The looming Demand Response consolidation

Perhaps the hottest market few have heard of right now is Demand Response, which we've discussed -- often -- here (but which I find more often than not is still unfamiliar to anyone who isn't a big cleantech geek like yours truly)... Negawatts-on-demand is proving to be an important new tool for generation- and transmission-constrained utilities.

The recent successful IPOs of Comverge and EnerNOC have raised the profile of the sector a bit, and brought in a significant amount of capital available for potential acquisitions. What is less well-known, furthermore, is that two additional factors are poised to drive a wave of consolidation in the still-emerging industry:

1. While a couple of the DR companies have gotten all of the attention lately, the DR capacity aggregator segment (the companies like Comverge and EnerNOC that are contracting with utilities to provide the negawatts-on-demand) is actually a pretty crowded space, with a lot of other companies (some quite large and established with good existing utility relationships) angling to get in on the action as well.

2. While there has been a bit of a "land rush" among DR capacity aggregators lately, their actual technical ability to automate the delivery of capacity on demand has fallen behind a bit -- when the utilities call for the negawatts to be provided later this summer, there will be a lot of frantic phone calls and text messages flying around, in a very manual attempt to get each building's facility managers to go turn down thermostats or turn on backup diesel generators. [I would be remiss if I didn't mention that @Ventures has a vested interest in seeing more automation technology roll-out in the demand response space, as our portfolio company Powerit Solutions is especially well-positioned in this regard, so: "Self-promotion alert"]

Putting it all together, you've got well-capitalized players in a fast-moving space -- players who will seek to grow in terms of both scale and technical capabilities by doing acquisitions. So it's no surprise to see the wave of consolidation get started with yesterday's announcement that Comverge is acquiring Enerwise... Expect more news along the same lines over the next year or so.

In other deals announced this week:

• Stion, a PV startup formerly known as NStructures (Michael Kanellos discusses some rumors about the technology here, and Jonathan Shieber also discussed the nanotech aspects of the company's approach in yesterday's VWire), announced a $15mm Series B led by Lightspeed Venture Partners. General Catalyst also joined the round, as did existing investors Khosla Ventures, Braemar Energy Ventures, and Moser Baer Photovoltaic. The company raised a $6.3mm Series A about a year ago, and is targeting silicon-like efficiencies without the high cost of silicon.

• SDCmaterials, which develops alternatives to precious metals used in catalyst applications, raised a $6.3mm Series A led by Emerald Technology Ventures, and also including BASF Venture Capital and two other unnamed investors.
  

• Marine Current Technologies, an ocean energy startup in the UK, has raised approx. $15mm in financing from Troidos Bank and AM2, a hedge fund. The capital will be used to build a commercial tidal energy farm in the next 3-5 years.

• GaAs triple-junction PV cell developer QuantaSol has raised a GBP1.35mm seed round of financing from Low Carbon Accelerator, Numis Securities, Netscientific Ltd., and Sheffield University Enterprise. This type of PV cell is most appropriate for use in concentrator-based solar power systems.

• VentureWire reported that UK-based food-waste biomass-to-energy developer Inetec has raised GBP2.5mm, led by Oxford Capital Partners, and with participation by existing investor Finance Wales and undisclosed other new investors.
  

• According to today's VWire, Konarka has engaged a banker to help raise a $40mm round of financing. Meanwhile, Howard Berke has stepped aside as CEO and will be taking a Chairman role going forward -- and is additionally signing on with Good Energies to help with portfolio management.

• Cleantech investors in the news: Battelle Ventures has taken in another $70mm from the mother ship... and Rustic Canyon has raised $185mm of a targeted $350mm fund.

Other news and notes: Had the pleasure of speaking on the "Carbon as Currency" panel at the Red Herring East 2007 conference yesterday; the panel was artfully moderated by Nick Parker of the Cleantech Group -- here is a write-up of Nick's plenary talk earlier in the day... The New England Energy Innovation Collaborative (NEEIC) has launched a CEO Council of regional renewable energy business leaders to help continue to build the local cleantech cluster, and to provide a common voice for the sector on regional policy issues... We mentioned Mr. Cleantech before, but now it's officially launched... A solar powered motorbike?... And finally, here's perhaps the harshest critique yet of biofuels.

SAVE THE DATE for the next REBN-East networking event:
July 19th, at Flat Top Johnny's in Kendall Square, 6:30pm.

Recurrent Energy, EPV and other news

• Last week, VentureWire broke the news that solar financing startup Recurrent Energy has raised a $10mm Series A, led by MDV and including JEN Partners. The round was actually closed back in March, but had been only recently publicly confirmed by the company. CEO Arno Harris also wrote about the round on his blog today -- he's been talking about Recurrent there for a while... The solar financing space has been pretty hot lately, with a lot of startup groups pursuing the large market of empty rooftops out there...

• Solar thin-film modco Energy Photovoltaics has raised a $77.5mm round of senior secured notes as part of a Series B round of financing. Unnamed VCs and other institutional investors participated in the financing.

Other news: Speaking of solar, Ed Gunther has a nice writeup of the Intersolar conference in Germany (including a trade ad that brings new meaning to "balance of system")... Tom Konrad shares his refined thoughts on the ethanol market... The California Clean Tech Open has put out a call for submissions... A useful overview of Fuel Cell 2007... Nanotech sector update: DuPont is teaming up with Environmental Defense to come up with safety guidelines for nanotech -- and some are expecting upcoming exits to re-invigorate venture interest in the space... Finally, it was a tough past week for cleantech investors on the policy front -- while many other VCs have been focused on the proposed tighter taxation treatment of carried interest, cleantech VCs are probably more disappointed in Congress' inability to follow through on anticipated policy support for clean energy technologies (more details here)... Maybe someone can rent these guys out and send them to Capitol Hill, clear out some of the deadwood holding back economic progress.

Reader feedback

As always, readers are encouraged to submit comments or even email feedback (I can't promise to be super-responsive, however, since this isn't my day job)... Received the following thoughts from a fellow cleantech investor in response to last week's post on engine re-designs and auto drivetrains:

I just wanted to say I agreed completely with what you said about auto technology deals. I have seen a bunch of them and turned them all down for the reasons you mentioned - it is just intrinisically not a good space for VC investors. If anything I think you were overly diplomatic! Takes forever to get to market, very capital intensive, low margin business, and then even if you get to market, selling into auto industry OEMs simply sucks, no two ways around it. And particularly anything related to power plant/drive train. The two other negatives you didn't mention are constant pricing pressure and onerous vendor requirements - selling to the Big 3 (and their ilk) is brutal - constantly playing you off your competitors, demanding your cost data and then pricing you down to the bone, terrible payment terms, etc etc... Personally I won't touch anything designed to sell to Big Auto OEMs with a 10 foot pole.

The only comment I would make is that things can look a little different for a) aftermarket; and b) trucks and buses. Trucks and buses tend to have shorter commercialization cycles, more retrofit activity than passenger vehicles, and recently more stringent regulatory requirements, so there might be some opportunities there. For instance we have seen a number of emission control technologies aimed at complying with the next gen European diesel regs, which are strict and coming fast. Still lots of intrinsic problems in these deals, but there is a sense of urgency from the OEMs, which helps a little bit. Though not enough in my opinion!

Good follow-on comments worth sharing, thanks much... It would be good to share a response from someone in the investment community with a different perspective as well, please feel free to drop me a line...

Also, missed mentioning ReVolt's EUR 10mm insider Series B. The Norwegian developer of zinc-air batteries last raised an EUR 7mm Series A in 2005, and plans on raising an EUR 30mm round next year, according to VWire.

Advent Solar, SV Solar, TrafficCast, Cyber-Rain and other news

[Self-promotion alert] Very pleased to share the announcement acknowledge the scoop by Jonathan Shieber of Venture Wire today, that Advent Solar has raised a $70mm Series D, led by ZBI Ventures (the private equity and venture investment subsidiary of Ziff Brothers Investments), with participation by other new investors Sun Mountain Capital and Globespan Capital Partners, and also including existing investors Battery Ventures, EnerTech Capital, @Ventures, New Mexico Co-Investment Partners and Firelake Capital. The bulk of the financing will be used to expand the company's capacity from 25MW to approximately 70MW.

Other deals to note:

• In the last posting, we briefly mentioned Silicon Valley Solar has acquired NuEdison in a combination of solar concentrator plays. Today comes word that facilitating this acquisition was a $10.2mm round of financing led by Bessemer Venture Partners.
  

• Traffic prediction startup TrafficCast has raised a $2mm Series A led by Phenomenelle Angels Fund I LP and NEW Capital Fund LP. Women Angels and a syndicate of individuals also participated in the round. Anything that reduces the number of idling engines stuck in traffic is a good thing...

• Smart sprinkler system manufacturer Cyber-Rain has raised an undisclosed amount of financing from Momentum Venture Management.
  

• Also, the Cool Earth Solar convertible note financing we referenced back in May is revealed by Ed Gunther to be now closed at "almost $1 million"... And it's interesting to note the money Google is putting into RechargeIT and PHEVs.

Sector updates:

• Biofuels are getting mixed coverage these days... Corn-based ethanol won't be profitable after 2008?... Don't tell these guys... Fascinating to note that the oil giants' reputations may be lower than the tobacco industry, according to the SVP of Technology at ConocoPhillips... Plus -- confusion at the pump?

• Solar: Solar industry to continue amazing growth path -- grid parity by 2014? So says RBC Capital Markets... Green buildings: Nice overview of cutting edge approaches here... Smart grid: Nice two-part article (part 1 / part 2) on some of the looming changes to the grid.

Other news and notes: Here's part two of the interview with Erik Strasser that we mentioned last week, including a very good argument in favor of thesis-driven investing... Cleantech is "old stuff"? Sure, and those grapes were probably sour, too... It's tempting to be skeptical of all of the breathless coverage about "free energy" from magnets these days (thanks, Steorn), but perhaps with so much smoke there's a little fire of some kind -- although certainly there's no such thing as free energy, maybe some useful mechanical efficiency gains are hidden in these kinds of results... Finally, here's a pretty good point.

The challenges of re-inventing the engine

There continue to be a lot of great ideas out there for re-inventing the internal combustion engine ("ICE"). From small tweaks to major redesigns, engineers have been coming up with innovative approaches that promise efficiency gains and other benefits. And yet, with all these better mousetraps, the world hasn't yet beat a path to their doors. It's surprising to many of these entrepreneurs that new engine technologies haven't gotten more venture capital attention than they have so far.

The story of the next generation ICE helps illustrate the market and financing challenges facing many startups.

First and foremost, introducing a new ICE to the market is very difficult. Performance is one factor for success, but so is cost and manufacturability. Many of these new design efforts would have difficulty scaling up to mass production levels that are necessary for business success. And the buyers of the technology are big (and slow-adopting) auto makers and capital equipment manufacturers who are very risk-averse and cost-focused. There's some anecdotal evidence that the "not invented here" dynamic is easing up a bit at some of these big OEMs, but even if they're open to trying new things it's going to take a long time for them to adopt any new outside technology at scale. Especially when the supplier is small and lacks manufacturing capacity.

Furthermore, the business models for capital equipment components (which is what ICEs are, in the end) are always challenging for early-stage funders like VCs. Facing slow market adoption, the entrepreneurs are often tempted to attempt to ramp up their own manufacturing capabilities, or even to use their engines in the development of their own end products. But this is typically a very capital intensive and (relatively) low margin path, with low exit multiples. Alternatively, some nextgen ICE entrepreneurs pursue a pure licensing business model. But a licensing-based business model is generally disliked by VCs, who assume that the company will end up having to give away most of the value of the technology in the pursuit of signing up a key customer, and furthermore that any successfully licensed IP will have a big bullseye painted on it by the customers and others out there who will seek to undermine patents, etc., anyway they can.

Ironically, the plethora of good nextgen ICE ideas out there is also hindering investor interest -- it makes it that much tougher for a VC to get convinced that the individual startup they're looking at really has the silver bullet idea as compared to all the other good ideas out there. So there's a vicious cycle of good idea creation hindering the financing of good ideas, leading to a big backlog of inventions out there. A simple patent search for internal combustion engine designs is a daunting exercise...

So all of which is why it's more difficult than many might expect for great new engine designs to become exciting businesses and investments... All that having been said, with current ICEs only about 20% efficient, there's certainly a lot of room for improvement. And as more VCs get comfortable with engine technology, it's the kind of big market pain and big market potential that usually attracts investors. We're already starting to see the beginnings of such VC activity. And as mentioned above, anecdotally it appears that the big OEMs may be more open these days to innovative new approaches. So the challenges may yet be overcome.

For another good take on this topic (albeit focused on electric motors and not ICEs), see this article (note: opens pdf).

New cleantech deal news:

• Speaking of engines, Stirling engine startup Infinia has raised a $9.5mm Series A round of financing. Khosla Ventures, Vulcan Capital, EQUUS Total Return and Idealab participated in the round, which also included existing investor Power Play Energy LLC. The company's technology has a number of applications, including solar power generation. As part of the transaction, Infinia also acquired another company -- Stirling Cycles -- from Idealab, for an undisclosed sum. John Cook has more coverage here, as the cleantech cluster in the Pacific Northwest continues to heat up.

• Power Air Corp (PWAC.OB) has raised a $5mm PIPE with Korean investors. The company is developing zinc-air fuel cells for backup power.

• Austria's Cycleenergy has raised a 6.7mm euro round of equity financing (note: pdf) to support the company's biomass and biogas power plant build-out efforts in Europe. 3TS Capital Partners led the round, providing 4.3mm euro, and founding shareholder Ventacc provided the other 2.4mm. The company eventually expects to raise over 100mm euro in equity and debt financing.

• UK-based fuel cell motorbike company Intelligent Energy has raised a GBP 8.5mm round of financing, according to the CEO. Credit Suisse Securities and Black River participated in the round, which also included existing investors Meditor Capital Management and Evolution Placements Corporation, who had participated in the company's October, 2005 GBP 11.3mm previous round.
  

• According to PE Week Wire, TerraPass has raised a $5.8mm Series A, with investments by Maveron and Nth Power. The company also has brought on board a new CEO, Erik Blachford.
  

• Bull Moose Energy, which is developing biomass power plants near urban centers, has gotten an agreement from Morgan Stanley to back the company's efforts with up to $60mm in project financing.

• Jonathan Shieber at VentureWire revealed earlier this week that AMR developer Silver Spring Networks has raised a $39.9mm Series C. Only existing investors Foundation Capital and JVB Properties are known participants in the round. It's also unclear if this financing is related to a $10.5mm debt and warrant financing the company filed earlier this year.
  

Cleantech investors in the news:

• An insightful interview with Erik Strasser:

• Pleased to share the announcement that Andrew Friendly has joined the Boston cleantech venture community, joining Advanced Technology Ventures. Andrew and yours truly will be pulling together the next REBN-East networking event on July the 19th in Cambridge.
  

• SJF's David Kirkpatrick on the emergence of demand response as a hot investment area.

Brief sector update -- fuels: T. Boone Pickens is convinced we're already at Peak Oil... Meanwhile, another voice of reason in the ongoing ethanol net-energy-balance debate (basically, corn-based ethanol is marginally beneficial at best, but alternative feedstocks are the key)... And ethanol continues to be the lawmakers' darling... But biodiesel is coming on strong -- farmers and biofuel processors are catching on, and automakers are providing the cars. Biodiesel is poised for strong uptake.

Other news and notes: A nifty new site for doing cleantech searches -- Mr. Cleantech... Promising results from efforts to use waste heat for coal drying... Massachusetts continues to get friendlier to the region's cleantech cluster -- but the fact that $9mm of PV projects will increase the state's solar capacity by 50% shows how far the state has to go to catch up with other regions... Speaking of the Mass cleantech cluster, check out how much activity there is in the MIT community on clean energy, as evidenced by this recent newsletter (note: pdf)... "Energy farms are the future"?... A merger of solar concentrator startups: NuEdison and SV Solar... Finally, Neal Dikeman explains why you're not powering your laptop with micro fuel cells when you get on an airplane -- but these guys hope that airplane might itself be powered by fuel cells.

CleanFish, and Braemar's next fund

• CleanFish, a distributor of sustainably-produced seafood, has raised a $2.1mm Series A, according to PE Week Wire. Mindful Capital Partners led the round.

• VentureWire reported this morning that Braemar Energy Ventures has set a target of $200mm for their second fund. Braemar invests across a wide range of energy sectors, including clean energy technologies, and according to the VWire article the firm still owns 10.2% of EnerNOC.

Other news and notes: Here's a useful illustration of how supportive public policy to boost demand for solar is having a near-term effect of increasing PV panel prices... Speaking of solar, it's interesting to see Nanosolar losing their chief scientist... Meanwhile, the Vatican is going solar... "Cleantech Venture Capital: How Public Policy Has Stimulated Private Investment"... Neal Dikeman on the bubble in cleantech journalism... Finally, WiTricity looks pretty nifty.

Envision Solar, Ze-Gen, Verari

Public mentions of planned cleantech financings this morning:

• According to VentureWire, Envision Solar has raised $600k of a targeted $2mm Series A round. The company is building "Solar Groves", which are PV-covered parking lots, based on Kyocera solar panels. The initial $600k has been in convertible notes, and current investors were undisclosed.

• According to Martin LaMonica of News.com, waste-to-electricity technology developer Ze-Gen is "in the process of securing $4.5 million in financing from venture capital firm Flagship Ventures." The article is worth reading for a general survey of the waste to energy space.

• It's a good example of the ways that the cleantech investment thesis can extend to other investment sectors: "Green" data center systems developer Verari has raised an "over $20mm" round of financing, that is targeted at $25mm when closed. Carlyle Venture Partners has led this round, which also includes investments by Voyager Capital, Sierra Ventures, and a strategic investor. Energy efficiency at data centers is a lesser-known but big cost issue, as significant energy has to be expended not just in operating the servers, etc., but also in cooling down the data centers themselves to counteract the major waste heat produced by all those powerful processors. Speaking of the green impacts of IT equipment, David Douglas of Sun Microsystems has a sometimes provocative blog on the subject.
  

Other news and notes: A new study released by The Carbon Trust suggests that in Europe, clean energy venture capital has been "on a par with European IT, biotech and semiconductor venture capital investment levels," at nearly 2B euros from 2003-2006... Meanwhile, in Israel there's concern that cleantech venture capital is not keeping up with interest... Finally, are the oil companies placing their more serious bets on biofuels instead of hydrogen?

If at first you don't succeed...

Jon Shieber at VentureWire had the scoop today about Tioga Energy's $10mm round and launch. Investors in the round included NGEN, DFJ, RockPort, DFJ Frontier, and Kirlan Ventures. Tioga is a solar financing effort akin to SunEdison, but aimed at smaller customers (small commercial and residential). The interesting thing about the Tioga story is that the company was originally known as CerOx, and was developing a waste treatment technology, after having raised $17mm. The redirect of the business model from a waste treatment equipment manufacturer to a solar project financing shop is intriguing to see.

Other news and notes:

If you enjoyed the John Doerr TED talk video, here's another one -- Vinod giving his biofuels talk at Google. It's an hour long, but full of content. (Cheers to Mark Wendman for the link)...

The second California Clean Tech Open is up and running -- Edgar Gunther has a nice overview of the goings on at the launch... He also worries that the paperwork for the new California solar incentives are too stifling...

Speaking of solar, Business 2.0 had a nice update on developments in the sector, and others are pointing out that Silicon Valley is becoming a strong solar cluster... Such clusters, it's now increasingly understood, are also strong engines for jobs growth... Speaking of Clusters, Tyler has a good column covering a recent speech by the Governator, and urging more cluster-building efforts in his neck of the woods... More cleantech investors -- this time it's two large Dutch pension groups... Asia, not North America or Europe, is driving cleantech spending (not to be confused with investments)... And with the two biggest recalcitrant carbon emitters (see here and here) now finally getting with the program, it's no longer a question of "if", but instead when a US cap and trade scheme for carbon will be implemented...

Wind power is doing very well...

Cleantech continues to go regional: A look back at the recent Austin conference, with award winners listed... And an upcoming cleantech conference in Georgia...

Fun items: It's true, it's a good thing no one has yet started using the phrase "Green 2.0", but it's gonna happen... I'm sorry, I can't hear you over the sound of my waste heat being turned into electricity... And finally, nice to see good recognition for good ideas like this one.

When you have 19:43 free...

...it's well worth checking out this video of John Doerr's powerful speech at TED. (thanks to Dan Primack for the link)

The emerging Boston cleantech cluster

We thought we might get a couple of dozen people to the inaugural REBN-East event last night.

Somewhere close to 100 renewable energy businesspeople and researchers showed up.

Looks like we'll have to have another Boston-area event soon...