Stimulus Act 101: Mana for Cleantech Companies

While passed nearly seven months ago, the American Recovery and Reinvestment Act of 2009, is still and will continue to be a watershed event for cleantech.  Virtually every one of the DOE programs outlined in the Stimulus was new.  At the end of June, the DOE announced a new $3.9 Billion smart-grid initiative.

What does all of this mean for cleantech companies?  Of the $38+ Billion in Stimulus funding, $25 Billion was slated to be distributed through grants as follows:  (i) $13 Billion on a competitive basis, and (ii) $12 Billion on a noncompetitive basis using formula grants via the states.   In addition, $7.3 Billion was to be used for new procurements, or for already competitively awarded contracts.  The remainder, some $5.8 Billion, was undefined until last week.

Under a grant arrangement, the government and the private party are to share costs on a 50:50 or in some cases on a 80:20 basis.  Formula grants allocated to states are to be spent in one of two ways: some through contracts managed by state agencies, and others will be provided directly to local governments and municipalities.

Under a very conservative reading of the Stimulus, at least $17 Billion in competitive grants is available resulting in potential cleantech transactions in excess of $34 Billion.  This figure excludes the formula grants and additions to already awarded contracts.

Companies interested in Stimulus funding should visit:

1. www.recovery.gov (for general Stimulus news and information)
2. www.energy.gov (for DOE specific news and rules)
3. www.fedconnect.net (for detailed information on specific funding opportunities)
4. www.fedbizopps.gov (for information on government solicitations, awards, and subcontracting opportunities)

California Stimulus initiatives cover a variety of areas of which energy ($3 Billion), water and the environment ($2.5 Billion), and housing ($2.1 Billion) offer the most opportunities for cleantech companies.

California has created a hierarchy of the ways in which Stimulus funds should be used.  The best method for getting funds into the economy is to use registered small businesses and disabled veteran business enterprises.

Companies interested in: (a) contracting opportunities with the State of California, or (b) registering as a small business or a disabled veteran business enterprise with the State of California should visit:

1. www.dgs.ca.gov

Angel Investors: Taking the Place of Early Stage VCs

With the recent decline in VC investments some entrepreneurs are turning to angel investors, especially the institutional investor type.  One such group in Southern California is the Tech Coast Angels.   Last night’s event was entitled, Raising Money: Calling on Angels.  The panel included:

Bill Waldo – Tech Coast Angels and

Keiretsu Forum

Ash Kumra – Co-Founder & CEO

DesiYou

Gene Alexander – Founder & CEO

MaMoCa, Inc.

So how active have angels been in funding companies?  According to a TCA member, TCA funded 12 deals in 2008 and 2 deals to date in 2009.  Those figures are not exactly encouraging.

Bill Waldo provided the answer to the question every entrepreneur wants to know: what are angels looking for in the companies they fund.  In his opinion, the following are essential:

1. management must demonstrate a clear understanding of the business and industry,
2. the business most have some substance, intellectual property, and have revenue or be close to revenue,
3. the business must be able to be cash flow positive within 6 to 12 months from the time of the investment, and
4. the products or service must be innovative and/or market disruptive.

TCA provided attendees an outline for an informal 30 second pitch competition judged by TCA members.  The stated goal was to cover the following in 30 seconds:

1. name, title, company name,
2. describe the market pain,
3. define the company’s solution,
4. describe the size of the market,
5. explain how the business generates revenue,
6. explain why management will be able to execute, and
7. state what the company is seeking (funding, an introduction to a strategic partner, etc.)

The winner was Calvin Chan of Nuvolo LLC.

The panelists provided valuable insight into some of the specifics of TCA funding practices:

Type of investment	Frequently a convertible note that converts into equity, at a discount, upon the next round of funding.
Board representation	TCA seeks a minority of seats which translates into 1-2 seats on a 5 person Board.
Average/minimum/maximum size of the investment	For TCA, the sweet spot is about $700,000.  The minimum is around $250,000.  The maximum about $1.4 Million.
Ownership of company post-funding	Anywhere from 20-35% on the first round, increasing to up 40% in a second round.

Listening to the pitches, presentations, and responses to audience questions, I compiled a list of take-aways.  They are:

1. in pitches and in executive summaries, follow the KISS principle (keep it simple stupid),
2. quantify results and product/service advantages in dollar/customer terms,
3. in pitches and in executive summaries, talk from the customer perspective,
4. investigate and play to your investor area of interest (e.g. software, IT, renewable energy, or biotech),
5. be able to show that management has skin in the game-using one’s own money to fund is an indicator of commitment,
6. be a known quantity in the investment community before you actually need the money for your company,
7. provide detailed, realistic milestones for the investor to examine, and
8. listen to advice and be coachable by the investors who funded your company.

Tips For Start-Ups: Pitching VCs In The Recession

Given the recent declines in venture investment, what are VCs looking for these days.  What does it take to get their attention?  Some of these questions were answered by the panelists at Pitching Venture Capitalists: Startups Uncensored on Monday night.  The panel included Nate Redmond, a Partner at Rustic Canyon Venture Capital, Mark Suster, a serial venture backed entrepreneur and current Partner at GRP Venture Capital, and David Stern, Partner at Clearstone Venture Capital.

First of all, what are the best ways to meet a VC?  The best ways are:

1. through lawyers who work with the VC community,
2. through executive recruiters,
3. by connecting with the VC’s own portfolio companies, and
4. by reaching out to other entrepreneurs

Second, what are the minimum standards for companies approaching VCs in this environment?  What metrics have to be achieved?  The panelists said:

1. the company should not have a product risk (some customer validation required),
2. there should be minimal team risk (management should have relevant experience),
3. there should be little sales or marketing risk,
4. the company must be able to define its value proposition,
5. as a corollary to the value proposition comment, the company must understand its business model and be able to explain it,
6. management must be able to demonstrate the trajectory of the business in terms of its own measurements (customers, sales, transaction size, market share, etc.),
7. management must be very cost-conscious (no pre-2001 style extravagance), and
8. executives should network their way in to the VC firm.

Third, when it comes to the investor presentation, what are the keys to getting and keeping a VC’s attention?

1. selling oneself to the VC (by focusing on past successes and explaining how this minimizes team risk),
2. explaining one’s passions for the product/service/market,
3. defining the vision for the company, and
4. describing the company’s future goals.

On the other hand, the best ways to blow the presentation are:

1. to not match the company’s market to the VC’s stated interests,
2. to not have any meaningful insight on the business sector/industry,
3. to not acknowledge the existence of challenges (e.g. the know it all problem), and
4. to have a one-way conversation so as to prevent the VC from asking questions.

Tesla Is Not GM

More amazing news from Tesla Motors came two days ago.  Tesla received approval for $465 million in low interest loans from the Department of Energy to be used to ramp up production.  Specifically, the money would be used to finance the production and assembly of the Model S.  This may generate up to 1,000 jobs.

Are Silicon Valley executives smarter than those in Detroit?  When it comes to the automotive industry the answer is yes.  Of course maybe that is not saying much.   As reported by Yale environment 360, a study conducted by the University of Michigan’s Technology Institute concluded that a major reason why the Big Three lost market share to their foreign competitors was their unwillingness to accept the fact that consumers valued fuel economy.  Maybe Elon Musk should run Detroit’s plants.

Where Will Cleantech Start-Ups Find Financing Now?

Cleantech financing dropped off a cliff in the first quarter of 2009 according to PricewaterhouseCoopers and the National Venture Capital Association.  Funding dropped an amazing 84% from the last quarter of 2008.  Some may say this is a good thing and it was inevitable as the exuberance was irrational in certain areas, such as solar.  I do recall having a conversation about how many VCs do not understand how capital intensive the cleantech space (especially renewable energy) is, as compared to software.  Lemming behavior or not, long-term this lower level of activity will be at a more sustainable level.  Nevertheless, existing start-ups now face a dilemma.  How do they survive and grow to the size to compete for the scarce VC, private equity, or hedge fund funding or utilize Stimulus programs?  The folks at Lightspeed Ventures have some suggestions.

Without VC and institutional funding, many cleantech start-ups will have to go down the food chain to friends and family and angel investors.  As long as they only need $3 Million, can promise returns of 3-5x in three to five years, offer reduced valuations, and have some sex appeal they can find an angel group willing to back them.

If you are a start-up, how do you navigate the maze of DOE regulations and programs?  In addition, how do you prove that your project is shovel-ready? Not so easy.  Of course there are exceptions.

The good news is angel groups will continue to see deals that formerly went to VCs and were priced accordingly.  The bad news is that the disruptive technology company without a robust management team with experience in the money-raising trenches will not have an easy time for the foreseeable future.  Maybe the answer is to change both the business strategy (to reach breakeven sooner and reduce scale-up risk) and the funding plan.

One interesting development is a report from the WSJ about VCs and cleantech angel investor groups forming a network to bridge the massive funding gap between family and friends and institutional capital.

Solar Powered Cooling at the ERC; Now I Know What Micro CSP Is

I knew that solar thermal is typically used to generate electricity and that it can also produce just heat, but I have not seen it used for building cooling.  During the Municipal Green Building Conference on April 15, 2009, a select few (who bothered to sign-up on time) were treated to a tour of the Southern California Gas Company’s solar pilot project at the Energy and Resource Center in Downey, California. The pilot project is intended to demonstrate the dual uses of solar: thermal generation and electricity. Currently, only the thermal generation portion is in operation. There are plans to upgrade the project to a combined heat and power showcase at a later date.

The basic concept is that the heat generated by the solar arrays powers an absorption chiller (a Yazaki chiller with a solar storage tank) which generates the cold water that serve’s the buildings air conditioning system. Both arrays (Sopogy and HeloDynamics) are capable of producing water temperatures of up to 325F. What makes this more even interesting is these systems provide the most power at roughly the same time as when the most cooling is needed.

The system supplied by HelioDynamics, the HD16.t, can also be used to provide heating to the building when cooling is no longer necessary. In addition, by changing the receiver and making a few other modifications, the array can produce both heat and power. Not bad. Unfortunately, I have no information on the levelized cost of energy produced or the cost of the system.

What To Make of GM’s Impending Bankruptcy and Tesla’s and Fisker’s Survival

Two years ago who would have predicted that General Motors, at one time the largest automaker in the world, would be on the verge of bankruptcy and that start-up alternative vehicle companies such as Tesla Motors and Fisker Automotive would survive and maybe even thrive. The conventional wisdom was that the automotive industry requires companies to have enormous capital and without it there is no chance of success. On paper, GM certainly had the capital, the technical know-how, the market share (historically at least), and the dealer network to survive the economic downturn. Obviously, something went very wrong. Specifically, the problems at GM resulted in the company producing cars that consumers did not want to buy.

Now let’s take a look at the newcomers. The latest news from Tesla is that it has taken 520 reservations for its new Model S retailing for approximately $50,000 and that it will open a regional sales and service center in London (the first of three planned European stores). According to StrategyEye, in early April of this year, Fisker closed on a $85 Million Series D round of VC financing giving it a total of $165 Million in outside financing. That is not too bad for a two year old company. Fisker recently named the 32 U.S. retailers that will sell its only product: the Karma, which retails for $88,000.

Granted Tesla has, and may continue to have financial problems in the future but the fact is that Tesla is not the one preparing to declare bankruptcy. Of course time will tell how well any of these alternative cars will sell and whether these carmakers will make a profit in the next five years.

So what can alternative carmakers learn from GM’s demise?

1. Size is not everything in the automotive business.
2. In order to survive, you must produce vehicles that consumers will want to purchase.
3. As a corollary, quality matters to a majority of consumers.
4. Once you gain a reputation for producing vehicles of poor quality, it is not easy to change that perception.
5. Do not dilute your brand by offering too many makes and models.

Administration Reverses Course on Greenhouse Gas Regulation, Cap and Trade, and Let’s Geoengineer

It appears that the Obama Administration is softening its stance on certain aspects of the proposed cap and trade system.  Specifically, it appears the President is, in the words of one reporter, open to compromise on the issue of whether businesses could receive some pollution allowances for free.  This is in stark contrast to candidate Obama’s position that 100% of the allowances should be auctioned off.  Maybe the Administration believes that geoengineering will make up the shortfall.  Hasn’t China been firing rockets at clouds?  What gives?  Could it be that certain lawmakers, whose constituents include the worst polluters, have voiced their displeasure at the prospect of having to pay for the few little externalities caused by their activities?  These would include greenhouse gas emissions and adverse health consequences for hundreds of thousands of people living downwind from these factories and plants.

If we let the fossil fuel industry dictate climate and economic policy, there will be no good time to clean up these industries as their profits will always be at risk.  To be fair, the industry says that having to pay for 100% of the allowances at once will drive up energy costs too quickly.  Fine, let’s use the auction proceeds to subsidize the increased cost to consumers.  It is hard to have sympathy for an industry that has historically invested so little in R&D (estimates vary but it is somewhere in the range of 11-18% of the amount spent by software and pharmaceutical firms) that could have made dramatic improvements in its operations and emissions.

Why in the mainstream discussion of cap and trade is there no mention of the potential savings in healthcare costs if these industries clean up their act?  There certainly are statistics available to inform the debate.  Furthermore, what of the potential economic stimulus and job creation resulting from these industries being required to reduce their emissions.  Someone will have to provide carbon storage and sequestration, advanced scrubbers and filters, etc.  Once these technologies and processes are successfully implemented domestically they can be exported abroad.

It seems to me that a cap and trade system that does not provide for a 100% auction of allowances is ripe for manipulation.  We have already seen that Congress is susceptible to pressure from the industry.  Under this new cap and trade arrangement federal and state governments could be given emissions allowances to hand out as they see fit.  So let’s say you are a coal company in West Virginia and you do not want to pay for your allowances.  You might bend your state representative’s ear so that when West Virginia is given allowances those allowances are directed to you.  Nicely played.  Of course this process could be repeated all over the country which would dramatically reduce the effectiveness of the whole system.  These are some of the reasons I favor a carbon tax: it is direct and less susceptible to gaming.  Too bad the carbon tax alternative is off the table.

Preface; Stimulus Act and Cleantech

My goal in writing this is simple: to provide the background and context to the cleantech stories that appear in the media and in other blogs.  While there is ample coverage of deals, layoffs, and technology in general, I believe that what is missing is the 30,000 foot view that fills in the picture for readers, not all of whom are intimately familiar with industry developments.  It looks like blogs may play a bigger role in covering the cleantech space (at least that is the opinion of one blogger, William Brent) so I hope this approach is useful.

Here is one example of what I am talking about.  On March 20, 2009, the DOE agreed to provide a $535 Million guarantee to Solyndra for a new manufacturing plant.  While this is great news for Solyndra what does this mean for other companies or other technologies like concentrating photovoltaics?  If nothing else, it means that the DOE loan guarantee program, which has the potential to provide up to $60 Billion in guarantees, can now provide fewer guarantees having spent a significant amount on Solyndra.  I do not mean to pick on Solyndra as they have a very promising technology/product and they submitted their application to DOE well before the Stimulus was signed into law.  Solyndra also has in excess of $500 Million in VC funding and reported revenues in the billions.  The point is that there are important decisions to be made on how the Stimulus funds are used.  Should the DOE give the funds to several of the biggest, best funded companies in each segment or to a larger number of smaller, breakthrough pre-revenue technology companies?  What makes this process even more interesting is the Stimulus’s focus on shovel-ready projects which is hoped will translate into faster results (aka jobs) and better poll numbers for the administration.  My hope is that the DOE does not get too enamored with the high-fliers in cleantech as they have the VC backing, the ability to engage the most lobbyists and get the most press, and they can be seen by some (especially the VCs) as too big too fail.  The danger of this path is obvious in terms of overemphasizing quick results at the expense of new, breakthrough technologies whether in solar or tidal or energy storage.  While consolidation may be inevitable (and accelerating in this economy see OptiSolar) what I do not want to see is segments of the cleantech space looking like the operating system sector dominated by one company.

Hello world!