July 8, 2008 SDF VC PWC

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On July 8, 2008 at Pillsbury Winthrop in Palo Alto, SDForum held the Quarterly Venture Breakfast Series in collaboration with PWC. They discussed trends in venture investments in Clean Tech. Steve Bengston of PricewaterhouseCoopers gave an overview of the current situation. Text from DJCline.com.

Investing in clean tech is so hot that even old media is covering it. Bengston held up a July 8, 2008 San Jose Mercury News article by Matt Naumann. A Cleantech Group study showed that global VC investment is now up to two billion for the second quarter of 2008. Of that, 1.5 billion is in the U.S. and $749 million is in California. Text from DJCline.com.

From his own research, Bengston said clean tech investment went from zero investment or deals in 2003 to 2.4 billion and 212 deals in 2007. It now is ten percent of all VC investment. While oil prices and environmental concerns are factors, government policy is the elephant in the room. The recent US government two-year ban of solar projects on federal land is an example. Seed deals are getting 2 million with later stage getting 13 million. The sectors of clean are solar, alternative fuels, pollution, storage, wind and geothermal. Many Silicon Valley VC’s see solar as played out with over 42 deals out of 212 deals in 2007. While there have been no VC backed IPOs last quarter, 25 percent of the firms planning IPOs are clean tech. Another 25 percent of the IPOs in 2007 were SPACs. These are ideas that are so compelling that people can raise money and then start a company. Text from DJCline.com.

The rest of the world is a much bigger player in clean tech. The U.S. spends only a third of what the rest of the world spends. Globally more IPOs and M&As are expected.

Sylvia Burks of Pillsbury Winthrop moderated a panel with Bengston, Steve Eichenlaub of Intel Capital, David Horning of Palo Alto Investors, Peter Nieh of Lightspeed Venture Partners and Matthew Trevithick of Venrock.

Steve Eichenlaub of Intel Capital talked about regulatory risks from the local to the global level. All levels must be weighed before going forward. Germany’s government actively supports wind and solar. Finding seasoned management teams that know how to run a clean tech company is hard. He talked about Dumb Old Utility Guys (DOUGs) who are proud of the title and think in twenty-year cycles. He looks for people who know the regulatory environment and understand the new technology. Even if the price of oil comes back down, there may be a new technology that proves competitive with oil as a result of this influx of investment. Investors with IT experience might better understand efficiency software than the hardware aspects of wind turbines. Globally, Intel wants to invest in technology that allows people to use its products whether it is infrastructure or end-use. Nuclear power is more expensive than most clean tech. Intel is looking at turning recycled plastic or e-waste back into fuel. They look for ways that server farms and private homes can be more efficient. Text from DJCline.com.

David Horning of Palo Alto Investors said that investing in clean tech is different than other sectors because the amount of time and money invested is on a much larger scale. It can take decades and billions of dollars to roll out a new idea. The switch from candles to kerosene lamps to electric lights took a generation. The energy demand is so great that right now there are profitable solar companies growing with thirty to forty percent margins. Beyond solar, investors need to understand the risks in the various sectors inside clean tech. One nuclear plant is the equivalent of ten wind farms or thirty geothermal plants or a hundred PV farms. Such plants may not happen until 2015 depending on the political climate. Being able to store all this alternative energy is the next challenge. You need to keep supplying electricity when the wind dies down.

Peter Nieh of Lightspeed Venture Partners thinks the market for energy is huge but the technology risks are larger compared to other sectors. Financing has even more risk and investment from beyond the VC community. The price to beat is not for a barrel of oil but the ten-cent price per kilowatt of coal. Lightspeed invests in Israel, India and China. They stayed out of Europe because the market is not as homogenous as one might think. The solar market is into its third generation, going beyond silicon into new materials. There are many places in the world where solar pays for itself. Bio-fuels are very different. You have to find a feedstock to turn into sugar, a refinery to turn it into fuel and customers who can use it.

Matthew Trevithick of Venrock says the biggest challenge is to explain to partners the particulars of clean technology. He thinks the regulatory risks and decade long timescales are daunting. Can the technology be scaled profitably? A demonstration project may cost tens of millions and you must be capital efficient to attract later stage investment. Rebuilding the energy investment of the planet seems like a good place for hedge funds and private equity. The floor on the price of oil determines the long-term viability of a project. A new generation of entrepreneurs who cut their teeth on clean tech are now want to take what they have learned to exploit the gaps in the markets. Venrock invests in companies that are global from the start. Technology can be developed in one country, built in another and deployed in a third. He sees opportunities in places like India, which has a notoriously unreliable power grid. “Novel nuclear” technologies hold promise. As for energy storage it is not clear who would pay for the cost. He has invested in Sapphire Fuels that turns algae in to octane. It makes sense if the price of oil is over sixty dollars a barrel.

Trevithick wanted to know where the Steve Jobs of clean technology is. We need clean tech that is easy to use and fashionable to boot.

I don’t see demand going down. As energy costs rise so will the demand for venture capital.

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