Powerit, LiveFuels, Southwest Windpower, INI Power, and NanoH2O

Lots of deal announcements over the past couple of days.

To begin with [self-promotion alert], Powerit Holdings, which provides automated solutions for energy demand management, announced a $7.1mm Series A led by @Ventures, and including participation by Expansion Capital Partners, as well as existing investors Stellar Holdings and company management. Powerit's technology is uniquely able to help large industrial and commercial energy users to achieve significant savings on their electricity bill without any negative impacts on productivity or comfort, and with very strong payback periods. Since industrial buildings consume 27% of all electricity produced in the U.S., it's a big market. Also, Powerit's technology fills in a big missing piece of the demand response market (see the recent IPOs of EnerNOC and Comverge), by providing automated solutions for large industrial sites to become participants in those company's programs.

Other deals to note:

• LiveFuels, a self-described "mini-Manhattan Project for algae-to-biofuels", announced a $10mm Series A led by David Gelbaum of the Quercus Trust. Jonathan Shieber at VentureWire reports that the company is trying multiple strains of algae and multiple processing technologies. "We are trying them all," he quotes from Lissa Morgenthaler-Jones, the CEO, "We're not biased. We'll use any one that works." [6/1 update: InsideGreentech also has a very good column on the company]
  

• Southwest Windpower, a developer of small-scale distributed windpower products, announced a $6.5mm round of financing (VentureWire describes it as a "second tranche of its Series B financing") led by NGP Energy Technology Partners. Existing investors RockPort, Altira, and CTTV Investments (Chevron's VC arm) also participated.

• INI Power, which is developing direct methanol fuel cells for portable power, announced a $4mm Series B led by MHI Energy Partners, who also led the company's $3mm Series A in 2004. Other unnamed investors also participated.
  

• NanoH2O, which is developing nanomaterial-based membrane technology for water purification, announced a $5mm Series A round of financing (note: link opens pdf) from Khosla Ventures.
  

"Cleantech venture bubble" watch, pt 3: Biofuels

As we discussed before, it's tough to declare a "bubble" across all cleantech sectors, especially when looking only at venture investments (versus the public markets).

There remains the possibility of small bubbles within certain sub-sectors, however.

One such sub-sector that is frequently called out as potentially seeing overinvestment is biofuels. Some investors, such as CMEA's Maurice Gunderson, have gone on record as saying so. And in the public market, previous high-flying ethanol stocks have been experiencing a bumpy ride lately. In the same article linked in the last sentence, Lux's Michael Holman declares that: "The herd mentality has begun to take over in the venture capital community and there is probably some not very wise money that is flowing into the ethanol segment in particular." Moo. Meanwhile, big major entrenched oil companies are also aggressively moving in.

As Nth Power's 2006 energy tech VC funding tallies showed, biofuels did indeed dominate last year, with more than a third of all VC energy tech funding going into the segment.

The argument for a bubble is simple: Even by optimistic forecasts of demand for ethanol going forward, there is a glut of announced future capacity. And thus, the high amount of money flowing into the sector won't be able to find a good home.

But as always, it's not quite so simple. Even just going by the above critiques, the data points to some distinctions within the biofuels sector from a venture perspective. The notable distinctions to make are tech versus capacity investments, ethanol versus other biofuels, and incumbent versus cellulosic technologies.

As the CleanEdge/ Nth Power report showed, a lot of the heft behind the hefty biofuels totals was due to VC participation in "capacity deals" -- essentially, venture equity used alongside project finance funding, inflating the "VC" numbers. And if you read what Maurice was describing, he was mostly concerned about this kind of investment as well (it's important to note that CMEA remains active in biofuels investments). Also, most critiques focus on ethanol, whereas biodiesel, biobutanol and other more exotic bio-based alternative fuels are rarely singled out as suffering from overinvestment.

Furthermore, while most of the publicly-traded ethanol stocks being criticized, as well as most of the capacity deals being funded privately, are based on incumbent technologies (basically: corn as feedstock)... Technologies to enable the use of non-food and cellulosic feedstocks are what continue to get the most VC attention these days. Vinod is particularly clear on this point, despite having taken part in some capacity investing himself -- in the various debates he's taken part of around energy balance and the market potential for ethanol, he always makes the clear distinction that cellulosic will overtake corn-ethanol (he believes this will happen within 10 years -- the below graph of his forecast comes from Wired from last October, btw). And we have only talked about the processing portion of the biofuels value chain -- there has been even less investment activity into upstream and downstream approaches.


None of the above says that there is NOT a bubble across the full spectrum of VC biofuels investments (and this site doesn't deal with public markets, so let's pass the buck there...). But if you had to rank the order of likelihood of potential overinvestment within the biofuels sector, pointing out capacity deals in corn-ethanol as a likely prime suspect would make the most sense. And it seems less likely, given the opportunities down the road, that there is a bubble in technology development for next generation feedstocks and next generation biofuels -- but given the timeframes we're talking about, it's still possible. Certainly, if these technology development startups all try to build their own processing capacity, that could exacerbate the glut -- but trade sale exits to capacity players is a more likely scenario for many of them.

The anecdotal evidence, for what it's worth, is mixed: There are definitely some biofuels deals that have been out there with very high valuation expectations, and some of those expectations have been met by VCs in a couple of cases. But also, there continue to be other opportunities where the entrepreneurs recognize the long, risky road ahead and have realistic expectations, where the VCs are bringing value-add strategic value to help early companies grow, and it's a win-win. (Hopefully...)

In other words: Is there a bubble in biofuels venture investments? A solid "maybe". Some instances where VCs have stretched themselves, mixed with indications that there are still some promising opportunities in lesser-invested areas of the biofuels value chain and in new technologies. As the market continues to develop, naturally there will be winners and losers, and those in between.

But is all the upside currently being priced out of the biofuels investment sector, across the board? ...It just doesn't feel like it.

In other news:

• Electro Power Systems, an Italian developer of fuel cell-based power systems, announced a 5mm euro round of financing by 360° Capital Partners. The company claims that it's the biggest venture round in Italy in the past 12 months.

Other news and notes: Another reason to continue to be excited about cleantech investments -- the fact that a lot of proven entrepreneurial talent is now rushing into the space... The debate over the role for coal continues... Cleantech as a national security issue... "Efficiency is the steak, renewables are the sizzle"... And demand response/ demand management is a huge potential market... The challenges facing electric vehicles -- but Tesla's got a Plan B, as a battery distributor... Finally, for all the Amish readers of this website, you'll be glad to know that solar power is now an option.

Happy Memorial Day

GE has announced that they plan on doubling their cleantech venture capital investments from $25mm this year to $50mm in 2008. It's yet another sign of the importance of cleantech for such large capital goods providers, who are also likely to be major acquirers of clean technologies as the space continues to mature -- and thus providing exits for many cleantech venture investments. It's also interesting to note that GE had previously moved away from direct venture investments in the past, and this announcement is further indication that the company is getting more comfortable getting back into a corporate VC business model...

Deals from the past week:

• SunLink, a manufacturer of proprietary mounting systems for solar panels, announced a Series B financing of undisclosed amount. The round was led by Clean Pacific Ventures.
  

• Greentech Media, a new cleantech-focused media firm, announced a $1mm Series A round, led by Northport Private Equity and Lightspeed Venture Partners. Several strategic angel investors also participated in the raise. As we previously mentioned, Eric Wesoff's Venture Power newsletter has also joined forces with Greentech Media...
  

• E-waste processing company Intechra announced a $30mm equity round, led by Richland Ventures, Oxford Bioscience Partners, and First Avenue Partners. Intechra has raised $50mm over the past two years. Jonathan Shieber at VWire had a nice column last week discussing this deal and others in the recycling space...

• An interesting play by Khosla Ventures and Venrock -- Transonic Combustion, which is developing a fuel injection system with fuel efficiency benefits for internal combustion engines, announced a Series B of undisclosed amount, with both venture capital firms participating (Venrock led the round). Advanced internal combustion engine designs and components can be a very difficult play for venture capital firms to get comfortable with (slow adoption cycles, a plethora of alternative designs out there sitting in engineers' garages, and potentially difficult exits are all factors), but there's no disputing that it's a huge potential market for any firm that can successfully address the challenges facing such efforts.

• Petra Solar, which is developing advanced BOS to improve solar PV efficiencies and provide greater flexibility, announced a $14mm Series A led by DFJ Element and BlueRun Ventures.
  

Cleantech investors in the news: OnPoint, which has been pretty active in cleantech, is losing some of its funding... Southern Cross, a new Australian venture capital firm, announced they have raised A$170mm first-time fund, and that clean energy investments in Australia and New Zealand will be part of the fund's focus... Nancy Floyd, of Nth Power, wants better clean energy policies in Oregon.

Other news and notes: Biodiesel producer Imperium Renewables, which has raised over $200mm in funding, filed for a $345mm IPO... In the ongoing discussion of cleantech clusters, the Economist adds this column worth checking out... A good overview of Cleantech 2007... The Cleantech Venture Network and Weber Shandwick are teaming up to promote the Cleantech Venture Fora... Finally, sounds like they're doing some neat things up at Dartmouth these days.

"Cleantech venture bubble" watch, part 2 -- Five Questions: Matthew Nordan

Last week we started a series of posts on the subject of investment bubbles in the cleantech sector -- and in the process, we used a recent research report by Lux Research as a centerpiece of the discussion. (We also, admittedly, took a little bit of a swipe at the PR announcing the report's release... All in the spirit of constructive informal dialogue, of course.)

This past friday, I had the pleasure of sitting down with Matthew Nordan, President of Lux Research, to discuss all matters cleantech. We discussed the various historical analogies to the emergence of the cleantech sector (IT, biotech, materials science), dealflow aggregation methodologies, and -- of course -- the potential for a bubble in the sector. Many points of agreement, and some thought-provoking areas of divergence...

It's clear that Lux has been doing a deep dive in this sector, and I felt Matthew's first-hand perspective would likely be of interest to readers of this site. So, with thanks to Matthew for graciously agreeing to participate, here are Five Questions:


1. Lux Research recently released a detailed report covering the cleantech sector. What was the motivation behind doing this report, and how long has Lux Research been investigating the cleantech space? Was this a one-time project?

Our mission is to help senior executives make strategic decisions about emerging technologies. We focus on the physical sciences – new materials and processes, and the things you can do with them – because we honestly think this is what will drive competitive advantage and economic growth over the next several decades.

We founded our business in 2004 with a first practice area in nanotechnology. As we built relationships with CTO/CSO types at large companies and became a trusted advisor to them, they started asking us to investigate other emerging technologies, many of which clustered around energy and the environment. So we started advising clients on what most people now refer to as cleantech around mid-2005.

After several of these engagements, we realized the market was telling us something about what our second practice area should be, and we formalized our efforts. We put together a team of researchers in May 2006 and set out to map the cleantech universe. We started by building taxonomies of cleantech segments across energy, air, waste, waste, and sustainability, and then began counting and categorizing the activity in the field, including scientific publications, patents, active companies, start-up creation events, VC deals, IPO and M&A transactions, etc. – tagging all of the things we inventoried back to our taxonomy. This research base underlies our practice, and it also drove The Cleantech Report, which is designed as a primer and reference guide for executives and financiers active in the field.

2. The report mentions 930 energy tech startups worldwide, and 1,500 cleantech startups overall. Your team also tracked the dramatic rise in venture funding in the space. What was your group's methodology for tracking down all of these companies and deals, and how might that have varied from other totals that have been publicly announced by other groups?

There are a couple of questions embedded in there, and both of them come down to definitions.

For the purposes of the report, we define cleantech as “innovative technologies specifically designed to optimize the use of natural resources and reduce environmental impact.” “Innovative technologies” rules out companies that are active in energy and environment but without any significant new technology – carbon offsetting services would be a good example. It also rules out project finance for, say, corn-based ethanol plants based on established processes. “Specifically designed” rules out companies that deliver energy and environmental benefits only as a pleasant side effect rather than the focus of their business, such as transport optimization software companies. “Optimize the use of natural resources” and “reduce environmental impact” rule out companies that have something to do with energy or the environment, but that primarily help speed up “dirty” consumption: Oil and gas proppants would be a good example. You can split hairs on lots of segments – are enhanced oil and gas recovery technologies cleantech? (we would vote no) – but the important thing is to be consistent throughout the analyses, which we feel we’ve done.

With those definitions in mind, the identification of companies and transactions happens through lots of means – tapping our network, querying information services, cross-checking with other people’s inventories, etc. All of our data sets are global to the extent that reliable data is available (for example, it’s really tough to discern between institutional venture capital and project finance in China, and many capital flows aren’t reported).

For many of the data sets we’ve assembled there are no comparables, but in the one place that they do exist – namely venture capital – our definitions make our numbers differ from other sources. We’re higher than Dow Jones/E&Y because of the global factor and we’re lower than Cleantech Venture Network because of our more restrictive cleantech definition. The sources of variance are detailed in the report.

3. The press coverage has naturally focused on the report's conclusion that there might be a looming bubble in energy tech. The report, however, appears to differentiate a bit between a) different sectors within cleantech; and b) different types of investments. What specific categories of energy tech investments seem most susceptible to bubble-like conditions right now? Why are these sectors attracting such an imbalance of attention, in your opinion?

It’s certainly true that the press loves downside stories. We’ve tried to be pretty specific about the two subsegments where we see an excessively high ratio of money and enthusiasm to opportunity: solar and biofuels. It’s hard to look at, for example, New Enterprise Associates’ pursuit of SolFocus and not see flashbacks to the Internet in the late 1990s. While some of our findings are counterintuitive, I don’t think this one is: I spoke at the Austin clean energy VC conference last week, and Maurice Gunderson who founded Nth Power gave a great presentation that honed in on these two subsegments in “bubble watch” mode.

Solar and biofuels get outsized attention because they are easy to understand (everyone’s seen a solar cell and everybody’s pumped gas), they’re both experiencing big technology shifts (crystalline silicon to thin-film and corn/cane to cellulosic), they both have government incentives and news flow working in their favor, they both have established valuation comparables (you’re not creating a new category), and they both have enormous headroom for growth – solar was 0.02% of U.S. energy last year! There aren’t many other subsegments where all of these factors line up. Coal gasification and supercapacitors are not easy to understand, water filtration is not undergoing a big technology shift, news flow doesn’t favor waste remediation…

4. The worldwide energy and water markets are as big or bigger than the market for Information Technology, for example. And yet cleantech appears to still be only 5-10% of venture capital investing totals, behind IT and biotech. How should we reconcile the magnitude of the market opportunity and these relatively low investment levels with the idea of a looming energy tech bubble?

Energy and water are huge markets but they’re nowhere near as accessible as IT, they require manufacturing and testing and shipping and servicing physical products at high volume, and the adoption cycles are a lot longer.

Think about water for a minute. More than $500 billion every year is spent on water, and the secular trends are really attractive: Access to clean water is already a limit to economic growth from China to the American southwest, and there’s no good alternative – you can replace gasoline with ethanol but you can’t replace water with anything. But the average municipal water facility literally uses Victorian-era technology: coagulation and flocculation that add salts to the water. The facilities are frequently publicly administered, have almost no operating free cash flow to invest in new technologies, and replace their infrastructure on cycles measured in decades. And the qualification and test cycles for installing new equipment can themselves take years even with accelerated testing regimes! That’s about as far as you can get from, say, web-based software where channels to market aren’t an issue, you don’t have to manufacture anything, and switching costs are very low.

Energy segments aren’t immune. Take rooftop solar cells – the solar shingles that are the apotheosis of many a business plan. If you wanted to install solar roofs on only one out of ten new U.S. houses constructed – no retrofits and no commercial installations – and it took two guys one week to string one up and test it out, you’d need 8,000 installers working full-time. That’s more than twice most estimates of the total number of installers in the U.S. You wouldn’t encounter this channel construction problem in IT or biotech.

5. What's the single biggest misperception about clean technologies that you'd like readers to gain a better understanding of by reading your report?

I think we touched on it earlier – it’s the thesis that cleantech is the next Internet or the next biotech. From the perspective of public offerings, wealth creation, and impact on society, this may very well be the case. But the investment dynamics and times to market are really different.

While there are plenty of exceptions like demand response services, a great share of clean technologies derive from new materials. And no matter what past example you want to look at, be it carbon fiber or nanoclays or polyetheretherketone, new materials simply take a long time to develop, scale up, and bring to market – it typically takes 20 years to get from invention to first commercialization and 20 more to mass adoption. That’s a long time – a lot longer than a 10-year closed-ended fund.

Demand response gets another comp

It would appear that the cat's out of the bag regarding energy efficiency/ smart grid technology, and particularly its subsector demand response. First, the successful IPO by Comverge (COMV), and now DR rival EnerNOC (ENOC) has made a similarly big splash in the public markets.

Both companies are venture-backed efforts in the DR space, so it's a good sign to venture investors that the public market exit option should be open to "boring" energy efficiency technologies going forward. It probably reflects a recognition of the strong economics presented by energy efficiency -- the best way to make a kilowatt-hour is not to use one in the first place (admittedly, we've been beating this drum for a while now, apologies for being repetitive). Hopefully these companies continue to provide strong comps going forward.

The thing to note about both companies and their competitors is that they will need to continue to build an ecosystem of smart grid/ energy automation technologies in order to support their growth. DR services are gaining acceptance by major utilities (and no less importantly, their governing Public Utility Commissions). But right now, most DR services (speaking only about all such providers overall) entail literally picking up a phone or paging or emailing a facility manager, who then individually turns down power usage (or turns on a backup generator) during the period of the "event." It's a relatively low-tech ESCO-like approach that will need to become more automated over time in order to access more than early adopter markets. I would expect a period of some consolidation -- both horizontal and vertical -- as the freshly-capitalized DR industry seeks to put together a truly integrated, comprehensive, tech-enabled service offering for utility customers.

Other deals:

• Solar thermal electric technology developer Sopogy has raised a $2.3mm Series A led by Tradewinds Capital, according to the CEO. The company, which is based in Hawaii, is targeting their products at both centralized and rooftop installations.

• PEWW today revealed that TriAlpha Energy, a nuclear fusion research company, has raised a $40mm Series C-2 round of financing. Funders included Goldman Sachs, Venrock, Vulcan Capital, Enel Produzione SpA and PIZ Signal. It also appears that NEA is a backer, since Dick Kramlich is on the board. Some interesting background on the company and a critique of their technology can be found on this site. [5/22 update: VWire mentioned this raise earlier on 5/21, it should be noted. rd]
  

• PEWW also reported that Dutch filtration system developer Fluxxion has raised a 6.4mm euro second round of financing, led by Emerald Technology Ventures and including Capricorn Cleantech Fund, WHEB Ventures and Koninklijke Philips Electronics NV.

Arch Rock and Ice Energy

• Arch Rock, which is developing hardware and software for wireless sensor systems, announced a $10mm insider round this week. NEA led the round, which also included existing investors Shasta Ventures and Intel Capital. This follows on a $5mm round announced a little over a year ago.

• Ice Energy, which uses ice-based air conditioners to shift energy usage from peak periods to non-peak periods (freeze the ice at night, use it to cool a building during the day) raised a $25mm round of financing. The round had been in the works for a while, and ended up being led by Goldman Sachs, with participation by Good Energies and existing investors Second Avenue Partners and Sail Venture Partners.
  

• VentureWire reported that AdaptivEnergy, which is developing piezoelectric devices for applications like thermal management and fuel cells, signed a development agreement with the CIA's In-Q-Tel -- and is seeking a $5-10mm venture round. The company has raised $5mm to date.

• VentureWire also reported this week that, according to a regulatory filing, Nth Power's fourth fund has now reached at least $132mm, toward a target of $200mm.
  

• It's not really a venture investment, but it's interesting to note Google.org gave a $200k grant to CalCars.org.
  

Lots of conference updates to discuss:

• It's perhaps the most-blogged cleantech conference ever. The first Austin Clean Energy Venture Summit was oversubscribed, and has gotten rave reviews. Tech Confidential wrote a series of blog posts (see here, here, here and here). There were quite a few good articles by Martin LaMonica and Michael Kanellos on News.com. A nice little column can also be found here. But I thought the best review of sorts was a text message I got on my cell phone from a colleague on-site: Grt conf down here. Woolsey said govt move twd fmly car hydrogen fuel cells "stupidest thing govt has done in energy policy ever." That was the complete message, beginning to end... Anyway, sounds like many kudos to Joel Serface and his team on a solid event.
  

• Also getting a lot of coverage was the latest Cleantech Venture Forum in Frankfurt, thanks in part to Bill Joy's declaration that "A global response to climate change will spur a bigger business revolution than the internet." A lot more detail on his remarks can be found here, and Wired's blog has their perspective as well. Speaking of the Cleantech Group, they've taken a very interesting step in backing a joint venture to launch a cleantech business park in China.
  

• Last week in Pasadena, California, the Clean Innovation Conference 2007 took place as well -- sounds like it was yet another strong, oversubscribed cleantech event.

Sectoral updates:

• Lots of talk recently about the solar market. Mark Coker writes about another new solar startup, Signet Solar -- interestingly, this one is 100% dependent upon Applied Materials' equipment, and not any proprietary technology. And solar moves one more step toward commoditization... Joel Makower has the story about Wal-Mart's recent RFP for solar on 340 store rooftops -- and their subsequent pull-back to covering only 22 locations... And here's a BusinessWeek article on the current state of play in solar... Finally, is there a Chinese solar company out there that isn't IPOing?
  

• Carbon markets: Charles points us to an interesting climate change/ cleantech series on MarketWatch... He also has a very useful update on carbon trading markets... Meanwhile, Arno has some interesting thoughts on "carbon neutral".
  

Other news and notes: Cleantech investors in the news -- OVP's David Chen... Here's a nice IT pundit's take on the fundamentals behind the emergence of cleantech as an investment area... Get your VC performance benchmarks here... Peak coal???... Finally -- Bill gets it.

REBN comes to Boston

Long-time readers of this site will know about the Renewable Energy Business Network (REBN), which has been bringing clean energy business professionals, investors and researchers together for informal networking sessions in the bay area...

Now REBN is coming to Boston! REBN-East will hold their very first renewables happy hour on Thursday, May 31st at Flat Top Johnny's in Kendall Square. Advanced Technology Ventures is graciously sponsoring the event, which will start at 6:30pm.

Cleantech Investing readers in the Boston area are all encouraged to attend -- looking forward to seeing everyone!

"Cleantech venture bubble" watch, part 1

Thanks to some recent research and commentary by Lux and others (such as this article), the potential for a cleantech venture bubble has been getting a lot of attention.

It's always a fascinating media topic: When does an investment sector get "too hot"? So expect even more attention will be paid to this topic in the future.

Two vital facts to keep in mind (and which the general media coverage most often loses sight of, it seems):

1. There is a big difference between public market investment trends and venture capital investment trends.

Yes, for obvious reasons the two markets are often somewhat linked. But the public market is open to many more retail investors, is focused on near-term (quarter to quarter) results, and operates within the context of benchmarks like the S&P 500 (8.2% average annual returns over the past 10 years).

Whereas the venture capital market is open to a different pool of private investors, is a market of long-term (multi-year) investments, and operates within the context of high hurdle IRRs (~20% average annual returns over the past 10 years). Different returns requirements will drive different valuations.

2. There is no single "cleantech" sector. It is multiple sectors.

A solar cell looks nothing like a fuel cell which looks nothing like a desalination unit, etc. "Cleantech" as a buzzword is often criticized as being too broadly defined. That breadth also means that the technologies covered by cleantech VCs aim for different markets, compete with different incumbent approaches/ commodities, are produced in entirely different ways, etc. In other words, Cleantech (a/k/a "greentech", "environmental tech", etc.) is actually a collection of numerous separate investment sectors, under a common investment thesis around looming natural resource scarcity.


When taken together, the above two points bring out two key conclusions:

1. If one technology sector starts to see inflated values, it won't necessarily "infect" other cleantech sectors at the same time.

The Lux Research report was actually very specific on this point:

The warning signs of a bubble are appearing in the energy segment, where IPO value rose from $1.6 billion in 2005 to $4.1 billion in 2006 and venture capital raised went from $623 million to $1.5 billion, primarily on solar and biofuel deals. At the same time, the air, water, and waste segments present hidden opportunities that are relatively starved for investment.

So... There's a danger of an energy tech bubble, but other cleantech sectors... not so much. Realistically, we have to evaluate over-investments for specific subsectors than simply looking at all energy tech as a whole. Thus, the most relevant question is: Are there bubbles in solar and biofuels?

2. If multiples among publicly-traded stocks seem high, that doesn't necessarily reflect venture investments, even in the same sectors.

Anecdotally, it seems like there might be a supply/demand imbalance right now in the public equity markets, reflecting pent-up retail investor interest in high-profile sectors like corn-based ethanol and solar PV. Which is why these sectors have seen the most IPO activity.

There are good arguments to be made on both sides of the "are publicly-traded solar share prices too high" or "are publicly-traded ethanol share prices too high" questions, and this site isn't the place for such a discussion (stock-picking is not a core skillset here). But it should always be kept in mind that these investment classes are very different from the kinds of investments venture capitalists are typically evaluating.

Ethanol is a great example. Most of the publicly-traded stocks in ethanol are for companies using corn-based, well-understood processes. Whereas most of the current venture investor activity in the space (not counting "capacity" deals) is focused on finding alternatives to corn as a feedstock (such as waste-to-ethanol or cellulosic feedstocks), with breakthrough technologies. The economics, timeframes, and technical issues are completely different.

There could be a "bubble" in ethanol venture investments at the same time as a "bubble" in publicly-traded ethanol share prices. But it's not necessarily the case.

As we continue to track the bubble coverage in future posts, we'll delve into specific sectors and try to read the signs. But the above breakdown should establish some necessary context beyond the headlines, in advance of these discussions.


One last note for today's column... The Lux Research report has provided a wealth of useful data and smart analysis, and looks to be pretty valuable. One statement I would quibble with, however, was from the press release:

"...There’s no way that more than a fraction of the 930 energy start-ups operating worldwide can possibly succeed."

Define "succeed"? And define "fraction"? Venture capital is necessarily investing at a risky stage where companies will fail. That's true of all VC sectors whether they are evidencing bubbles or not. Furthermore, "success" shouldn't be defined by high-profile Google-esque exits -- only about 10-20% of all venture-backed companies IPO, for example. The majority of successful venture exits are industry trade sales as part of ongoing sectoral consolidations, at reasonable valuations.

When you consider the enormous magnitude of the energy market worldwide, and the many incumbent sectors that are ripe for creative destruction... It's not a stretch to argue that, yes, a significant share of the venture-backed portion of those startups (hopefully the VCs aren't picking a random sample from the overall pool of available investments) will grow and find successful exits in some form. And anyway, how does anyone know how many startups in a sector are too many? 930 (which I believe is a low count anyway)? 1,500? 15,000? This study claims that renewable energy will be a $200B market by 2015... There's a lot of available value to be created, somehow.

But admittedly, technically-speaking, since even 99/100 is "a fraction", the statement isn't wrong per se. It's just more hyperbole...

Tesla's $45mm and other deals

• Tesla Motors today announced a $45mm Series D, led by Technology Partners and Elon Musk. TP's Ira Ehrenpreis will be joining the company's board. Capricorn Investment Group also participated, as did all previous investors (including Vantage Point Venture Partners, Draper Fisher Jurvetson, JP Morgan Bay Area Equity Fund, Valor Equity Partners and Compass Venture Partners). I'm ready for my test drive anytime, Ira...

• VentureWire reported today that MBA Polymers, which is developing plastics recycling facilities, has raised "at least" $20mm in financing from Benchmark Capital Europe, Doughty Hanson Technology Ventures, and existing investor AsiaWest.

• Also in VWire this week: Solar concentrator play Cool Earth Solar has apparently raised a $750k seed round of convertible notes. You can read more about the company here... And LumaSense, a venture-backed effort to roll up various sensor technologies, has apparently raised between $50-100mm in debt and equity (this press release suggests that at least $25.5mm was debt) to finance their continued acquisition activity. Oak Investment Partners and Element Venture Partners provided the equity, and Comerica provided most or all of the debt.

• In one of those "capacity deals" that's tough to classify as a venture investment, Shunda Holdings, a Chinese PV-silicon production company, has raised $82mm to finance expanded operations. Shunda provides silicon to Suntech. Actis provided $40mm of the financing, and local investors Jolmo and Waichun made up the rest.
  

• Other international dealflow, as highlighted by New Energy Finance: Israeli LED startup Oree raised a $7mm Series A, of which ~$6mm was provided by Belgium's GIMV, the remainder being provided by Genesis Partners... Also in Israel, CoreFlow -- which has developed "aeromechanical" approaches to the handling and transportation of substrates (such as for solar applications) -- raised a $3.2mm round of financing led by Ofer Hi-Tech and including Dagesh FK Ltd... Finally, Australian wave energy developer Oceanlinx raised a $12mm Series A, and "may look at an IPO next."
  

Other news and notes: A nice overview of a recent cleantech investor "what's hot/ what's not" panel... Finally, expect high gas prices again this summer.

Catching up

Deals and news from the past week or so:

• Silicon production startup Solaicx announced a $27.1mm Series C. DE Shaw led, Mitsui Ventures also joined in, and existing investors Applied Ventures, Firsthand Capital Management, Big Sky Ventures, and Greenhouse Capital Partners participated as well. Jonathan Shieber at VentureWire reports that the company current has less than $5mm in revenues.
  

• New Energy Finance reported last week that PV thin-film and project developer Optisolar had taken in $10.2mm in "venture capital funding" from Gardiner Group Capital, Richardson Ventures, and four other private investors. Gardiner Group and Richardson Ventures each holds >10% of the company after the funding. The company was also in the news regarding a 40MW project development deal in Ontario.

• Two green chemistry deals to note: Marrone Organic Innovations closed a $3.75mm Series A round, led by Clean Pacific Ventures, in one of the cleantech-focused firm's first announced deals. One Earth Capital, Saffron Hill Ventures, Calvert Social Investment Fund, Wavepoint Ventures, and strategic and angel investors all also participated. Marrone develops organic alternatives to pesticides and weed management.
  

• The second deal in the category was Segetis, which is developing bio-based plastics, adhesives and solvents. Khosla Ventures is providing $15mm in funding in three tranches, with the first $5mm in Q1 this year. Fun quote: "Vinod is like a rock star in the venture capital world" (from a gushing Minneapolis growth forum leader).
  

• Other deals: Ethanol technology developer TMO Renewables has been taking in "pre-IPO" placements, such as the one described here... Swedish distribution transformer designer Hexaform announced they raised 30mm SEK (approximately $4.4mm) from InnovationsKapital... PEWW reported that telecom-focused backup power system manufacturer Purcell Systems has raised $7.23mm of a $10mm Series B-2, building on a $9.27mm Series B from 2005. Weston Presidio participated... VentureWire reported that hybrid drivetrain developer Hybra-Drive has raised $350k in seed and "pre-seed" financing, and is looking to raise a $10mm Series A... Finally, high-temp superconductor developer Zenergy raised a GBP 6mm PIPE (note: link opens a pdf).
  

Other news and notes: A good interview with Emerald's Scott MacDonald... A nice column on the challenges of being a female entrepreneur in the (very unfortunately, hopefully temporarily) male-dominated cleantech space... As we've been talking about for a while, the solar consolidation phase is getting underway... India needs more cleantech venture capital... The Lux Report really did talk about a lot more than the "bubble" media coverage would suggest to a casual reader -- here's a useful presentation of some of the data in the report (including a tally of $8.6B in cleantech IPOs and M&A last year)... NEF has some interesting news (note: site doesn't work in all browsers) on an uptick in cleantech IPO activity -- and here's one take on why one IPO didn't go so well... Some useful advice for cleantech entrepreneurs... An update on carbon market developments... Yet another take on the attractiveness of water tech... Finally, it's a better kind of "oil can": If you drink enough Foster's this summer when you throw some shrimp on the barbie, you just might power a house in Australia.

Five questions: Eric Emmons and Jay Fiske

Today we are introducing a new regular feature on this site, "Five Questions", where we ask cleantech investors to share some of their perspectives firsthand. With so many different investment strategies out there in the cleantech space, readers may be interested to get a peek into the mindset of some of these leading VCs -- how they're seeing the market develop and what they're looking for...

To kick off the idea, Eric Emmons and Jay Fiske, Principals with the Massachusetts Green Energy Fund have generously offered to tell us a bit about their Bay State approach, and their perspectives on the sector in general:

1. Why don't you tell Cleantech Investing readers out there a bit about the Massachusetts Green Energy Fund.

The MGEF is a private early-stage fund started in June 2004 to invest in the renewable energy technology companies doing business in the Commonwealth. One of our biggest LPs is the Renewable Energy Trust, a state organization that promotes the development of Massachusetts’ cleantech industry.

As a smaller fund, our model is to spend time in the region’s leading labs, know all the early technologies coming out of the state’s public and private universities, and to do 2-3 good deals a year. Generally, our bite size is anywhere from $200K to $1M in the first round. We tend to lead the due diligence effort and once we’ve reached terms, we help to syndicate the deal to larger funds who might not have had the bandwidth to spend a lot of time with the company.

2. Generally speaking, what strikes you about current cleantech dealflow?

Dealflow is strong, but this is an industry in which it pays to do deep due diligence. Unlike the software, IT, and biotech sectors, cleantech and renewable energy are industries generally characterized by expensive assets that have to reliably generate a very cheap product for a very long time. Margins are usually thin in the out years. A good CEO should have a clear plan up front for achieving the requisite cost, reliability, and durability, and investors need be able to understand the key assumptions. If they are predicated upon a supply of cheap unobtainium or a dramatic shift in US consumer behavior, you have a problem.

Because these challenges are so significant, many of the more interesting opportunities actually lie outside the traditional energy profile (e.g., portable power and portable energy storage vs. large-scale energy generation)

There’s now a tailwind in cleantech coming from the public markets which was certainly not around 3 years ago when we started the fund. We generally think strong, sustainable cleantech companies are a good thing, and we hope the investment industry doesn’t take its eye off the ball re: forming companies with strong fundamentals.

3. Without getting into specifics...thinking about cleantech deals you’ve looked at closely before passing on, what made these opportunities challenging, and what lessons do you wish cleantech entrepreneurs would take away from such experiences?

As we mentioned before, we take a long hard look at the opportunities that we consider, and spend a lot of time working with the company to review the science, the customer demand, and the business model. Sometimes we end up passing on the deal because we can’t get comfortable with one of those components, but we hope that the entrepreneur benefited from the process. The best entrepreneurs will use the experience of raising capital to refine their plan and approach.

4. What was the most recent investment you made and what did you like about it?

We have recently led a Series A round in PoroGen Corporation, which is a Woburn, MA company developing polymeric membrane filters for gas and liquid separation / purification in those high temperature or corrosive environments in which conventional polymeric membranes can’t function. PoroGen’s technology pushes the envelope significantly as to where high performance membranes can be commercially used, and allows producers of several high value fuel products to replace commercial distillation and cryogenic separation processes.

What we liked about the deal was a) an expert team with 25 years of relationships in the field, b) a proprietary technology platform with a lot of market reach, and c) strategic investors willing to put in capital to accelerate the commercialization of a product they clearly want.

5. PV is attracting a lot of interest. What are you seeing in this area?

Like everyone else, we are seeing a lot of no- or low-silicon solar technologies using various band gap materials in different low-cost architectures. Generally, we think this R&D direction is exciting and that a couple of these are going to cross the $1/watt threshold.

However, before getting deep into the specific design and its benefits, we like to take a reality check and start with the estimated balance of materials and production process so as to calculate the materials and allocated capital equipment cost per square meter. That way, we have a yardstick with which to evaluate all subsequent information.

Conventional solar modules cost about ~$375/sq.meter to manufacture, and will likely reach $325 or so in the next couple of years. If the new process will cost ~$1000/sq.meter in full production, we will need to see a way to get to 3x current module efficiency (or a different addressable market.) It is all too easy to get wrapped up in the novel physics and forget that these new products will be competing against a multi-billion dollar polycrystalline industry that is steadily coming down the cost curve.