Peter Rothstein, President New England Clean Energy Council and moderator of today's Massachusetts Technology Leadership Council's breakfast seminar entitled Building the Cleantech Ecosystem in New England, kicked off today's program by noting that venture capital firms investment in clean tech has increased dramatically over the last five years, from 2% then to 17% today. He added that VCs financed more deals in New England than any other state, although our region came in third in terms of total dollars.
Moreover, most of this money came from investors reinvesting in later stage deals that they had financed in earlier years. This caused Peter to ask how we will finance new deals in a highly fragmented regulated industry where solutions are selling at commodity prices.
The panelists included a broad spectrum of clean tech executives: Dr. Marcie Black, CTO, Bandgap Engineering; Marty Flusberg, CEO Powerhouse Dynamics; Howard Nunes, CEO, Pepperdash; Stu Patterson, CEO Nexamp; and Tom Zarrella, CEO, Sustainx.
They discussed a wide range of issues from financing sources to business models to value propositions. This post highlights some of the takeaways from the perspective of this B2B marketing consultant.
In the introductions, we heard a little about each company. Powerhouse Dynamics is pursuing a consumer market, has 140 dealers in North America, and sells online at Amazon.
Howard told us Pepperdash is developing the first building management systems that make automated decisions, based on predictive modeling of long-term use patterns. The company is self-funded. He noted that sales were just under $3 million last year and that grant money is hard to get. He said that 2200 companies applied for 26 grants last year.
Marcie relocated her company from Los Alamos because she felt being a part of a clean tech cluster is essential. With the help of the community, she succeeded in raising seed and Series A capital from VCs who have been great partners. Her company is aiming to increase the efficiency of solar energy to the point where it is cost-competitive with electricity.
Tom previously ran GT solar, where he achieved a 20x return for private investors. His company, SustainX, is developing completely mechanical isothermal technology to address the grid-scale energy storage problem. Where alternatives run on batteries, Sustainx' solution is completely mechanical.
Stu is raising a Series A round from VCs for Nexamp. Nexamp originally planned to target energy solutions for buildings. After receiving several stimulus grants for solar deployment of waste water treatment, the company shifted its focus. Going forward, he said the company will probably pursue both markets, although possibly as two separate companies.
From there, the panel turned to a deeper discussion of financing. The panelists were raising money from a variety of sources including self-funding, stimulus grants, VCs, and angels.
They remarked that that raising money was particularly difficult now. Howard was self-funding and hoping to raise additional funds from revenue.
Stu was minimizing his financing needs by partnering with developers that would work for sweat equity. Marcie's plan called for using existing manufacturing processes to constrict funding needs.
Martin raised $2.5 million, mostly from angels, a couple thousand dollars at a time. Tom, on the other hand, raised the entire $20 million that he needs to take his company to commercialization.
Next, the panel discussed the difficulty of operating in a heterogeneous market where regulations and growth drivers differ from region to region. For this reason, among others, Marcie said she was also targeting overseas markets.
The panel discussed some of the difficulties of selling to utilities. For one, utilities move slowly, especially as pertains to IT. They only do RFPs once every year or two so candidates need to wait.
Someone pointed out that buying an existing utility partner was a way to expedite the process. Another panelist had worked with a Wharton class to tier utilities by the mandates they must meet.
Martin eschews utilities because they won't buy products that are on the "other side of the meter". This is one of the reasons he opts to work with affinity partners (e.g. consumers, chains, HVAC distributors, etc.) The problem is that it's hard to get traction with small sales.
Apparently, just like health care, clean tech is another industry with perverse financial incentives. Today, the focus is on $/panel; the problem is that customers buy "energy" rather than panels. Also, everyone talks about roundtrip efficiency rather than return on capital.
Marcie noted that in the most mature segments, solar and wind, look at cost/kilowatt hour. The Department of Energy however, is interested in the dollars per watt which creates a bias for less efficient cells. Moreover, solar incentives vary by region across the globe.
Tom finds that with Sustainx, just as in the early days of solar, he finds that he has to build market benchmarks. He finds that he also needs to develop a different value proposition for each market.
He warned Marcie that Asia avoids introducing new technologies and that you need to find companies with development lines in their manufacturing facilities. She responded that there is a supply glut, lower tier will go out of business, and some companies will realize that they can get a major bump in efficiency and need to differentiate to survive.
Lessons from Evergreen
When asked about lessons learned from Evergreen Solar, answers included too high a requirement for capital expenditures, missed opportunities to learn from others by deciding to do everything themselves, and government tax credits for job creation are short term drivers-but very powerful.
Advantages of different funding sources
Job creation is not a factor in the venture world. All that matters is economic payback.
Nevertheless, government provides certainty. Presidential directives are facts. Agencies must execute right or wrong.
Utilities change goals year by year, and state by state. It's essential, therefore, to pick the right region.
During the Question and Answer period, panelists told us that:
- Predictive modeling is important even for businesses with fixed use patterns because people's behavior is unpredictable-except in the long term.
- Less developed countries are generally where products get a second life, rather than where innovation happens.
- The west coast VCs make quicker decisions but a good investment will sell on either coast.
- Chinese and US VCs are partnering to take advantage of deals in each others' regions
- Because clean tech is new, the business model is still developing. No one has exited or built relationships for the long haul.