Thursday, October 23, 2014

Mixing Up the Potential of Disruptive Clean Tech and Scatter-Shot Investing Strategies

Re-posting a webinar synopsis about disruptive green technology from a Yale School of Management panel this summer. These guys share some pretty great war stories about the initial opportunity identification at First Solar and Tesla, and the constraints we need to be keeping in mind when evaluating clean tech investments.

Given the degree to which investors have pulled back from green tech investing since 2007, its tempting to think that it's the sector that is to blame. But I'd argue, and I think some of this analysis supports me, that it wasn't so much the industry that disappointed at that time, but the investing strategy form VCS that went along with it. Big funds like Khosla Ventures took a scatter shot approach looking for early-stage science wins without attention to business plans, markets, or management teams.

Unsurprisingly, a lot of those plays went bust or are yet to yield fruit. But let's not confuse the investing strategy with the medium itself. In the cases where VC's applied there traditional diligence and logic, and invested in clean tech companies with complete business plans and credible management teams with execution experience, as is normally expected in other fields, returns I suspect faired better.

The next clean tech VC rush I think many be just on the horizon now, but when it arrives, let's hope we get a little more wisdom and rigor, and a better, more sustainable investing strategy.

Click the link to watch the video or read the synopsis below. 
Green tech investors want to put their money behind firms with the potential to disrupt their industries and bring both positive environmental impacts and financial success. But what’s disruptive is by its nature unprecedented and unpredictable. How do investors assess the potential of a green technology company? Everyone is looking for the idea, product, or company that is really going to shake things up. For those willing to accept significant risk and uncertainty there are opportunities to make early-stage investments in disruptive innovations in the quickly expanding field of green technology. But what does disruption look like in that sector? 
Four experts offered their answers in a June 24 online discussion. Nancy Pfund '82, managing partner at DBL Investors and lecturer in the practice of management at Yale SOM, moderated the conversation. The panelists were Daniel Gross '98, managing director at Oaktree Capital Management; Stuart Patterson '83, an experienced tech sector investor and entrepreneur and currently president and COO of RAMP; and Rosemary Ripley '80, managing director of NGEN.  
Pfund described how her venture-stage firm approached putting money behind a green vehicle. "Any improvement on the internal combustion engine is an improvement in terms of climate impact," she said. But DBL considered hybrids to be an incremental step. Seeking a truly disruptive choice, she invested in 2005 in a company working on an all-electric vehicle. That company was Tesla. 
 One piece of finding a disruptive opportunity is understanding the industry. As in other industries, Patterson said, investors start by looking for "earlier, better, and cheaper." But there are important differences in green tech. Internet startups don't take a lot of money to get going; green tech requires expensive research and development. "If you want to have something that's truly disruptive and is going to have a major impact on the clean tech space," he said, "you need to allocate in the tens of millions if not hundreds of millions of dollars." Green tech also requires patience, he added. It often takes years to refine the technology and business model.  
In these ways—and in the need to negotiate significant regulatory overhang—green tech is more like the life sciences than other parts of the technology industry, Patterson pointed out.  
On the other hand, there are periods where change happens quickly in a new industry, and that can be a source of opportunity. Gross, who focuses on the growth stage, said, "Clean tech is such a rapidly growing industry that whenever you see things scaling up, as an investor, you can step back and look for the natural constraints." He added, "If you can spot companies that don't face those bottlenecks or control those bottlenecks, they are likely positioned for growth and market disruption."   
As an example, he pointed to a period when demand for silicon exceeded supply, resulting in prices spiking from $24 per kilogram in 2004 to $450 per kilogram in 2008. First Solar, which Gross invested in while at Goldman Sachs, "was the only company that had a proven, in-market technology to make a solar panel that didn't use silicon," Gross said. Instead, the company used cadmium telluride in its "thin film" modules. First Solar went public in 2006 and remains a major player. 
Real disruption isn't just a few months of buzz that drive an IPO. It creates ripple effects, Ripley said, that reshape multi-billion dollar industries. When she is considering an investment, she looks at how the company might maintain its initial advantage. "Once a new idea gets proven, the big players will come charging in. What does a new firm have that means the business model, product, service, or technology will remain differentiated and sustainable over time?"

Wednesday, October 22, 2014

If We Can't Get Big Money Out of Politics, Let's at Least Get Some Good Big Money Into It

The New York Times has run yet another major expose on Tom Steyer, the billionaire former Hedge Fund manager who has taken up investing in progressive political outcomes as a second career.

While I think most folks agree that we should be limiting the excessive amount of money flowing into politics, its at least nice to see that there is at least some cash flow coming from environmentally minded folks with an eye toward preserving a livable climate for future generations.

With a $50 million pledge to push for the revival of cap and trade on the political agenda, this is another reason to get bullish on renewables for the longrun.

According to NYT's map, he's going head to head with the Koch brothers in terms of directly backing candidates, and of course putting his money in the swing states where it will get the best bang for the buck.

Steyer's second career is an encouraging development for the environmental movement. But he's got a long way to go to catch up to the Koch brothers.

Tuesday, October 21, 2014

Next Steps for Solar

Solar PV prices have hit their bottom.... at least for now. So what's next for the solar industry? Gigaom's got a great article on financial and product innovation as the next steps. Read it below, and here.

A few years ago the biggest influence on the solar industry was the falling prices of solar cells, leading to some of the cheapest solar panels in history. But today, that solar panel price drop has slowed. Now solar companies are focusing on other ways to reduce costs and push the industry forward, including new types of solar panel financing, novel and more efficient panel designs and low-cost, next-gen batteries to pair with solar panels. At the solar industry conference Solar Power International, which kicked off Monday in Las Vegas, expect to hear all about the latest innovations from startups and big companies that are developing these new business models and new designs. Image courtesy of Apple.
Photo courtesy of Apple

Batteries and energy storage

For the past couple of years, batteries have taken center stage in the solar industry, and they’ve only gotten more attention in recent months thanks to Tesla’s big battery factory bet in Reno, Nevada, which will eventually churn out some batteries for the power grid. When paired with solar panels, batteries can store solar energy at night when the sun goes down, making solar systems available to provide power around the clock. However, battery systems add significant costs to the solar system. At SPI, solar service company Sunrun announced Monday morning that it has started a pilot project to offer battery systems from OutBack Power Technologies to its solar customers. Last week, startup Stem unveiled a partnership with Kyocera Solar to offer a solar panel and battery system for commercial customers. In the early stages of this market, partnerships can help small companies compete on a larger scale, and partnerships between nimble startups and big service providers can introduce more innovative thinking.
  Batteries ready to ship at Aquion Energy's factory. Image courtesy of Katie Fehrenbacher, Gigaom.

Batteries ready to ship at Aquion Energy’s factory. Photo by Katie Fehrenbacher, Gigaom. Of course, these companies aren’t the first to make partnerships across the solar/battery divide. SolarCity works with Tesla for its batteries (Tesla CEO Elon Musk is also chairman of SolarCity). One Roof Energy has been working with battery maker Silent Power to launch products. SunPower is working with KB Homes to provide a solar-panel-and-battery combo to new homeowners in Irvine, El Dorado Hills and San Diego. And SunEdison has piloted a battery from startup Seeo. Other grid and solar-focused battery startups are now working on the next generation of their battery chemistries. Awhile back, startup Aquion Energyswitched its anode-materials blend to a higher-energy, better-performing one.Battery startup Ambri has made changes to its chemistry as well. Startup Eos recently showed off its first zinc battery installation for New York utility Con Edison.


Offering less expensive ways to finance solar panel systems is another way to reduce overall solar project costs. Last week SolarCity announced the first registered offering of solar bonds, starting with a $200 million fund. The earnings on the solar bonds are paid for by the income from monthly solar energy payments from SolarCity’s customers. SolarCity has developed a booming business by enabling customers to pay for solar power as a monthly service, instead of having to pay for solar panel installations up front.
  SolarCity panels, image courtesy of SolarCity.
On Monday, reinsurer PartnerRe said it plans to offer $100 million toward financing purchasing loans originated by Mosaic, the crowdfunding solar startup based in Oakland. For now, crowdfunded solar projects make up a tiny fraction of solar systems, but Mosaic has been expanding its services to other types of solar financing.

“Soft costs”

Financing is part of the “soft costs” for solar. Soft costs include everything that has to do with installing solar panels on rooftops (and large solar projects in the desert, for that matter) except for the cost of making the actual solar hardware — so it’s things like permitting, financing, taxes, marketing and customer acquisition, labor and supply chain costs. When it comes to installing solar panels on the rooftops of homes across the U.S., soft costs made up a whopping 64 percent of the total cost of the system, according to a report out late last year from the National Renewable Energy Lab (relying on data from 2012).
  Solar panels, Image courtesy of Jon Callas, Flickr Creative Commons

According to GTM Research, most of the reductions in solar costs are coming from the “balance of systems” costs, which are improvements in the design, engineering, labor and financing for rooftop solar systems. And soft costs make up a major part of the “balance of systems” costs. GTM expects the cost of installing solar power to fall by 33 percent between 2013 and 2017, and only six percent of that will come from a drop in the solar module prices. According to the Solar Energy Industry Association’s latest report, the U.S. installed 1.13 GW of solar panels in the second quarter of 2014. That was up 21 percent over the second quarter of 2013, and represented the fourth-largest quarter for solar installations in the history of the market.

Saturday, October 11, 2014

"Environmentalism" is Dead

NPR's coverage of a recent PEW Research poll reaffirms an interesting trend in American life: The environmental movement is dead. While 44 percent of our grandparents generation self-identified as environmentalists, only 32 percent of Millennials today

Part of the issue is semantics. "Environmentalist" is just no longer a cool word, so Millenials, ever aware of the perceptions of others, just don't use it. My suspicion would be that the term will likely never return to its near 50% threshold that it enjoys with the generation that invented it.

But the death of "environmentalism" doesn't necessarily spell doom for the planet. It's not that kids these days don't care about the environment. Quite the opposite. Instead, I think it's that Millenials just don't like labels in general. "Environmentalist" is an adjective.

If PEW Research were to take a similar poll across generational groups around support for "sustainability," "climate action," "recycling," "clean energy innovation," and "environmental markets," and "ecosystem preservation," I think they would see that our generation is just as "environmentalist" as our parents and grandparents if not more so.

Indeed, from the ashes of "environmentalists," has risen a plethora of successor movements. A menagerie of conservationists, climate activists, locavores, sustainable foodies, green consumers, and green investors.

So don't fear for mother nature. The decline of environmentalism doesn't represent the decline of environmental progress. Instead, we making a healthy transition away form a focus on adjectives, and toward a focus on verbs. Actions are more important than labels anyway, so it's a shift I think can only be good for the movement and the planet.