SDForum Quarterly Venture Breakfast 20090721

Clean Technology Investment Trends

Notes from SDForum Quarterly Venture Breakfast with PricewaterhouseCoopers and Pillsbury Winthrop 21 July 2009.

Opening

Audience (by show of hands): Majority were entrepreneurs, a few looking for funding. Some venture capitalists, some media.

Opening Remarks – Steve Bengstrom. MoneyTree statistics.

US topped Germany in wind generation, 1H2009.
Drivers of clean tech are oil price, corporate attitudes, legislation, energy independence and security.
VC clean tech funding grew exponentially, peaked 2008, down 75% 2009.
Up to 2008: funding of traditional capital-efficient ventures, plus non-efficient “frothy” deals. Today, non-frothy deals wouldn’t be done, don’t really fit the VC funding model.
Number of deals by far greatest in Silicon Valley, next New England at 1/3.
Dollars greatest in New England, then Orange County, then Silicon Valley.
Current 1CQ2009 investments more closely spread among geographic regions.
1CQ2009 funding: Software (138, $614M), Biotech (81), Medical (52), Industrial/Energy (38, $234M)
Government funding $83B Cleantech, plus tax incentives.

Discussion
VC funding traditionally 1/3 of funding in cleantech; the rest split between corporate investments and government. Jury is out on whether cleantech deals will be good for VC, vs. good for GE-like corporations. This was argued from both sides without clear conclusion.

Clean tech deals may not fit the VC model due to size of investments, and capital efficiency.
Life sciences take tech risk only; IT takes market risk; semiconductor takes both market and tech risk; clean tech takes risks in market, technology, commodity, regulatory, government… Risk to VC has to be decreased.
Example: in the bubble, Solyndra raised $500M plus $500M from the government. This would not be possible now.
Bullish on solar, should match utility prices in the near future.
VC model: instead of taking 1% position in a large company, prefer 60% of a smaller defined market the venture can dominate since most profit goes to the dominant player.

In the audience a handful had requested funds, none had received yet.
Government seen as a short-term fix for availability of capital to keep the industry moving forward.
However, government may fund companies that should die.
Have to look at spreading out funding more. At one VC, 1/3 of limited partners disappeared, others reduced investment to 50%.
One VC stated that VC big dollar investments are gone. In all current SmartGrid deals stimulus funding is always a topic.
Funding smaller loans from ARPA-E, DARPA for early-stage investments.
Perhaps government funding is useful to take a venture out of the lab and across the Valley of Death.
Now even DOE (Department of Energy) needs identifiable projects, not frothy ill-defined efforts.

VC fund size limits VC investment size. These companies are very capital intensive.
Can’t own 2% of Solyndra. VCs need companies that need $10’s of millions. $100’s of millions does not fit the VC model.
VCs like capital efficiency but also are interested in capital flexibility.
One VC thought a company with fuel-secreting algae is worth VC investment despite large investment required.
- He didn't reference; could this be Solix Biofuels?
- Oilgae info source.
VCs syndicate large investments, to 3 partners and tranche payment to significant milestones.
VCs looking to invest in core IP, looking for capital efficiency.

Talk about owned sub-segment, don’t waste time on market overview. Don’t waste time proving you’ll be more profitable than Google, we won’t believe that.
Focus on your core value proposition.
Describe how end users of the venture’s technology will benefit. It can’t be just lower cost, that’s a race to the bottom. Mention profit.
Presentation on clean tech is like any other VC presentation. Starts when you get out of the car. Attitude, style, appearance, confidence. They’re looking for great people as much as technology. You won’t get past the first slide, so immediately give the 5 reasons you’ll win, with confidence. Then support your outcomes with slides.
Don’t waste time on your past positions.
Know more about your competition than the VC does.
Show credible financials. VC multiplies capital required by 2-3, may reduce projected revenue. What happens if you hit a downturn, revenue will not be a hockey stick.
Selling electrons is selling a commodity. Understand the costs, understand competition.
You won’t get up-rounds unless you’re hitting critical milestones.

Smart Grid, Storage.
How will utilities balance load? Expect one-way communications for a long time (with plug-in cars for example).
Smart Grid, but we’re over-invested in homes.
Concern about a 20-year SmartGrid equipment replacement cycle.
Newer solar: non-silicon, thin-substrate silicon
Solid-state lighting
Changes to power infrastructure in homes. Although AC is distributed, only a few appliances use AC.
Clean-tech investment outside the US. Most VC funding is in US.

Most VC funding is in the US; quality of investment is divided by cube of distance.
Much foreign VC funding in the US is specific to the interest’s commercial venture.
Lessons from Solyndra: regulation/zoning held back construction of generation facility, required an additional capital round.