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...
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:...
4


Just one little problem...



 Almost no exits yet

   And few failures either

                     VCs don’t yet kno...
5


So what should cleantech VC look like?




              What structural and strategic
                 considerations...
6


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

      • 1996 average fund size = $138M
      • 2,000 total VC investments pe...
7


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

     160

     140                                        Aver...
8


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



...
9


             We can make some assumptions (1 of 2)

               1) VC economics haven’t changed
                   ...
10


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

5) Over t...
11


           So what are cleantech exits likely to look like?
                                                       Mo...
12


      Even IPOs aren’t a guaranteed big return
        Largest US-domiciled VC-backed cleantech
                    I...
13


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

                                                              ...
14


      Yet VCs are putting more $$ into each deal

      Avg. US cleantech round size                                 ...
15


     Cleantech is complex and varied…




GreenTech Media

                  This information is not investment advic...
16


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

     As new investors get into the market, by default they jum...
17


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




                                                 ...
18


                Cleantech VCs are shifting to late stage

               North American # of                         ...
19


  The problem is… Everyone is going later.
                      It raises a few questions…
How will so many firms go...
20


          Cleantech isn't just in CA and MA…

                 Cleantech innovations                                 ...
21


     But VCs aren’t happy travelers


        Cleantech deals
(first round only, since 2004)
                        ...
22


 What Cleantech VC looks like today
• >100 VC firms investing in cleantech, with most dollars and deals
  going into ...
23


 What Cleantech VC needs to look like

• Probably fewer funds in the sector overall, but definitely fewer late
  stag...
24


Conclusion




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



…They need to ...
25


Questions?


       Peter Mills                                                               Marc Poirier
  pmills@v...
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Whats Wrong with Cleantech Venture Capital

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Whats Wrong with Cleantech Venture Capital

  1. 1. DRAFT What's wrong with cleantech venture capital? December, 2008
  2. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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 $$ Pre- FirmA own% Series A $3M $6M $6M 25% Early rounds need to be at Series B $2M $8M $18M 25% reasonable valuations Series C $1M $10M $50M 23% FirmA $6M 23% Total And you can’t end up $130M exit * 23% 5x return putting gobs of money $6M in = into the company This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  14. 14. 14 Yet VCs are putting more $$ 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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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