John Babcock, Cleantech/Green Venture Capital, at Opportunity Green Business Conference 2009


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Learn who the big players are in Clean Tech, what they're looking for and what's hot right now for getting investment. Also learn where one should be investing and where the opportunities exist in socially responsible startups.

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  • Discussing environmental issues and particularly global warming is difficult, because it’s complicated science and most discussions in the popular press are either alarmist or over-dramatized or naively dismissive of the issues in front of us. If we’re going to commit massive amounts of capital to conserve resources or reduce pollutants, it’s worth quantifying the real costs and risks involved.
  • " The Tragedy of the Commons " is an influential article written by Garrett Hardin and first published in the journal Science in 1968. [1] The article describes a dilemma in which multiple individuals acting independently in their own self-interest can ultimately destroy a shared limited resource even where it is clear that it is not in anyone's long term interest for this to happen. Central to Hardin's article is a metaphor of herders sharing a common parcel of land (the commons ), on which they are all entitled to let their cows graze. In Hardin's view, it is in each herder's interest to put as many cows as possible onto the land, even if the commons is damaged as a result. The herder receives all of the benefits from the additional cows, while the damage to the commons is shared by the entire group. If all herders make this individually rational decision, however, the commons is destroyed and all herders suffer.
  • The commons today of course is the atmosphere which it is tempting to fill with green house gases. If you are a developed or developing country, competing globally with other countries, it is very hard to not use the lowest cost fuel to power your economy. You can use other sources, but you put your citizens at a competitive disadvantage. For many countries in the world, including the United States, coal is that cheapest fuel.
  • In case you don’t know where your electricity comes from, the answer is probably coal. Nuclear is the other really low cost options. That orange band is hydroelectric which is the only really meaningful renewable energy source today in the US. That skinny little gray line is all of the solar and wind and geothermal combined.
  • So we have two factors multiplying. World population is growing and rising standard of living in developing countries is increasing the per-capita consumption of electricity, water, and other resources. On this chart, all of the bars are rising, but it’s the Chinese one that really catches your eye. Yes, that is a doubling between 1990 and 2000 and doubling again by 2007.
  • So why are venture capitalists looking at these markets right now? A number of things have come together. The biggest current driver is probably government initiatives which is different than other markets that VCs tend to invest in. The costs to the United States to need to import so much fuel are very high, higher than we might have acknowledged in the past. And the government is working hard to do the things it can to encourage industry to develop domestic alternatives to imported oil. There’s also real concern about AGW and so both state and federal governments have done things to assure that there is a market for renewable energy if it can be produced. Management teams that are working in cleantech today are often a lot better than the ones who were working in energy 10 years ago. I don’t think I’m going too far out on a limb by acknowledging that the A-students from the Graziadio school or the A-students from top engineering schools weren’t heading to work at utilities 10 years ago. That top talent was focused on the Internet or on IT and it’s focused on cleantech today. As we’ll see in a few slides, many of the technologies that have been a long time in developing are coming to fruition now or soon and have the opportunity to really change markets. It’s those factors that combine to really disrupt enormous markets that excite venture investors.
  • I like Wikipedia and think this definition is a good one. It actually ends with that incredibly insightful last sentence. Let’s come back to that one in a bit.
  • This is hard to read, but it’s an attempt by greentechmedia to tie together the many industries that fall under the Cleantech aegis. There are electric vehicles and fuel cells up here. The green ones are different power generation: solar, wind, geothermal, nuclear, clean coal. The red area is energy storage including fuel cells, super capacitors, flow batteries, flywheels, and compressed air energy storage. Teal is an assortement of advanced materials technologies. Gold are different waste technologies including e-waste handling (getting rid of old PCs and cell phones) and waste to energy technologies. Blue is different water technologies. The x-axis here reflects whether this technology is purchased personally, at the residence level, commercial level, industrial, governmental, or utility.
  • VC was really built on 3 businesses: computer hardware, software, and biotech or life sciences. If you look at the biggest successes of venture capital, they have shared a lot of common traits.
  • Looking at the early cleantech success stories, they don’t fit that earlier model easily. Their gross margins are lower, but they require much more capital to reach scale. Also, there are so many different sub-categories that it is difficult to fit them into simple pre-existing financial templates. If you approach an experienced VC with a hosted software company, he’s going to know instinctively what appropriate customer acquisition costs are going to be, what your development schedule should look like, and what you need to pay your sales reps. If you instead say that you want to develop smart meters that allow utilities to turn off appliances inside the home at peak demand, he’s going to require a good big more work. And that work won’t be applicable if you want to develop an improved thin film photovoltaic module.
  • And it’s more likely that your VC invested in solar. It garnered about 40% of the VC dollars that went into cleantech.
  • The consultancy McKinsey and Co wrote an 80 page report titled “Reducing Greenhouse gas emissions: how much and at what cost?” I think it’s one of the best contributions to the discussion of these emissions. They methodically performed a cost benefit analysis of hundreds of different policy and business actions and developed a cost curve of the marginal cost to reduce one ton of CO2 by different methods. The methods include everything from replacing inefficient water heaters to building nuclear power plants and applying carbon capture and sequestration to coal fired power plants. If you are involved with cleantech, I expect that you have already read their report. If you haven’t and are interested, I highly recommend it. As you can see from the curve, many of the abatement techniques have negative costs. That is, they are so cost effective that they pay for themselves by energy savings. These actions are economically rational even if you don’t care about reducing GHG. Presumably, you would do the cheapest items first on the list and then keep moving from left to right to more expensive solutions depending on your commitment to reducing green house gases. What’s interesting is that the two areas that attracted over 50% of all cleantech venture dollars last year are pretty far to the right: Solar and biodiesel. Biodiesel, particularly food-based biodiesel is an area that has already experienced a lot of trouble, but solar remains very popular with VCs. We can talk about why solar is so popular with VCs at the end in the Q&A, if you’re interested.
  • John Babcock, Cleantech/Green Venture Capital, at Opportunity Green Business Conference 2009

    1. 1. Cleantech Venture Capital Opportunity Green - Los Angeles, CA November 7, 2009
    2. 2. Prerequisite Cleantech Slides <ul><li>Blue Marble Shot </li></ul><ul><li>McKinsey Chart </li></ul><ul><li>The CFL </li></ul><ul><li>Polar Bear </li></ul>
    3. 3. Cleantech Markets Today <ul><li>Environmental issues </li></ul><ul><li>Market opportunities </li></ul><ul><li>Market challenges </li></ul><ul><li>Examples </li></ul>
    4. 4. Rustic Canyon Partners <ul><li>Founded in 1999 </li></ul><ul><li>$800MM under management </li></ul><ul><li>Investing out of Rustic Canyon III – closed in Oct 2008 </li></ul><ul><li>Offices in Santa Monica and Silicon Valley </li></ul><ul><li>49 portfolio companies </li></ul>
    5. 5. <ul><li>Current Investments </li></ul><ul><li>Foodlink </li></ul><ul><li>Leads360 </li></ul><ul><li>Pentadyne* </li></ul><ul><li>Serious Materials* </li></ul><ul><li>Transonic Combustion* </li></ul><ul><ul><li>*Cleantech </li></ul></ul><ul><li>Prior Investments </li></ul><ul><li>SiliconSystems </li></ul><ul><ul><li>Sold to Western Digital </li></ul></ul><ul><li>HomeGain </li></ul><ul><ul><li>Sold to Classified Ventures </li></ul></ul><ul><li>Cyrano Sciences </li></ul><ul><ul><li>Sold to Smiths PLC </li></ul></ul>John Babcock
    6. 6. Where Do We Invest? <ul><li>Location: </li></ul><ul><ul><li>Almost always in California (two-hour rule) </li></ul></ul><ul><li>Amount: </li></ul><ul><ul><li>$3 - 10MM first investment </li></ul></ul><ul><ul><li>$5 - 25MM over the life of the company </li></ul></ul><ul><li>Engagement: </li></ul><ul><ul><li>Always lead or co-lead financing round </li></ul></ul><ul><ul><li>Always take a board seat </li></ul></ul>
    7. 7. The Pressing Need
    8. 8. The Tragedy of the Commons
    9. 9. Coal is Really Cheap
    10. 10. U.S. Electricity Production
    11. 11. Energy Growth > Population Growth
    12. 12. Why Cleantech Now?
    13. 13. Why Cleantech Now?
    14. 14. Cleantech Definition <ul><li>Cleantech is a term used to describe knowledge-based products or services that improve operational performance, productivity or efficiency while reducing costs, inputs, energy consumption , waste or pollution . Its origin is the increased consumer, regulatory and industry interest in clean forms of energy generation—perhaps, the rise in awareness of global warming and the impact on the natural environment from the burning of fossil fuels . The term cleantech is often associated with venture capital funds. </li></ul><ul><li>Source: </li></ul>
    15. 15. Cleantech is Diverse Source:
    16. 16. VC Has Distinct Sectors <ul><li>Traditional Software </li></ul><ul><li>SaaS </li></ul><ul><li>System Hardware </li></ul><ul><li>Life Science Devices </li></ul><ul><li>Life Science Drugs </li></ul>
    17. 17. Cleantech Doesn’t Fit Old Formula <ul><li>Gross margins: 60% - 90% 20% - 50% </li></ul><ul><li>Capital intensive: $5 - $50MM $50 - $250MM </li></ul><ul><li>Markets: Creating New Entering Old </li></ul>Classic VC Cleantech VC
    18. 18. Where the Money is Going
    20. 20. 51% 27% 27% U.S. Energy Demand Built Environment Transport Industry
    21. 21. A supreme union of form and function, there is no other window that saves more heating and cooling dollars. Beautiful for your home, your wallet . . . and the planet.
    22. 22. After 100 years, there’s finally a better alternative to gypsum drywall. Contractors love it. Termites and mold hate it. Made from 80% recycled materials using dramatically less energy and no mercury, EcoRock helps build a cleaner, cooler future, one home at a time.
    23. 23. What if a transformational approach to fuel injection yielded a dramatic improvement in fuel economy and radical reduction in engine emissions? That’s how Transonic Combustion drives change forward.
    24. 24. A bold step forward in “recycle/reuse,” Fulcrum Bioenergy unlocks the energy trapped in trash to create clean-burning ethanol – while reducing solid waste blight and harmful landfill methane emissions.
    25. 25. Market Conditions <ul><li>Fuel prices low (used to be high) </li></ul><ul><li>Capital is very expensive (used to be cheap) </li></ul><ul><li>Political support very strong (used to be strong) </li></ul>
    26. 26. Are We in a Bubble? Yes.
    27. 27. Just Like the Last Bubble? Yes.
    28. 28. Venture Capital101 <ul><li>Don’t do it if you can grow organically </li></ul><ul><li>Expensive money </li></ul><ul><li>Limits early exit and autonomy </li></ul><ul><li>Works when growth = 40% year/year and viable, quick path to $100M in revenue </li></ul>
    29. 29. Questions?