Cleantech sector – Predictions for VC investments in 2010

Predicting trends for the next year is a silly exercise. But oh well. We all play silly games some times. I will check back at the end of 2010 to see how wrong I may have been.

Hot in 2010:

- Water: This is a darling of VCs despite the fact that very few people have actually invested in the space. But I think people will start to get their act together here finally. Invested technologies may not necessarily be in drinking water per se, which is the holy grail, but in industrial/municipal/commercial cleanup applications.

- Biochemicals: Now that VCs have gone soft on biofuels, there will be more interest in the biomass to biochemicals space. DOE has 12 platform chemicals that would be high value add to make, and then there are a number of companies pursuing diff polymer chemistries. VCs like the fact that you can potentially build smaller plants that are still profitable.

- Motors/generators: Old school and probably not so sexy…but markets are large, innovations have been few in the past decades, and applications in electrified vehicles to industrial robotics to high efficiency HVAC are making this an interesting segment again.

- Next gen energy storage: A123 euphoria is eroding a bit (or so I hope), and people will start to look beyond Li-ion for both automotive and grid storage applications. There are some who will wait for cheap Chinese Li-ion to arrive in the US (esp for grid storage applications), but the technophiles are already looking at all solid state, metal-air and other battery chemistries.

- Waste heat: We have seen a few companies invested in this space, but this will be a growing trend. Not just thermoelectrics, but also heat-engines and other mechanical technologies for utilizing low-grade and medium-grade waste heat. People will find applications in developing countries as well, e.g. India.

- Small wind: Is this going to be the year that small wind technologies will finally demonstrate the performance they promise? I think we might see some interesting fundamental innovations to make it more real.

- Balance of System: VCs learnt a few new words in 2009, and ‘Balance of System’ costs were among them. With pressure on solar/LEDs etc for rapid cost cutting, there will be more investments in equipment and other businesses that bring these costs down.

Not-so-hot in 2010:

- Biofuels: Despite some investments in the algae fuel space in 2009, it will take some time for investor confidence to return to the biofuels space. At least a few of the companies that have now raised hundreds of million of dollars would probably need to find an exit for their investors first.

- Solar PV: Another casualty of the financial downturn and the China factor in 2009. Investors remain unclear how big the technical/cost disruption needs to be for a new player to emerge successful. Investments will be slow until market conditions improve and inventory declines.

- Smart grid: This must have been the hottest sector in 2009. But now there are credible worries of a hype in the sector. So I think VCs will go into a watch and track mode.

- Electric cars: The year started off with new electric auto OEMs trying to raise capital as future tech platform suppliers to the big OEMs. And then the gov’t came and infused billions into them directly as well as into their suppliers. Now the same companies are gearing for an IPO, riding high on gov’t dollars.

- Algae fuels: I just don’t see how the current technologies scale and become cost-effective. Is there a venture play here at all?

- Concentrating PV: 2009 was a difficult year for CPV players. It was hard to raise money and they all needed to get to large scale for costs to come down. 2010 might also be a difficult year for many of them. The upfront capex is still too high compared to CSP and rapidly declining non-concentrating PV costs.

- Project development: Lack of project finance scared VCs  from companies developing infrastructure projects. While project finance may start to flow (or so I hope), it will still take a while for VCs to get comfortable with such capital intensive projects. Eventually this space should see lots of action.

How does General Catalyst think about its cleantech portfolio?

I am often asked what are the areas within cleantech that General Catalyst focuses on. Well, that’s kind of a hard question to answer. Despite what other VCs may try to tell you, VCs are opportunistic and would jump onto any great opportunity regardless of space. A better question might be around areas where the VCs may not invest. It is possible for VCs to write certain spaces off for good reasons: LP concerns, capital intensity, IP quagmires, regulatory risk etc…

When asked about GC cleantech investments, I like to talk about how we view our portfolio. Our investments tend to categorize in three broad buckets:

(a) Deep science projects: These are deep technology startups that often emerge out of academic labs. Many materials science based companies tend to fall into this category. Innovations tend to be in labs of faculty that have spent a long period of time investigating the space, and eventually broke ground on something that is totally disruptive and game changing. In addition to the innovation itself, our observation is that faculty that has spent a lot of time in the space (not just the past few years), tend to have a large body of knowledge/work that supports the innovation to get commercialized. These investments typically have a long gestation period before exits (tending to 6-10 yrs), and technical risk is usually high. However, the bet is on something that would truly disrupt the industry and create large value along the way. (Examples of GC investments: Mascoma, Lumenz etc)

(b) Engineering innovations: These investments tend to involve entrepreneurs who have solved one or more hard engineering problems in already well established industries. Investment revolves around commer cializing innovative solutions that would transform the industry and create long lasting disruptive change. Technology leadership in such companies could emerge out of academia as well, but often the innovators have significant practical experience in the space and leverage their intimate knowledge of the pain felt by the industry to find the ‘painkillers’. The solution could be at component or system level. Market risk is often less of a problem since industry dynamics are either well established or well understood, but in addition to technical risks around scale up etc, there is often risk around finding the right channel partners to commercialize the innovation. (Examples of GC investments: Modular Wind, Advanced Electron Beams etc)

(c) Infrastructure/projects: This is an area that VCs have typically shied away from. Project based capped returns of 15-25% IRR are not sexy for VCs. But we think there are some rather interesting opportunities here for investment. That does not mean we do typical renewable energy project development investments. We think a project development company could be a strong investment if they are working in an environment where they have some level of ability, access or control over a scarce resource – and having that creates a competitive advantage for companies that also execute well and prove they can deliver on time, budget and plan. Strong execution, plus control over a scarce resource, allows a developer to not just create value from projects on the ground but also from future pipeline of projects. (Examples of GC investments: SunBorne, C12 etc)

How to get started as a Venture Capital (VC) analyst?

I get asked this question often: How does one become a VC? Well, if you are an analyst/associate candidate, this should really help you. Click on link below for the rest of a very useful article…Great pointers on how to be a strong network node!

As an analyst, you can be useful at pretty much only three things: communication, sourcing, and analysis. The great thing for VC wannabes is that these are all things that you can do now, before a job even comes up. There's nothing stopping you from putting forth your analysis of a new startup, or tipping VCs off to potential deals today, even when you're not at a firm.

Many students have the misconception that, as an analyst, you're going to be put in front of a big stack of business plans and your filtering skill is what's going to make you the next Mike Moritz. Guess again. VCs hustle hard to track down deals and they expect everyone in the shop to be bringing deals to the table, because you should be in the flow of interesting things going on.

via How to get started as a Venture Capital (VC) analyst | from This is going to be BIG! – Comments on New York Tech Community, Startups, Venture Capital and Career Education.

How to know if the VC is ‘not that into you’?

Vinit Nijhawan (from BU) is a friend and a respected colleague. He had the following to say on an article about the arrogance of venture capitalists that appeared in Xconomy. He might be spot on, and hence sharing here….click on link below for original article.

I have been both an entrepreneur and a VC and now I am teaching entrepreneurs how to deal with VCs at Boston University. In the end raising money from VC is a sales process not unlike selling a product/service to a customer. You first have to establish the need: 1 is the VC partner interested in making an investment in the space you are in and 2 how many boards are they on, the fewer, the more likely they need to make another investment. Next you have to identify the targets: this is much harder since VCs needs are dynamic, sometimes as dynamic as what they read in WSJ that morning about a space. Then you have to make the sale: my experience is that VC partners make their mind up to promote your investment within 15 minutes of seeing your pitch–move on if the body language is not totally supportive of you. Lastly and the most difficult is the close: without real or perceived competition it is not in the VC’s interest to close quickly–their risk goes down over time as your company/idea matures. Net net it is a difficult sales process for most entrepreneurs, especially first time entrepreneurs and it is time consuming. Finally it is crucial to manage the post-sales process effectively: my recommendation to VC-backed CEOs is that they have to allocate 15% of their time to “investor relations”. It feels like overhead, but it is crucial to manage your VC investors in good times so that they are supportive in bad times.

via The Arrogant Venture Capitalist: A View from the Trenches | Xconomy.

What would I say to a 1000 techies (at MIT)?

I was jotting down some thoughts on what would I say if I was speaking to 1000 techies at a place like MIT. Since I am not speaking to them anytime soon, I will share them here . Obviously there is a lot more to say than the few points below.

1. Techies should focus on Big ideas. Big problems. Big markets. There are 7 billion customers worldwide for most innovations we can come up with.
2. Geographies matter less now than ever before in today’s globalized world. Technologies developed in US/Europe are bringing people closer the world over, e.g. Facebook and Twitter are helping people connect as far away as Brazil and Ghana, and are providing momentum to political movements in places like Iran. Similarly, technologies scaled in India and China  are bringing cheap clean power to the West, e.g. Suzlon.
3. Techies are often worried about sharing their ideas with others in case they are stolen. While there is an important role for intellectual property (IP), and proper IP advice should be taken in order file patents etc in time, in general good ideas become better when shared with others. Techies should find trusted advisors in their professors, experienced entrepreneurs and helpful investors who can guide, advise, and not just show but help form a path to success from the early stages on.
4. Technology and Engineering design are helping shape peoples’ lives, livelihoods and futures everywhere: from the IPhone use interface innovation to the design of a car for the masses (i.e. Tata Nano). It is often at the intersection of multiple disciplines that the most creative, and valuable solutions are found.
5. There is no bad time for entrepreneurship and for people to start companies. Entrepreneurs are eternally optimistic, cautiously skeptic, and driven to succeed. The best entrepreneurs have emerged in the most difficult economic times.
6. Techies should focus on solving real world problems. It is not just rewarding in a financial and moral sense – but it is also intellectually stimulating. I could not be more excited about the opportunity I have at General Catalyst to interact with young, bright, aspiring and inspiring entrepreneurs. In that spirit I want to highlight ENTER – a program I am proud to have founded that is devoted to breaking down the barriers of communication between aspiring student entrepreneurs, venture capitalists and seasoned executives and CEOs. Join the fledgling group on facebook at http://bit.ly/3m8Tx.

Pitching ideas to investors

I will one day do a longer post on this -  from my own experience as the one receiving pitches from entrepreneurs. But in the meantime I can the  summary in this presentation by Venture Hacks. I agree that  please do not send me the long word-documents that business school entrepreneurship profs are still teaching their students to write. I really don’t find time to read through them. Be concise, clear and to the point in your .ppt decks.

By the way: If you are an entrepreneur looking to raise funding (esp for the first time), you would really be wise to check out venture hacks first. There is a wealth of information to make you wiser before you send off that email to a VC.

Check it out: http://venturehacks.com/articles/pitching-hacks-at-stanford

Biofuels/biochemicals, automotive, Green Tie Gala

A few articles that focused on some of the sectors that I am looking at these days. Check them out…

Xconomy:
Never Mind That Bailout: Venture Funding for Auto Innovation Accelerates As Startups Race to Leave Detroit in its Own Dust by Bruce Bigelow
Plunging Oil Prices Require Alternative Fuel Startups to Take a Long View by Bruce Bigelow

C|NET
Eyes turn to auto start-ups’ funding, aid requests by Martin LaMonica

with Governor Duval Patrick (MA) at the annual NECEC Gala

And finally, a nod of thanks to the New England Clean Energy Council for inviting me to their first annual Green Tie Gala. It was a great event, a celebration of the ‘energy’ present in the New England area to promote and commercialize clean energy technologies. New England has certainly become the hot bed of cleantech startups, but more importantly, the Massachusetts government has shown its leadeship by staying way ahead of the everyone else in sponsoring, promoting and providing support to clean energyand energy efficency initiatives in the region.  Kudos to Nick D’Arbeloff, Trish Fields,  and the rest of the NECEC team.

Colin Powell Endorses Obama: A Voice of Reason

I could not say better was Fred Wilson, a fellow VC, wrote on his blog…so I copy it word for word. Thanks, Fred. and Thank you General Colin Powell.

Say what you will about Colin Powell’s endorsement of Barack Obama, I was inspired by it. In particular, I was inspired by his talk about the need for more tolerance of different religions. This part just made me jump for joy:

“Well, the correct answer is, he is not a Muslim, he’s a Christian. He’s always been a Christian,” he said. “But the really right answer is, what if he is? Is there something wrong with being a Muslim in this country? The answer’s no, that’s not America. Is there something wrong with some seven-year-old Muslim-American kid believing that he or she could be president? Yet, I have heard senior members of my own party drop the suggestion, ‘He’s a Muslim and he might be associated terrorists.’ This is not the way we should be doing it in America.”

I’ve done a lot of travelling since 9/11 and I am always amazed how people of different dress and skin color get treated. It’s like anyone who is not white and christian is a potential terrorist. That’s what 9/11 did to our country and it has been extremely hurtful to our country and our culture.

So I applaud Colin Powell for his forthright and honest and correct remarks. America is the melting pot where we accept all races, creeds, and colors. It’s what has made us great and if we walk away from that, we are in big trouble. Colin Powell knows that, Barack Obama knows that, and by the way so does John McCain but the only way he wins at this point is by playing into those fears which he is doing and Colin Powell called him on it.

I am very hopeful for what may be around the corner, a new administration, a new world view, a new tolerance, and some healing finally.

Where to raise money: bootstrap, angels, or venture capital?

Where should entrepreneurs turn to for investors is an important topic. I regularly see entrepreneurs dealing with this question, esp. the first-time entrepreneurs, often because each venue requires significant time and effort.

So if you are putting together a business idea with your best buddy, where should you look for funding?

Bootstrapping: Are you confident enough and have the means to bootstrap for a while? Can you save some equity along the way or are you being penny-wise, pound foolish?

Angels: How do you find the right angels? Is this dumb cash, or smart money? How many angels is too many? What to do if they become damending, like a seat on the Board?

VCs: Is your business idea ready for VC prime-time? Are you still sellable if it is shot down by a few leading VCs? Are they sharks that one must avoid at all costs?

I have these discussions with entrepreneurs all the time. Frankly, while there are general thoughts around this question there is no perfect answer. It all depends, on the idea, on the team, and the people involved – not to mention the investment climate in the space you are working on. But here I want to link to an interesting extract from an article by Ananad Rajaraman on GigaOm. Read on:

Early stage VCs raising later stage funds, including private equity/hedge fund

Cleantech companies typically require a lot of capital before they become profitable and bring success to their investors. Investing in them can be rather strange business for all the IT/media/tech investors (which is a majority of the the VCs out there) who are used to deploying smaller capital amounts to reach commercial success. John Doer told us (again) just last week that Google required a total investment of merely $25million!

So what are early stage cleantech venture investors to do when their portfolio companies require >$100 million before scalability of technology is proven and reached? To prevent dilution VCs have to keep on investing in subsequent rounds. But doing so might require slightly difference investment vehicles, and probably a different set of professionals.

So that is exactly what they are doing! Many major VC firms are raising large funds solely focused on later stage financing of energy/cleantech companies. Private equity investors and investment banking professionals are in demand and they are joining leading firms in large numbers. Kleiner Perkins, Sequoia, etc…‘they are all doing it’, as a VC remarked to me. Interesting!

Here’s the news on Seqouia Capital from the PE Week Wire.

Asset diversification has become business as usual in private equity, as many top-tier firms have launched distressed funds, real estate funds, hedge funds, sub-debt funds and other things that don’t involve privacy or equity (let alone both). Venture capital firms, on the other hand, have mostly stuck to their knitting. Sure, you can argue the demerits of certain firms moving toward later-stage deals or raising country-specific funds, it most of it still falls within the conventional rubric of venture capital.