Cleantech Venture Forum -- San Francisco

Just one long, end-of-day post today, as I am attending the Cleantech Venture Forum, put together by the Cleantech Venture Network (and co-sponsored by my firm, Expansion Capital Partners) on a semi-annual basis.

The Forum has become one of the best and biggest events at which to network with other venture investors in the cleantech community. The first day (today) is always centered around a series of brief presentations by 20+ cleantech companies seeking venture funding. The second day, those companies are asked to leave, and the meetings and sessions are for VCs talking to VCs. More on that tomorrow.

Today's sessions started out with a positive speech by Alan Salzman, Co-Founder and Managing Director of Vantage Point Venture Partners -- a large fund in the IT/ Telecom space that has started making some bets in the cleantech markets. He argued that cleantech is now mainstream. In his words, "The next eBay, Broadcom, or Google is going to come from Cleantech. All the ingredients are there, and that is why you're seeing many more mainstream VCs enter the space." [As always, my apologies if my paraphrasing differs from actual quotes... I am by no means a journalist]

The state of cleantech investing

Nick Parker of Cleantech Venture Network then presented some recent data on the current state of cleantech venture investing, based upon 2004 figures:

• 59% of cleantech VC funding went into either energy or materials/ nanotechnology-based applications. Most of that (40%+ of total funding) went into energy tech. Clearly energy tech remains the highest profile segment in cleantech. Solar in particular was cited as garnering a lot of attention.
• Nick expressed surprise that water hasn't gotten more attention, since it has been identified as a strong market as well, with perhaps more near-term potential.
• According to the Cleantech Venture Network data, about 2/3rds of all such funding is going into "follow on" rounds. Nick then mentioned that "This fact is somewhat worrying, because the ratio of early-stage to follow-on is reversed in the rest of VC investments [ie: tech, telecom, biotech]." He attributed this to a "supply bottleneck," that many large funds were running out of capital at this time, and haven't yet raised their new funds -- thus they are temporarily reserving their capital for re-investing in their own portfolio companies. To this observer, however, there are a lot of other more plausible explanations...
• Direct investments by pension funds (e.g., CALPERS), banks, etc. is on the rise.

Strong returns found in cleantech VC study

Nick also described the results of a recently-released study that the Cleantech Venture Network sponsored (and that one of Expansion Capital's partners, Diana Propper, co-edited -- you can get an executive summary here). This study estimated exit returns for cleantech investing over the past 10-20 years, to try to finally answer the question "Can You Make Money From This?" That question remains ultimately unanswerable, but the study makes a good attempt and has some suggestive results. The full report is very detailed and data rich (covering over $90B in transactions over two decades); the methodology isn't perfect, but is the best available given the data at hand.

What the report shows is encouraging:

• Cleantech IPOs in the study yielded 5.3x returns on initial investment
• Cleantech M&A exits in the study yielded 4.1x returns on initial investment
• A hypothetical portfolio, assuming a 5-7 year holding period, and a 40% write-off level, would thus yield 30% or higher IRRs. This compares very well with the typical return across all VC categories of 26% over the past 10 years.
• This portfolio also outperformed the public markets, whether the starting point was 1990, 1995, or 2000.
• There are large and acquisitive players buying cleantech companies -- some of the largest in the study's database, btw, include Danaher, Tyco, and ABB.

Nick then went on to outline what he sees as the biggest challenges in cleantech investing right now:

• Fostering serial entrepreneurs
• Building big-small business partnerships
• Attracting institutional capital and getting recognized as an official investment category
• Avoiding a mini-bubble
• Building better linkages across capital categories, with project finance especially needed

To which I would add (if you will pardon the opinionizing) that we also need better weeding out of the technologies that just plain don't work. They taint the entire industry.

Company presentations (pass the hat)

The lion's share of the day was taken up by company presentations. Some were interesting; some were far-fetched. Some themes:

• There were several solid oxide fuel cell companies presenting; most were targeting large-scale adoption at least five years away, or more. But they are looking for additional development capital today. I've also spoken with a certain stealth solid oxide fuel cell company in the southern silicon valley -- and they're also a ways away from real commercialization. Even if there is something real there, it is a long way away.
• Plastics recycling is finally starting to catch on. In large part, that is driven by the implementation of very tough electronics take-back and other regulations overseas (such as Europe's WEEE). One such company, MBA Polymers, won the "most promising presenter" award today. Notably, all this activity is overseas -- even California-based MBA Polymers is building plants in China and Austria and not here stateside. MBA Polymers also illustrates the project financing gap in cleantech (which we will discuss in depth another time) -- they are looking to VCs to provide capital to finish the Austrian plant, and this is something VCs as a rule don't do, but there are few other places for the company to turn.
• A few other technologies that have been much-promised and a long time coming appear to be getting closer: Thin film flexible batteries will apparently soon make their introduction into the "smart" credit card market (Solicore), high-temperature superconductors may soon start appearing in specific pieces of equipment in the electricity distribution system (SC Power Systems), and alternative materials for logistical pallets are also coming soon (EcoDuro).
  

Other companies that presented include:

• Acumentrics (Solid Oxide Fuel Cells)
• AgraQuest (Environmentally-friendly pest management products)
• Cyrium Technologies (Quantum-dot photovoltaics)
• EarthRenew (Organic fertilizer products)
  
• Energy Innovations (Rooftop solar PV concentrators)
• EnerNOC (utility-side demand response for electricity savings)
• EnviroScrub's as-yet-unnamed water filtration spin-off (removing arsenic from drinking water)
• Franklin Fuel Cells (Solid Oxide Fuel Cells)
• Kainos Energy Corp (Solid Oxide Fuel Cells)
• Nanox (Advanced catalytic converters)
• Stirling Energy Systems (solar thermal concentrators)
• Surefast technologies (end-user demand response for electricity savings)
• Verdiem Corp (software to reduce wasted electricity by corporate computer fleets)
• Watertrax (data management software for water treatment utilities)

A full day. More tomorrow.