Notes from the SDForum VC Cleantech Breakfast

July 8th, 2008 by admin

This morning I attended SDForum.org’s quarterly Venture Breakfast, this time focusing on cleantech investing. The panel of speakers included Steve Bengston of PriceWaterhouseCoopers, David Horning from Palo Alto Investors, Steve Eichenlaub from Intel Capital, Peter Nieh of Lightspeed Venture Partners and Matthew Trevithick from Venrock. The following are some interesting highlights:

About cleantech investing in general:

• The potential market for energy technologies is huge.
• New energy technology transitions will take decades to replace existing technologies, not the short adoption timeframes associated with typical Silicon Valley tech companies.
• Because of the downturn in the credit and real estate markets, there is a lot of money out there looking for a good place to invest, and cleantech is an obvious place to put this money. The flip side to this is that in down markets, investors traditionally turn to commodities investing, which should place downward pressure on oil prices. Lower oil prices means greater competition and risk for most cleantech companies.
• Due to the high competition with oil prices, some VCs are focusing on investing in cleantech which does not have a high correlation to oil prices. The example given was solar power in China, which competes with coal power plants and there for is dependent on the price of coal and not oil.
• Cleantech companies compete with long-established energy technologies and therefore face severe price competition. One effect of this is that most cleantech companies are global companies, with manufacturing and distribution on different continents to take advantage of price efficiencies, such as manufacturing in China and distribution in the US.
• There has been an increase in the number of quality entrepreneurs starting companies in the cleantech space. These are “2nd-stage” entrepreneus, who had previously worked at leading-edge companies and became aware of the gaps in the market. These entrepreneurs are now attempting to fill these market opportunities.
• The best quote of the day came from Steve Bengston of PricewaterhouseCoopers. When asked to define what, exactly is cleantech, he paraphrased Supreme Court Justice Potter Stewart quote on pornography by saying that “cleantech is hard to define, but we know it when we see it.”

About solar power:

• Solar is still very dependent on subsidies to be competitive.
• Most of the panelists felt that the unsubsidized cost of solar is still too high to be competitive with existing energy sources, and is still a factor of 2 or 3 away at the retail level. The consensus was that the retail price for solar needs to come down to at least 30 cents/KWh to be competitive. On a wholesale level (large power plants), solar is even farther away, where it needs to be around 5 cents/KWh to compete with fossil fuels.
• The solar business model is still based on an assumed theoretical declining cost curve. While this cost curve remains to be proven out, most people believe that it is accurate.
• There are some locations where solar is already competitive, due to very high energy costs or favorable conditions.
• When asked about solar’s dependency on scarce raw materials (i.e., silicon) one panelist said that third-generation solar tech is focusing on becoming less resource-dependent. He also stated that a large portion of the cost of solar panels was in the aluminum and glass components.

About storage technology:

• While energy storage technology is potentially a very important component in the adoption of new energy generation technologies, the cost is still much too high to justify implementation.
• Even if energy storage technology becomes price-competitive, it is not clear who will pay the cost to implement it. Will is be the energy generators, the suppliers or the consumers?

About alternative fuels:

• Alternative fuels are “sexy”. They are easily understood by the public, because of their day-to-day experiences fueling their vehicles, etc.
• Alternative fuel investing is extremely risky, but also has extremely high rewards. The VCs who are investing in alternative fuels see it as a necessary component of their portfolios, albeit a small one for now.
• The biological and chemical expertise necessary to implement alternative fuel technologies is extreme.
• There is an opportunity in techologies which can convert e-waste plastics into biofuels. This is viable technology which can also greatly reduce waste.

About pollution and recycling technology:

• Current efforts are focusing on mercury, sulfur and nitrogen waste reduction.
• Silicon Valley is not currently investing very heavily on these types of technolgies. Sillicon Valley VCs focus more on products than services, because products are easier to scale up to profitability levels that VCs are interested in. Pollution and waste reduction technologies are viewed as mostly services, which are harder to scale up.
• Most of the panelists cited the need for an appropriate regulatory framework in order for these types of services to be feasile. There is some debate on whether regulation should lead the way or wait for technologies to prove themselves before regulating them. Countries like Germany are taking the leading approach, while the US is mostly taking the lagging approach.

All in all, the news was very positive. It seems like cleantech is not being affected by the downturn in the economy. Om the contrary, it appears to be benefitting from high oil prices and a dearth of good investment opportunites.