Emerging Technology Market Highlighted at the Cleantech Venture Forum, UtiliPoint Issue Alert(r)

Tuesday, November 2, 2004

Last week I had the good fortune to attend the Cleantech Venture Forum in Toronto. The forum is intended to provoke thoughtful discussion of the factors impacting private equity investing in the clean technology sector. The forum also provides a showcase for venture-grade investment opportunities in the sector.

The Cleantech Venture Network hosts this event twice a year for equity professionals and entrepreneurs representing cleantech companies. This forum was the largest East Coast forum yet, with 265 attendees.

The forum's concept of clean technologies embraces a diverse range of products and services that are inherently designed to provide superior performance at lower costs, greatly reduce or eliminate environmental impacts, and, in doing so, improve the quality of life.

Smart Energy

Day one of the conference focused on how governments and companies are urgently seeking cleaner generation, more reliable grids, and more efficient end use. Speakers and panels made the point that these goals cannot be achieved with the electromechanical equipment of the last century. Instead, a transition must be made to more modern, digital gear.

All of the speakers highlighted the fact that the application of digital technology to the electricity network with the addition of electronics and intelligence to the generation, distribution and consumption of electricity opens the door for new applications and companies. At the same time, the technology reduces costs, lowers environmental impacts, and increases reliability.

Presenters focused on three specific areas where this transformation is going to occur. First, in the generation sector there will be a transition to more efficient, more controllable production, including renewable energy. Secondly, with regards to the nation's grid, there will increasingly be automating, optimizing and monitoring of transmission and distribution lines, including intelligent switches, digital relays and advanced meters. Finally, energy usage will be impacted by technology that increases efficiency and reduces peak loads. Such technologies will include energy management software, smart motors, intelligent load shedding and building automation.

Investment Opportunities

The second day began with a keynote address from Ira Ehrenpreis, general partner at Technology Partners, a venture capital firm focused on energy technology, water technology and materials sciences. He discussed the current venture capital environment, and the opportunities and challenges with regards to cleantech in particular.

Ehrenpreis pointed out that between 1999 and 2001 nearly $200 billion was raised by venture capitalists, but since then less than $30 billion has been raised. According to Ehrenpreis, much of the money that venture capitalists raised in recent years has yet to be spent, resulting in an estimated $68 billion "overhang."

Additionally, most of the venture capital money investments are being made in traditional sectors such as telecommunications, biotech, software, medical devices and semiconductors. For example, in 2003, energy technology investment accounted for less than 2.4 percent of total venture capital investments.

The implications of this environment for venture capitalists? For those focusing on the traditional areas of investment, there is too much money chasing too few deals, an incredibly competitive environment, a continuous pressure on valuations and a need for differentiation.

There are several factors making the sector more attractive to venture capitalists. For one, there is a relative lack of competition for those focused on energy technology compared to the oversaturated areas of information technology and life sciences. Ehrenpreis cited several other factors, including the high price of oil and aggressive government programs such as state renewable portfolio standards.

Ehrenpreis also sees a number of challenges that should be addressed to encourage more venture capitalists to consider the sector. Companies need to get better at turning science projects into commercialized products. While numerous companies have great ideas, few have successfully turned their products into commercial successes. Then, there are few examples of quality exits made by venture capitalists. The sector has yet to have a success such as a Yahoo, Google or Cisco Systems. Those companies that are in the sector that have had initial public offerings have not done particularly well.

Finally, Ehrenpreis also mentioned that in general the sector lacks proven entrepreneurs. In some sectors, such as biotech, it is not uncommon for a CEO of a company seeking venture capital to have successfully done the same for two or three companies in the past. Such serial entrepreneurs in the energy technology sector are rare.

After Ehrenpreis' address, 19 companies that are currently in the market for venture capital made presentations. They demonstrated the wide range of cleantech, and included technologies related to advanced materials, biotechnology, information technology and nanotechnology.

The forum's award for most promising presenter went to Mark Komonoski, director of Carmanah Technologies Corporation. Based in Victoria, British Columbia, Carmanah supplies proprietary solar-powered LED lighting solutions for the marine, roadway and railway markets worldwide. In our next Emerging Technology IssueAlert® we will take a closer look at this interesting company.

After the company presentations, Mossadiq Umedaly addressed the audience. Umedaly is the chairman of Xantrex Technology, Inc. During his tenure as the CEO of the company from 1999 to 2003, he transformed Xantrex from a small niche player to a leader in advanced power electronics.

Umedaly's address focused on how venture capitalists can help their portfolio companies be more successful. According to Umedaly, venture capitalists need to look for companies led by individuals with vision, passion, a quality team and good judgment.

He suggested that there were two main ways that venture capitalists could help their companies. These were to invest thoughtfully, and to be generous with both time and resources. He also thought that there were two chief ways that venture capitalists diminished the success of their companies. First, they attach so many concerns and investment protections to deals that they limit a company's ability to grow. These actions can burden company management and reduce incentives for success. Secondly, venture capitalists tend to hang around to look after their investments. Umedaly cited a few examples, such as a venture capitalist receiving veto power over certain management decisions, or obtaining a board spot to look after his or her investment. These actions can burden management decisions, and preclude offering board spots to individuals who could provide better strategic guidance to the firm.

According to Umedaly, the mistake most venture capitalists make is not knowing who their customer is. They consider their investors to be the ultimate customer. In Umedaly's opinion, the customer is the emerging technology company.

The second day concluded with a panel that discussed cleantech investment's historical returns and perspectives on the future. The panel agreed that clean technology venture investing is accelerating, and data was presented that indicated nearly $3 billion has been invested since the beginning of 2002, representing 6 percent of total venture investments in North America. More than 500 cleantech venture transactions have been completed in this same time period by a growing number of investors.

The panelists concluded that the sector's future appeal to the venture community and to limited partners deploying capital in cleantech funds will in large part depend on what exit returns are achievable.

Renewables and the On-Going Industrial Revolution

The final day of the conference presented several concurrent panel discussions. I had the opportunity to attend two of these. The first was entitled The On-Going Industrial Revolution. The panel focused on how emerging companies are imbedding clean technologies into traditional manufacturing and processing industries. These technologies improve productivity, increase operating efficiency, and reduce energy consumption, waste and pollution. They addressed the intense pressure industries are facing from shareholders to become more efficient, and the demands from governments and the public to cause less environmental damage.

The other panel I attended was entitled Growth Markets in Renewable Energy. The panel, which discussed the market opportunities in renewable energy, was moderated by Tim Woodward, managing director at Nth Power. Woodward presented data that demonstrated that this market is large and is growing rapidly. According to Woodward, the market for solar generation will grow from a $4.7 billion market in 2003 to a $30.8 billion market in 2013, while the market for wind generation will grow from $7.5 billion to $47.6 billion in the same time frame. This represents an average annual growth rate of 20.7 percent for the solar market and 20.3 percent for the wind market.

This panel explored financing opportunities from venture capital to project finance, and the impact that critical market drivers such as state renewable portfolio standards were going to have. According to Woodward, if the existing portfolio standards in 13 states are fully enforced, an incremental 18,000 megawatts of generation will be required by 2017, representing more than $50 billion in new renewable projects.

I would have to agree with most of the venture capitalists. The market drivers are definitely there for cleantech to be an attractive opportunity. These drivers include expensive energy prices, regulations insisting on cleaner energy sources, increased interest in clean technology by major corporations, and the rise of serial entrepreneurs in the clean technology sector.