Thursday, March 24, 2005

CTVF Day 2: Another really long post

Day 2 of the Cleantech Venture Forum, the day which is generally for VCs only, saw some very interesting discussions and presentations. Several potential investment opportunity areas were highlighted, and the day also served to illustrate the breadth of markets addressed by "clean technologies".

NGEN's materials panel

One of the day's early panel sessions, organized by NGEN, brought several researchers together to discuss a few specific opportunities in materials sciences -- NGEN's area of focus. Such technologies illustrate one typical investment thesis of "cleantech investors": As Daniel Colbert, CTO of NGEN, put it, "We're not a cleantech firm. We're a materials technology firm that happens to do a lot in areas that overlap in cleantech." Colbert described NGEN as targeting two different categories of cleantech investments: "Active" technologies that have a direct impact on environmental issues, such as those that clean up contaminants and pollutants; and "Passive" technologies that indirectly provide environmental benefits by improving materials or energy efficiency.

This is pretty typical of most of today's cleantech investors. The first order of business is to identify strong bottom-line investment opportunities. The hope is that, by identifying such opportunities and then putting them through a cleantech screen (ie: being mindful of looming natural resource constraints), you find technologies and investments that are also advantaged over the long run. Net-net, the fact that your technologies are helping solve environmental problems may feel good, but if it doesn't make money, we don't want to be involved.

One emerging technology introduced to the audience was solid-state lighting, presented by Tony Cheetham of UC Santa Barbara. For example, there are the LED lights used in many traffic lights around the country, replacing incandescent bulbs based on glowing filaments, just like the one Edison originally invented. Why is this a clean technology?
  • Edison's first lamp got 1.4 lumens (a measure of brightness) per watt.
  • Modern incandescents (like the ones we use in our homes) get 15 lumens/watt.
  • Fluorescent lights get about 70 lumens/watt.
  • Solid state lighting has the potential to achieve 200 lumens/watt.
The fewer the watts used, the less energy wasted. And lighting represents 20% of all electricity consumption in the US.

Of course, as Cheetham admitted, there is a lot of progress yet to be made. Current state-of-the-art solid state lights in the lab achieve only 80 lumens/watt, and the ones available commercially only get 30 or so. But according to Cheetham, "This is something that's going to show returns in the next few years, and is a wonderful investment opportunity." He cited forecasts that showed this to be a $10B market opportunity by 2025, with viable commercialization and profitability in only a few years. Specific technology breakthroughs still sought include:
  • Higher efficiency for near-UV LEDs,
  • Longer lifetimes for organic LEDs (OLEDs)
  • Perfecting the transformation of blue LED light into white (as Cheetham amusingly put it, while shining a blue-tinted 'white' light at the audience, "If you want a romantic evening at home with your partner, this is not the color for it."
  • More suitable substrates
  • Lower defect densities for the primary material being used, gallium nitride
  • And better packaging and integration
Companies that target these challenges may be of interest to early-stage cleantech investors.

Another technology spotlighted was antimicrobial coatings. The presenter, Matthew Tirrell (also of UCSB), made the tenuous connection of antimicrobial coatings to cleantech by arguing that "they protect against other environmental contaminants that harm humans -- bacteria." This is a shaky argument at best (by that argument, hunting mountain lions could be called a 'cleantech' activity). But still, many of these coatings allow currently-used materials to last longer before needing to be replaced, and that efficiency savings can be considered cleantech. Regardless of the justification for the audience, it was an interesting presentation.

Tirrell pointed out that the market for antibiotics is $26B and growing. Although much of this is targeted for use by humans and animals, not for coatings, antimicrobial coatings are starting to be seen in market segments such as building materials, HVAC (heating and variable air control, incl. air conditioners), food processing and packaging, healthcare, and others. Part of what is driving the need for breakthrough materials is the rise of antibiotics-resistance by some of the more dangerous bacteria out there.

Tirrell explained that bacteria basically have 6 or 7 vulnerabilities to target, but that many of these have the side effect of speeding up the development of resistance, whereas a few don't seem to have the same effect -- these, therefore, are the areas of most interest to the market. He highlighted two startups:
  • Agion - a company using silver ions bound into a ceramic matrix, which can then be incorporated into fibers or devices, so that they release slowly over time (silver ions bind to specific sites on the surface of bacteria and kill them)
  • Migenix - a company developing antimicrobial peptides
Are these really cleantech? It is unclear. And given the current state of biotech VC investing, it is not surprising that these companies may be trying to re-brand themselves as "cleantech" in hopes of gaining some differentiation and higher multiples. But cleantech or not, they captured the attention of the audience (this was also helped by Tirrell's fascinating illustrative graphics).

The third panelist, Greg Keenan of Air Products, presented the opportunities for further innovation in hydrogen technologies. But this raises one recurring theme of the conference -- the "opportunities" for further technological development in hydrogen were seen as serious obstacles by many participants.

What "hydrogen economy"?

VCs in attendance seemed to have very divergent views on the future of the "hydrogen economy" in general, and for specific hydrogen-related technologies such as H2 generation, fuel cells, etc. Some remain convinced that the technologies hold significant promise for the future. But many others expressed (particularly in side conversations) significant pessimism. "The 'hydrogen economy' is a broken model," one VC expressed to me, capturing the views of many I spoke with.

The argument for hydrogen technology is simple: Hydrogen can be combined with oxygen (e.g., in fuel cells) to create electricity with few byproducts (often only H2O) and no climate impacts (at least within the context of that specific reaction itself). As climate change forces changes in public policy regarding fuels and energy sources, the argument goes, and as hydrogen technologies become more efficient over time, these technologies will revolutionize transportation and power generation.

But as one VC I spoke with described, the problem is that the basic concept has some general flaws. First, he argued, hydrogen is only a form of energy storage, it is not itself a source of energy -- in other words, at some point you have to create the hydrogen, which takes a lot of power. Then you have to re-transform the hydrogen back into power for use. So essentially hydrogen is a middleman. This VC argued for eliminating the middleman in many cases.

But even those attempts to eliminate the middleman with other related technologies, such as solid oxide fuel cells (SOFCs), appear to face their own significant challenges. SOFCs, which have the capacity to use fossil fuels directly, rather than requiring pure hydrogen input, would eliminate the need to generate, transport, and store hydrogen, and are thus seen by some as a "stepping stone" to a hydrogen economy. But SOFCs are, according to many (and bolstered by yesterday's SOFC company presentations) still years away from commercial readiness.

Some stepping stone. VCs generally need technologies to take no longer than 5 to 7 years to widespread adoption, in order to make their promised returns.

Another investor pointed out that there are significant challenges facing many of the specific leading technologies. For example, this investor pointed to proton-exchange membranes' (PEM, one of the leading contenders for an automotive fuel cell) reliance upon Nafion, a Teflon-like material that shares its toxicity. And as Keenan's presentation showed, there are other significant challenges as well.

He described several areas where significant technological challenges exist in hydrogen-related technologies.
  • PEM fuel cells only work in certain temperatures, and with high humidity. What is strongly needed are membrane materials that operate well at low humidity and high temperatures (>100 celsius). But so far, such materials have not been discovered.
  • Storage of hydrogen. If auto makers are to incorporate hydrogen-fueled devices into their cars, they will need storage that is comparable to gasoline. To get 300 miles' worth out of a typical car requires a gasoline tank that holds 15 gallons and that weighs (fully loaded) 94 pounds. So hydrogen storage will need to achieve similar volume and weight. Unfortunately, no means exists for this. For similar 300-mi. range, storing gaseous hydrogen at 700 bar pressure would require a 53 gallon tank that weighs 232 pounds. Liquid hydrogen would mean a 48 gallon tank weighing 190 pounds. Other emerging approaches provide only incremental improvements. Said Keenan, "There is not a storage technology today that will meet the needs of the automotive guys. There will be a lot of talk about advanced materials solutions. But when you see them, ask about the container. Ask about what else needs to be in the system, what other costly support it needs. And will it be safe?"
One audience member interjected to ask about the use of carbon or other types of nanotubes for storage. At this point, Colbert, who has direct experience in such technologies, dashed the audience member's hopes: "I wish it were true that nanotubes could be a solution, but they don't seem to meet the need. And even if they were, the costs would have to be dramatically lower."

Keenan was one of those who drew the optimistic conclusion: That companies that found solutions to these dilemmas would be well-positioned for success. But others in the audience appeared to draw the conclusion that these are further examples of the obstacles preventing the eventual emergence of a 'hydrogen economy'. When diesel gensets and electric/ hybrid motors are achieving many of the goals of hydrogen- and other fueled fuel cells, what is the incentive to spend billions of dollars overcoming these signficant obstacles over many years to come? And that's assuming it will ever even make sense to have a system where energy is used to create hydrogen which is then used to create energy.

Alternative fuels

Such conversations were also seen in another panel discussion, on alternative fuels. This panel included entrepreneurs with ethanol and clean coal technologies, as well as hydrogen investors.

It takes a venture capitalist to lump all these technologies under a single label. They are completely separate chemistries being used in very different applications. But the conclusions were nonetheless interesting. Faced with the question, "Has the age of alternative fuels finally arrived?" the panelists were fairly optimistic. But they naturally differed as to which fuels were going to succeed. And even the hydrogen/ fuel cell investors had to admit that the only near-term potential market for such technologies is portable storage, or battery replacement.

Clean coal, represented by Christopher Poirier of CoalTek, took some lumps (pardon the pun) from one audience member for being only an 'incremental clean technology'. But as Christopher pointed out, the benefits -- though incremental -- are nonetheless real when considered against the reality that coal use isn't going away anytime soon. And, he pointed out, coal represents 50% of all electricity generation in the US, so it is a near-term, huge market. Many VCs I spoke with agree with Christopher, and CoalTek appears to be the subject of strong interest in the investment community...

Clean water investing

Finally, another strong point of optimism was seen in the panel on water technology investing, moderated by Bernardo Llovera of Expansion Capital Partners. Panelists from GE, SAM Private Equity, RockPort Capital Partners, and Aqua International Partners all agreed that the market need for water technologies is real and near-term, and that the technologies being used by interesting venture-stage companies are often well-proven out with relatively few risks. While valuations and risks may be relatively high in the energy tech sector, there may be good dealflow to be found in water tech.

In all, another very successful Cleantech Venture Forum, kudos to Nick Parker and Keith Raab and the rest of the team at Cleantech Venture Network.

[Note: Very long posts like this are going to be by far the exception rather than the rule in this blog. But the CTVF is always such an important meeting point for most of the cleantech VC community that it seemed worthwhile to share many of my notes and takeaways from the event. rd]


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