At an Energy Tech Investor Conference and Senate Passed Energy Bill

It’s a very busy week here in San Francisco: I am currently at the second annual Energy Tech Investor Conference. Stay tuned tomorrow for some highlights from the conference. In the meanwhile, you have undoubtedly already seen that the Senate passed a new energy bill yesterday. You also probably know that there is work to be done before the House and Senate can come to agreement in this respect. That said, and while the drivers for Cleantech generally are not regulatory or politically driven, these key provisions, if implemented, should benefit Cleantech VC’s:

• 10% RPS: new requirements to produce 10 percent of generated electricity from renewable sources by 2020
• Clean coal: a new 20 percent investment tax credit for clean coal facilities and a new 20 percent investment tax credit for coal gasification units that produce fuels and chemicals; Tax breaks, loans and credits to companies for technology to voluntarily reduce carbon dioxide emissions - such projects may include coal gasification and carbon sequestration
• Ethanol: a requirement for refiners to use 8 billion gallons of ethanol by 2012

Housekeeping

I was traveling at tail end of last week (on my way back from a conference), and missed the opportunity to post anything on Friday or over the weekend. The below is a summary of the last few days (and also some items from last week I didn’t have time to comment on during the conference).

• GE plans largest desal plant in Africa. As a part of GE’s ecomagination effort, GE Infrastructure, Water & Process Technologies today announced it plans to build Africa’s largest saltwater desalination plant in Algeria. The project is scheduled to begin this month, and last for 24 months, so the majority of the technology is likely already spoken for. This does however underscore the continued interest in desal, another source of demand for improvements in membrane technologies (briefly discussed before in this blog).
• Merrill Lynch, World Resource Institute collaborate on “Energy Security & Climate Change: Investing in the Clean Car Revolution” report (see here for WRI’s announcement and here for Greenbiz’s article on the report). It’s good to see increased coverage of public Cleantech companies. From a venture perspective, the public markets offer an obviously attractive exit path, although in the near term, M&A’s are a more likely source of liquidity for investors.
• This article in the Seattle Times today addresses VC interest in electric cars. Has the recent success of hybrid cars such as the Toyota Prius paved the path for electric cars? An interesting question we may discuss at some point. In the meantime, read the article.
• Ballard Signs Agreement to Sell German Subsidiary to DaimlerChrysler and Ford. The automakers continue to show interest in fuel cell technologies. While the word is still out on the hydrogen economy (see this post), it is good and interesting (in light of the above bullet) to see the automakers taking a long term perspective on fuel cells.
• And finally, adding even more on to this post, HelioVolt Receives $8 Million from New Enterprise Associates to Develop Thin-Film Solar Technology. The Company seeks to dramatically shorten CIS (Copper Indium Selenide) photovoltaic manufacturing and thermal budget (total amount of thermal energy transferred to the wafer during the given elevated temperature operation). One word on the VC market for solar: Sizzle.

New Energy Capital Raises $30 Million in Financing

Project finance fund New Energy Capital announces $30M funding, $15M from CalSTRS and $15M from Vantage Point. Click here for Live Power News’ write up of the announcement. Adding to Mark McFadden’s article, it’s great to see NEC’s progress. The team is solid, and it also provides the much needed project finance component of the Clean Technology equation.

Who said Clean Technology is gaining traction(?) and another water acquisition

Oh, right, everyone. Today, this article in New York Times, as well as an article in the print edition of the current Red Herring (note: link is now here), both point to the increased interest in Clean Technology, and some reasons why it is a compelling area for venture dollars.

In the New York Times article, Ira Ehrenpreis (who is a friend of our firm), partner at Technology Partners (a great Silicon Valley VC) says the reason his firm allocates money to the sector is he believes it is an area that can generate attractive returns.

Other key take-aways from the article include (and are not new to readers of this blog):

• The sector is underinvested relative to the opportunity
• Clean Technology represents huge, multi-billion dollar markets
• Expect to see smaller niche-sized startups, rather than an array of Clean Technology Google, E-bay’s and Yahoo’s
  

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Earlier this week, Watts Water Technologies announced the acquisition of Alamo Water Refiners, Inc.

One interesting thing to note about this transaction, beyond the fact that it is in the water quality segment, is that Alamo Water Refiners is reported to have annual revenues of approximately $13M. This stands in stark contrast to the $1.1B Mueller Industries reportedly had in 2004 revenues at the time of its acquisition by Walter Industries and ~$440M of revenues Ionics had when GE announced its intent to acquire it last year.

Energy Innovations raised $16.5M round led by Mohr Davidow Ventures

Adding a bullet to this recent blog post on investments in solar companies:

• Energy Innovations raised $16.5M round led by Mohr Davidow Ventures. Energy Innovations solar concentration technology, while still early stage, could help improve the performance of such companies as Nanosolar (also a Mohr Davidow portfolio company), making it an interesting addition to Mohr Davidow's recent investment. Other investors in the Company include Idealab.

Walter Industries buys Mueller Water Products Inc. for $1.9 billion

Hi all, I'm very happy to keep the blog alive while Rob is away on his very well deserved vacation. I intend to keep with Rob's spirit in my postings, so it should not be too much of a change for you all.

Adding to Rob's recent postings about water infrastructure, Walter Industries today announced the acquisition Mueller Water Products for $1.9B, broken down into $860M of cash, and $1.05B of debt (Walter Industries will assume Mueller's debt). Mueller Water Products had $1.1B of 2004 revenues, according to this St. Petersburg Times article. To view the press release, click here.

Walter Industries plans to slot Mueller into its U.S. Pipe's subsidiary. This blog has noted before the expectation of increased water infrastructure spending, and that corporates such as GE are gearing up in anticipation of this. Here's what Don DeFosset, Walter's Chairman and CEO, says: "We have been tracking Mueller's growth and compatibility with U.S. Pipe for some time, and we are excited to have the opportunity to bring these businesses together. The complementary fit of Mueller's water infrastructure and U.S. Pipe's water transmission business makes us ideal partners, well positioned to benefit from increased water infrastructure spending in North America."

Going on vacation (and a biomimetics article to read)

I'm happy to say that I will be going "off the grid" for a couple of weeks of long overdue vacation starting tomorrow.

But not to worry, my colleague Kjartan Jansen here at Expansion Capital has graciously offered to help keep the Cleantech Investing conversation going during my absence. There might also be a "guest column" or two from other cleantech VCs, depending upon schedules... Many thanks to Kjartan for taking this on...

In the meantime, let me leave everyone with a heads up on a great article and an interesting topic:

You may have already seen it in last week's issue of The Economist, but in case you missed it, here's a great article on biomimetics and its potential.

"Biomimetics" refers to the use of technologies already invented by nature. The most famous example is velcro, as the article describes. But other uses are already being found in agricultural products, in water treatment technologies, and in emerging forms of solar energy technology, among other areas. The article describes some other applications as well. For cleantech investors, technologies inspired by nature can mean breakthroughs that offer less toxicity and better efficiency than incumbent approaches, so biomimetics is an area worth tracking. Most will be very early stage, but with strong potential.

Check out the article, and track these technologies as they develop.

Lamina Ceramics raises $9M Series C

As mentioned before, solid state lighting is making some strong progress and could soon start to make some waves in the overall lighting industry.

Lamina Ceramics, a manufacturer of LEDs for architectural lighting and large screen LCD backlighting, announced that they have raised a $9M Series C. The deal was led by Granite Global Ventures, while existing investors Morgenthaler Ventures and SpaceVest also participated.

Clean energy VC panel, and AWWA conference

Yesterday I had the pleasure of moderating an "investing in clean energy" panel for the VC Task Force, graciously hosted by Heller Ehrman -- a panel which included a great set of speakers: Scott Benner of Heller Ehrman, Ira Ehrenpreis of Technology Partners, Dave Pearce of Miasole, and Elton Sherwin of Ridgewood Capital. A tremendous set of experiences between them.

• Scott is an expert in international energy projects, especially with an international angle, having worked extensively with clients across a wide range of private equity transactions both here and in Asia
  
• Ira is an always entertaining and informative speaker, whose energy investments include PolyFuel (mentioned recently here) and PowerGenix, among others (look for more info out of Technology Partners soon, too!); and he's been playing a leading role with the Cleantech Venture Network for some time
  
• Dave is an experienced "serial entrepreneur" who's made his mark already in hard disk drive manufacturing and the fiber optics industry, and is now making some great progress in the solar world
• Elton, whom I've just gotten to know recently, has made some smart technology investments in the past and is now jumping into cleantech investing with both feet, recently investing in both Comverge and Oryxe
  

It was a pretty intimate (20 or so venture investors, plus panelists), informal, engaging session, with a lot of good comments and questions from the other participants in the room. Without going into any specific comments, I'll just say:

a) There was a strong sense that this is a fast-growing area of interest among VCs, many of whom are just starting to look at the sector now;
b) There was a variety of points of view about the opportunities for a lot of "home run" investments in the space -- some investors view this as a ripe for a next Google, etc., while others look at this as more of a trade-sale-exit kind of industry (not that the two views are necessarily mutual exclusive, note);
c) Much healthy and informative discussion about the drivers and sustainability of the recent growth in the sector, typical stumbling blocks for companies, and different investors' particular strategies and investment criteria

All in all, it was a treat to be able to participate

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Today, had the opportunity to cruise the American Water Works Association conference here in SF. Given some of the recent press about water technology investing, I wasn't too surprised to hear from several people I spoke with that I wasn't the first investor-type they'd seen wandering the booths this year... As one exec told me, "I've been going to these things for years, and this is the first year I've seen any VCs, but it seems like I've seen several of them this time. What is that all about?" I think the word is getting out.

While an interesting technology investment area that is getting more attention, this industry remains "low tech" in many ways. There were a lot of large pieces of metal and machinery on the exhibition floor... Admittedly, this conference was aimed at utility customers much more than it was designed for investors, but it was still striking when compared to other industry conferences in other sectors. It does strike the outside observer that there might be a lot of mid- to small-market M&A opportunities to be seen in consolidating a lot of these very fragmented vendors in very mature markets/ technologies...

Regardless, there were also some interesting technological and market developments that were clear to see. The new standards for arsenic in drinking water, due to come into effect in January, are clearly getting a lot of attention both from vendors and customers. New disinfection, filtration, sensor, and other technologies are showing some interesting developments as well. And for what it's worth, I found myself thinking often about machine-to-machine communications while looking at the vendor offerings -- a lot of technology on display that assumed such communications links would be in place, but who's going to provide them? And how?

In all, an interesting conference. Some things to get excited about, and also a good chance to reality check -- nothing like walking through a few displays of specialty hammers, shovels, and fire hydrants to remind you what makes most of the industry really tick.

USA Today front page: "The Debate is Over"

Without getting into policy issues (not the purview of this site), it's worth noting this article that came out today.

While the public attention and any public policy impacts of such news can only help clean technology investing, an important point to take away from the article (once again) is that business leaders (and their large, acquisitive companies) are starting to move toward clean technologies even in the absence of any policy change. This helps enable successful exits for cleantech venture investors, and lends further momentum to the investment sector in general.

Nice article on the current state of solar VC investing

Some good quotes by several leading-light (pardon the pun) cleantech VCs in this nice article about solar PV on CNET News.

Apparently the article was written before word came out last week that Mohr Davidow is backing Nanosolar...

The Hydrogen Economy: Point-counterpoint

This weekend I stumbled upon (thanks to Hydrogen and Fuel Cell Investor) an interesting debate being carried out in the editorial pages of the Vancouver Sun, discussing the overall potential of the "hydrogen economy."

On the one hand, Jon Hykawy (the Director of Technology Research at Fraser Mackenzie, a Canadian investment bank) argues that "hydrogen is too expensive to become a useful fuel in our modern world". He even goes so far as to make a strongly-implied suggestion that government funding for hydrogen-focused technologies be directed elsewhere.

This was followed a week later by a response from Dennis Campbell, the CEO of Ballard Power, who shoots back that "investing in hydrogen and fuel cell commercialization is a 'no brainer'..." (note: opens a PDF from the Ballard website).

For those interested in the ongoing debate about the hydrogen economy and hydrogen-fueled fuel cells, these two short opinion pieces are a great resource, simply and clearly laying out the arguments that both sides of the debate tend to use.

...It's also interesting to take note of a couple of sub-plots. First of all, as a research analyst with Fraser Mackenzie, Hykawy covers Ballard. Here's a pdf of one of his recent research reports. Ouch. Secondly, while assailing PEM fuel cells as having a long way to go before broad commercialization, and PEM-based companies like Ballard for not having strong financial returns (a criterion he cites for government funding), it's interesting to see that Hykawy seems to feel just as strongly -- but in this case, positively -- about solid oxide fuel cell companies (see here a pdf of one of his recent research reports on Fuel Cell Technologies... interested readers might want to dig into his economic analysis, it's enlightening).

Now that the cat's out of the bag...

...as per SiliconBeat, we're free to cite Matt Marshall that:

• Nanosolar raised a $20M round led by Mohr Davidow, and including Mitsui, Benchmark Capital and the US Army venture capital fund OnPoint.
• Miasole raised a $16M round led by Kleiner Perkins with participation by existing funders.

Matt Marshall's post at SiliconBeat is worth checking out -- he's right that the big news is that these thin-film solar manufacturers are getting close to ready for full production runs. Miasole in particular is getting close to ready for prime time (full disclosure: I am a minor shareholder), while Nanosolar is looking for commercialization in 2006.

Look for big news down the road from these and other thin-film upstarts. Silicon is just very expensive...

Other items of note on a busy day

• Protonex announced that they added $2M to their Series B round from the $9M previously announced (and described here back in April), by adding funding from Venture Capital Fund of New England and Yellowstone Energy Ventures, and more money from that previously committed by Parker Hannifin Corp. Corporate venture funding has an important role to play in cleantech investing -- something to address in a longer discussion at a later, less-busy time.
  

• Here's a decent primer on "green tags." Between green tags (renewable energy certificates), carbon emission reduction credits, and other emissions credits, there are some new avenues opening up for energy efficient technology firms to gain additional revenue besides simply selling commodity electricity or capturing energy cost savings. Even in the absence of effective policy change in the U.S., such efforts to monetize the positive market externalities associated with clean energy technologies can help cleantech firms capture some of the additional value they are creating. It is a very early, but promising, market development -- which deserves a longer discussion at some point.

• Frost & Sullivan released a report which forecasts U.S. revenues for microfiltration membrane technologies (for water and wastewater treatment) will reach $1.3B by 2011. And then take note: The Chinese market for water technologies could be even larger. Who was it who said, "water will be the next oil?" Oh right, everyone says that now -- and for good reason. This deserves a longer discussion at some point.
  

• SunEdison announced the launch of a new $60M fund to finance solar installations, in conjunction with BP Solar. SunEdison reminds us that, while we all search for cost-effective technological solutions for manufacturing and installing solar systems, there is a potentially lucrative market in simply providing the capital and project management know-how. And that's true for a lot of other power generation approaches beyond simply solar. Such solutions require innovative financial models, strong knowledge of regulations and regulatory drivers, and a good ability to connect cutting edge technologies with installers and naturally-reticent end customers. But SunEdison is not alone in seeking the profit in such a role, there are several other groups with similar aspirations... We will have to discuss them and this broader topic down the road.

It's a bit busy around here right now, but there will be more on these and other topics when the opportunities present themselves...

Crossbow raises $12M

Crossbow Technology, which provides wireless sensor networks for environmental monitoring, industrial monitoring, etc., announced that they have raised $12M in funding from strategic partners Cisco and Intel, and including "significant funding" from Paladin Capital Group.

Wireless sensors, advanced optical sensors, and machine-to-machine (M2M) technologies are all combining to enable automated decision making with richer data, better responsiveness, better accuracy, and lower costs. This in turn is driving increased efficiency across a wide range of applications. Real-time data across a broad network of measurement points is increasingly a reality, and it can have a lot of different implications for cleantech applications, technologies and markets. Even though these technologies are not necessarily pure "clean technology" plays by themselves (depending upon how restrictive a definition you may use), they are key enablers, and thus they should be of strong interest to cleantech investors.

PolyFuel to list on AIM

In a move that other technology startups have also considered, PolyFuel has announced that they will be listing on the London Stock Exchange's AIM market for early stage companies. They will reportedly raise about 12M pounds at a valuation of 40M pounds.

Listing on AIM or other "venture exchanges" is an interesting new option for early stage companies that would ordinarily be looking at new private equity rounds. The jury is still out regarding what kind of treatment such moves will be given in the long run, what the implications will be for broader acceptance of cleantech investing, and what the implications will be for private equity investors.

At least for now, such listings generally appear to be being received well by the public markets, and they are also providing a nice opportunity for venture capital investors to gain some early liquidity opportunities and mark-to-market valuations.

AgraQuest raises $14.35M

AgraQuest, which offers natural solutions for pest management, announced today that they have raised $14.35M. Existing investor Otter Capital joined new investors TPG and Halcyon Capital in leading the deal.

AgraQuest had previously raised $9.4M in early 2003.

Contango Capital raising second fund

Houston-based alternative energy VC Contango Capital has announced they are raising a second fund (they closed their first fund in Jan. at a little over $8M). This second fund is targeted for $50M. The firm's current portfolio is heavily weighted in hydrogen and fuel cell technology plays.

Monday morning follow-ups

There have been a few odds-and-ends news items in the past few days that follow up on topics we have discussed here before. Thus, in case you missed them, check out:

• This news release from Frost & Sullivan describing the need for increased spending on water infrastructure -- a nice follow-up to this post linking to Matt Marshall's good article on the attractiveness of clean water venture capital investing. The Frost & Sullivan report indicates that water infrastructure spending in the U.S. is already a $4B market, and is growing as regulatory and sheer operational needs mount. The report specifically points to membrane technologies and water meter reading as key areas for growth.

• Matt Marshall also has a very interesting post on SiliconBeat today referring to this post on Vinod Khosla which itself linked to an interesting story at BusinessWeek's Dealflow column.

• Regarding this post on biomass energy, here's a timely announcement from the DOE and USDA that they are going to promote the use of biomass-generated hydrogen.

• As mentioned a couple of times (here and here), solid state lighting is an area of interesting innovation. Here's another recent CleanEdge article describing ongoing progress in that technology.

• Finally, Konarka continues to get more press coverage, following on these mentions here, here, here and here.
  

Enerpulse takes in an additional $2M from Altira

Following on some successful tests of their technology, and a commitment made by Altira Group last year, Enerpulse announced earlier this week that they have taken in a second tranche of funding from Altira, in the amount of $2M.

Enerpulse has an innovative sparkplug design that improves fuel efficiency. For transportation industries, even a small gain in fuel efficiency (Enerpulse claims 2.7% gains) -- particularly in the current market conditions -- can be a big deal for the bottom line... Delivery trucks and other such vehicles use a lot of fuel.

Enerpulse reports they will soon be going out for a Series B round of $3-5M, and they expect to launch their first commercial products late this year or in 2006.

[Note: Edited 6/5 to better reflect the applications that Enerpulse's product can address. Thanks to Derek for calling me on it.]

Biomass getting closer to commercialization

Think of it as another form of solar energy.

Wired has a good article on the potential for biomass-to-ethanol approaches, which could provide renewable sources of fuel, better energy security, and income for the American farmer. Much of the article focuses in on the debate between corn-based biomass and other sources such as switchgrass.

For cleantech venture investors it is often not clear how VCs can participate in this potential market. Most of the investment opportunities are going to be at the ethanol plant facility-level, or in new biomass-tailored agricultural products developed by big players. However, cleantech investors should be on the lookout for opportunities such as biotech-based developers of new strains of crops that are well-suited; for developers of new technologies for more efficient production of ethanol; and -- depending upon investment model -- for service providers and financial developers who specifically target servicing and/or developing fleets of biomass producers and ethanol plants.

The timing and political factors are highly uncertain, and the investment opportunities for technology-focused venture investors are not obvious. This may be a market generally better suited for project financing investors than VCs. However, at 10:1 energy yield ratios and $25/barrel crude oil equivalent prices, there may be something there, and it is worth tracking.

Continuing the conversation on cleantech clustering...

As discussed here and here ("griping" comment aside), there doesn't appear to be nearly as much of a cleantech cluster here in the bay area as there exists for IT and biotech. We've discussed before why that may be the case, and provided some reasons why the industry may continue to be scattered or why it may start to centralize (in which case the bay area would be a good candidate location).

It's not new, but it's worth mentioning an NRDC/ Environmental Entrepreneurs survey that was released last year, "Creating the California Cleantech Cluster." (note: opens a PDF) The author, Pat Burtis, interviewed a number of cleantech VCs (with an estimated $2.5B of cleantech-targeted funds under management) to get their thoughts on California as a cleantech investment region, and derived a few interesting tidbits, including:

• The VCs interviewed most often cited California as the most attractive region in which to make cleantech investments, twice as often as the next most attractive region (New England) was mentioned
  
• Strong VC support for public policies that position California to be in the forefront of innovative environmental regulations, to promote technology and market development
  

But the telling graph is Figure 2.2 on page 19. As a portion of total US venture investments by industry, in 2003 California received:

• 63% of all semiconductor VC funding
• 59% for computers and peripherals
• 56% for networking and equipment
• 55% for medical devices
• 43% for software and IT
• 38% for biotechnology
• 36% for telecom
• 33% for financial services
• and only 31% of total cleantech US venture investments went to California-based companies.

These are 2003 numbers, but as point of comparison California's overall share of VC funding that year was 43%, and according to the most recent Q1 numbers from Moneytree that remains the same (43.6%) today.

To some extent, the favorable view of California cleantech investing that was expressed by the VCs as described above may only reflect the fact that 11 out of the 21 VCs interviewed were California based. In fact, the fact that only 3 of the 21 were from New England, and yet New England still showed up strong in the rankings of attractive regions for cleantech investment, suggests that region has a strong pull as well. Indeed, New England took in 25% of 2003 North American VC cleantech funding versus 29% for California (note: US #s above versus North American #s here). Which of course leaves almost half of all funding going into entirely other regions altogether.

None of the above argues against the eventual development of a strong cleantech cluster in California, and the report does a good job of describing some ways that might happen over time. However, at least in comparison with other technology industries, cleantech funding does not appear to be centralized in the California region as much as one would expect.

As I said last time: To be effective -- at least at this stage in the industry's rapid, decentralized development -- cleantech investors are going to have to be willing to spend some significant time on airplanes. Because many of the more intriguing investment opportunities are going to be found outside of California and New England.

Virent Energy Systems raises $1.5M

Claiming a technology for generating hydrogen and fuel gas from biomass (such as corn stalks, etc.), Virent Energy Systems today announced that they have raised $1.5M. The round was led by Venture Investors of Madison, WI, and Advantage Capital Partners also participated. It looks like the company is still in the product development stage.