Friday, July 15, 2011

The Debt Ceiling Matters To Startups

I love living in D.C. Architecturally, it is one of the most distinct cities in America, and there is nothing like taking a jog in the morning among memorials that folks travel thousands of miles to visit. The downside, unfortunately, is that even though I don't work in politics, I am a bystander to the blow-by-blow of our political system. It's what people do, what they talk about, and what's always on TV (it also seems like every taxi I get in has NPR on).

Over the last two weeks, that blow-by-blow has centered around the debt ceiling. Without getting in to the politics of it, the fact is not raising the debt ceiling would be a disaster. It is the mother of all no-brainers. If you don't understand why - then I encourage you to read any commentary, interview, or OpEd by anyone that actually knows what they're talking about (Ben Bernanke, Bill Gross, or Tim Geithner would be a good start).

It seems like one of the few things all politicians can agree with (in theory), is that no one wants to do bad things to small businesses, startups, or entrepreneurs - the so called "job creators". Nothing scuttles any idea in Washington like putting "job-killing" in front of it. Unfortunately, where the small business and startup community have gone wrong is not speaking up on this issue.

If you look at technology startups, in particular, they are one of the bright spots in our economy today. While the unemployment rate in the U.S. has continued to hover above 9%, Silicon Valley can't find enough good engineers. Investment in startups is at an all-time high and valuations are going through the roof. However, the piece on which all of this hinges is that investors expect the IPO market to be strong. IPO markets provide strong returns to investors, which drive more investment, which drive more jobs...and round and round we go. The venture business model is somewhat of a "feast or famine" business model - and the feast cycle is driven by the strength of the public equities market.

And this is where the debt ceiling comes in. Next week, we will know if we have a workable solution on raising the debt ceiling. If we do not, the world won't end - but a few things will happen:
  • The U.S. credit rating will be downgraded, increasing the borrowing cost of the federal government - which will trickle down to higher borrowing cost for every business and every person in America
  • The equities market will respond negatively to higher rates - so stock prices will likely plunge (despite the fact that corporations are reporting record profits)
  • The rise in borrowing costs and uncertainty around the entire credit climate will further halt investment and hiring
  • Prolonged weakness in the stock market will ultimately close the IPO window
Clearly, entrepreneurs should be most focused on getting their product to market and building their teams - and not be concerning themselves with the machinations in Washington. But Silicon Valley and the broader small business community have a vested interest in this getting resolved quickly and efficiently. It's time the thought leaders in those communities made their voices heard.

Friday, July 8, 2011

The problem with Silver Spring

Yesterday, Silver Spring filed their S-1, announcing a $150 million initial public offering. With over a billion dollars in multi-year contracts, the Company has been a rumored IPO candidate since 2009. However, even today, it faces some significant challenges:
  • No line of sight to profitability
  • A hardware play with 79% negative gross margins, and no clear walk to positive gross margins
  • Revenue recognition issues
  • A market that is seeing increased competition from the "dumb meter" companies such as Itron and Landis+Gyr - which are winning more of the new awards
  • Long sales cycles with customers that are questioning the value proposition of the product
Many of these issues can be resolved, and having backlog of over a billion dollars is a huge confidence builder in the business model. But there's a saying: "you can only go public once". If you go too early, your investors will get burned and the public markets will not be quick to buy into your story again. Public markets are also fatigued with cleantech manufacturing plays that are gross margin negative and burning hundreds of millions of dollars of cash - as evidenced by the performance of A123, SemiLeds, and others.

So why not wait?

Well, after raising $400 million, Silver Spring has likely tapped out it's ability to raise private capital. The Company is using the public market as a source of venture funding. The IPO is less a way to get an exit for its investors (although that is also at play here), and more a way to fund the company to profitability when no one else will.

I want Silver Spring to succeed. It will be good for everyone (cleantech space, smart grid companies, cleantech VCs, etc) - which is why I'm dismayed at the bankers/investors pushing another IPO which will be facing an uphill battle from the get-go.

Time will tell - and as always - I could be completely wrong.

Tuesday, June 28, 2011

How to get into venture capital

I do my best to respond to folks looking to learn more about venture capital, and one of the most common questions I'm asked is "what's the best way to break into venture capital"?

My response seems to surprise, and somewhat dismay, a lot of people

Very few venture capitalists became venture capitalists through entry level positions (analysts or associates). While these jobs do exists, the supply/demand for this type of position does not favor a job applicant. Unlike investment banking, consulting, or even private equity - venture capital firms are structured like inverse pyramids: a lot of senior level partners, and very few junior level investment professionals. This is because most venture deals don't hinge on huge financial models. While any good diligence will include financial, competitive, market and technical analysis - The single biggest determinant in whether an investment is good or bad is the management team.

Thus, I tell folks that trying to get into venture capital from the ground up is not the best or easiest path.

In my view, the best way to becoming a venture capitalist is to join a startup (or, even better, start one yourself). With any luck, and some success, you will emerge with the kind of experience that will make you a great advisor to other startups; which is what being a VC is all about. That is why VCs place a large value on successful entrepreneurs and bring them in laterally as venture partners, Entrepreneurs in Residence, or general partners. If you look at the most prominent venture capitalists today - Vinod Khosla, John Doerr, Marc Andreesen & Ben Horowitz, Peter Thiel - they came from the startup world. The biggest exception of the guys I can think of is Jim Breyer from Accel Partners (Mr. Facebook).

Interestingly, a lot of people I tell this to seem to react negatively to it. I usually bite my lip, but I would hope that if you want to be a VC, joining a startup would sound like an exciting proposition.

Another option is to seek out a business development function at a large corporate that is active in the sector you are interested in. When I say "active", I mean a player that does a fair amount of M&A, JVs, or minority investing. If you're coming out of business school, working for GE, ABB or Siemens might not sound like the sexiest job in the world, but the reality is, those companies are probably the biggest cleantech investors today. They are also great training grounds for young investment professionals, since the deal flow and deal pace is so high; and strategic investors are increasingly becoming more important in the venture ecosystem.

I should note that I followed neither of these paths - as my entry was from the ground up. Then again, it's too early to tell if mine is a career path anyone should want to emulate. Reminds me of how a business school classmate who has become a great investment banker still quotes Goose from Top Gun, whenever anyone comments on how great he is doing in his career: "Are you kidding me? You remember the name of that truck driving school we saw on TV. TruckMaster's I think it was. I may need that."

Wednesday, June 15, 2011

Why IPO Mania May End Up Hurting VCs

Bloomberg published an interesting article yesterday on how the current IPO wave has benefited a select few within the VC community - making the "haves" stronger and the "have nots" more challenged to win deals. I think there is a good deal of merit to the argument that, in the long-term, these dynamics will be bad for the venture community as well as startups, which benefit from increased competition from it's sources of capital (as LendingTree put it, "When Banks Compete. You Win").

However, I would like to focus another consequence of IPO Fever which we should be wary of.

In times like these, every entrepreneur and investor, begins to believe that their company has a shot of going public. That's great. You want that kind of enthusiasm. The problem is, if everyone thinks their company can IPO at $4 billion - they don't mind paying $1 billion in a venture round - which is why you're seeing higher and higher private capital valuations. My argument here isn't that we are in a bubble and that these valuations are crazy. I'm just trying to point out that, statistically speaking the most likely successful outcome for any startup is an acquisition, and when you raise a great deal of capital at valuations in the hundreds of millions of dollars, you effectively price yourself out of the market of being acquired for a good return. Sure, the billion dollar acquisitions grab the headlines, but most acquisitions are in the $0-$300 million range.

Let me be clear. IPOs are a critical part of the business model to venture capital - and what is happening right now in the market is fantastic for investors (albeit to a smaller subset of them, as was mentioned at the top of this post).

However, at some point, the IPO window will close as it always does. The investors that deployed capital at more reasonable valuations will find they have more options for realizing an exit. Those that are only in the "hard to get into" premier billion dollar deals, will have to wait for the next IPO window.

Wednesday, June 8, 2011

An Eye-Opening World Energy Snapshot

Today BP released it's "Statistical Review of World Energy Data", which is impressively comprehensive and the best report I've seen recently in painting the picture of our global energy supply and demand.

I have pulled out a couple stats / graphs that jumped out at me:
  • Energy demand growth is at it's highest in 30 years - outpacing economic growth (not unexpected as developing countries have become more energy hungry). This trend should become more dramatic as China and India GDP/capita explodes.
World Energy Consumption
  • We really are a coal planet. Coal accounts for largest share of energy use (30%) - and is the largest energy source in Asia where demand growth is highest (China represents almost 50% of coal consumption). This is unsustainable in terms of air quality and CO2 emissions, and I view it as a positive indicator for the need for renewables.
Reserves / Production (years) by Source and Region

  • Our reserves to production ratios for fossil fuels are actually increasing - this is counter to the "peak oil" theory of fossil fuels. In essence, we are getting better at finding and tapping difficult to get to resources - however, the incremental resources are at higher costs.
Reserves / Production (years) of Oil

Monday, May 23, 2011

Impressions from LightFair 2011

Attended LightFair last week and had the opportunity to spend some time with portfolio company Bridgelux as well as walk the floor.

Some takeaways below:
  • LightFair might as well have been called LEDFair. About 90% of the floor space at the Philly convention center was dedicated to LEDs ("solid state lighting") - despite the fact that LEDs still account for a minuscule percentage of lighting sales. This was certainly not the case 5 years ago. Conventions can tend to be leading indicators, but the question is whether adoption of solid state lighting is 2 years or 10 years out.
  • Did not see a lot of differentiation among the various lighting controls companies. I would love to see a compelling business model in lighting controls, but as it stands today, the paybacks are still too long (3-5 years), sales cycle is difficult, and there are a lot of companies doing a lot of the same things. Some exceptions here are Digital Lumens, which focuses on the industrial/warehouse market and Encellium, which has some really cool 3-D visualization tools. I suspect this space will become commoditized as fixture companies begin to embedd zigbee chips onto individual lights themselves - which we're already seeing with the Lighting Science / Google announcement.
  • Nichia showed off a 6" inch GaN on silicon wafer. Today, LEDs are typically built on 2" wafers, but there are great cost advantages in moving up to larger wafer sizes (increasing your batch size and therefore, throughput). We expect the industry to move to 6", which is standard in solar in semiconductor industries, which should help to further bring lighting costs down.
  • There sure are a lot of fixture companies. The fragmentation in the downstream part of the industry is incredible. It will be interesting to see how companies here differentiate themselves, and how non-China companies are able to compete. One company that stood out was Switch - a Vantage Point portfolio company with a $20 liquid cooled incandescent replacement.
All in, a good trip (although my retina is still recovering from staring at lights all day). Until next year....

Wednesday, May 18, 2011

The Coming Adoption Wave in Lighting

As I slowly make my way to Philly on the Amtrak to attend Lightfair, I am bemused by how little has changed in lighting and train travel in the last 100 years. In many ways, these two industries are a paradox of the modern age. You'd be hard press to name many other major industries that haven't seen some sort of technology revolution in the last century - just think of how much has changed in communications, aviation, or computing, to name a few.

By contrast, today,
50% of the light sockets in the world are still made up of incandescent bulbs - a technology that was commercialized in the late 1800s. While there has been innovation along the way, nothing has fundamentally transformed lighting since people figured out how to produce long-lasting filaments in vacuum bottles.

Lighting is a $70 billion industry, and if the press releases going into LightFair are any indications - folks are quite excited about the potential of LEDs to be a killer app in this space. At Novus, we have a strong investment thesis around solid state lighting and believe that the industry is on the cusp of a major adoption wave.

So why do cleantech guys care about this space? By way of comparison, an LED can provide the same illumination for 1/5th the power today and last 50 times as long as an incandescent bulb. This is important since lighting accounts for 25% of global electricity use. The problem, however, is that LEDs have been too expensive. A year ago an LED bulb may have cost $50-80 at Home Depot (if you could even find one). This week Philips and a few others have announced $20 bulbs. The adoption wave in CFLs showed that a $10 price point was a tipping point for mass adoption.
At Novus we are invested in Bridgelux, and they have stated publicly that a $10 bulb is within reach in the next 1-2 years. Materials science and packaging advancements are driving performance improvements, while the demand surge of LEDs for LCD televisions has brought large scale to the industry and helped reduced costs dramatically.

We've seen LEDs make their way into traffic lights, street lights and automobile headlamps, but not the larger general illumination markets. At least - not yet.
So what happens if (or when) solid state lighting takes off?

There will certainly be opportunities to make and lose a lot of money; and we can look at how the solar industry evolved as a guide for what may happen:
  • Asian manufacturers will dominate and commoditize the industry - driving down costs further, shrinking margins and killing anyone with high cost structures
  • There will be a huge opportunity in the downstream space (lighting service companies, networked lighting, lighting demand response)
  • Shortages in raw materials such as phosphors, indium and sapphire
  • Capacity overbuilds leading to dramatic booms and busts for equipment makers
It's going to an interesting next couple of years. But tomorrow, I will just enjoy walking the floor and seeing some cool lights.

Thursday, May 5, 2011

The Value of Offsites

Since founding Novus, the Partners have made Quarterly Offsites one of the cornerstones of how we work together. Once a quarter, our cross-Atlantic team gets together under one roof and spends day-long sessions reviewing each portfolio company in detail, providing sector updates, and discussing or adjusting the overall investment strategy of the Fund.

These meetings are sometimes conducted over a weekend of skiing, hiking or other outdoors activities (half of our team is Norwegian, and they love their outdoors), and also give us an opportunity to spend time together outside of the office. My girlfriend jokingly calls these my "Man Retreats", and although they can sound like a boondoggle, I am always amazed at how productive and valuable they can be.

I find that so many of my days are spent just keeping up with the momentum of the work week - going from one conference call to the next, one meeting to the next, one email to the next. There are days when email takes up an entire morning (As an aside, it is my firm belief that as a work culture, we are over-emailing. Too much cc'ing, replying all, and having long conversations that should be had over the phone). I imagine this is felt by many out there. While offsites are not a cure-all, I have found them to be a good opportunity to step back and discuss issues at a high level; get feedback and input from people you don't usually interact with; and get everyone on the same page as to what we should all be focusing on.

It is one of the best practices we have established here at Novus and I encourage any of you to try to implement them in your organization.

Tuesday, May 3, 2011

Cleantech: The next generation

Over the last 10 years the primary focus in cleantech has been on solving very difficult engineering and science problems, with the goal of bringing down the cost of solar, lighting, batteries and electric vehicles. In many respects, those efforts have yielded unprecedented results. Consider the example in solar, where technologies are nearing maturity. In the last five years, the cost of solar modules has dropped from $4.50 per Watt to $2 per Watt, with a pathway to grid parity by 2015 in some markets, based on further reductions.

During that period, something pretty extraordinary happened in the broader Tech space. The unique confluence of (1) lower storage and computing costs; (2) faster development cycles; (3) profileration of mobile technologies; and (4) rise of cloud computing and social media, resulted in all of us becoming walking supercomputers that generate mountains of data.

So what does that have to do with Cleantech?
As science and engineering solutions reach maturity and cost levels reach a tipping point, there will be a huge opportunity for companies that can leverage technology platforms (online, mobile, social, etc) to enable and accelerate mass adoption of renewables.

Folks have called this Digital Energy, Cleantech 2.0, Green IT , and many other names. Sunil Paul of Spring Ventures has probably done the best job articulating this general thesis and has called it GreenWeb. (For the record, the term we use at Novus is Green Net)

Green Net business models could include:
  • [Cleantech] as a service (for example "Lighting as a service", "Solar as a service", etc.)
  • Analytical tools to enable managing or developing renewable assets
  • Optimizing existing assets
  • Data analytics engines
  • Social platforms for energy efficiency
  • Innovative financing and leasing
...just to name a few.

Many companies are already hard at work in this space. Just recently, I've come across a number of interesting examples such as Solar Mosaic, which crowd funds solar development; Green Wizard, which serves as a market place and analytics tool for LEED construction; Geostellar, which has a geodata platform for solar developers; and Automatiks, which has a telematiks platform for electric vehicles. (I should note that Novus is not invested in any of these companies).

There has been a lot of commentary lately of generalist venture capital funds having been burned by cleantech investments, and leaving the space altogether to focus on their core sectors. While this is understandable (and probably rational given what's going on in the broader tech market), my belief is that we are about to enter a pretty extraordinary period in cleantech, and Green Net businesses will have a big role to play.

Only time will tell.

Monday, April 25, 2011

Is Cleantech Venture Investing Dead?

Many in the investment community are wondering if cleantech venture investing is dead (or dying). While I disagree with the notion, the critique is not without merit:

Compared to the current boom in venture investing - cleantech has been a bust
This cannot be disputed. While segments in cleantech such as solar, electric vehicles and LEDs have had unprecedented growth, it simply cannot compare with what has happened in social media, mobile and IT in the last 3 years. We all know that Accel will have the best performing fund EVER with Facebook; but this is not just a Facebook/Twitter/Groupon story. There has been a fundamental paradigm shift in how we communicate, consume information, and generate and access data. This shift, coupled with the reduction in storage, hardware and computing costs, has opened up a huge disruption opportunity for startups. You take those factors, add strong balance sheets at public companies (for M&A), global growth, and robust equities markets - and you have the makings of a boom.

As Sunil Paul recently stated at the Green:Net 2011 conference, "We [cleantech] are winning, just not compared to everyone else".

Cleantech in the U.S. competes with natural gas, which is at all-time lows
We are in a different power price environment than we were in 3 years ago. The discovery and successful exploitation of shale gas in the U.S. has resulted in a historically low natural gas environment, which is expected to remain for some time. Because natural gas prices drive power prices, the abundance of shale gas has made it more difficult for renewables to reach grid parity in the U.S. As a result, the growth in renewables has really been a China story.

Climate change has disappeared from the national dialogue and governments are broke
I must admit, 3 years ago, I would have said we would have carbon legislation in some form by 2012. As Adam Grosser of Silver Lake Kraftwerk recently said, "we were naive about the regulatory environment. VCs were not aware of the capricious and byzantine nature of the regulatory environment." While RPS standards have been enacted in many regions, the budget deficits faced by most state and federal governments today does not bode well for these standards being enforced when push comes to shove. In short, regulations alone will not drive Cleantech.

So all of this begs the question - why do I believe in Cleantech investing?
While there will always be asset classes that provide higher returns at any point in time, I fundamentally believe that the macro story for cleantech is unmatched: We are in a resource-constrained planet, and we will increasingly consume more resources-per-capita to fuel our current rate of global economic growth. This would be sustainable, if we were getting more productive at tapping our resources. In fact, the opposite is true:

(1) Growth in crop yields has decreased substantially, despite the massive increase in fertilizer.
(2) Global oil production is peaking and is only sustained by deepwater & unconventional sources
(3) Precious metal prices have skyrocketed as we have moved to more difficult-to-access deposits

The result has been a commodity boom like no other in history (Source: GMO quarterly letter):

As Jeremy Grantham, recently put it "This is not about peak oil, but peak everything".

Cleantech is all about selling electrons. Electrons, after all, are a commodity. Cleantech will not be driven by carbon, or climate change or "Going green". As we have seen, those things come and go. Ultimately, investing in cleantech is all about moving up the resource productivity curve.

Our current rate of growth and resource productivity is unsustainable; and at some point, things that are unsustainable come to a halting stop.

Thursday, April 21, 2011

The Twilight of U.S. Manned Spaceflight

Earlier this week NASA announced it had awarded $269 million to four companies to develop orbital spacecraft for human spaceflight. This is just the latest in a series of moves that hands over development and operation of spacecraft from NASA to private companies, many of which are startups. The expectation is that private companies will be able to do things faster, cheaper, and better.

While this announcement is a positive sign of things to come - it is clear that we have presided over the demise of our human spaceflight program. After 50 years of leadership in space, we will now watch China put a man in orbit and likely on the Moon in the next decade, and will be relegated to hitching rides on Russian rockets to get anything done in space. Even if we wanted to go to the Moon tomorrow, it would take us 10 years to get there since we lack the heavy lift capabilities we had 40 years ago. Pretty sad, given that there is more processing power in an iPad than NASA had on Apollo 11.

Some will say that these are economic realities - that we have bigger priorities here on Earth. While this is true, the writing has been on the wall for almost a decade, and it has been bad planning, not just budget restrictions, that have left us here. When I was at Boeing Phantom Works almost 10 years ago, it was already painfully clear that the Shuttle program no longer made sense from a strategic point of view, was old technology, and was not worth the cost. What did we do? We kept patching it up and extending the life of the program, without developing a plan for a cost effective replacement.

So what's the point's here? Organizations, big and small, need road maps to get to where they want to go. Some companies call this Next Generation Product Plans. Development efforts take time and money. Things have to be done in parallel. At the height of the iPod - Apple developed the iPhone (even though some said it would cannibalize sales of the former). At the height of the iPhone - Apple developed the iPad (Even though some said it would cannibalize sales of the former). Guess who just reported record sales & profits yesterday? Do you see a trend?

As we look at our Energy plan, Space program and Defense spending, we can't just focus investment on today's technology at the expense of tomorrow's. China has realized this better than anyone, and that is why they will not only be the leaders in space but also in renewables for years to come. Kicking the can down the road doesn't really do much good unless your job is to kick cans.

Saturday, April 16, 2011

The week in review - Zipcar

Last week Zipcar had one of the more successful IPOs of the year - first pricing above its expected range at $18 per share, and then soaring out of the gate on the first day of trading. By the time it was all said and done, Zipcar had risen 60% and settled at a market cap exceeding $1 billion - an impressive feat for a company with around $180 million in revenue. Congratulations are certainly in order to management, the investors, and the founding team that developed an innovative concept almost 10 years ago.

Much was written over the last week about what it all meant. After taking a few days to ponder it - here's my take:

(1) "[ ___ ] as a Service" has gone beyond IT
Over the last decade, customers have moved away from ownership; paving the way for "as a service" business models. The first iteration of this was software and storage, which made the leap to "The Cloud". Today, we are realizing that the benefits of non-ownership, such as ease of maintenance, capital efficiency, and upgradeability, can extend beyond IT.

The success of Zipcar is one more example of that trend - and we shouldn't expect it to stop there. At Novus we have seen a number of business derivatives of this kind making their way into cleantech. Will consumers accept "lighting as a service" from LED companies, or "solar as a service" from solar leasing companies? Time will tell - but I for one am bullish.

(2) Hold the champagne...for now
Make no mistake - an IPO is a significant milestone for any Company and its investors. To reach that point is a mark of success that the majority of startups will never experience. But it is not the endgame. Successful IPOs are measured in months and years - not in days. Investors in Zipcar have a 6-month lockup, and even when that lockup is reached, they will likely offload their shares over time. While Zipcar has a lot of room to grow, unprofitable companies have historically not fared well after their initial IPO bump (I must admit, we at Novus, have had first hand experience of this).

For late investors that paid over $15 per share in the last private round, a successful story will depend on Zipcar's ability to hit growth targets and move to profitability rapidly. So I congratulate everyone again on hitting a key milestone - but I'd keep the champagne on ice for a few more months.

(3) To the CEO: "With great [market] power comes great responsibility"
Yes I took that from the movie Spider-Man. Valuations are based on expectations, and a $1 billion valuation comes with a helluva lot of expectations. I have heard CEOs describe the burden of their company being valued above what they thought they could deliver. High valuation multiples are a double edged sword. The best thing management can do is execute according to their plan, and not be focused on unreasonable expectations in the short term.

(4) The IPO market is strong - but VCs should be wary of rushing companies out the door

This year, 40 companies have gone public raising more than $16 billion - that's an incredible statistic given we are only in April. These sort of numbers make people wonder if we are in the midst of another bubble. However, unlike the last tech bubble, a great deal of the companies going public today are profitable or approaching profitability. Whenever we talk about exiting companies in our portfolio at Novus, I always tell my colleagues - "You can only go public once". In my view, taking a company public before it is profitable or without having a fully funded business plan is risky. You need almost perfect execution to pull it off. Public investors are a tough combination of exceedingly sophisticated and impatient. As someone said recently "VCs invested in my business. Public investors invested in my stock".

So yes the IPO market is hot and the window is open - but nothing closes that window faster than a series of bad performing IPOs. So whether or not Zipcar is good for the market will depend on Zipcar.

All that being said - I think Zipcar is a great company and I am confident they will continue to have success.

Wednesday, January 26, 2011

80% by 2035

Last night the President gave one of the better State of the Union speeches in recent memory. In contrast to prior years, where the President went through a laundry list of things he does or doesn’t like followed by half of Congress rising in exuberant ovation and the other half huffing and puffing while sitting on their hands, this year’s speech was well received by most spectators in the chamber and focused on a single over arching theme: How does America Win the Future?

These days, it seems that people are more afraid of China taking American jobs and displacing this country’s place as the leader of the world’s economy than they are of terrorists hijacking airplanes. Unlike a lot of fears we all hold dear - this one is quite warranted.

At the heart of President Obama’s vision for America is a belief that the innovation, ingenuity and spirit that propelled us to the top of the 20th century remains unmatched in the world. We have shown that in the most perilous times, all we need to do to achieve something, is decide to achieve it. In answering this generation’s Sputnik moment, the President called for this country to set a national target of 80% renewable energy by 2035. Many out there may think this is unrealistic or more of the same job-killing tree hugging rhetoric from a liberal administration.

As it stands, I don’t know if it is achievable.

But one thing is for certain, if we don’t do it, someone else will. And if you think Americans hate losing their jobs to China – imagine how upset they will be when they depend on China for their energy needs.

As we speak, China is the world’s leading exporter of solar panels and is rapidly taking over the wind and LED industries. While our elected leaders were busy arguing whether or not we should be subsidizing clean energy, if the EPA is constitutional or if climate change is even real – the rest of the world moved full speed ahead in financing and fostering the industries that will one day power our planet. It may not happen by 2035, or 2085 for that matter, but it will happen. And when it does, we can either be at the forefront of technology or find ourselves in the unfortunate position of having replaced a dependency on foreign oil with a dependency on foreign solar panels, wind turbines, batteries and semiconductors.

So how do we get there? I don’t have all the answer, but certainly a lot of things have to change.

We must stop decrying the construction of offshore wind farms because they might ruin the view (the Kennedy’s and everyone on Martha’s Vineyard – you know who you are); stop clinging to spoils of yesterday’s energy technologies (the distinguished gentlemen from West Virginia and Gulf Coast states – you know who you are); and perhaps most importantly, accept that Bill Gates, Warren Buffet and the majority of bankers at Goldman Sachs might have to pay higher taxes.

If not – well, at least it was a good speech. I’m sure China will ship everything with English instructions anyway.

Saturday, January 15, 2011

The State of Venture

It seems venture capitalists these days are busier than ever. Silicon Valley is quite preoccupied with developing the next great app, social media tool, or business plan that gives the richest people that have ever walked the face of the earth the ability to buy more things they don't really need.

One only has to look at the latest valuations of Facebook ($50 billion and counting), Twitter ($4 billion), Groupon ($6 billion), Zynga ($5 billion), any many others to realize that this approach has worked out well for investors and entrepreneurs. Yes, it has worked out for the rest of us as well. These companies provide unique services we can't seem to get enough of and have impacted the way we live, communicate, advertise, and play.

So what's the problem? Well, maybe nothing. Except that perhaps investors with the capital, risk appetite and experience to help foster technology innovation should be out searching, not for the Zuckerbergs of the world, but for the Thomas Edisons. There was a time when Silicon Valley was primarily focused on solving scientific and engineering problems - playing a key role in developing the microprocessor, establishing semiconductor foundries, and inventing our modern day operating systems and programming languages. Over the last 50 years, these innovations helped usher in the greatest rise in GDP per capita, and by extension standard of living, since the first industrial revolution.

By comparison, the latest Silicon Valley successes have empowered me to know what mood a girl I met at a party 3 years ago is in, in the middle of playing a virtual reality game where I'm a farmer, as I get 50% off yoga pants - all while being updated on Ashton and Demi's dinner plans and Sarah Palin's latest quip characterizing people that went to Harvard as douche bags.

OK - I'm half kidding...but this reality isn't lost on everyone. There was a New York Times article a few months ago on this point, and I know of one prominent venture capitalist, Peter Thiel, who ironically was the first investor in Facebook, that is making a strong push around the venture community to return to science investing.

All of this is a bit of a preamble to what this blog is really about - venture investing in cleantech. There have been many questions raised over the last few years about whether the venture model is appropriate for cleantech. It's not difficult to see why. It's hard to get a 100x (or even a 10x) return on investment when you have to invest hundreds of millions of dollars into an enterprise. By contrast, the $500,000 that Peter Thiel famously invested in Facebook turned him into a billionaire. Moreover, technical milestones are expensive and take a long time to achieve, so it is difficult to cut your losses early; and the sales cycles are long and hard. What is perhaps the biggest killer, is that most cleantech companies don't benefit from network effects - the more people use them, the more valuable they become, which makes more people use them. Network effects are what helped many of the companies I mentioned earlier grow exponentially.

In short , I understand all the cons of cleantech venture investing - and as someone once told me, "you can't fight the math". But in my view, because it's hard is exactly the reason why it's appropriate.

Tom Wolfe wrote about the test pilots that became our country's first astronauts in
The Right Stuff, and seemingly captured their constant desire to push the outside of the envelope - that is, to exceed the limits of what is considered safe or possible. Going to the moon doesn't seem to captivate us like it used to. When I worked as an aerospace engineer on space programs, my mother once remarked: "I just don't see the point. Why do we spend all that money fooling around up there when we have so many problems to solve down here?"

While I disagree with her, the woman has a point. We do have major challenges here on Earth - many of them energy related. Technology helped give us the standard of living we enjoy today, and we need breakthroughs now more than ever to maintain our way of life amidst a crowded, resource-limited planet.

I'm not sure how we're going to get there, but we'll certainly need a lot of Thomas Edisons and others pushing the envelope to figure it out....and if they can get some venture funding - that would be good too.