Ad hominem attacks over cleantech VC 'disaster'

At a TechCrunch conference in San Francisco, PayPal co-founder Peter Thiel said (according to VentureBeat):

“Cleantech is an increasingly large disaster that people in Silicon Valley aren’t even talking about any more. …The failure in energy and transportation points to a larger failure in clean energy — we aren’t moving any faster, literally, than we were when modern airplanes first came out.”

In response, Greentech Media’s Eric Wesoff wrote:

Peter Thiel Doesn’t Like Cleantech VC, Mankind
Eric Wesoff

Peter Thiel, known as the "Don of the PayPal Mafia," declared clean technology a “disaster” at Venture Beat's TechCrunch Disrupt 2011 conference in San Francisco.

OK, folks, go on home. Stop all this saving-the-world, green-energy stuff. It just isn't working. Thiel has spoken.
…
Greentech Media is talking about it. And so are plenty of Silicon Valley venture capitalists. And Thiel, evidently, hasn't driven a Tesla.

So, he isn't a fan of cleantech -- or at least the way cleantech investments have progressed.

Judging by these quotes in a Cato Institute essay, other things that Thiel doesn't like include poor people and women.

• I no longer believe that freedom and democracy are compatible.”
• “Since 1920, the vast increase in welfare beneficiaries and the extension of the franchise to women [voting-ed.] -- two constituencies that are notoriously tough for libertarians -- have rendered the notion of ‘capitalist democracy’ into an oxymoron.”

Apparently his other disreputable choices (at least for GTM readers) include backing a libertarian for president and a Republican for California governor.

I have met and like Eric Wesoff and respect his knowledge of the industry. However, this sort of ad hominem attack is unseemly and (I would have thought) beneath Wesoff and a reputable organization like GTM. However, the green/cleantech/RE/solar press sometimes seem like they confuse their role as conveyers of accurate information with being cheerleaders for the industry.

There are thrree reasons why the attacks on Thiel are inappropriate (and unnecessary).

First, we all know that rich VCs are opinionated, have big egos and make claims supported by intuition, preferences (or self-interest) rather than facts. For every Peter “emperor has no clothes” Thiel there’s two Vinod "save the planet yesterday" Khoslas. As with any prediction, there’s no way to know which one will be correct— but eventually these investments either will or will not produce the huge returns expected by the VC limited partners.

Second, Thiel is hardly the only one making these criticisms. Respected academics and other analysts are pointing to the scale of investments and risks for cleantech that dwarf software, IT or even biotech investments — and were doing so a year ago. To me, cleantech (at least at the Solyndra level) seems to be a level even beyond Fred Wilson’s bifurcation between software and biotech. (There’s also additional analysis suggesting that VC may no longer be adequate for biotech).

Frankly, the solar industry doesn’t need a lot of new investments to start yet another me-too module company. After excess entry, the brutal price wars and associated shakeout are underway, and VCs have seen such shakeouts before in hard disks, PCs, software, dot-coms and just about anything else funded by the VC herd.

VCs that invested in capital intensive cleantech companies (also including autos and biofuels) will have to decide whether to continue to support their companies (pre-liquidity event) or pull the plug.

It may be that the near-term future for cleantech investing is smaller bets on niche players or companies that can become self-funding soon. Since VC euphoria is cyclical, that would only be a natural correction while investors wait to see how the current wave of investments play out.

Thin film on thin ice

Solyndra’s well-publicized annus horribilis was usually explained as being specific to the company: their technology didn’t improve quickly enough, they didn’t execute, they weren’t able to scale commensurate with their sizable capitalization.

Others see it as part of a broader problem of Silicon Valley’s cleantech infatuation, in particular the inability of high-cost American firms to use technology to compete with low-cost Chinese rivals to produce commodity electrons. I think the jury is still out on that point.

A clearer picture is the failure of the thin film experiment. (FirstSolar excepted.) Cheap low-efficiency thin film panels are losing to cheap average efficiency crystalline silicon panel, as the volumes of cSI drives ongoing cost reductions.

DowJones has an (apparently exclusive) report about a cramdown for MiaSolé, the Santa Clara-based maker of CIGS thin film panels. According to DJ’s sources, the $100+m Series F round closed with a pre-money valuation of $550 million, versus $1.2 billion three years earlier.

The article identifies a pattern of troubles for similar companies. Companies seeking a valuation above $350m will find few takers. The price of panels has plummeted since 2008, in part because the temporary spike in polysilicon materials has passed. However, the biggest problem seems to be economies of scale — or lack thereof — in a commodity industry where cost savings are driven by scale.

Although MiaSolé has achieved enviable efficiency for a thin film maker — planning to ship panels with a 13% efficiency later this year — the company and its technology are fighting the scale economies of its mainstream rivals. Or as the final paragraph put it,

By moving into efficiencies in the mid-teens, the company is beginning to compete directly with polysilicon-based modules. But the small scale of production means that costs are still high. Miasole's 22 MW last year is a drop in the global photovoltaics market that was around 18 gigawatts last year, according to Barclays Capital.

I can see one other problem for the go-it-alone, technology-based Silicon Valley thin film startups: there’s no exit strategy.

Companies with capacity aligned to the mainstream silicon market can merge and combine with other companies to increase their scale economies. But the firms building their own processes and technologies and production have no potential mate — and with falling valuations, no IPO options either.

Once the world’s leading solar manufacturer by volume, in 2010 First Solar may have slipped behind China’s Suntech to become number two, but it’s still the first company to ship more than a gigawatt of capacity in two consecutive years. That makes it the only thin film maker to achieve scale on its own, and the latest news continues to suggest that its US rivals will be hard pressed to match that scale.

Are VCs giving up on RE? Should they?

Cross-posted to Engineering Entrepreneurship.

Statistics released Friday by the Cleantech Group say that “cleantech” VC investments in 2010 hit a record $7.8 billion, up 28% from the $6.1 billion in 2009 for North America, Europe and Chindia. The N.A. data was even more impressive, up 45% to $5.28 billion. Worldwide, solar continued to account for the largest share of the investments, up 52% from 2009 to $1.83 billion.

Although this sounds encouraging, Iris Kuo of VentureBeat had a different take. First, cleantech VC investment has been declining for the past two quarters. Instead, the capital-intensive have been going to government sources, including BrightSource, Solyndra and Tesla.

However, analysts are just beginning to realize that cleantech businesses may be fundamentally unsuitable for VC investment. A series of clues have emerged in the past 6 months.

Exhibit A was the whole debate started by VC Fred Wilson and his “two venture capital industries” thesis:

The first VC industry is investing in software based businesses. The software VC business has been fundamentally altered by the massive decrease in the cost of building and launching a software based business.…

The second VC industry is investing in cleantech, biotech and other capital intensive tech businesses that have economic models that have not been fundamentally altered. This VC industry operates largely the same way it has operated for the past twenty or thirty years.

The statistics were supported by TechCrunch data from the first 8 months of 2010: an average of $5m for web/ecommerce vs. $31m for cleantech.

Exhibit B was the decision of Kleiner Perkins to pull back from cleantech investing and go back to its roots in IT. Of all the major Silicon Valley VCs, KPCB had made the most aggressive bet on cleantech — particularly green energy. This is the firm that in 2007 made a partner out of a former presidential candidate and Nobel Prize winner.

Exhibit C are the observations of one of the most respected IT industry executives, analysts, inventor and entrepreneurs: Bob Metcalfe (MIT ’69), inventor of Ethernet and founder of 3Com. Having finished a decade as a venture general partner, last month Metcalfe said that the VC model (so far) does not fit cleantech:

Q: What did you learn from your investing in clean-tech, or as you call it, enertech?

A: I’m still in the process of learning – this is complicated stuff. But I learned that the innovation environment in the energy space is not there yet. The problems we see are a mismatch between the asset class called venture capital and the innovation opportunities in energy – it takes too much capital and it takes too much time. But I claim that’s only because the innovation environment in energy hasn’t developed, say, the way it has in pharma. Drugs take a lot of money and a long time, but there’s a lot of venture capital activity in drug discovery. That’s because the drug-discovery business has grown into being able to exploit the venture capital model. The partnerships that big pharma has with drug companies in stage one, stage two, stage three [clinical trials] allow venture capitalists to do what they do and get the returns that they need. The energy space has not quite developed, but it will.

This entire debate was anticipated by Prof. Martin Kenney of UC Davis, the editor of Understanding Silicon Valley — perhaps the leading academic expert on Silicon Valley and a longtime expert on hightech VC.

In July 2009, Kenney wrote a book chapter entitled “Venture Capital Investment in the Greentech Industries: A Provocative Essay” that will be published in the Handbook of Research on Energy Entrepreneurship. He notes a number of warning signs:

1. investors have been pouring money into green energy without being able to get it back from IPOs;
2. market growth may be slow, since “clean” technologies are competing with established (and cheaper or better) incumbents;
3. the cleantech bubble investing bubble parallels the Internet bubble;
4. thus far, the most successful cleantech businesses have been self-funded: either bootstrapped (e.g. Danish wind turbines) or internal green ventures from existing multinationals like Siemens and Sanyo.

Kenney tries to offer a positive scenario, suggesting that VCs could learn and adapt like they have in biotech. However, in the past 18 months have been signs that biotech VC may be facing similar problems (if the returns to pharma R&D are becoming less certain).

While the scale of investment in energy is enormous, the VCs have various reasons to actually favor larger deals (and often pension funds throwing money at them to invest). While VC worked great during the 1990s with relatively small investments followed by quick exits via IPO or acquisition, but both are much harder in renewable energy.

The first problem is the time scale. If (as Zider’s 1998 classic HBR article suggests) VCs seek a 10x liquidity event after 5 years (to cover their losers), then doubling the delay to 10 years cuts the IRR by more than half (and the NPV even more than that). For a 10 year exit — and ignoring the increased risk of failure — the same IRR would require a 100x return.

The other problem is that the size of the investment reduces (if not eliminates) the opportunity to exit via acquisition. A 10x return via acquisition was common for $50m dot-com investments, but such exits are going to be much rarer with $500m invested; a 100x return is going to be out of the question.

If VC can’t find a way to make money off cleantech investments, then cleantech entrepreneurs are going to have a hard time bringing their businesses to scale. Without VC, new businesses will have a hard time competing with self-funded multinational incumbents — or government-funded enterprises in large centrally-planned economies.

Rough days for venture-funded cleantech startups

Tonight’s event hosted by the SJSU-affiliated Environmental Business Cluster (EBC) was officially about Creative Financing for cleantech startups. And certainly the speakers talked about strategic investing (CVC) and government grants in addition to normal angel and VC funds.

One of the panelists was Brian Sager, a VP and co-founder of Nanosolar, which had A-list Silicon Valley tech zillionaires as its angels, then did a Series A and B with VCs, Series C with private equity and Series D with strategic investors impressed by a $4b backlog. By the time it was done, it raised almost a half-billion dollars.

Still, this is not a great time for cleantech investors. Moderator Eric Wesoff of Greentech Media noted an excessive number of VC-funded entires in a wide range of PV technologies, and Wesoff and several panelists alluded to the shakeout now underway.

The final comment of the evening, by NREL CIGS researcher turned VC Andrew Willamson, noted that valuations this year for most series B,C,D were off 40-60% (or even 80%). Dr. Williamson concluded: “I’m not doing anything this year that I can’t get for half off.”

Still, there were some thing missing from the session — great speakers but a little more coherence was needed. (Admittedly, the audience was a mix of people who attend two of these events every week versus those who were at their first or second.)

Wesoff tried but skimmed through his slides to avoid boring industry veterans. One thing that would have been interesting was the observations of GTM coworker Rob Day last month on cleantech VC “conventional wisdom”:

1. Cleantech only happens in Silicon Valley and MIT. If you look at the dollars flowing into cleantech from venture capitalists, and read the sunday NYT, that's the natural conclusion you would draw.…
2. Cleantech is really only solar, "smart grid", biofuels and electric vehicles.
3. Cleantech is really only about capital intensive business models.
4. Cleantech startups are only for whiz-bang PhD researchers who have earth-shattering innovations. Business models like energy efficiency services, and other implementation efforts, need not apply.
5. The only good cleantech startups are those backed by VCs. The fact that only 1% of startups get their initial capital from VCs simply means that 99% of new businesses are bad ideas.

BTW, of $864m of Q3 VC investing in “industrial/energy”, 60% went to SV vs. less than 5% for Boston. Wesoff noted there were more deals being done for smaller amounts in 2009 than 2008.

Still, I think the anecdotes of a few individuals would have benefitted by adding the perspective of an academic or researcher, to address several other points:

• Where is the VC money going within cleantech? If you’re not in those areas, are you toast?
• What models require VC (that “capital intensive” story) versus ones that are unlikely to get VC?
• How do you scale without outside investment?
• What do we know in general about sources of funds for high-tech startups, particularly during these difficult economic times?

With the current economy, I have seen a lot of SV events around bootstrapping in the past year. Admittedly, no one can build a $100m factory by bootstrapping, and many of the businesses that most excite the audience (especially VCs) are the ones that are going to grow fast or die trying.

Still, some of the people in the room seemed keen to get their business of the ground — to make a difference somehow — and perhaps sell out early to a larger firm that has the resources to take it the rest of the way. Perhaps a separate event could focus on getting early stage companies off the ground — to proof of concept — a topic that would be eagerly embraced by many in the audience and of course fits the EBC’s mission.

Cleantech VC plunges

Ernst & Young announced that Q1 VC investments in cleantech have fallen dramatically. As the SF Chronicle reports

Compared with the first quarter of 2008, investments dropped 63 percent, to $277 million, and the number of deals was down nearly 50 percent, to 24, according to Ernst & Young.

Investments in electricity generation fell 73%. eSolar of Pasadena got $40 million of the $56 million of investments.

The drought in capital spending — and end to any near-term exit possibilities — is overwhelming any positive effect of the Obama administration’s support for clean technologies. As a WSJ blog concluded

So what’s the outlook? Just like more mature corners of the clean-energy industry—just like all industries, come to think of it–clean tech is hunkered down and waiting for Washington to prime the pump.

“While the timing of the receipt of government funding is uncertain, we expect that loan guarantees and other government financing structures, as well as corporate adoption rates of clean technologies, will be early indicators of an upward investment cycle,” said Joseph A. Muscat, Ernst & Young’s Americas Director of Cleantech.

Spook turned VC

R. James Woolsey, former Rhodes scholar and Yale Law graduate, is best known as CIA director under President Bill Clinton. He also served in a series of defense-related government positions during the Bush, Reagan and Carter administration.

Today, Woolsey is a venture partner and “senior advisor” for the CleanTech investment group at Vantage Point Venture Partners, near SFO in San Mateo County.

Sunday, the Merc published an interview with Woolsey, focusing on his perceptions of the need for CleanTech investing, both from the standpoint of carbon emissions and also oil imports. He mentions how he introduced Tesla to the VPVP senior partner which led to their investment and Woolsey’s halftime role at VPVP.

Woolsey has recently left his Maryland farm for a year to hang around in the Bay Area, both for VPVP and as a Hoover Fellow. On the off chance that John McCain wins on Nov. 4, Woolsey could be called back to Washington, but right now it seems like the Woolseys can feel confident that they will finish their one-year lease here in the Bay Area.