertible debentures from Cornell Capital. XsunX is developing thin-film solar technology for application on windows. As previously mentioned here, the raise is part of a larger commitment by Cornell Capital.
  

Oxford Catalysts, Ltd. launches, and other news items

• Oxford Catalysts, Ltd., announced a GBP500k funding led by IP2IPO Group plc, with additional funding from Top Technology Ventures (also affiliated with IP2IPO), as part of a spin-out from Oxford University. The company's catalyst technology has uses across several energy areas, including the production of hydrogen from waste methane.

• Here's a good article describing the recent NREL Industry Growth Forum.
  

• Yet another mostly optimistic overview of recent developments in clean energy in this Red Herring article.
  

Solar still hot: Carmanah and Cyrium announce raises

• Carmanah Technologies, an integrator of solar PV and LED lighting for a variety of outdoor lighting solutions, announced a $15M private placement. Carmanah is publicly-traded (on the TSX Venture exchange), and has made acquisitions in the past.

• Cyrium Technologies, which is developing next generation solar products using nanotechnology (specifically, "quantum dots"), announced a $3M raise led by Pangaea Ventures Fund, with participation from seed funders Chrysalix and BDC.
  

• On non-solar matters, for today's amusing see this article in Wired News. Best quote: "Eighty percent or more of the ideas that come directly to us violate the laws of physics..."
  

GreenFuel raises $11M Series B

DFJ made a big bet on smokestack-cleaning GreenFuel Technologies today, putting $6M into an $11M Series B round. GreenFuel is interesting not only as a CO2 and NOx cleaning technology, but also as a technology angle on biofuels manufacturing. DFJ views this as a bet on "carbon management solutions," according to the quote from Jennifer Fonstad. Existing Series A investors including Access Industries put in $3.9M, and individuals put in $1.1M.

GreenFuel had previously announced a bridge financing back in July.

News among cleantech investors

• NGP Energy Technology Partners, a fund managed by NGP Energy Capital Management, announced a final close on a $148M fund to invest in various energy technologies, including clean energy technologies. The firm also announced closes on two other funds, totaling $1.7B in capital. NGP ETP invests both growth capital and buyout capital.

• The IFC is getting into cleantech venture capital, with the announcement (note: pdf) of the formation of the $14M Sustainable Energy Fund, to be managed by E+Co. The debt and equity fund will be used to finance seed stage and growth equity for sustainable energy projects and energy service companies ("ESCOs") in Central America, Brazil, China, and Southeast Asia. E+Co. will also provide technical assistance, paid for by the IFC. The fund will be allocated 25% to early stage investments and 75% to later stage investments. Most of this will clearly be project financing, but the investments in ESCOs would more classically be thought of as venture capital.
  

• There's a good interview with Kleiner Perkins' Bill Joy in the latest Fast Company. He especially highlights his investment thesis in clean energy technologies. Notable quote: "I don't think there will be one energy company that's as significant as a Netscape. [But] there may be more than a couple as significant as Google."

• [12/9 update: In other cleantech investor news, @Ventures announced that Matt Horton has joined the firm as a Principal. Matt comes over from Garage Technology Ventures, where he had helped them make investments in Hoku Scientific, Miasole, and ClearFuels Technologies.]
  

3Q05 cleantech investments total $425M

Cleantech reached 8.1% of all venture capital investments in the third quarter, according to statistics from the Cleantech Venture Network.

The Cleantech Venture Monitor identified 69 different deals, totaling $425M, for the biggest quarter on record. According to the press release:

The most active investor in Q3 was EnerTech Capital with five investments in the quarter. Chrysalix Energy, Draper Fisher Jurvetson and Kleiner, Perkins, Caufield & Byers participated in a total of three financings each.

Key Q3 2005 Statistics:

• The Return of the Northeast: In an upset the Northeast reclaimed its number one position in cleantech investment with a record setting $141.4 million

• West Coast Depression: West Coast investment slipped to less than 10% of total capital committed to cleantech at $41.0 million, the lowest recorded quarter for the region since Q4 2002

• Energy Continues to Dominate: Q3 energy related investment increased 32.5% from Q2 capturing 59% ($251 million) of total cleantech investment, 38 of the 69 Q3 investments were energy related

• Water and Materials Doubles: Water Purification and Management ($61.5 million) and Materials Recovery and Recycling ($29 million) both saw increased investments increasing more than 50% respectively

• Materials and Nanotechnology Falter: Investment in materials and nanotechnology declined to $28.7 million in investment over only eight investments

• Environmental IT Slow to Build on 2004 Growth: With one Q3 deal, only 5 investments have been made in the sector in 2005 for a total of under $20 million combined, after a total of $60.3 million was invested into the category in 2004

HBS Cyberposium reactions, venture capital, clean energy, and clean water

Based on all of the reporting that's come out of the HBS Cyberposium (see the column here and one reaction here), it's caught some attention. It appears to have been a very good conference with a lot of thoughtful discussion. Despite not having been able to attend (an impending family arrival keeps me local right now), the discussion definitely deserves some reactions.

"In the future, I see a median rate of return of zero or less"

"We're in the lottery business"

Is venture capital really nothing better than playing the lottery? Taken out of context, that quote would imply that there is no skill involved. And it also implies another potential point of view about the traditional venture investing areas -- that they may be over-invested, so that the expected return to an average investor has been capitalized down to zero (which would clearly be even worse than other investment classes), as Professor Sahlman postulated. Under that kind of scenario, and in a "hits-driven" industry, the idea would be to simply place your bets in the right market, and hope for the unlikely best.

Venture capital and other forms of private equity are all about imperfect information. If the public equities markets are "perfect" markets, where close-to-perfect information means that all assets are predominantly fairly priced (as some argue), then private equity is the opposite: It is supposed to be the opportunity to get into areas that are less-understood, with less liquidity, so that superior knowledge matched with some patience and targeted assistance can yield strong returns. There's still a lot of risk and volatility involved, of course. But the returns shouldn't be zero. In fact, it should be the opposite -- given the riskiness of the investment class, even under a "it's nothing more than a dartboard" mindset venture capital should still outperform public equities overall, since LPs will need higher returns on average over time to compensate for higher risk. Even compensating for the fact that Professor Sahlman's statement was carefully about median and not mean returns (leaving open the possibility that a few "star performers" could float overall industry returns while the predominant body of investors achieve around zero returns), his statement should have been seen as unrealistically pessimistic versus other investment classes.

So for investors to seriously think that venture capital returns will be zero at the median, and not skill-driven, is a scary thought -- it means that on average it is probably WORSE than throwing darts. How could that be true, unless investors are consistently and knowingly over-investing in certain areas, hoping to get lucky. Just like the lottery, it wouldn't make economic sense unless you are an incredibly risk-seeking investor.

I would argue that most venture capital investors would disagree with the idea that venture investing is nothing more than a lottery with an expected return of zero. Many VCs are experts in their specific areas of investment, and even those who aren't subject-matter experts are often terrific at pattern-recognition and have other valuable experience to draw upon. There's a lot of skill involved in figuring out which fledgling companies and technologies have a strong chance for dramatic growth, and which seem like too much of a risk compared with the opportunity and price. Furthermore, VCs can improve the odds of their bets by being value-add investors, taking an active supporting role with their portfolio companies, providing key business contacts and access to top external resources, and leaning on their previous experience and connections. Backing the right horse, based upon such skill and intentions, shouldn't be a complete crap-shoot. It should be a very educated guess for an investor with strong knowledge and experience in a carefully-chosen space (or at least unique access to such knowledge and experience), and it shouldn't be a passive action. But the fact that such pessimistic sentiments are nevertheless being taken seriously, and even agreed with, suggests that smart venture investors should be looking more into the areas where the main body of investors aren't looking.

Which of course is where the next quotes of note come in:

"Clean energy is big on the west coast... Venture capitalists haven't traditionally invested in [healthcare, education and the environment], but given the amount of money that's in the business, somebody is going to try, and somebody will be right."

"Those spaces [healthcare, education and the environment] don't fit the venture profile for timeframe and liquidity. They require a ten year, $100M investment. With that said, the profile around energy, particularly solar, is starting to look more standardized."

Clearly, clean energy is being seen in these quotes as an area that is seeing increased liquidity and shorter investment timeframes, and an area where investors are increasingly turning. It would appear that such investors would agree with the analysis above which suggested turning to relatively underinvested areas.

It's no coincidence as well that solar is particularly highlighted in the above quote, since that's the clean energy investment area that's been getting the most attention lately from non-specialized investors, as the spate of recent major fundings shows. Ironically, in an effort to move in new directions, a lot of mainstream VCs seem to be commonly looking for deals in solar right now... Thus, other clean energy investment areas are undoubtedly going to gain the attention of such investors next, as they gain comfort in the industry and move deeper into the space to try to stay ahead of the curve.

Those who regularly visit this site, of course, know that the opportunities for attractive returns in "standard" liquidity timeframes already stretch far beyond simply investing in solar, and further into other clean technologies besides clean energy.

Will water be next?

I had the pleasure of participating on a local Wall Street Transcripts panel on water investing last week, along with Ira Ehrenpreis of Technology Partners, Warren Weiss of Foundation Capital, Marty Lagod of Firelake Capital, and Rod Parsley of The Water Fund and Terrapin Partners, a pretty impressive group. All are actively investing in private equity opportunities in water (the first three plus my own firm focused on venture-stage investments).

There was a lot of optimism about the water space as an emerging area for venture investment.

• Large markets with a lot of unmet needs (billions more dollars need to be spent on upgrading water distribution infrastructure in the U.S. alone),
  
• Significant opportunities for the application of successful technologies from more mature investment areas (sensors, telecommunications, distributed computing), and
  
• Large acquisitive players to provide liquidity and strong exit potential.

Some significant obstacles remain, however. The panelists cited such challenges as:

• Capital-intensive, often more applicable to project financing than venture capital
• Not all unmet needs will be met via proprietary technological solutions, in fact much of the expected multi-billion dollar investments in water infrastructure over the next decade-plus will be in non-technology spending
• There aren't enough proven entrepreneurs entering the space (although there are definitely some), more backable management teams are needed
• Slow-adopting customers for technology means a long sales cycle and slow market penetration rates
• Water remains a low-priced commodity where pricing is not very clear to the end user
  

Nevertheless, as one panelist noted, the venture investors on the panel probably represented a significant portion of all active investors in the space, suggesting that the space is not getting a lot of attention. As noted, there are significant challenges to investors looking to get into the water space. But given the magnitude of the opportunity, and the increasing innovation and increased entrepreneurial attention in the space, it probably deserves more venture investor attention. As I noted on the panel, water is a critical resource, just as critical if not more critical than energy, with significant shortages and resource constraints looming. There's an important role for innovation in solving these challenges, and larger industry providers and technology incumbents are increasingly reaching out to venture investors to help them identify and cultivate such innovation. Energy may be an increasingly hot area for venture investors... But water may be next.

Big day for sensors: Tiger Optics and Sionex

• Extremely pleased to report this one (self-promotion alert): Tiger Optics, which has developed superior sensors using a proprietary cavity ring-down spectroscopy technology (note: opens pdf), completed the first close of a Series B funding in the past week, led by Expansion Capital Partners. The company's products are used for the detection of trace gas contamination, and has applications in semiconductor manufacturing, industrial processes, environmental sensing, automotive emissions testing, medical devices -- it is, in short, a strong platform technology. Will provide a link with more details as soon as one is available.

• According to today's PE Week Wire, Sionex closed $10.08M of a $12M Series C, with funding from Navigator Technology Ventures, Morgenthaler Ventures, Rho Ventures, TechFarm Ventures, and Draper Labs. Sionex offers a sensor-on-a-chip based on MEMS technology.

We've mentioned the strong cleantech opportunity in sensors before. As optical technologies -- often derived from telecommunications innovations -- see dramatically lowered component costs, and as intelligence moves further out into the emerging machine-to-machine monitoring and automation network, sensors are becoming a critical piece of the puzzle for efforts to drive efficiency in manufacturing, better monitor environmental and safety conditions, and improved energy efficiency in everything from motors to buildings. The newer technologies are often a dramatic improvement, in terms of both cost and performance, on incumbent technologies that may take a long time to operate, or may be labor-intensive and hard to operate remotely, or often require constant recalibration. It's not surprising that it's an area that is getting increasing attention from cleantech investors.

Day4 and clean energy in Red Herring

Chrysalix announced on Friday that they've invested an undisclosed amount in Day4 Energy, which is developing solar concentrator PV systems. Day4 has also received investment from the British Columbia Discovery Fund, and expects to construct its first commercial production line in the next 12 months.

Also of note is the soon-to-be-released article on clean energy in Red Herring, which should be hitting newsstands on Monday.

Newsweek's Eco-Friendly Companies, plus Aerogel Composite and P21

• In case you missed it last week, here are Newsweek's profiles of "Ten Eco-Friendly Companies," many of which will be pretty familiar to regular readers of this site.

• GreenShift announced a $500k investment in Aerogel Composite. We've discussed aerogels before, with Aspen Aerogels. GreenShift, which previously provided bridge financing for REC intermediary Sterling Planet and has made investments in a number of other cleantech startups, is taking 25% ownership.

• Germany's P21, which is developing stationary fuel cells, announced a 5M euro raise from existing investors Target Partners, Conduit Ventures, and Tech Fund Capital Europe. There appears to be room for a similar investment from a new investor.
  

Random articles on alternative energy

Below are some links to articles that have come along in the past few weeks:

• Red Herring had a couple of good surveys of flywheels and fuel cells. Interesting quote from the latter article: "While the technology might still be shaky, its promise is certainly large enough to be worth pursuing, even if early adopters have to endure a few moments of shaking, tapping, and cursing." Fuel cells, of course, continue to have their critics.
  

• Stirling Energy Systems has been in the news a bit lately. Here's the latest such mention. It's a different take on solar from what you might usually picture -- far different from panels on rooftops.

• As CleanEdge noted, BP has made a big commitment to commercializing alternative energy technologies, pledging to invest up to $8B over 10 years, in large part through their newly-formed division BP Alternative Energy. Notably, they expect BP Solar to hit $1B in sales in 2008. This is all a big deal for clean energy investors, since it not only provides further momentum, but could signify good M&A exit dynamics. Coincidentally or not, one academic believes that "peak oil" happened over the Thanksgiving weekend -- did you notice?
  

Bill Gates invests in Pacific Ethanol

Pacific Ethanol, which is building a series of ethanol plants in the west coast region, announced an $84M investment by Cascade Investment, LLC (note: opens PDF), which is owned by William H. Gates III.

Pacific Ethanol, which is publicly traded (Nasdaq: PEIX), is building sites in the west coast to try to capture first-mover advantage in building out ethanol production capacity in what they see as an untapped region. This points to the fact that much of ethanol production (and biofuel production in general) is a very well-understood, mature process, so the competitive advantages for winning players are more likely to be due to location, feedstock costs, financial engineering, operational excellence, customer relationships, etc., rather than a proprietary technological advantage. Also, the investments tend to be project-oriented by nature. As we've discussed before, it can make it tough for technology investors (ie: VCs) to participate -- with exceptions, of course.

The price per share of the transaction was at about a 20% discount versus the closing price on the 15th, when the deal was announced.

Gridpoint has $9M reasons to give thanks

According to yesterday's Washington Post, Gridpoint Inc., which sells computerized power backup systems, raised a $9M round Series A recently. The article mentions that "a few" venture capital firms including Advantage Capital Partners participated in the round, but that most of the round was raised from individual investors. There are a number of other interesting details as well:

• Gridpoint is raising another $6M in addition to the current round, to "increase production" and increase headquarters staff
  
• Revenues for 2006 are anticipated to be $10M, off of 2,000 units sold
  
• The appliance is about the size of a refrigerator, costs $6-16k (based upon the above revenue estimates, the channel must be taking a pretty big cut), is being sold directly to customers through hardware stores such as Lowe's, and in high-end versions can help manage on-site solar or wind resources.
• Where time of use pricing is in effect (which is certainly not a given, especially for residential and smaller commercial users), 10-15% electricity bill savings can be gained by moving electricity draw away from peak periods, and potentially by selling power back to the grid from the unit's storage.

The company's last raise was a $1.8M angel round in 2003. Given the pricing data given above, interested readers who want to put such a unit on their own home might contact Gridpoint to see if they can buy one direct from the company... probably not, unfortunately.

Coaltek's $7.7M Series A, and other items of note

• PE Week Wire revealed today that Coaltek has raised an approx. $7.7M Series A from funders including Technology Partners, DFJ, Braemar Energy Ventures, and Warburg Pincus. Coaltek's proprietary treatment process for coal allows dirtier Western coal to much more closely resemble Eastern coal, providing economic and pollution benefits. We last saw Coaltek at the spring Cleantech Venture Forum, where the clean technology implications of such "incremental technologies" were debated (scroll down to "Alternative Fuels" to read about it).

• Can't link to it, but if you get the chance, see the WSJ's column today on "Where the Bets Are," which describes where VCs are shifting their attention these days. Of course, clean technology is prominently highlighted, with a nice quote from Ira Ehrenpreis of Technology Partners.
  

• Cleantech investors EnerTech Capital Partners announced that Wally Hunter is coming over from RBC to become a Managing Member and open up EnerTech's Canadian office in Toronto. Everyone seems quite pleased at what seems like a good fit, compliments all around.

• For those following fuel cells as an investment area, there was this interesting overview of the 2005 Fuel Cell Seminar. Quite useful reading. It appears that the critical hydrogen storage issue remains unresolved...
  

SunPower's IPO, silicon supply, and cleantech investing

The long-anticipated IPO of SunPower happened today, and it shot up more than 40% in one day.

This will undoubtedly bring even more mainstream VC attention to the clean energy market in general, and solar energy in particular. After all, SunPower, with annualized revenues of around $65M, now carries a market cap of $1.5B -- even if that valuation goes down over time as the euphoria wears off, that kind of "pop" will get any investor's attention.

SunPower is certainly a great example of the business opportunity presented by the rapidly-growing solar market. According to Solar Buzz, for instance, solar installations grew 62% from 2003 to 2004, and by all reports the industry has continued to grow rapidly this year as well.

Investors need to realize that it will be difficult for the industry to continue this level of growth, however. Much of this growth has been due to specific regulatory incentives -- solar power is not yet competitive in cost with grid power in most cases, so the pure economic case alone isn't driving most of this growth. Nevertheless, demand for solar is growing quickly and won't stop growing anytime soon.

But then there's the silicon supply issue.

As Tyler at Clean Break and Jim at the Energy Blog pointed out a while back, Piper Jaffray put out a research report on the solar industry last month (pdf available here), with some pretty interesting conclusions:

• PV modules based upon polysilicon currently make up 91% of the market
• The supply of polysilicon is constrained, and available polysilicon is sold out already through 2007
• Polysilicon feedstocks are only expected to grow at 12% through 2007 -- but demand has been growing at least 30% per year

Based upon this information, the report concludes that solar market growth will only be in the single digits next year, and that prices will likely continue to increase for solar modules. They also conclude that PV technologies that don't depend upon silicon are going to see more rapid growth.

What conclusions should venture investors be drawing about the solar market?

First, the good news: PV technologies that minimize or eliminate the need for silicon (so-called "second and third generation" solar) are earlier in their development, and thus are more readily available for venture-stage investments. Even without shortages of silicon, the high cost of silicon was already driving significant innovation in the search for alternatives. If silicon-based PV is going to be unable to meet demand in 2006, then any commercially-available 2G or 3G solar technology is going to see pretty rapid market acceptance. Thin-film and concentrator technologies that are "ready for prime time" may be at an inflection point. And even earlier stage technologies will undoubtedly garner a lot of attention going forward.

But the bad news is that the silicon situation points to a very basic fact about the solar industry going forward -- it is essentially a semiconductor industry. The technologies, manufacturing processes, and even some of the players are the same (SunPower, for instance, was funded in large part by Cypress Semiconductor). And just like with semiconductors, there will be capacity-driven boom and bust cycles. The supply of silicon will be subject to capacity-driven booms and busts, which will flow down the value chain. And then the building of larger and larger PV production lines will also drive periods of undersupply followed by overcapacity, and vice versa. Underlying these cycles will be continued fast growth. But there will be significant price and production fluctuations around that growth trajectory. SunPower picked the right time to IPO, given where we are in the cycle right now...

Finally, while solar has been getting a lion's share of the cleantech investing press lately, I would expect to see SunPower's successful IPO as having a somewhat counter-intuitive effect of broadening mainstream VC interest into other areas of clean energy. The successful IPO will help draw attention to clean energy technologies, but there's already been a lot of recent funding activity in 2G and 3G solar. There will be increased capital deployed in solar, no doubt. But mainstream VCs will be forced to also look elsewhere within the clean energy sector if they are to find significant new opportunities. And that's a good thing, for everyone involved in the industry -- innovators, entrepreneurs, LPs, specialized funders, and mainstream funders with an interest in the space.

Now, let's all hope we see continued strong performance out of SunPower going forward.

Tuesday deals and other notes

• Last week, Solar Integrated Technologies announced they raised a $37M private placement of 6.5% 2010 convertible notes. Goldman Sachs and Crestview Capital participated. SIT is developing building-integrated photovoltaic (BIPV) systems, which many point to as the future format for solar power -- the thinking being that BIPV can lead to lower PV system costs by helping to reduce the costs of system installation (a significant portion of the total system costs), if the right form function can be developed. SIT is traded on the AIM.
  

• PE Week Wire reported yesterday that BioCare Solutions Ltd., a developer of environmentally-friendly household cleaning products, raised Gbp 4M. BioCare also anticipates an AIM listing.

• Metara, which provides systems for inline chemical metrology, raised an $11.5M Series E round. VantagePoint Venture Partners and Cipio Partners led the round, which also included Compass Venture Partners and Merifin Capital NV. Metara's systems are used to monitor the use of chemicals in semiconductor manufacturing, so that the use of chemicals is minimized and processes are optimized. Metara is an example of where manufacturing technologies can overlap with sensors and monitoring, with resource efficiency benefits.

• Seahorse Power Company announced a $1.1M raise of venture capital and angel funds, with funders including the Massachusetts Green Energy Fund and Jim Gordon, President of Cape Wind Associates. Seahorse's solar powered trash compactors are designed for outdoor applications.

• Here's an interesting article on the potential for coal-powered fuel cells.

• Last but not least, here's a nice interview with fellow cleantech investor Vincenzo La Ruffa that appeared in Red Herring a while back -- nice work, Cenzo.
  

Advent Solar raises $30M Series C

In a long-awaited announcement, Advent Solar today put out the news that they have raised a $30M Series C round. Battery Ventures led the round with fellow new investor Firelake Capital, and existing investors EnerTech Capital Partners, CMGI's @Ventures, the New Mexico Co-Investment Partners, and Angels with Attitudes also participated.

The capital is going to be used to build a 25MW manufacturing plant for the company's emitter wrap-around solar modules. Want to see a close-up picture of one? Steve Jurvetson has posted a picture on his Flickr account. He has posted a lot of other interesting pictures as well... DFJ, of course, has invested in Konarka, another high-profile solar startup.

The Advent raise follows on the heels of the other major solar fundings this year, and is in advance of the announced IPO of SunPower. Certainly, solar is getting the most attention right now among the many cleantech investment areas.

For those following the cleantech-cluster debate

[Update: this is a guestblog entry by Kjartan (it's nice to be back), sorry for not mentioning this in the original post...]

I had the pleasure of hearing San Francisco Mayor Newsom speak today at a luncheon. Mayor Newsom is a very skilled public speaker and always entertaining.

In addition to other good topics such as homelessness and hotel strikes, he reiterated the city'’s Cleantech initiative, which if you missed it, Joel Makower has already summarized nicely here.

For Cleantech investors this is interesting on a couple of levels: The initiative stands alongside three others, namely Biotech, LifeSciences, and Nanotech -- clearly the Mayor believes Cleantech as an investment area will continue to grow significantly in coming years. Also, will this help incentivize entrepreneurs to locate or re-locate to San Francisco? There are good arguments why it should: It's a great town; Good eats; Easy access to VC's; 10 year payroll tax credit for qualifying Cleantech businesses; etc. On the flip side: Prohibitively high cost of living.

In our outsourced world, the Mayor realizes that the city will never compete with low cost manufacturing jobs, and thus seeks to attract talent and creativity through initiatives such as this. Stay tuned.

Hydropoint raises $5M Series B

HydroPoint Data Systems, which sells remote-controlled, weather-activated irrigation systems that promote water efficiency, announced a $5M raise led by existing funder Monitor Ventures, also including Toro, Shea Ventures, Firelake Strategic Technology Fund, and Scenic Ventures. A pdf of the press release is available here.

Nanosys closes on $40M

Nanotech developer Nanosys, which has offerings across a number of industries including several cleantech applications, announced a $40M raise today. El Dorado Ventures led the round, which also included new investors Masters Capital, Medtronic, and Wasatch Advisors, as well as previous investors Alexandria Equities, ARCH Venture Partners, CDIB BioScience Ventures, CW Group, Harris & Harris Group Inc., In-Q-Tel, Intel Capital, H.B. Fuller Company, Lux Capital, Polaris Venture Partners, Prospect Venture Partners, UOB Hermes Asia Technology Fund, Venrock Associates, and others.

This brings the total amount of capital raised by the Palo Alto-based company to almost $100M so far.

[11/10 update: This article has more interesting details]

Motorola Ventures invests in Tekion

It's been a big day for energy storage/ portable power.

Motorola Ventures announced today that they have made a strategic investment in Tekion, which is developing micro fuel cells for battery replacement in devices like PCs and cell phones. Tekion claims to be pursuing a "fuel cell on a chip". Terms and amount of investment were not discussed in the announcement.

Power Paper raises $30M

Israel-based Power Paper, which is developing thin, flexible micro-batteries, announced a $30M round. The company's products are used in RFID, as well as in some cosmetics applications. The round was led by Apax Partners, which put in $16M, and included Clal Industries and Investments and the Infinity Venture Capital Fund ($12M total between the two), as well as existing investor BancAmerica Capital Partners ($2M). Existing funders included Amadeus Capital Partners (UK), PolyTechnos (Germany), the Millenium Fund (Israel), Yasuda Enterprise Development (Japan), EDB (Singapore), and Toppan Forms (Japan). Total investments to date are almost $60M.

Lilliputian reportedly raises $30M

Lilliputian Systems, which is developing fuel cells as battery replacement for portable devices, has reportedly raised a $30M round of financing, which would bring total investment so far to $40M. Investors include Atlas Venture, Kleiner Perkins, and cleantech-focused Rockport Capital Partners.

Yellowstone, and catching up

Work and work-related travel have made it difficult to post lately, so here's a laundry list of recent items of note:

• Houston's Yellowstone Capital Partners, a private equity firm with broad interests across several industries, announced the final close of their $10M Yellowstone Energy Ventures Fund. They also announced six investments made to date, including Protonex Technology Corp (fuel cells -- see previous mentions here and here), Fideris Inc. (fuel cell-related testing equipment), and Solaris Nanosciences (solar-related advanced materials).

• Following up on the previous post on the Energy Venture Fair in Boston, here's Bob Bellamare's take.

• Following up on their previous discussion of the impacts of Katrina on clean energy markets, Red Herring has put up a more thorough discussion here.

• While we're on the topic of solar, SunPower has priced their IPO.

• If this is true, it should be pretty entertaining. Start working on your elevator pitch now... And forget about an NDA.
  

• Last, but certainly not least, the ever-knowledgeable Joel Makower has put up a couple of very interesting posts lately. First of all, here's his discussion of the San Francisco city government's efforts to help promote a clean energy cluster in the area (take note, Matt) [update: see Gavin Newsom and William K. Reilly's announcement here]. Secondly, he discusses a recent report put out by REN21 that concludes that global investments in renewable energy reached $30B in 2004. That number seems a bit high given other data points out there, and as an investor I can't draw necessarily positive conclusions from Joel's inference that this remains an industry with more investment dollars than revenue dollars coming in the door. But it's certainly worth checking out.

The NREL Industry Growth Forum is in the bay area this week -- I look forward to seeing folks there.

Notes from the Energy Venture Fair

Had the pleasure of attending the Energy Venture Fair in Boston this week. As always, it was a good opportunity to network and to see a lot of promising energy-related startups (something like 70-75 this year) do a very brief presentation, so it's a very useful survey. One fellow VC described it as a "speed dating conference."

One of the more interesting segments of the conference is always the panel of VCs who give their impressions of the market, what's hot, etc. Some of the participants have been on the panel several times now, so it's a good way to not only hear their interesting thoughts right now, but also to see how interested investors' outlooks might be changing.

What I find interesting about this conference in particular is that, unlike some of the cleantech or clean energy focused events, the Energy Venture Fair attempts to address the full spectrum of energy-related investments, from oil and gas to solar to more exotic technologies. That sets up a fascinating diversity of attitudes, both among investors and other participants. The VC panel discussion was no exception. This year the panel was moderated by Robert Bellamare of Utilipoint, and included Phil Deutch of NGP Energy Technology Partners, Ira Ehrenpreis of Technology Partners, Mark Riser of Hamilton Robinson, and Bryant Tong of Nth Power.

The panel was generally "skeptical, but optimistic" in the words of one participant. But there was a wide range of just how skeptical, and just how optimistic, these investors were. Some selected quotes that caught my attention and I jotted down (and as always, apologies for paraphrasing poorly, I am decidedly not a journalist):

"Every year we talk about how 'this is the start of the energy tech era.' But this year, we're seeing more mainstream VC activity, and strong performance by public companies like Evergreen Solar, so it really does appear to be picking up."

"There's a bluntness to the interest right now. We see high energy prices, high spending on energy reliability, and movement toward things like the Kyoto Protocol. My view is that those are dangerous catalysts. Those can go away. The interest is driven by front page coverage in the New York Times, but my concern is that expectations are too high. There are still a lot of obstacles. All the excitement has to be tempered by how complex these issues are."

"It's encouraging to see companies with real revenues targeting significant market needs. More of these companies exist this year than last year."

"We see a lot of crossover of companies using technologies from other fields. Just like materials sciences enabled the semiconductor industry and other traditional VC investment areas, we see the same thing going on in energy."

"There's still no Google in energy technology... Or at least not in clean energy technology."

"This is an industry with a history of the 'Pop and Flop'. That's discouraged people, raised skepticism. But we're seeing good growth in the underlying fundamentals now."

"Energy is a market that adds up to trillions of dollars worldwide. It's easy to look at that and see a huge opportunity. But unlike a Google, with few inherent limitations to its business model, there are limits to the applicability of any one energy technology. So I don't see a Google ever happening."

"The energy bill isn't a driver. We don't want to have to predict who's in a majority next year, or if it's a presidential election year. In some selected areas, regulations definitely area plus and will continue to be so in some form, such as the strong support for solar and wind. But when it comes to specific legislation or regulations, we don't ever consider it as part of our investment decisions."

"For a room full of smart people here today, if we're really interested in venture investing in energy, we need to think about what it means that so few of us are investing in nuclear, coal, natural gas, and the like."

"The bar has been raised for pre-revenue companies in this space. The management team must have very related experience, they must know their markets well. The business plan must recognize the slow adoption rates and slow absorption rates we see in these industries. By that I mean that utilities are slow to adopt a technology, and even when they do, they're slow to roll it out across their network."

"The big mistake is that we see entrepreneurs thinking about their story in a vacuum. If it's a pre-revenue company, they need to provide a list of good industry references who can validate the opportunity."

"The business plan needs to be blunt. It needs to have a full recognition of the competition and risk."

Some of the audience comments were thought-provoking.

One participant wondered how energy startups could possibly compete in oil and gas and coal against such entrenched big players. The general response from the investors was that there are a lot of opportunities to play around the edges, in enabling technologies, rather than take such companies on head-to-head. And one investor pointed out that these large companies tend to spend most of their efforts being defensive, protecting their existing businesses, opening up opportunities for more aggressive technologies to be led by smaller firms.

Another comment challenged the investors' outlook in general, charging that "there is a problem with the model. We need more patient capital to make things happen. But VCs only want to invest in things that are successful."

This speaks to the general variety of philosophies and outlooks prevalent in the emerging cleantech investing space today. For what purpose, to what end, are investors looking at this space?

The short version of the much longer answer that this question deserves is that, simply put, VCs are generally speaking looking to maximize returns because that is their mandate. There are certainly organizations that promote and enable "patient capital", and other classes of investors may have different investment timeframes. But VCs, whether cleantech-focused are not, are almost invariably tasked with maximizing financial returns, and while there are good win-win opportunities for them to invest in, that doesn't mean that every socially valuable technology is a good fit for VC investment.

As one panelist put it:

"One reason we don't mention things like climate change as a driver of our investments is that investors have been burned by looking at such things in that way in the past. We believe in it as a driver. But we don't talk about it."

Fortunately, while investors may not be able to back every opportunity they would personally like to, the conference served to demonstrate that there are a lot of compelling "win-win" opportunities out there regardless. Overall, it was a valuable conference with a lot of interesting companies and viewpoints represented.

A123 emerges

Battery maker A123 Systems put out a press release yesterday describing the company's efforts and progress to date. Using proprietary nano-scale electrode technology, the company promises dramatic performance benefits for its products, and has already locked in a couple of key customers.

Also mentioned is that the company has raised $32M so far, from investors including Desh Deshpande (the founder of Sycamore Networks), Qualcomm, Sequoia Capital, Motorola, North Bridge Venture Partners, MIT, YankeeTek and U.S. Army-funded OnPoint Technologies.

CropSolution, Vycon and In-Pipe

• CropSolution, which develops advanced, more efficient herbicides, pesticides, and other agricultural products, has apparently raised a $2.9M Series C round, according to PE Week Wire. This brings the total funding into the company since 2002 to $14.3M. Investors include The Aurora Funds and ATP Capital.
  

• Also from the same PE Week Wire column: Vycon, which is developing flywheel technology for energy storage in large-scale applications, has apparently raised a $2.5M Series A. Investors include BankInvest, RWE Dynamics Venture Capital Management, Sumitomo Corp., Cooper Capital Partners and Tridus International -- Vycon has been a division of Calnetix, a technology development company focused on motors and electric components, and it is unclear what the current ownership of Vycon amounts to.

• In-Pipe Technology, which offers wastewater treatment systems, announced a $3.5M Series A, from "a group of institutional investors". In-Pipe's system combines technology and microbial solutions to move early stages of treatment up into the wastewater collection system, improving the efficiency of operations at the downstream centralized wastewater treatment systems.
  

Where are you?

According to my limited website traffic statistics, readers of this site come from all over the world, with some strong concentrations in various North American cities. But you may not know who's near you, reading this same page...

For those who are interested, visit the Cleantech Investing map on Frappr, and add yourself. It only takes a second, and you can enter as much or as little info as you would like. It would be interesting to get the visualization of where everyone is, all of us commonly watching the cleantech venture investing space as it continues to develop. And if you enter some contact information for yourself, it may be useful for networking with like-minded folks near you, if that's of interest as well. Just continuing this site's mission of fostering the growth of this interesting space we're in.

Thanks to SiliconBeat and PE Week Wire for pointing me to this fun site on the web...

Atlantium raises $4-5M Series A -- maybe?

[10/28 update: After posting the following entry, we received word that the cited article announcing the raise was wrong on a number of points -- so read it how you will!]

Atlantium, which manufactures UV-based water disinfection systems, is reportedly on the verge of raising a $4-5M Series A, to be led by Pitango Venture Capital, and including VantagePoint Venture Partners, Aurum-SBC Ventures, and existing private investors. Interesting to see this story, which doesn't appear to be based on any announcement from the company or the purported funders, it's unclear who told the online journal about the round... Hence the uncertainty about the final amount of the raise.

Regardless of details, ultraviolet-based disinfection of drinking water is an area that has garnered some attention from cleantech investors, because it is generally chemical-free and can be used closer to point of use, among other benefits.

Smart grid: A $45B opportunity

We've talked at length about the "smart grid" before -- the idea that adding intelligence into the electrical transmission and distribution grid (and some lump in distributed generation as well) would help promote energy efficiency, reduce waste in transmission, and prevent outages and brownouts.

Now the Global Environment Fund, a cleantech venture investment firm, has released a very useful study (note: opens pdf) which specifically addresses the subject. Out of the global $81B spend on power grid infrastructure in 2005, they argue, $25B could be addressed by "smart" products. As they point out, transmission spending is already forecast to be greatly increasing in the U.S., since 70% of transmission lines are 25 years old or older, 70% of transformers are 25 years old or older, and 60% of circuit breakers are 30 years old or older -- and we're running out of capacity to begin with. A large bill is becoming due, and smart grid technologies can help mitigate the costs and build a more reliable system in the doing.

The report is particularly useful because it provides an introduction to key customer segments, key technologies, important market drivers, etc. A good primer. Cleantech investors and others who are getting up to speed on the topic should certainly check it out.

Items of interest on a busy Tuesday

• Regretfully unable to attend the Cleantech Venture Forum in Washington, DC this week. Fortunately, Tyler Hamilton is blogging his notes and thoughts from the Forum, which is quite helpful and great to see. I definitely encourage checking out his site, both during the Forum and beyond, especially for those particularly interested in the Canadian players in cleantech.

• Speaking of the Cleantech Venture Forum, the organizers -- the Cleantech Venture Network -- have announced that they are projecting that North American investors are going to put $10B of venture investments into cleantech over the next four years. That would represent continued strong growth from the estimated $1.5B in cleantech investments in 2005, and from the $7.3B that was invested over the previous 10 years. Just a further sign of the maturation of the space. Can the "cleantech is underinvested" secret be kept for just a little while longer, please? No thanks to sites like this, of course... I also found this article to be an interesting juxtaposition.

• Chrysalix Energy, a clean energy venture capital firm, announced the second close of their Chrysalix Energy II fund. LPs in the fund include Delta Lloyd, WestAM, Robeco, Teachers Private Capital, The Mitsubishi Corporation, BASF Venture Capital and Shell Hydrogen LLC and other investors. Chrysalix has broadened their investment focus beyond the fuel cell and hydrogen technologies they originally targeted, while maintaining their leadership position in those investment areas.

• On the general topic of nanotechnology, which intersects with cleantech in ways we've discussed before, here's an interesting column describing the Lux Executive Summit on the topic. It raises issues of environmental concerns, venture funding, business models, etc. [10/25 update: Here's an interesting blurb from Clean Edge discussing nanotech and green chemistry]
  

• Finally, it's worth noting the many clean technologies highlighted as part of the Wall Street Journal's Innovation Awards.
  

Gaia Power and CellFor

• Speaking of the "smart grid", Gaia Power announced a $2.25M Series A investment today, led by GHO Ventures (recent space traveller Greg Olsen's investment vehicle), and including the NJTC Venture Fund and the Small Business Technology Investment Fund of the Empire State Development Corporation. Gaia Power's initial energy storage/ backup power products are turnkey systems aimed at both the business and residential markets.

• CellFor, which produces superior tree seedlings for industrial forestry, announced the completion of a US$32M Series C raise, with a corporate investment from DuPont, and including existing investors ATP Capital, CSFB Private Equity, GrowthWorks Capital, and BDC Venture Capital. CellFor's "naturally-selected" varietal pine seedlings are disease resistant, and provide higher yield and wood characteristics, thus improving efficiency of industrial forestry operations. This is one of those investment areas where "cleantech" is in the eye of the beholder -- readers are invited to comment pro and con.

Energy technology startups are starting to hire again

In one encouraging sign that things are going well in the clean energy space, I've recently seen a few clean energy companies starting to ramp up hiring. Even over the past couple of years of strong growth, such companies have been reticent to expand their teams. It's always a big deal to take on more headcount. But apparently, clean energy CEOs are getting comfortable enough now that they're willing to take on the costs and obligations, and that's an encouraging sign. It also reflects how much new money the industry has taken in lately -- that capital is supposed to be spent expanding management teams, in many cases...

I know a bunch of readers of this site are people looking to get into the industry, so as a reminder, here are some thoughts on where and how to look for positions in the space.

Thursday tidbits

• Sustainable Development Technology Canada (SDTC) announced C$42.5M in new funding for a variety of Canadian clean technology companies. Tyler Hamilton of Clean Break has some good thoughts on the news. Earlier today, a reporter asked me why "Canada seems to be so active in cleantech compared to the U.S." Hmmm... Good question.
  

• Meanwhile here in the States, mainstream VCs continue to look into "interesting areas" like cleantech. See this article from Red Herring. Is cleantech "muddy water", per the "big fish" quote by Rob Chandra? On the other hand, the article puts the increased VC interest in cleantech in context, given the wide range of other investment areas mentioned, and the fact that "clean technology" isn't even mentioned while energy is only mentioned in passing... Such mainstream VC interest undoubtedly seems more noteworthy to the people inside the industry than to the people currently outside looking in...
  

• On the general topic of fuel cell markets and timing, here are some outspoken comments from the President and CEO of PolyFuel. "When," "how" and even "if" remain key questions for cleantech investors looking into various aspects of fuel cell markets, so Balcom's thoughts are interesting to read.

• Finally, as we often note, there are some fun things to think and learn about in the world of early-early-stage clean technologies. Here's today's fun story.
  

Expansion Capital Partners purchases additional shares of Biorem Inc.

Happy to note amongst the regular cleantech deals tracking that Expansion Capital Partners' Clean Technology Fund II has announced the purchase of additional shares of portfolio company Biorem Inc. in a PIPE transaction. The press release is here. Biorem manufactures biofilter media for use in air pollution control.

Organic Holding Co., Cleantech VC fundraising, and more on In-Q-Tel

• Organic Holding Company, which offers the Organic-To-Go delivery/ pick-up service, announced a $2.5M Series B raise. The round was provided by Funk Ventures, and brings total capital raised in 2005 to $5.5M.

• There's been much news lately about the continuing strong fundraising in the VC community. And this is being seen in the cleantech portion of the industry as well. Here's a good article highlighting DFJ Element's emergence and discussing the broader trend (mea culpa: also includes a couple of quotes by yours truly, but it remains a good article nonetheless). [Update: Here's a good in-depth article in Red Herring]
  

• Building off of the mention a couple of weeks ago of In-Q-Tel's investment in Tendril Networks, the Christian Science Monitor has an article profiling another investment by the CIA-backed venture group: SkyBuilt Power. No details on the round are mentioned, but we'll provide them when they're available.
  

SmartSynch raises $12M Series C

SmartSynch, which has technology for advanced wireless automated meter reading (we've discussed the topic before here), announced a $12M Series C round. Battelle Ventures (with affiliate fund Innovation Valley Partners) provided the new outside capital in the round, along with existing investors Siemens Venture Capital, JPMorgan Partners, Kinetic Ventures, Nth Power, Endeavor Capital, Lime Rock Partners, Cinergy Ventures, and GulfSouth Capital. The general AMR industry appears to be re-energizing lately.

Technology Review on new solar technologies

Following on the heels of the various news reports last week regarding emerging solar technologies, there's this brief column in the MIT Technology Review. Worth checking out.

Biofuels continue to get project financing -- from VCs

Biodiesel and ethanol continue to attract project financing, with the announcement that New Energy Capital has committed to funding a 55m gpy ethanol plant in Michigan, with total construction costs expected to reach $86M (pdf of the press release is here). This follows similar news from New Energy Capital, Seattle Biodiesel, and others.

What's interesting about this from a venture capital perspective is that several venture capital firms are getting into these biofuel project finance deals indirectly -- by funding the project finance firms. Rustic Canyon and others recently funded US Renewables Group, and New Energy Capital raised $30M from Vantage Point and CalSTRS.

So in effect, these venture capital firms are providing project financing for biofuel facilities. And others are looking at the possibility. It's an interesting development. It reflects the fact that technological advantage isn't necessarily going to be a determinant of project success in biofuels as much as geographic location, capital efficiency and strategic relationships might be. And the way it's happening reflects that VCs may be looking to get into biofuels, but are finding it hard to find technology pure-plays in the space, where they presumably could apply their core competency in identifying winning technologies -- and instead are giving their capital to project financiers who presumably have better expertise in funding "steel in the ground". This, despite the fact that project financing often targets lower returns than venture capital investments aim for. ...Of course, these venture capital firms would likely counter-argue that their expected returns in these particular cases are competitive, and that there are additional strategic benefits to having good exposure to real-world use of energy technologies. No matter what, it's an intriguing development.

An early sign of a growing trend of indirect investing by cleantech VCs? Or a technology-specific solution that won't be applied in other cleantech market segments? These investments raise some interesting questions.

[10/25 update: US Renewables Group has made another investment, acquiring Bottle Rock Power Corporation, a geothermal operation. These project plays, as noted, go beyond biofuels.]

NP Photonics raises $2M Series A2

NP Photonics, which has advanced optical-fiber sensor technology, announced an additional $2M investment in their Series A2 led by Shepherd Ventures (pdf here). This brings the total A2 raise to $7M.

Optical sensing technology, often drawing from breakthroughs developed originally for telecom purposes, are having increasing impacts on clean technology applications. Some new-technology optical sensors are being used to detect contamination in environmental conditions, manufacturing conditions, natural gas pipelines, etc. Others, such as the fiber-based sensors that NP Photonics are developing, are being used in a wide range of cleantech and non-cleantech applications -- on the cleantech side, for example, fiber-based strain detectors are being used to measure "sag" conditions on powerlines to predict outages, and to monitor underground storage tanks for leaks. There are other applications that are not directly cleantech-related as well. So optical sensors are a good example of the kind of platform technologies that are increasingly crossing across and into clean technology investing areas -- other examples would include M2M communications and manufacturing-focused software.

A few updates

A couple of updates on previous discussions:

• Here's a well-done profile of USRG, which recently announced a capital raise.

• Referring back to the series of posts on the intelligent grid, this analysis of the impacts of the new energy law on transmission is an interesting read.
  

Energy prices, "Peak Oil", and cleantech investing

People often ask about the effects of high gas and oil prices on cleantech investing.

The idea is that many emerging clean energy technologies (solar, fuel cells, etc.) are still higher cost than incumbent fossil fuel-based technologies. And thus, as the cost of clean energy technologies continues to come down, any significant rise in fossil fuel prices only accelerates the market attractiveness of clean energy.

It's not quite that simple. Oil-based fuels aren't the comparable across all clean energy technologies. For solar, for instance, a more appropriate comp would be natural gas and coal-fired electricity generation. Oil prices are not entirely linked to those prices.

Nevertheless, cleantech investors are unsurprisingly very interested in the long-term trajectories of energy prices, and the most visible such prices are oil. Some subscribe to the idea of so-called "Peak Oil", that the production of oil is peaking and will decline, in the near term. While energy demand is unlikely to fall, if fossil fuel production goes down, the energy production must come from somewhere, and new energy technologies are a likely beneficiary. Along these lines, the ongoing debate between oil optimists and peak oil advocates (read parts one and two) is important to follow.

But cleantech investors also need to watch more than just oil prices as they think about the long-term viability of energy tech investments. Natural gas prices have also been rising as well. And new coal generation capacity has been lagging demand, at least in the U.S. But for how long? Or will increasing emphasis on policies to address climate change permanently raise these prices as well?

The point being, it's possible to envision scenarios where energy prices continue to rise in oil-based energy markets (e.g., transportation), but fall back again in natural gas and coal-based energy markets (e.g., grid electricity). Or vice versa. Or where both rise permanently. Cleantech investors need to make their own judgements and be ready for any number of possibilities.

[10/14 update: I received the following good thoughts from another cleantech investor who asked to remain anonymous:

"People seem to think that because the price of oil is high that this benefits alternative energy companies and technologies across the board, but that's not true.

In the energy sector, there are separate commodities, which are not fungible: oil, natural gas, and eletricity.

The price of oil does not directly affect the price of electricity - only 2.5% of electricity in the US came from burning oil in 2004 - whereas 50% came from coal and 18% from natural gas.

Therefore, adoption of solar PV does not depend on the price of oil but on a) the retail price of electricity and b) government incentives and mandates (buy-downs, RPS)."]

Mark Anderson's notes on Solar Power 2005

I mentioned a couple of days ago that Mark Anderson of AltEnergy Stocks was going to be blogging his notes and impressions from the Solar Power 2005 conference in Washington, DC. But it's worth specifically noting his take on the venture investing panel that took place. Worth checking out.

And on the same topic, here's yet another well-done article on "why solar is hot right now" (no pun intended), this time from Wired News.