VCs Pour Millions into Clean Energy Startups as Oil Prices Climb

‚SolFocus sounds like a typical Silicon Valley startup: Eight em-
ployees, big ideas—and zero profit. Yet in mid-May, the phones at
the eight-month-old company wouldn’t stop ringing.
The callers were venture capitalists, and they were dan-
gling millions of dollars in front of the Palo Alto, California–
based solar panel maker. Ty Jagerson, vice president of
business development, says as soon as he’d start talking to
one VC, another would call offering money. “It was complete-
ly insane,” Jagerson, 35, says.
Up and down Sand Hill Road, the venture capital hub
south of San Francisco, the financiers who bankrolled the
technology boom of the 1990s are chasing their next big
thing: alternative forms of energy. As oil and natural gas
prices climb, venture capitalists are investing hundreds of
millions of dollars in young, often money-losing companies
that hope to harness the power of the sun or the heat inside
the Earth. They’re pouring millions more into companies
that cook up gasoline and diesel substitutes from corn, sugar
and soybeans. In all, U.S. VC funds invested a record $739
million in renewable energy in 2005, up 36 percent from
Spurred by high oil prices, the backers of
the 1990s technology boom are hunting
for the Google of clean energy.
By Edward Robinson
PUMPED
Evangelist: Venture capitalist
Vinod Khosla is pushing ethanol.
VCs Get
COVER STORY:
THE POWER OF GREEN
PHOTOGRAPHS BY ANDY FREEBERG
Bloomberg Markets
August 2006 37

38
2004, according to Cleantech Venture Network LLC, a re-
search group based in Ann Arbor, Michigan.
VCs haven’t buzzed like this since the Internet captured
investors’ imaginations in the ’90s. Alternative energy stocks
have surged the way dot-com shares did in 1999—before the
bottom fell out of the Nasdaq Stock Market. The 40-stock
WilderHill Clean Energy Index has rocketed since its August
2004 debut, gaining 69 percent as of June 5. Mutual funds
that invest in green power and other clean industries have
exploded, gaining an average of 39 percent in the 12 months
ended on May 3. (See “Ecofriendly Funds,” page 42.) As they
did in the late ’90s, stock investors are baying after compa-
nies that have yet to turn a profit. Pacific Ethanol Inc., based
in Fresno, California, for example, lost $611,763 in 2005 on
sales of $38 million. Its stock? Up 143 percent in the 12
months ended on June 5.
The frenzy troubles Silicon Valley pioneer Vinod Khosla,
who co-founded Sun Microsystems Inc. in 1982 and, then, as
a partner at Menlo Park, California–based VC firm Kleiner
Perkins Caufield & Byers, helped finance Amazon.com Inc.
and Netscape Communications Corp. “We need to be cau-
tious that this doesn’t become like the dot-com bubble,” says
Khosla, 51, a champion of ethanol. “We don’t want to get
ahead of ourselves.”
For now, the alternative-energy bulls are charging. They
say a collision of powerful forces—from the soaring price of
OPEC crude to the booming economy of China, to growing
concern that global warming threatens our planet—is about
to usher in a new era of green power.
Oil prices have tripled during the past three years, and the
first energy crunch of the 21st century has begun to rip
through the world’s fossil fuel–based economy. In the U.S.,
the largest energy consumer, $70-a-bar-
rel oil has sapped consumers’ confidence
and raised the threat of stagflation, a
toxic combination of accelerating infla-
tion and slackening economic growth
last seen in the ’70s. President George
W. Bush has urged the nation to break
its “addiction” to foreign oil and find
new, cheaper sources of power. Bush’s
ranch in Crawford, Texas, has a geo-
thermal system.
Today, the world is straining to feed
its seemingly insatiable appetite for en-
ergy with oil, natural gas and coal. To-
morrow looks even worse. China, now
the No. 2 energy consumer, devours
6.5 million barrels of oil a day. By 2025, it will gulp 14.2 mil-
lion a day, according to the U.S. Department of Energy.
Emerging economies such as India’s will swallow still more.
Global warming, meantime, has vaulted from scientific
journals to front pages worldwide. The news is everywhere:
Glaciers are melting, polar bears are drowning and each year
sets new heat records. In April, Vanity Fair, chronicler of the
Hollywood A-list, confronted the issue by declaring “Green is
the new black.” Julia Roberts, who won an Oscar playing en-
vironmental crusader Erin Brockovich, graced the cover,
with Al Gore, George Clooney and Robert F. Kennedy Jr. at
her feet. Country singer Willie Nelson, the long-haired Texas
rebel who twangs “On the Road Again,” has started a compa-
ny that sells biodiesel at truck stops in Middle America.
As President Bush, a Republican, touts alternative fuels,
Gore, his Democratic opponent in 2000, warns of the catas-
trophes that lie ahead if we keep spew-
ing greenhouse gases into the air. Gore’s
environmental documentary, An Incon-
venient Truth, opened in U.S. theaters
on May 26. The film raked in $17,292
per screen, besting The Break-Up, a
comedy starring Jennifer Aniston.
Kleiner Perkins and Menlo Park–based
VC firm Foundation Capital have held
private screenings of Gore’s film for
partners and clients.
Climate change is no longer the buga-
boo of a few scientists. About 85 percent
of people in the U.S. believe it’s probably
happening now, according to a March
ABC News/Time magazine/Stanford
Today, the world is straining to
satisfy its demand for energy.
Tomorrow looks even worse.
COVER STORY:
THE POWER OF GREEN
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Bloomberg Markets
August 2006

39
University poll. Goaded by $3-a-gallon gaso-
line, thawing icecaps or both, some consum-
ers are changing old habits, and entrepreneurs
and companies are responding. General
Motors Corp. has discontinued the Hummer
H1, its hulking gas guzzler. At Toyota Motor
Corp., U.S. sales of the hybrid Prius coupe
doubled in 2005. Honda Motor Co. is build-
ing a diesel engine that it says will be cleaner
and more fuel-efficient than gasoline-
powered models. (See “Honda: Engines of
Change,” page 50.)
S
o where will VCs find the green in
green? That depends on whom you
ask. Khosla, who withdrew from Klein-
er Perkins as a full-time partner in 2004 to
start his own firm, Khosla Ventures, a few
doors away, is betting on ethanol. He says the
fuel may help the U.S. break its dependence on overseas oil,
which he calls a threat to national security.
Erik Straser, 36, a partner at nearby Mohr Davidow Ven-
tures who once worked at the top-secret Los Alamos Nation-
al Laboratory in New Mexico, says the cure to our energy ills
is right over our heads. New solar-power cells may one day
reshape the global electricity industry, he says.
Lee Bailey, chief operating officer of Santa Monica, Califor-
nia–based US Renewables Group LLC, says he’s not counting
on big, new ideas. Instead, Bailey, 54, has spent $38 million
for a stake in a mothballed geothermal power plant in the
pine-covered hills of northern California. Workers there are
drilling new steam wells and restoring a 70-ton turbine.
Then there’s Nancy Floyd, who has seen promise—and
profit—in green power since she went to work for the Public
Utilities Commission in Vermont in 1977. Co-founder of San
Francisco–based Nth Power LLC, Floyd, 51, is wagering on
biodiesel, a fuel made from soybean and canola oils, among
other bets.
“A lot of VCs have woken up to the sheer magnitude of op-
portunity in the energy markets,” says Ira Ehrenpreis, a
partner at Technology Partners, a Palo Alto–based VC firm.
Venture capitalists could use a winner. Many of them are still
nursing losses from the Nasdaq bust. After that rout, institu-
tional investors pulled back, and VCs’ money dried up.
Investment flows into venture funds plunged to $4 billion in
Mohr Davidow’s Erik Straser, above, sees a bright future in solar power.
Nanosolar’s Martin Roscheisen, below, is developing new solar cells.
Bloomberg Markets
August 2006

Bloomberg Markets
August 200640
2002 from a record $106 billion in
2000, according to the Washington-
based National Venture Capital
Association. VC funds posted a neg-
ative return of 6.8 percent from 1999
to 2005.
And so the deals keep coming. In
April, five venture capital firms,
among them Kleiner Perkins, clinched
the biggest clean-power deal the VC
industry has ever seen. They invested
a combined $50 million in Altra Inc.,
a Malibu, California–based ethanol
company. In May, venture capitalists
from Goldman Sachs Private Equity
Group met with executives at SolFo-
cus as the startup raised $15 million.
People have dreamed of finding
cheap, clean sources of energy since
the oil-price shock of the ’70s. So far, the hopes for alternative
energy have far outstripped the reality.
Green power is expensive. Even now, after oil and natural
gas prices have surged to record highs, it’s still usually cheap-
er to generate electricity by burning fossil fuels than it is by
using solar panels, wind turbines or underground steam. In
May, Rosemead, California–based Southern California Edi-
son agreed to pay 6.15 cents per kilowatt-hour for electricity
from renewable sources, plus an additional, undisclosed rate
to ensure energy would be available during peak hours. Power
produced by natural gas–fired plants costs 4–6 cents per kilo-
watt-hour. Solar power costs U.S. homeowners as much as 30
cents per kilowatt-hour—double or even triple the price of
gas- or coal-generated electricity, according to Jefferies &
Co., a Los Angeles–based investment bank.
Strip out state and federal incentives designed to promote
renewable power—subsidies that might disappear when the
political winds shift—and the economics of green look even
worse. Take biodiesel. In late May, the fuel cost $2.99 a
gallon in Washington state. Regular diesel cost $3.15–$3.30.
A biobargain? Not quite. U.S. biodiesel actually costs closer
to $4 a gallon. The federal government pays distributors as
much as $1 for every gallon of biodiesel they sell.
Because it’s relatively expensive, green power has never
really caught on. In 2005, wind turbines, solar panels and
other alternatives to fossil fuels generated about 357 billion
kilowatt-hours of electricity, or 9.4 percent of the juice used
in the U.S., according to the U.S. Department of Energy.
That’s down from 11 percent in 1989. Oil, coal and natural gas
generated 72 percent. The rest came
from nuclear power, a proven alter-
native to fossil fuels that doesn’t con-
tribute to global warming but carries
its own environmental hazards.
“Alternative energy has been just
around the corner for 20 years,” says J.
Stephan Dolezalek, a partner at San
Bruno, California–based VantagePoint
Venture Partners. Once a green-power
doubter, Dolezalek is now backing
clean-energy startups.
Institutional investors that invest
in VC funds are warming to clean en-
ergy, too. The $130 billion California
State Teachers’ Retirement System,
for example, is investing $250 mil-
lion in alternative energy through VC
and private equity funds. “We’re not
head over heels in love with this sector, but we’re moving pru-
dently to invest in it,” says Margot Wirth, a money manager
at the teachers pension fund.
To green-energy skeptics, VCs have a familiar reply: This
time, things are different. The economic, environmental and
cultural stars have finally aligned for a new era of alternative
power, they say. “Something has really changed,” says Floyd of
Nth Power, which has invested solely in alternative energy
since 1997. “This industry isn’t just for the Birkenstock set
anymore; it’s got serious capital behind it now.”
That includes corporate cash. General Electric Co. has
made wind turbines since 2002 and solar systems since
2004. Now, its GE Energy Financial Services arm plans to
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COVER STORY:
THE POWER OF GREEN
‘Alternative energy has been just
around the corner for 20 years,’
one VC says.

41
Bloomberg Markets
August 2006
triple its renewable energy fund to $3 billion by 2008. “The
growth opportunity is so apparent, so we’re going after it,”
says Kevin Walsh, managing director of GE Financial’s re-
newable energy unit.
Khosla, the former Kleiner Perkins VC, has become a
leading ethanol evangelist. A Republican, he says U.S. depen-
dence on Middle Eastern oil threatens the nation’s security.
Ethanol is not only cleaner than gasoline; it’s ultimately safer
for the country, too, he says. His firm has invested an undis-
closed sum in Altra and other ethanol startups.
“Oil is a fundamental component of our economy and, argu-
ably, nothing but trouble,” Khosla says in a 12-page white paper
he distributes to U.S. lawmakers and investors.
Khosla has allied himself with national se-
curity hawks such as R. James Woolsey, 65, di-
rector of the Central Intelligence Agency from
1993 to ’95. “We are so locked into oil that we’re
unprepared to substitute another fuel,” says
Woolsey, 65, who advises VantagePoint Part-
ners on alternative energy investments. “What
if a terror attack or a regime change in Saudi
Arabia takes 6 or 7 million barrels off line for a
year? Would the price of oil go to $100 or $200
a barrel?”
K
hosla, a native of Pune, India, with
close-cropped gray hair and deep-set
eyes, made his name developing net-
work computing companies such as Cerent
Corp. and Juniper Networks Inc. Kleiner
Perkins turned an $8 million investment in
Cerent into $2 billion.
That record has won Khosla entree to Washington power
brokers. He’s delivered his pitch on ethanol to Democratic
Congressional leaders, such as Nancy Pelosi of California, as
well as Republicans such as senators Richard Lugar of Indiana
and John McCain of Arizona.
The U.S. government is already pushing ethanol, whether
consumers want to pay for it or not. The Energy Policy Act of
2005 requires that oil refiners—which blend ethanol with gaso-
line as an additive—double biofuel consumption by 2012. For
now, at least, consumers are paying the freight: For the past
eight years, corn-based ethanol has cost them an average of 49
cents a gallon more than gasoline.
With about 6 million flex-fuel ethanol vehicles already on
California mothballed the Bottle Rock geothermal plant in 1990. Lee Bailey,
below, has bought a stake in the plant and is financing its rebirth.
MARKHAMJOHNSON(BOTTOM)

42
U.S. roads, Khosla says his
plan isn’t grandiose. “When
we started with the Internet,
every telecom carrier said, ‘No
way. We have a 100-year-old
infrastructure, and it will
never change,’ and in less than
10 years, it did,” he says. “I
think the same thing can hap-
pen in energy. I have no doubt
that we could replace most, if
not all, of our fuel needs with
ethanol in 25 years.”
Bailey of US Renewables
isn’t waiting for Khosla’s eth-
anol revolution. Instead, he’s dusting off another decades-
old idea: geothermal power.
The Bottle Rock geothermal power plant sits atop the
largest subterranean steam field in the world, about 50
miles (80 kilometers) north of Napa County wine country.
When Bailey first saw Bottle Rock in 2005, it had been idle
for 15 years and was overgrown with weeds and littered
with stacks of rusting metal pipes. He had to sidestep bear
droppings as he surveyed the derelict plant. “It was a com-
plete mess,” he says.
Nonetheless, US Renewables, which is investing a
Bloomberg Markets
August 2006
$100 million fund in alter-
native energy projects,
bought about 88 percent of
the plant last October and is
financing its rebirth.
Back in the ’80s, Bailey,
a lanky, 6-foot-5-inch law-
yer from upstate New York,
served as general counsel of
Rochester Hills, Michigan–
based Energy Conversion
Devices Inc. The company
developed the batteries for
GM’s short-lived EV1 elec-
tric car. After directing a
Clinton Administration program that promoted sales of
state companies in Russia and South Africa, Bailey joined
Santa Monica, California–based Rustic Canyon Partners,
founded by Thomas Unterman, former chief financial
officer of newspaper company Times Mirror Co., which is
now part of Tribune Co. Rustic Canyon, with $800 million
under management, invests part of the fortune of the
Chandler family that built the Los Angeles Times. Bailey
formed US Renewables in 2004 with Rustic Canyon as
lead investor.
Making the drive to Bottle Rock through the rice-growing
ut wis
Mutual funds are striking gold
in green stocks. Worldwide,
funds that invest in alternative
energy and other environmen-
tally friendly industries posted
an average return of 39 percent
in the 12 months ended on May
31, according to data compiled
by Bloomberg.
Managers of the best-per-
forming green funds say the
boom has only just begun. Rising
oil prices and growing concern
over global warming have sent
green power stocks soaring.
Companies involved in water
treatment, recycling and waste
management are gaining, too.
“People know that we are
not on a sustainable path and
that in the next five, 10 or 15
years, the main problems will
be environmental,” says Nicolas
Rochon, who helps manage the
198 million euro ($248 million)
Performance Environnement
fund at Paris-based Financière
de Champlain. The fund re-
turned 51 percent in the year
ended on May 31, the best
showing among green funds
worldwide, according to
Bloomberg data. (See table.)
The fund was launched two
years ago, with a mere
$400,000 in assets.
Rochon, 28, says many in-
vestors believe they’ll profit by
looking out for the environment.
Alternative energy stocks have
already surged the way dot-com
shares did in 1999. The 40-
stock WilderHill Clean Energy
Index has rocketed since its
August 2004 debut, gaining 69
percent as of June 5.
During the past decade, in-
vestors have poured money
into mutual funds that follow
environmental, social or reli-
gious guidelines. The assets of
such funds ballooned to $179
billion in 2005 from $12 billion
in 1995, according to the
Washington-based Social In-
vestment Forum.
Ecofriendly funds represent
only a fraction of that universe.
The seven U.S. green funds
tracked by Chicago-based
Morningstar Inc. have a com-
bined $619 million of assets
under management.
Managers of green funds
typically invest in small compa-
nies that they think are poised
for fast growth. Altshuler Sha-
ham Green Fund, which returned
36 percent in the year ended on
May 31 and has 403 million
shekels ($90 million) in assets,
supplements its small-cap picks
with stocks of large companies it
believes are committed to ener-
gy efficiency, such as Milwaukee-
based automotive systems
manufacturer Johnson Controls
Inc. and Toyota City, Japan–
based Toyota Motor Corp.
“Investing in large con-
glomerates that invest in
energy-efficient products
helps offset the volatility of
our small-cap holdings,” says
Yotam Irroni, an analyst at Tel
Aviv–based Altshuler Shaham
Mutual Fund Management
Ltd. Among the Altshuler
Ecofriendly Funds
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COVER STORY:
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43PHOTOCREDIT
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green fund’s biggest picks
are Spanish wind power
company Gamesa Corp.
Tecnologica SA, Canadian
organic food distributor
SunOpta Inc. and Chinese
solar panel maker Suntech
Power Holdings Co.
Rochon invests in 70–80
stocks to reduce the volatili-
ty of his fund’s returns. He
also picks companies with
contracts that guarantee
stable sales. Performance
Environnement invested in
Paris-based Sechilienne SA,
which has a contract for biofuel
power in Guadeloupe.
Jackson Robinson, who start-
ed the Boston-based Winslow
Green Growth Fund in 1994,
hunts for sound, small companies
that have run into some trouble.
For example, Robinson, 64,
bought shares of Danville, Con-
necticut–based organic food dis-
tributor United Natural Foods
Inc. in 2000, when a new CEO
was struggling to upgrade the
company’s computer systems. At
the time, the stock traded at $8.
On June 5, it traded at $33.36.
As oil prices have soared, al-
ternative energy has emerged as
the hottest investment area for
green funds, Robinson says, add-
ing that the rush to these stocks
reminds him of the Internet
share frenzy of the ’90s. “There
are hundreds of companies in
this space, and many will not
survive,” Robinson says. For
now, at least, mutual fund
managers—and their inves-
tors—are seeing green.
DEEPAK GOPINATH
fields north of Sacramento, Bailey says he doesn’t have the
patience to finance new solar or hydrogen technology. Bottle
Rock plans to go on line by December, a little more than a
year after he invested in it, he says. “Going into the lab for
years and then developing a technology into a commercially
viable product takes a long time,” he says. “It could be 10
years before you can exit.”
B
ottle Rock draws volcanic steam from reservoirs
10,000 feet underground and pumps it through al-
most two miles of pipe to a turbine and generator.
Housed in concrete walls almost 2 feet thick to withstand
earthquakes, the $60 million facility was state of the art
when it opened in 1985.
“It was the Cadillac of plants,” says Louis Capuano, chief
executive officer of ThermaSource Inc., an oil and steam well
driller in Santa Rosa, California, and a minority stakeholder
in Bottle Rock. Five years after going on line, the steam wells
clogged. With natural gas then at $1.46 per million British
thermal units—four times less than it cost on June 5—Cali-
fornia shut the plant rather than fix it. Bottle Rock no longer
made economic sense, Capuano says.
Now it does, Bailey says. Twenty states have passed laws
requiring utilities to buy a portion of their electricity from
alternative sources. California has required its utilities to
buy 20 percent of their power from non-fossil-fuel plants by
2017. On May 16, Bottle Rock landed a 10-year contract
from San Francisco–based Pacific Gas & Electric Co. Bailey
says Bottle Rock will generate 25 megawatts of electricity an
hour by December, enough power for 25,000 homes, and is
capable of putting out more than twice that much.
At Mohr Davidow, a Sand Hill Road mainstay founded in
1983, Straser says he sees a bright future for solar power. A na-
tive of Manhattan Beach, near Los Angeles, Straser got a Ph.D
in engineering from Stanford in 1988. As a student, he pat-
ented a system that uses wireless sensors to monitor satellites
and power plants. After working at the Los Alamos lab and
Interval Research Corp., a technology incubator funded by
Microsoft Corp. co-founder Paul Allen, Straser joined Mohr
Davidow in 1998, at the age of 28.
At a restaurant near his office, Straser pushes aside his stir-fry
and grabs a pencil to diagram how rising energy costs are press-
ing companies to seek alternatives like solar power. “Solar is all
about cost performance now, and those companies that can move
the cost needle down, that’s the only goal that matters,” Straser
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Silicon Valley pioneer Khosla
says ethanol could help the U.S.
end its foreign-oil addiction.
Bloomberg Markets
August 2006

44
says, scribbling on the butcher paper covering the tabletop.
In early 2005, Straser met with Martin Roscheisen, 37, a
fellow Stanford-trained engineer, who’d assembled a team of
30 Ph.D.-level scientists and engineers in an office park in
Palo Alto. They were developing a new type of solar technol-
ogy that cost less to produce than typical silicon panels.
Google co-founders Sergey Brin and Larry Page were early
investors in the company, called Nanosolar Inc.
A
few months later, Mohr Davidow led a $10.5 mil-
lion round of financing for Nanosolar, which includ-
ed Benchmark Capital, the Sand Hill Road VC firm
that funded EBay Inc.
“Given that we invested in the company before the prod-
uct was developed, there was a technical risk,” Straser says of
Nanosolar. “But we dove in deep on the technology, and we
could see how a breakthrough manufacturing process could
unlock a huge economic advantage.”
For 30 years, solar cells have been fashioned from silicon
wafers similar to the ones that semiconductor manufacturers
like Intel Corp. use to manufacture computer chips. The rigid,
delicate panels are expensive to make, costing customers about
$5.40 per watt, and must be mounted in modules on rooftops
or other exposed surfaces.
Using nanotechnology, the science of building microscopic
materials from single atoms and molecules, Nanosolar’s scien-
tists created a “photovoltaic ink” that converts sunlight into
electricity. The ink is coated onto flexible, foil-like strips that
wind through roll presses similar to those that print newspa-
pers. The thin film of ink, which is 1/100th the thickness of a
silicon-based solar cell, can be attached to walls or any other
flat surface or integrated into roofing material. Roscheisen
says this process will enable Nanosolar to make solar cells for
as little as a 10th of the cost of silicon panels.
Roscheisen says he doesn’t aspire to replace existing
electricity sources with his PowerSheet-brand solar cells.
Rather, he plans to market the product as a source of relief
when electricity is most expensive—during the afternoon, es-
pecially in the summer, when air conditioners tax the power
grid. In California, electricity prices jump to 30 cents in the
afternoon from 6 cents per kilowatt-hour at night. By draw-
ing electricity from solar cells, customers can save money.
“Solar is fundamentally about peak power availability and
value,” Roscheisen says. Nanosolar, which has raised $100 mil-
lion in capital, plans to build a factory in the Bay Area that can
make enough solar cells to generate 120 megawatts of power
by the end of 2007 and 430 megawatts by 2009.
Right now, many solar companies are feeling growing
pains. Worldwide sales of solar panels more than doubled to
$11.2 billion in 2005 from $4.7 billion in 2003, according to
Clean Edge Inc., a Portland, Oregon–based research firm.
Solar cell makers that can’t buy the silicon they need face
backlogs of as long as two years, says Jeffrey Bencik, an ana-
lyst at Jefferies in New York.
Nanosolar confronts commodity risks of its own. The
company uses copper and indium, both of which have under-
gone volatile price swings during the past year. Indium, a
metal as scarce as silver, swung from $950 a kilogram in
June 2005 to $1,035 in September, to $797.50 on June 5. An
even bigger challenge is that Nanosolar’s “thin-film cells” are
less efficient than conventional solar panels. They convert 14
percent of the sunlight that strikes them into electricity,
whereas silicon cells convert about 20 percent.
Nth Power’s Nancy Floyd has been involved in green power since the 1970s. She’s investing in biodiesel, a petroleum alternative.
New solar technology could
upend the $1 trillion global elec-
tricity industry, Straser says.
COVER STORY:
THE POWER OF GREEN
Bloomberg Markets
August 2006

ROBBIEMCCLARAN
Bloomberg Markets
August 200646
Michael McGehee, a materials science professor at Stan-
ford’s School of Engineering, says Nanosolar’s cells show prom-
ise. “I’m excited about this technology, but it’s going to take a
while,” he says. “There are always glitches you can’t predict.”
Floyd of Nth Power has been confronting the uncertain
future of alternative energy since her days at the Vermont
Public Utilities Commission. Back then, she was fresh out of
Rutgers University in New Jersey, with a master’s degree in
political science, and says she didn’t know a watt from a volt.
(Watts measure electric power, and volts are the unit of force
that carries electricity.) Then President Jimmy Carter jump-
started the renewable power industry with tax credits. Floyd
was hooked. “There were a lot of new technologies coming on
line, and there weren’t many entrepreneurs, so it was a mar-
ket where you could really make a mark,” she says.
In 1982, Floyd founded NFC Energy Corp., a wind power
company in San Francisco that raised $30 million and erect-
ed 130 wind turbines in the Altamont Pass that connects the
Bay Area to the Central Valley. Floyd, who used to hike into
the pass and use a device called an anemometer to measure
the force of the wind, struck gold: In 1985, she sold NFC for
25 times its initial investment capital.
A
fter a two-year stint at Pacific Telesis Group, the
telecommunications company now owned by AT&T
Corp., Floyd co-founded Nth Power in 1993 with
Maurice Gunderson, a thermodynamics engineer. It took
them four years to raise their first fund.
“Finding investors was a challenge,” Floyd says. It’s less chal-
lenging now: In June, Nth Power closed its fourth fund at $200
million. Chevron Corp. and Electricité de France SA, the state-
owned power provider, are among Nth Power’s investors.
Floyd says alternative energy is still the wide-open indus-
try she remembers, where an individual with little capital
and a big idea can make a splash. Last November, she backed
just such a person, a former airline pilot named John Plaza.
In 2004, Plaza, 40, quit his job at Northwest Airlines
Corp., withdrew half of the savings in his 401(k) plan, took
out a second mortgage on his Seattle home and sold his be-
loved Ducati Supersport motorcycle. With the $300,000 he
raised, he started Seattle Biodiesel LLC.
Plaza picked biodiesel because it’s a tested, clean alterna-
tive to petroleum. Like cooking oil, the fuel, which is more
yellow colored than gasoline, can burn in any diesel engine
with little modification. Unblended biodiesel emits up to 50
percent less carbon monoxide and 78 percent less carbon di-
oxide than petroleum diesel, according to the U.S. Environ-
mental Protection Agency.
By July 2005, Plaza had raised $2 million from individual
investors. Martin Tobias, a partner at Seattle-based VC Ignition
Partners LLC, had come aboard as CEO. Plaza’s startup built a
plant in a 10,000-square-foot (929-square-meter) warehouse
on Seattle’s south side. It looks like an oversized chemistry set,
with pipes snaking across the ceiling and connecting various
tanks wrapped in silver-colored insulation. Plaza salvaged a
dozen 7,000-gallon (26,500-liter) tanks from a brewery that
was closing to hold vegetable oil and finished biodiesel.
The plant receives soybean oil from Cargill Inc. and other
growers by rail, heats it up to 200 degrees Fahrenheit (93 de-
grees Celsius), uses a proprietary process to remove glycerin
and then purifies the fuel. Plaza fills his Chevy diesel pickup
directly from a tank at the plant, which makes 5 million gal-
lons a year.
Floyd visited the plant in the fall of 2005 and concluded
that the company could prosper by catering to truckers and
other fleet customers. Even better, biodiesel might eventual-
ly be used by power plants or refined into heating oil. Last
November, Nth Power took part in a $7.5 million funding
round led by Technology Partners, a Palo Alto venture firm.
“We don’t need a massive shift by U.S. consumers to get a
venture return,” Floyd says.
Plaza and Tobias are now rounding up $40 million to build
the largest biodiesel plant in the U.S. at an old lumber mill port
on the Olympic Peninsula, west of Seattle. It will be capable of
producing 100 million gallons of biodiesel a year by mid-2007.
John Plaza, a former airline pilot, founded Seattle Biodiesel.
Made from soybeans and canola
seeds, biodiesel burns cleaner
than ordinary diesel fuel.
COVER STORY:
THE POWER OF GREEN

BLOOM B ERG TOOLS
For a menu of venture capital–related Web sites, type VCPL <Go>.
48
Bloomberg Markets
August 2006
To list the 40 stocks that make up the WilderHill Clean
Energy Index, type ECO <Index> MEMB <Go>. To see
how the index has performed relative to U.S. benchmark
stock indexes, type COMP <Go>. Tab in to the second
field in the Securities column, and enter SPX <Index>
for the Standard & Poor’s 500 Index. Enter CCMP
<Index> for the Nasdaq Composite Index in the third
field in the Securities column. To base the comparison
on the 12 months through June 5, enter 06/06/05 and
06/05/06 in the RANGE fields. Tab in to the PERIOD field,
enter D, and press <Go>, as shown below. The WilderHill
index jumped 53 percent in
the 12-month period. The
S&P 500 rose 5.7 percent,
and the Nasdaq composite
gained 4.5 percent.
Type RV <Go> to use
the Relative Value function
to compare the stocks in
the clean energy index on
the basis of fundamental
data that you can select. To
rank the members of the
index so that those with
the highest market values
appear at the top of the
Relative Value screen, click
on the Current Market Cap
column heading and select Actual Descending. As of early
June, Praxair Inc. topped the list, with a market value of
$17.3 billion. Praxair is a Danbury, Connecticut–based
company that produces industrial gases. MagneTek Inc.,
which makes power control products and is based in Los
Angeles, had a market value of $72.8 million in early
June, putting it at the bottom of the list.
Type MOV <Go> to list the stocks that are most re-
sponsible for moving the index up or down during the
current trading day.
JOHN DIXON
How Have Clean Energy Stocks Performed?
By the time the plant is pumping out biofuel, the young
company will be facing formidable competition: On May 11,
Chevron’s venture arm acquired 22 percent of Galveston Bay
Biodiesel LP, a Houston-based company that’s building a 100
million–gallon biodiesel refinery. With Chevron’s distribu-
tion network, Galveston could capture many of the custom-
ers Plaza is aiming for.
P
laza shrugs at the challenge. “If the oil companies do that,
and we’re on 100 percent renewable fuel as a country, and
I’m dead broke, well, then I’ll feel like a success,” he says.
For green-power fans, the biggest risk of all is oil. Ven-
ture capitalists and stock market investors are all betting
that high-priced crude is here to stay. “If oil suddenly drops
to $50 a barrel on decreasing demand, then this whole thing
could drop like a rock,” says Robert Wilder, CEO of Encini-
tas, California–based WilderShares Inc., which tracks the
WilderHill Clean Energy Index.
An oil slump might bring an end to today’s green rush.
Given the spiraling demand for power worldwide, however,
cheaper oil alone won’t cure our energy ills for long. Ernest
Moniz, co-chairman of the Energy Research Council at Mas-
sachusetts Institute of Technology, which is researching non-
carbon-based energy sources, says the world must come to
grips with its appetite for energy and the environmental
havoc being wrought by fossil fuels. There’s no time to waste,
he says. “These are huge issues that have to be grappled with,”
he says. “We’re talking about a transformation of the global
energy infrastructure over the next few decades.”
Time moves fast in Silicon Valley. In 1999, VCs were the he-
roes of the New Economy. By 2002, many of them looked like
goats. What many investors seemed to forget during those
dark, post-bubble years is that, sometimes, the dreamers are
right. In less than a decade, a seemingly quixotic startup with
a goofy name—Google—has become one of the most-valuable
companies in the world. VCs who can find a Google or Amazon
or EBay of green power will make a fortune. And if they hap-
pen to save the world along the way, well, that’s fine, too.„
EDWARD ROBINSON is a senior writer at Bloomberg News in San Francisco.
edrobinson@bloomberg.net
COVER STORY:
THE POWER OF GREEN

VCs Pour Millions into Clean Energy Startups as Oil Prices Climb

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