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DRAFT




    What's wrong with
cleantech venture capital?
        December, 2008
2


We are all convinced cleantech = $$, right???




    This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
3


   Some very smart VCs are 110% on board

“John Doerr said to me: ‘Are we going to have any more Googles?’ And I said:
 ‘You're damn right we are, because we are at the point of new wealth
 creation when it comes to green technology.’”
                                                                        Bill Joy

“The underlying markets of cleantech are among the largest markets in the
 world. India and China represent 40 percent of the world's population, and
 they're undergoing the type of industrialization that we experienced in the
 twentieth century. The energy demands that will cause is a tremendous
 opportunity.”
                                                                   Ira Ehrenpreis

“There are many such things going on that are radical, implausible – each
 individually (is) somewhat implausible, on the aggregate (it is) highly
 plausible that one plan will work. That's the key to the solution.”
                                                                    Vinod Khosla

“I think the oil industry is actually getting fat and lazy, and I think there
 are some great opportunities there in clean tech.”
                                                                    Tim Draper


          This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
4


Just one little problem...



 Almost no exits yet

   And few failures either

                     VCs don’t yet know what
                     works and what DOESN’T
                       work in this sector


    This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
5


So what should cleantech VC look like?




              What structural and strategic
                 considerations would
                    maximize IRRs?

   This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
6


      ’95-’96: What VC used to look like

      • 1996 average fund size = $138M
      • 2,000 total VC investments per year
             -Avg. around $4.5M per investment across all stages
             -50% in seed and early stage investments
             -37% of venture dollars into CA, 9% into MA
             -Top 5 MoneyTree sectors (out of 17) garnered 57%
              of venture dollars
                1995: Software, telecom, media, biotech,
                  medical devices
      • 20-35% of investments resulting in IPO
             -Accounting for the bulk of the profits
             -Average holding time to exit = 4 years
             -IRRs >20%

MoneyTree; Gompers and Lerner, 1999

                This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
7


VCs shifted in the late '90s, and learned hard lessons

     160

     140                                        Average Annual Rate
     120
                                                    of Return to
     100
                                                 Investors in U.S VC
                                                       Funds
       80

       60

       40

       20

         0
             1974   1976    1978    1980    1982    1984     1986    1988    1990    1992     1994    1996    1998
      -20


                                                                                                            Source: Venture Economics




    This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
8


But are cleantech VCs now making the same mistakes?
                                                    Circa 2000




    This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
9


             We can make some assumptions (1 of 2)

               1) VC economics haven’t changed
                      •       Buy      low, sell high
                      •       Still    looking for 5-10x return potential
                      •       Still    operating under 2.5 and 20 comp structure
                      •       Still    looking for 3-7 year holding periods


               2) VC operations haven’t changed
                      • Pick one out of a hundred opportunities, lots of time
                        spent in search and evaluation
                      • Serve on Boards, lots of time spent on portfolio
                      • Raise new funds every two years


               3) Valuations are often affected by round size*
                      • Entrepreneurs focused on dilution more than a dollar
                        valuation
*Even if they shouldn’t be!

                          This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
10


We can make some assumptions (2 of 2)
4) The money needs to go to where the ideas
   and entrepreneurs are

5) Over time, cleantech exits will look like other
   VC-backed exits
   • The usual mix of M&A and IPO, at similar values


6) Exits require profits, not to mention strong
   revenues
   • See point #7 below if you disagree


7) THE LATE 1990s WERE AN ABERRATION AND
   THOSE KINDS OF RESULTS WON’T EVER
   HAPPEN AGAIN IN VENTURE CAPITAL

    This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
11


           So what are cleantech exits likely to look like?
                                                       Most VC exits are via M&A
                             # of US VC-backed exits, all sectors

                                                 340             313          439           408      426       445            205
                                      100%                                                                                            IPO

                                         80


                                         60

                                                                                                                             M&A
                                         40


                                         20


                                          0
                                                2002         2003             2004          2005     2006      2007          1-3Q08




                                        And the median M&A exit is <$100M
                                     $200M



                                                                                                            $153M
                                        150




                                        100                                                                           $98M

                                                                                              $74M   $77M
                                                                                                            $98M

                                               $54M                                  $57M
                                         50                                                                           $63M
                                                                       $38M
                                                         $29M                                 $47M   $52M
                                               $27M                                  $39M
                                                          $18M
                                                                       $24M                                                           Median
                                                                                                                                      Mean
                                          0
                                               2001      2002          2003          2004     2005   2006   2007      1Q08




                 Finding IPO-worthy companies is still important, but you
                          can’t price deals with that expectation
Thomson Reuters/ NVCA,
Dow Jones Venture Source
                     This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
12


      Even IPOs aren’t a guaranteed big return
        Largest US-domiciled VC-backed cleantech
                    IPOs, 2001-1H08

      Company                              Year                      Raised                         Pre                    Exchange
      Comverge                             2007                        $95M                     $286M                          Nasdaq

      EnerNOC                              2007                        $92M                     $486M                          Nasdaq

      Clean Air Power                      2006                        $18M                        $29M                            AIM

      Protonex                             2006                        $16M                        $52M                            AIM

      Hoku Scientific                      2005                        $21M                        $80M                        Nasdaq

      Ocean Power                          2003                        $42M                        $73M                            AIM

      Metabolix                            2006                        $95M                     $233M                          Nasdaq

      PolyFuel                             2005                        $14M                        $26M                            AIM
E&Y

            This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
13


   So how do you get a 5x out of a decent trade sale?

                                                                                                                            ILLUSTRATIVE



  It helps to be an early                                                               Oversimplified example
         investor
                                                                                           FirmA $$         Rnd $$         Pre-    FirmA own%


                                                                             Series A          $3M            $6M          $6M        25%


Early rounds need to be at                                                   Series B          $2M            $8M         $18M        25%

  reasonable valuations
                                                                             Series C          $1M           $10M         $50M        23%


                                                                               FirmA
                                                                                               $6M                                    23%
                                                                               Total
  And you can’t end up                                                                   $130M exit * 23%
                                                                                                                          5x return
 putting gobs of money                                                                       $6M in
                                                                                                                      =


   into the company


       This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
14


      Yet VCs are putting more $$ into each deal

      Avg. US cleantech round size                                        Avg. total capital per VC-backed company
              (all stages)                                                                 (so far!)

   $20M
                                                                                 Transportation                                              $61.0M


       15
                                                                                             Solar                            $40.9M




       10                                                                                Biofuels                            $39.1M




                                                                                     Energy Eff.              $13.9M
        5

                                                                                            Water             $13.9M

        0
                                                                                                   0          20          40          60         80
         19 5
         19 5
         19 7
         19 8
         20 9

         20 1
         20 2

         20 4
            05


         20 7
         20 0



         20 3



         20 6

       (3 08
            9

            9
            9



            0



            0



            0
            9



            9
            0

            0
            0



            0
         19




         20




          )
         Q




MoneyTree; E&Y

                 This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
15


     Cleantech is complex and varied…




GreenTech Media

                  This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
16


     …Yet VCs are piling into just a couple of techs…

     As new investors get into the market, by default they jump into the
                  sectors where money is already flowing



                                                                                                            • GreenTech Media is
                                                                                                              tracking 150 solar startups


                                                                                                            • Solar is now >35% of
                                                                                                              global cleantech VC dollars


                                                                                                            • Together, solar,
                                                                                                              biofuels and
                                                                                                              transportation are now
                                                                                                              ~60% of global
                                                                                                              cleantech VC
                                                                                                              investments (1H08)




Cleantech Group; GreenTech Media
                This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
17


            ...And techs which don't always have good economics




                                                                                                                                              Includes
                                                                                                                                            most of the
                                                                                                                                               supply-
                                                                                                                                               related
                                                                                                                                              solutions
                                                                                                                                              VCs are
                                                                                                                                            investing in




Includes
  many
demand-
 related
solutions




                This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
18


                Cleantech VCs are shifting to late stage

               North American # of                                                              • Clean technologies in the lab can
               cleantech deals by stage
                                                                                                     take longer to commercialize than
                                                                             Follow
               200                                                           on                      I.T., Web2.0, etc.
                                                                                                         - But not longer than biotech! Shh!

               150                                                                              • The returns this decade have been
                                                                                                     stronger in later stage
                                                                                                         - But that’s not true for longer term
               100                                                                                         returns, shh!!!
                                                                             First
                                                                             round              • The herd is moving to later stage
                                                                                                     and “balanced” (ie: 80% late stage)
                 50
                                                                                                • It’s also the only way to spend all
                                                                              Seed
                                                                                                     the money in the latest mega-funds
                   0
                   2003 2004 2005 2006 2007 2008*                                                    in the sector



Source: Cleantech Group
* Annualized from Q1-Q3 data
                                                                                                             So let’s go later!
                               This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
19


  The problem is… Everyone is going later.
                      It raises a few questions…
How will so many firms going after the same few deals find
                 reasonable valuations?

  Later stage investors with good brand and networks in
   cleantech will have successes, but how much will the
  “winners curse” otherwise impact a crowded market?

How does a $10M minimum check size (as some investors
now have) work within an M&A-driven exit environment?

How will we create enough early stage companies to fulfill
      the appetites of the late stage investors???

    Are more big late-stage funds really the answer???

       This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
20


          Cleantech isn't just in CA and MA…

                 Cleantech innovations                                                                       Cleantech entrepreneurs
No. of U.S. patents filed since
2000, by keyword in abstract
            1,012               610                389               265                                                                   6,193
 100%                                                                                                      100%


     80                                                                                                         80

                                                                                                                                        Other USA
     60                                                                                                         60
                                                                                         Plains
                                                                                         PNW+AK/HI
     40                                                                                  Southwest              40
                                                                                         Rockies
                                                                                         Great Lakes
                                                                                                                                           Boston
                                                                                         Southeast/
     20                                                                                  TX
                                                                                         Mid-Atlantic/
                                                                                                                20
                                                                                         NY                                                   CA
                                                                                         New England
                                                                                         California
      0                                                                                                           0
             quot;solarquot;       quot;wastewaterquot;         quot;ethanolquot;         quot;energyquot; +                                           Renewable Energy Business
                                                                quot;consumptionquot;
                                                                                                                       Network: LinkedIn members

    Author’s patent search; REBN

                       This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
21


     But VCs aren’t happy travelers


        Cleantech deals
(first round only, since 2004)
                               330              AK/HI/PR
 100%
                                                Rockies/
                            Southeast
                                                Plains
                           Northwest
     80                    Southwest

                            Midwest

     60
                           Northeast

     40



     20                    California



       0
                  1st round VC deals


Cleantech Group

                  This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
22


 What Cleantech VC looks like today
• >100 VC firms investing in cleantech, with most dollars and deals
  going into late stage

• Mega-funds (>$300M) being raised, locking in the crowded late
  stage as an entrenched feature of the market

• Most clean technology subsectors being relatively neglected as
  everyone piles into the increasingly zero-sum-games of solar,
  biofuels and electric vehicles

• Most investments going into California and New England, artificially
  limiting the pool of possible investments

• Many VCs gambling that they can find “black swans” that will be
  huge IPOs, even knowing that such outcomes will be very rare

• Lack of exits and failures means little track record to differentiate
  between VCs – so P.R. is heavily deployed

       This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
23


 What Cleantech VC needs to look like

• Probably fewer funds in the sector overall, but definitely fewer late
  stage focused funds

• More smaller funds writing smaller checks into capital efficient
  businesses with high-growth and good exit potential

• Early stage specialists and sophisticated seed stage funders acting as
  “scouts” in the underdeveloped subsectors/ technologies, leading the
  way where generalists can then co-invest and follow

• Investments where the innovations and entrepreneurs are,
  not where the VCs are based

• Building subsector ecosystems, not betting on singular “black swans”

• A focus on building high-growth and PROFITABLE companies that
  then become natural acquisition and IPO candidates


       This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
24


Conclusion




 VCs need to stop trying to figure out what
new investment models work in cleantech…



…They need to start figuring out what parts
of cleantech work for the proven VC model.




   This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
25


Questions?


       Peter Mills                                                               Marc Poirier
  pmills@ventures.com                                                         marc@ventures.com
     650-322-3245                                                              978-658-8980 x1




     Matt Horton                                                                    Rob Day
   matt@ventures.com                                                            rob@ventures.com
     650-322-3246                                                                978-658-8980 x5




   This information is not investment advice and should not be used to inform any investment decisions by anyone at any time

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What's Wrong With Cleantech VC

  • 1. DRAFT What's wrong with cleantech venture capital? December, 2008
  • 2. 2 We are all convinced cleantech = $$, right??? This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 3. 3 Some very smart VCs are 110% on board “John Doerr said to me: ‘Are we going to have any more Googles?’ And I said: ‘You're damn right we are, because we are at the point of new wealth creation when it comes to green technology.’” Bill Joy “The underlying markets of cleantech are among the largest markets in the world. India and China represent 40 percent of the world's population, and they're undergoing the type of industrialization that we experienced in the twentieth century. The energy demands that will cause is a tremendous opportunity.” Ira Ehrenpreis “There are many such things going on that are radical, implausible – each individually (is) somewhat implausible, on the aggregate (it is) highly plausible that one plan will work. That's the key to the solution.” Vinod Khosla “I think the oil industry is actually getting fat and lazy, and I think there are some great opportunities there in clean tech.” Tim Draper This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 4. 4 Just one little problem... Almost no exits yet And few failures either VCs don’t yet know what works and what DOESN’T work in this sector This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 5. 5 So what should cleantech VC look like? What structural and strategic considerations would maximize IRRs? This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 6. 6 ’95-’96: What VC used to look like • 1996 average fund size = $138M • 2,000 total VC investments per year -Avg. around $4.5M per investment across all stages -50% in seed and early stage investments -37% of venture dollars into CA, 9% into MA -Top 5 MoneyTree sectors (out of 17) garnered 57% of venture dollars  1995: Software, telecom, media, biotech, medical devices • 20-35% of investments resulting in IPO -Accounting for the bulk of the profits -Average holding time to exit = 4 years -IRRs >20% MoneyTree; Gompers and Lerner, 1999 This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 7. 7 VCs shifted in the late '90s, and learned hard lessons 160 140 Average Annual Rate 120 of Return to 100 Investors in U.S VC Funds 80 60 40 20 0 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 -20 Source: Venture Economics This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 8. 8 But are cleantech VCs now making the same mistakes? Circa 2000 This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 9. 9 We can make some assumptions (1 of 2) 1) VC economics haven’t changed • Buy low, sell high • Still looking for 5-10x return potential • Still operating under 2.5 and 20 comp structure • Still looking for 3-7 year holding periods 2) VC operations haven’t changed • Pick one out of a hundred opportunities, lots of time spent in search and evaluation • Serve on Boards, lots of time spent on portfolio • Raise new funds every two years 3) Valuations are often affected by round size* • Entrepreneurs focused on dilution more than a dollar valuation *Even if they shouldn’t be! This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 10. 10 We can make some assumptions (2 of 2) 4) The money needs to go to where the ideas and entrepreneurs are 5) Over time, cleantech exits will look like other VC-backed exits • The usual mix of M&A and IPO, at similar values 6) Exits require profits, not to mention strong revenues • See point #7 below if you disagree 7) THE LATE 1990s WERE AN ABERRATION AND THOSE KINDS OF RESULTS WON’T EVER HAPPEN AGAIN IN VENTURE CAPITAL This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 11. 11 So what are cleantech exits likely to look like? Most VC exits are via M&A # of US VC-backed exits, all sectors 340 313 439 408 426 445 205 100% IPO 80 60 M&A 40 20 0 2002 2003 2004 2005 2006 2007 1-3Q08 And the median M&A exit is <$100M $200M $153M 150 100 $98M $74M $77M $98M $54M $57M 50 $63M $38M $29M $47M $52M $27M $39M $18M $24M Median Mean 0 2001 2002 2003 2004 2005 2006 2007 1Q08 Finding IPO-worthy companies is still important, but you can’t price deals with that expectation Thomson Reuters/ NVCA, Dow Jones Venture Source This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 12. 12 Even IPOs aren’t a guaranteed big return Largest US-domiciled VC-backed cleantech IPOs, 2001-1H08 Company Year Raised Pre Exchange Comverge 2007 $95M $286M Nasdaq EnerNOC 2007 $92M $486M Nasdaq Clean Air Power 2006 $18M $29M AIM Protonex 2006 $16M $52M AIM Hoku Scientific 2005 $21M $80M Nasdaq Ocean Power 2003 $42M $73M AIM Metabolix 2006 $95M $233M Nasdaq PolyFuel 2005 $14M $26M AIM E&Y This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 13. 13 So how do you get a 5x out of a decent trade sale? ILLUSTRATIVE It helps to be an early Oversimplified example investor FirmA $$ Rnd $$ Pre- FirmA own% Series A $3M $6M $6M 25% Early rounds need to be at Series B $2M $8M $18M 25% reasonable valuations Series C $1M $10M $50M 23% FirmA $6M 23% Total And you can’t end up $130M exit * 23% 5x return putting gobs of money $6M in = into the company This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 14. 14 Yet VCs are putting more $$ into each deal Avg. US cleantech round size Avg. total capital per VC-backed company (all stages) (so far!) $20M Transportation $61.0M 15 Solar $40.9M 10 Biofuels $39.1M Energy Eff. $13.9M 5 Water $13.9M 0 0 20 40 60 80 19 5 19 5 19 7 19 8 20 9 20 1 20 2 20 4 05 20 7 20 0 20 3 20 6 (3 08 9 9 9 0 0 0 9 9 0 0 0 0 19 20 ) Q MoneyTree; E&Y This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 15. 15 Cleantech is complex and varied… GreenTech Media This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 16. 16 …Yet VCs are piling into just a couple of techs… As new investors get into the market, by default they jump into the sectors where money is already flowing • GreenTech Media is tracking 150 solar startups • Solar is now >35% of global cleantech VC dollars • Together, solar, biofuels and transportation are now ~60% of global cleantech VC investments (1H08) Cleantech Group; GreenTech Media This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 17. 17 ...And techs which don't always have good economics Includes most of the supply- related solutions VCs are investing in Includes many demand- related solutions This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 18. 18 Cleantech VCs are shifting to late stage North American # of • Clean technologies in the lab can cleantech deals by stage take longer to commercialize than Follow 200 on I.T., Web2.0, etc. - But not longer than biotech! Shh! 150 • The returns this decade have been stronger in later stage - But that’s not true for longer term 100 returns, shh!!! First round • The herd is moving to later stage and “balanced” (ie: 80% late stage) 50 • It’s also the only way to spend all Seed the money in the latest mega-funds 0 2003 2004 2005 2006 2007 2008* in the sector Source: Cleantech Group * Annualized from Q1-Q3 data So let’s go later! This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 19. 19 The problem is… Everyone is going later. It raises a few questions… How will so many firms going after the same few deals find reasonable valuations? Later stage investors with good brand and networks in cleantech will have successes, but how much will the “winners curse” otherwise impact a crowded market? How does a $10M minimum check size (as some investors now have) work within an M&A-driven exit environment? How will we create enough early stage companies to fulfill the appetites of the late stage investors??? Are more big late-stage funds really the answer??? This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 20. 20 Cleantech isn't just in CA and MA… Cleantech innovations Cleantech entrepreneurs No. of U.S. patents filed since 2000, by keyword in abstract 1,012 610 389 265 6,193 100% 100% 80 80 Other USA 60 60 Plains PNW+AK/HI 40 Southwest 40 Rockies Great Lakes Boston Southeast/ 20 TX Mid-Atlantic/ 20 NY CA New England California 0 0 quot;solarquot; quot;wastewaterquot; quot;ethanolquot; quot;energyquot; + Renewable Energy Business quot;consumptionquot; Network: LinkedIn members Author’s patent search; REBN This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 21. 21 But VCs aren’t happy travelers Cleantech deals (first round only, since 2004) 330 AK/HI/PR 100% Rockies/ Southeast Plains Northwest 80 Southwest Midwest 60 Northeast 40 20 California 0 1st round VC deals Cleantech Group This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 22. 22 What Cleantech VC looks like today • >100 VC firms investing in cleantech, with most dollars and deals going into late stage • Mega-funds (>$300M) being raised, locking in the crowded late stage as an entrenched feature of the market • Most clean technology subsectors being relatively neglected as everyone piles into the increasingly zero-sum-games of solar, biofuels and electric vehicles • Most investments going into California and New England, artificially limiting the pool of possible investments • Many VCs gambling that they can find “black swans” that will be huge IPOs, even knowing that such outcomes will be very rare • Lack of exits and failures means little track record to differentiate between VCs – so P.R. is heavily deployed This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 23. 23 What Cleantech VC needs to look like • Probably fewer funds in the sector overall, but definitely fewer late stage focused funds • More smaller funds writing smaller checks into capital efficient businesses with high-growth and good exit potential • Early stage specialists and sophisticated seed stage funders acting as “scouts” in the underdeveloped subsectors/ technologies, leading the way where generalists can then co-invest and follow • Investments where the innovations and entrepreneurs are, not where the VCs are based • Building subsector ecosystems, not betting on singular “black swans” • A focus on building high-growth and PROFITABLE companies that then become natural acquisition and IPO candidates This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 24. 24 Conclusion VCs need to stop trying to figure out what new investment models work in cleantech… …They need to start figuring out what parts of cleantech work for the proven VC model. This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 25. 25 Questions? Peter Mills Marc Poirier pmills@ventures.com marc@ventures.com 650-322-3245 978-658-8980 x1 Matt Horton Rob Day matt@ventures.com rob@ventures.com 650-322-3246 978-658-8980 x5 This information is not investment advice and should not be used to inform any investment decisions by anyone at any time