Taken from http://www.lightspeedvp.com/news/stories/LSVP_20070829.pdf
Outstanding article on Challenges and Potential growth for Cleantech
When emerging sectors or geographies erupt onto the investment scene - such as China, India, or cleantech – generalist VCs like Lightspeed have to determine whither and how to extend their franchise into a new area. Some generalist firms simply grow a practice by hiring partners away from specialist firms, while others observe from the periphery, sending team members to conferences and selectively seeing deals.
At Lightspeed, we have taken a phased approach by initially making a focused effort to divert resources into cleantech, with a goal of expanding presence over time – but what were some of our considerations before taking the plunge? What might have potentially given us further pause? From an initial survey of the space, we quickly
observed a number of structural challenges for generalist VCs to ramp up quickly and get comfortable with cleantech investing.
First, cleantech comprises an umbrella of sectors that draws from a vast range of technologies and sciences. On an average day, one may evaluate solar concentrators using thin-film cells (materials science, physics, optics), enzymes that facilitate biofuel production (synthetic biology, biochemistry), alternative proton exchange membranes for fuel cells (nanotech, chemistry), and ocean-wave-powered generators (fluid dynamics). For generalist VCs who are more used to dealing with bits and bytes as opposed to bandgap absorption wavelengths and alkane-producing algae, properly evaluating such investments can be a nontrivial task.
Second, cleantech startups have to deal with a range of macroeconomic, policy, and regulatory externalities that are often absent in IT investments. The solar and biofuels sectors continue to depend on subsidies and face upstream feedstock supply issues. Smart grid or water purification companies need to sell into utilities or municipalities, whose purchase affinity can change with evolving regulations. At a roader level, any major shifts in electricity and oil price trends could represent a doomsday scenario for multiple sectors.
Third, many cleantech plays require a different style of investing vis-à-vis eneralist IT deals. Many companies that have a technology founded in advanced materials, enzymes, or catalysts can have long development timelines that match more closely with biotech or pharmaceutical investments. Others have capital requirements from capacity expansion that are more characteristic of project finance or private equity type deals. Similarly, opportunities in “hot” areas like solar concentrators, thin-film, and cellulosic ethanol that have reached lofty valuations may look less like venture-backable deals. As such, for many generalist funds with shorter time horizons or smaller fund sizes, cleantech can pose significant structural and financial challenges.
Finally, the increased number of entrepreneurs coming out of the woodwork to dust off their 20-year-old solar concentrator concept or backyard biodiesel refinery has
also served to depress the signal-to-noise ratio, making it harder to find quality deals and solid management teams. Early-stage founders often have less experience in building teams and scaling production, and successful serial cleantech entrepreneurs remain few and far between. In addition, the geographical diversity of the opportunities in this space adds further challenge to deal sourcing and management team recruiting.
While the amalgam of the above challenges can overwhelm at times, Lightspeed continues to be bullish on cleantech. What are some factors that give us
confidence that the space holds promise for outsized returns?
• Massive global energy markets served and strong macroeconomic tailwinds. Overall energy demand has marched upward relentlessly in recent decades, with electricity generation nearly doubling in the U.S. and up eightfold in China since 1980. Solar,
biofuels, wind, storage, grid management, and water purification each already represent multibillion dollar markets, yet alternative energy in sum accounts
for only approximately 5 percent of total energy output today. As such, we believe that many of these sectors have double-digit growth potential, especially with rising oil and natural gas prices and increased concerns over national security.
Further, in sectors like solar, biofuels, clean coal, and clean water, we
have observed that supply-demand imbalances have reduced market and customer risk; if you can produce it at reasonable cost, someone will buy it.
• Improved cost economics. The intersection of technology- and scale-driven cost reductions within cleantech sectors and recent price increases for traditional energy sources has made a range of business models viable. Solar, for example, has
reached grid-parity pricing (with subsidies) in select geographies for the first time in the sector’s history, and as the industry continues to scale rapidly and
go up the learning curve, we believe solar costs will drive closer to today’s power rates. A similar phenomenon can be seen in the biofuels sector, where economies of scale combined with subsidies have closed the cost gap between crop-feedstock based
biofuels and petroleum-based fuels.
Significant technology headroom for innovation. Many of today’s companies utilize decades-old design approaches and manufacturing practices. For example, in solar, crystalline PV upstream processes are based on old techniques from the semiconductor industry, and the most oft-discussed thin-film materials such as copper indium gallium selenide (CIGS) have remained relatively unchanged for decades. Thus, as a new wave of technologists experiment with processes and materials designed to optimize for solar applications, they have an opportunity to create PV cells with quantum leaps in efficiency and cost reductions. Beyond solar, recent advances in synthetic biology have created enzymes and microorganisms that enable the use of noncrop biofuel feedstock and step-function changes in production yields. We have also seen recent breakthroughs in nanotechnology and materials science that have interesting applications for slowmoving sectors like batteries, fuel cells, and water
purification. The increasing number of world-class technologists and non-cleantech serial entrepreneurs now lending their talents to the emerging space should further increase the opportunities for disruptive innovation.
• Opportunities to play to Lightspeed’s strengths.
As we venture deeper into cleantech, we have found that certain aspects of our firm’s experience,network, and investment model actually help overcome the challenges related to this space. With deep roots in early-stage semiconductor investing,we have helped entrepreneurs build successful businesses and top management teams in an industry that relies on fast-cycle-time technical R&D, strong manufacturing execution, and heavy pre-revenue investment in capital equipment
– not too different from the lifecycle of many cleantech operations. Further, we have observed many well-respected, senior-level veterans from the semiconductor, networking infrastructure, and software sectors exploring cleantech ventures of
late, and we believe that the entrepreneurial DNA of emerging companies in this space will increasingly come from industries where Lightspeed has a robust
network. Our global platform, including investment programs in China, India, and Israel, also gives our portfolio companies access to opportunities for new
deals and potential customers in key international markets for cleantech. Indeed, we feel strongly that generalist VCs do have capabilities that can lend well to cleantech investing.
• Government, corporate, and social imperatives.
There has not been a time in recent memory when public and private sentiment aligned so well in supporting clean technologies as it has today. Governments worldwide have instituted tax subsidies and incentives for consumers to use clean energy sources and manufacturers to make “greener” products. In the U.S., an emerging portfolio of compliance laws and regulatory policies has targeted traditional energy providers like coal-fired plants to seek cleaner, lower-emissions alternatives.
Meanwhile, major corporations like Google, Wal-Mart, AMD, and British Petroleum have sponsored initiatives to increase the usage of renewable energy. BP made the headlines earlier this year in partnering with the Lawrence Berkeley National Laboratory to lead a $500 million research effort to develop new sources of energy. We feel that at least in the short-term, such social sentiment will help support the economic value proposition for cleantech, move industry-wide R&D efforts along, and contribute to public and investor interest in the space.
Armed with conviction in the market fundamentals, cost economics, and technology headroom in cleantech, Lightspeed has pursued investments with a concentrated internal effort and external collaboration with many of our specialist and generalist
VC colleagues. After having seen 300-plus deals that span the breadth of sectors, we are well-calibrated and have embarked on the beginning of our focused investment program in cleantech. With a portfolio of four companies to date spanning the energy storage, biofuels, LED lighting, and clean coal sectors, we believe we are off to a strong start and will continue to make an impact in cleantech.
Wednesday, November 11, 2009
Four Trade Secrets for Clean Tech Entrepreneurs in Small Countries
Very Interesting Article from http://www.huffingtonpost.com/karin-kloosterman/4-trade-secrets-for-clean_b_312046.html
A plucky little country, is how the late Princess Diana once described Israel to Shimon Peres. About the size of New Jersey, Israel has a disproportionate number of clean tech companies and investment in clean technology compared to its size. And now businessman and investor David Anthony from 21Ventures in the US is about to reveal his trade secrets and insider information about clean tech investing in Israel. If you are itching to become a clean tech entrepreneur in Israel, this is must-read information. If you'd like to know more about what makes the industry tick, read on. His advice applies to many other small countries interested in ramping up development and investment in clean tech.
Unlike Silicon Valley and the high-tech industry, the clean tech market today has no center of excellence, Anthony tells Green Prophet. In the last 50 years of venture capital investing there has been a saying: Never fly over your company -- meaning one shouldn't invest in a company that isn't within a 60 mile radius of the office. But without a center for clean technology, explains Anthony, a VC fund now has to dig into new territory to find the golden investment egg. Investors need to cross borders and turn over new stones.
light bulb sprouting green roots photo 21ventures
Compared to any other country in the Middle East, Israel is a clear and defined leader in this market, so we've focused on Israel. Most of Anthony's tips could work in other non-US locales as well.
First a short background on Israel:
According to Anthony, clean technology researchers are not the same scientists that the traditional Israeli technology environment was founded on. Focused primarily on IT and telecom, Israel's high-tech success came about as a result of Israelis joining the army and getting an electrical engineering degree. But this is not the case anymore in clean tech: "What did Israel need to succeed?" Anthony asks. "Telecom was critical. They needed to tap Arafat for 30 years. IT security obviously is critical for Israel so necessity has driven the Israeli technology economy to focus on IT and telecom."
But today, Israel and the world has bigger problems than Arafat, says Anthony:
Global warming and over-population and the combination of global warming and over-population is greatest problem of the 21st century. There are different types of scientists solving these problems like physical chemists and fluid dynamicists.
These are individuals who have not traditionally participated in the technology economy of Israel for the last 20 years. There is a disconnect between the entrepreneurs and the technology refugees because there are little opportunities now in IT and teleco.
Usually management types with electrical engineering backgrounds, this kind of training and background might not be applicable when "scouring scientists of major universities in Israel," says Anthony.
DAVID ANTHONY
david-anthony-21ventures-photo-invest-israel.jpg
How to bridge the divide and disconnect? Anthony, offers his trade secrets:
1. Scour universities. Troll these places before technology refugees get to them. Entrepreneurs are not digging deep enough at Israeli universities -- at the Weizmann Institute, The Technion, Bar Ilan University or Tel Aviv University. Entrepreneurs, he says, need to go out in the field and do their research. They need to meet with tech transfer officers to find out what's interesting.
"One of the great mysteries is why doesn't Israel have a leading solar energy company," Anthony asks. "Luz I was a failure ... Israel is not on the map of the Top 10. Why is Germany a big leader? Germany doesn't have sun."
It's because the entrepreneurs in Israel have not mined the scientists or scoured or searched deep enough, he reasons. Time to get busy:
Read Science Daily, a compendium of scientific released from universities around the world.
Go and visit the tech transfer offices, like Ramot at Tel Aviv University.
Contact scientists directly. Tell them: I would love to sit and talk with you about the potential for commercializing your research.
"What I do isn't brilliant or insightful," says Anthony. "It's like being a basketball scout: but at universities you are dealing with scientists instead of 16-year-old seven footers."
2. Be less practical and forget about getting to the top. According to Anthony Americans are less practical than Israelis might think. Living in 7,000 square foot homes, Israelis who live in 4-room apartments don't see how impractical Americans really are, he says. Even though milestones and pilot projects are developed in Israel through connections and limited funds, "Adopting technology quickly doesn't always win."
Instead of wasting years and money developing a pilot in Israel, one needs referencable customers in the US to attract US investment. The Israeli military mentality doesn't translate well in America, North America or Asia. Nor does aspiring to get to the top quickly, says Anthony.
Let's forget about going to the top. Israelis are good at tinkering and improvising and getting a prototype. ... If I tell someone my security software is defending the Israel Defense Forces, Americans want to know who is your US customer.
The bottom line: don't bank on pilot projects in Israel.
3. Bet your life on your research. Israeli scientists, unlike those in the US, are not as quick to leave the comfort of academia. Being a scientist and having a position at a university commands more respect in Israeli culture than in the US, meaning the Israelis are less likely to leave their tenure.
Anthony asks:
But if I am investor and you're at Bar Ilan University or the Technion, am I supposed to put my money in you if you aren't betting your life? This is something that IT scientists understand, but I don't think it has reached the clean tech researchers yet. I want a CTO full-time.
There is something about betting your life on a business. If you don't, then it's hard for me as an investor, with an investment ranging from $10 to $15 million over a set of milestones.
4. Build a business plan and milestones with teeth. The last tip, Anthony offers is for entrepreneurs to build a solid business plans with milestones mapped out. This demonstrates to him the increasing value of the company.
In today's market, my most difficult job negotiating is not the price, but the teeth of the milestones. That to me is always the weakness in business plans and I see it in presentations: someone will say I need $4 to 10 million. This needs to be broken down into 4 or 5 milestones over 3 or 4 years. Thinking out those milestones, commercial milestones, collaborative milestones ahead of time is the best way to get my attention.
If you have an opportunity and solve a huge problem, then I am interested. If you thought out the milestones well, then I have a compatibility with you.
David Anthony is the founder and manager of 21Ventures, a virtual clean technology incubator focusing on the ideas and innovations that will dominate the 21st century. You can follow him on Twitter at http://twitter.com/DavidAnthony21
Karin Kloosterman is the founder of Green Prophet, a green news site covering green business and environment news from Israel and the Middle East. See www.greenprophet.com.
A plucky little country, is how the late Princess Diana once described Israel to Shimon Peres. About the size of New Jersey, Israel has a disproportionate number of clean tech companies and investment in clean technology compared to its size. And now businessman and investor David Anthony from 21Ventures in the US is about to reveal his trade secrets and insider information about clean tech investing in Israel. If you are itching to become a clean tech entrepreneur in Israel, this is must-read information. If you'd like to know more about what makes the industry tick, read on. His advice applies to many other small countries interested in ramping up development and investment in clean tech.
Unlike Silicon Valley and the high-tech industry, the clean tech market today has no center of excellence, Anthony tells Green Prophet. In the last 50 years of venture capital investing there has been a saying: Never fly over your company -- meaning one shouldn't invest in a company that isn't within a 60 mile radius of the office. But without a center for clean technology, explains Anthony, a VC fund now has to dig into new territory to find the golden investment egg. Investors need to cross borders and turn over new stones.
light bulb sprouting green roots photo 21ventures
Compared to any other country in the Middle East, Israel is a clear and defined leader in this market, so we've focused on Israel. Most of Anthony's tips could work in other non-US locales as well.
First a short background on Israel:
According to Anthony, clean technology researchers are not the same scientists that the traditional Israeli technology environment was founded on. Focused primarily on IT and telecom, Israel's high-tech success came about as a result of Israelis joining the army and getting an electrical engineering degree. But this is not the case anymore in clean tech: "What did Israel need to succeed?" Anthony asks. "Telecom was critical. They needed to tap Arafat for 30 years. IT security obviously is critical for Israel so necessity has driven the Israeli technology economy to focus on IT and telecom."
But today, Israel and the world has bigger problems than Arafat, says Anthony:
Global warming and over-population and the combination of global warming and over-population is greatest problem of the 21st century. There are different types of scientists solving these problems like physical chemists and fluid dynamicists.
These are individuals who have not traditionally participated in the technology economy of Israel for the last 20 years. There is a disconnect between the entrepreneurs and the technology refugees because there are little opportunities now in IT and teleco.
Usually management types with electrical engineering backgrounds, this kind of training and background might not be applicable when "scouring scientists of major universities in Israel," says Anthony.
DAVID ANTHONY
david-anthony-21ventures-photo-invest-israel.jpg
How to bridge the divide and disconnect? Anthony, offers his trade secrets:
1. Scour universities. Troll these places before technology refugees get to them. Entrepreneurs are not digging deep enough at Israeli universities -- at the Weizmann Institute, The Technion, Bar Ilan University or Tel Aviv University. Entrepreneurs, he says, need to go out in the field and do their research. They need to meet with tech transfer officers to find out what's interesting.
"One of the great mysteries is why doesn't Israel have a leading solar energy company," Anthony asks. "Luz I was a failure ... Israel is not on the map of the Top 10. Why is Germany a big leader? Germany doesn't have sun."
It's because the entrepreneurs in Israel have not mined the scientists or scoured or searched deep enough, he reasons. Time to get busy:
Read Science Daily, a compendium of scientific released from universities around the world.
Go and visit the tech transfer offices, like Ramot at Tel Aviv University.
Contact scientists directly. Tell them: I would love to sit and talk with you about the potential for commercializing your research.
"What I do isn't brilliant or insightful," says Anthony. "It's like being a basketball scout: but at universities you are dealing with scientists instead of 16-year-old seven footers."
2. Be less practical and forget about getting to the top. According to Anthony Americans are less practical than Israelis might think. Living in 7,000 square foot homes, Israelis who live in 4-room apartments don't see how impractical Americans really are, he says. Even though milestones and pilot projects are developed in Israel through connections and limited funds, "Adopting technology quickly doesn't always win."
Instead of wasting years and money developing a pilot in Israel, one needs referencable customers in the US to attract US investment. The Israeli military mentality doesn't translate well in America, North America or Asia. Nor does aspiring to get to the top quickly, says Anthony.
Let's forget about going to the top. Israelis are good at tinkering and improvising and getting a prototype. ... If I tell someone my security software is defending the Israel Defense Forces, Americans want to know who is your US customer.
The bottom line: don't bank on pilot projects in Israel.
3. Bet your life on your research. Israeli scientists, unlike those in the US, are not as quick to leave the comfort of academia. Being a scientist and having a position at a university commands more respect in Israeli culture than in the US, meaning the Israelis are less likely to leave their tenure.
Anthony asks:
But if I am investor and you're at Bar Ilan University or the Technion, am I supposed to put my money in you if you aren't betting your life? This is something that IT scientists understand, but I don't think it has reached the clean tech researchers yet. I want a CTO full-time.
There is something about betting your life on a business. If you don't, then it's hard for me as an investor, with an investment ranging from $10 to $15 million over a set of milestones.
4. Build a business plan and milestones with teeth. The last tip, Anthony offers is for entrepreneurs to build a solid business plans with milestones mapped out. This demonstrates to him the increasing value of the company.
In today's market, my most difficult job negotiating is not the price, but the teeth of the milestones. That to me is always the weakness in business plans and I see it in presentations: someone will say I need $4 to 10 million. This needs to be broken down into 4 or 5 milestones over 3 or 4 years. Thinking out those milestones, commercial milestones, collaborative milestones ahead of time is the best way to get my attention.
If you have an opportunity and solve a huge problem, then I am interested. If you thought out the milestones well, then I have a compatibility with you.
David Anthony is the founder and manager of 21Ventures, a virtual clean technology incubator focusing on the ideas and innovations that will dominate the 21st century. You can follow him on Twitter at http://twitter.com/DavidAnthony21
Karin Kloosterman is the founder of Green Prophet, a green news site covering green business and environment news from Israel and the Middle East. See www.greenprophet.com.
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