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
\"solar\" \"wastewater\" \"ethanol\" \"energy\" + Renewable Energy Business
\"consumption\"
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