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.