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Saturday, November 05, 2005

Rob Day of CleanTech Investing visits Boston's Energy Venture Fair

Excerpted from Clean Technology Investing Blog

Rob Day is a San Francisco-based principal with Expansion Capital Partners, a dedicated clean technology venture capital firm. The views expressed on this website are those of Rob and his friends and colleagues, not necessarily the views of Expansion Capital Partners.

Rob's Notes from the Energy Venture Fair in Boston:

Had the pleasure of attending the Energy Venture Fair in Boston this week. As always, it was a good opportunity to network and to see a lot of promising energy-related startups (something like 70-75 this year) do a very brief presentation, so it's a very useful survey. One fellow VC described it as a "speed dating conference."

One of the more interesting segments of the conference is always the panel of VCs who give their impressions of the market, what's hot, etc. Some of the participants have been on the panel several times now, so it's a good way to not only hear their interesting thoughts right now, but also to see how interested investors' outlooks might be changing.

What I find interesting about this conference in particular is that, unlike some of the cleantech or clean energy focused events, the Energy Venture Fair attempts to address the full spectrum of energy-related investments, from oil and gas to solar to more exotic technologies. That sets up a fascinating diversity of attitudes, both among investors and other participants. The VC panel discussion was no exception. This year the panel was moderated by Robert Bellamare of Utilipoint, and included Phil Deutch of NGP Energy Technology Partners, Ira Ehrenpreis of Technology Partners, Mark Riser of Hamilton Robinson, and Bryant Tong of Nth Power.

The panel was generally "skeptical, but optimistic" in the words of one participant. But there was a wide range of just how skeptical, and just how optimistic, these investors were. Some selected quotes that caught my attention and I jotted down (and as always, apologies for paraphrasing poorly, I am decidedly not a journalist):

"Every year we talk about how 'this is the start of the energy tech era.' But this year, we're seeing more mainstream VC activity, and strong performance by public companies like Evergreen Solar, so it really does appear to be picking up."

"There's a bluntness to the interest right now. We see high energy prices, high spending on energy reliability, and movement toward things like the Kyoto Protocol. My view is that those are dangerous catalysts. Those can go away. The interest is driven by front page coverage in the New York Times, but my concern is that expectations are too high. There are still a lot of obstacles. All the excitement has to be tempered by how complex these issues are."

"It's encouraging to see companies with real revenues targeting significant market needs. More of these companies exist this year than last year."

"We see a lot of crossover of companies using technologies from other fields. Just like materials sciences enabled the semiconductor industry and other traditional VC investment areas, we see the same thing going on in energy."

"There's still no Google in energy technology... Or at least not in clean energy technology."

"This is an industry with a history of the 'Pop and Flop'. That's discouraged people, raised skepticism. But we're seeing good growth in the underlying fundamentals now."

"Energy is a market that adds up to trillions of dollars worldwide. It's easy to look at that and see a huge opportunity. But unlike a Google, with few inherent limitations to its business model, there are limits to the applicability of any one energy technology. So I don't see a Google ever happening."

"The energy bill isn't a driver. We don't want to have to predict who's in a majority next year, or if it's a presidential election year. In some selected areas, regulations definitely area plus and will continue to be so in some form, such as the strong support for solar and wind. But when it comes to specific legislation or regulations, we don't ever consider it as part of our investment decisions."

"For a room full of smart people here today, if we're really interested in venture investing in energy, we need to think about what it means that so few of us are investing in nuclear, coal, natural gas, and the like."

"The bar has been raised for pre-revenue companies in this space. The management team must have very related experience, they must know their markets well. The business plan must recognize the slow adoption rates and slow absorption rates we see in these industries. By that I mean that utilities are slow to adopt a technology, and even when they do, they're slow to roll it out across their network."

"The big mistake is that we see entrepreneurs thinking about their story in a vacuum. If it's a pre-revenue company, they need to provide a list of good industry references who can validate the opportunity."

"The business plan needs to be blunt. It needs to have a full recognition of the competition and risk."

Some of the audience comments were thought-provoking.

One participant wondered how energy startups could possibly compete in oil and gas and coal against such entrenched big players. The general response from the investors was that there are a lot of opportunities to play around the edges, in enabling technologies, rather than take such companies on head-to-head. And one investor pointed out that these large companies tend to spend most of their efforts being defensive, protecting their existing businesses, opening up opportunities for more aggressive technologies to be led by smaller firms.

Another comment challenged the investors' outlook in general, charging that "there is a problem with the model. We need more patient capital to make things happen. But VCs only want to invest in things that are successful."

This speaks to the general variety of philosophies and outlooks prevalent in the emerging cleantech investing space today. For what purpose, to what end, are investors looking at this space?

The short version of the much longer answer that this question deserves is that, simply put, VCs are generally speaking looking to maximize returns because that is their mandate. There are certainly organizations that promote and enable "patient capital", and other classes of investors may have different investment timeframes. But VCs, whether cleantech-focused are not, are almost invariably tasked with maximizing financial returns, and while there are good win-win opportunities for them to invest in, that doesn't mean that every socially valuable technology is a good fit for VC investment.

As one panelist put it:

"One reason we don't mention things like climate change as a driver of our investments is that investors have been burned by looking at such things in that way in the past. We believe in it as a driver. But we don't talk about it."
Fortunately, while investors may not be able to back every opportunity they would personally like to, the conference served to demonstrate that there are a lot of compelling "win-win" opportunities out there regardless. Overall, it was a valuable conference with a lot of interesting companies and viewpoints represented.

Read more about renewable energy venture investing from Expansion Capital Partners' Rob Day at his CleanTech Investing Weblog

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