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.