Start Ups vs. Large OEMs

Before one can invest in a technology or firm, an investor must first believe in the relevant sector. If this prerequisite is satisfied to a high degree, the next logical step is to decide how to best capture the upside of the sector. In Clean Technology many start up firms hope to be bought out by larger, more established firms. Very few firms will be lucky enough to IPO and establish themselves as an independent player in the market, while many other start ups will unfortunately die a slow, financial bleeding death.

Several years ago I spoke to a Senior Executive for Exxon Corporation. The gentleman I spoke with, while agreeing with much of what I said about the need for Exxon to hedge its position in oil with at least a few of the upcoming alternatives told me that Exxon, in 2003 anyways, had absolutely no desire nor immediate plans to get involved with Clean Technology. After an awkward pause on the call he said, “Why should we risk money and waste time developing something when we have enough cash to just buy whatever we want once it becomes established?” Wow, how could I argue with that- he did have a valid point. Which brings us to 2010:

This blog often profiles technology developments from the investor’s perspective. Many of the VC firms we discuss invest in small start ups in sectors like biofuels, solar, wind and energy storage. But there’s another way to capture these sectors if you want to participate- investing in the large OEM. In fact, Exxon later on did invest $600MM in a biofuel firm called Synthetic Genomics and is “prepared to invest billions more to scale up the technology.”

While we won’t perform an individual investment analysis of each sector and firm here, we can highlight some key options as well as investment pros and risks.

Investing in the large, diversified OEM Pros:
Limited Downside, Economies of Scale/Faster route to mass market, more established vertical infrastructure and brand name recognition
Cons: Limited Upside/No IPO potential, less nimble & dynamic management team & the fact that you are also investing in many other sectors or technologies you may like/dislike.

Flip all of the above pros/cons when investing in the Start Up Firm. Now- a brief look at investment options:

The Start Up vs. the Large, Diversified OEMs!

Energy Storage
A123, Ener1, EEStor, PowerGenix Panasonic Sanyo, Bosch, Samsung, LG Chem

Wind

Vestas, FloDesign, Ramco GE Wind, Samsung, FPL

Water

Statkraft, Saltworks, Pentair, Israeli Start Ups Zenon (GE Water)

Biofuels

Joule, Cereplast Exxon, BP, Shell

FloDesign high efficiency Wind Turbine based on Jet engine technology

Adding to my colleagues post below, I thought we should show the full video relating to Flodesign. It is a novel design concept making use of jet engine design. Has Kleiner found another gem here? Agree with Brett that the design could face some challenges. Putting it on buildings et al may create some form of kinectic energy perhaps?

Vodpod videos no longer available.

more about “FloDesign high efficiency Wind Turbin…“, posted with vodpod

Breaking new wind

An expert in the aeronautics industry during World War 2 probably could be forgiven if they believed that fighters such as the P-51 Mustang or an RAF Spitfire were close to being the fastest and most advanced planes technologically possible. That is, until the Luftwaffe introduced the world to the jet engine turbine system. Similarly for Wind Energy- how else can the basic 3 blade turbine be engineered to improve on cost and performance? Isn’t there only so much you can do to a technology that is relatively basic?

Well- much like the WW2 Fighter plane analogy- wind energy is now entering the jet engine age.  Welcome FloDesign Wind Turbine. The Massachusetts based start up firm has recently emerged onto the public eye with their patented technology that allegedly is 3-4 times more efficient than traditional wind turbines. See informational video here:

Traditional blades tend to push wind away and cause a complex turbulence condition- which consequently demands strict attention to the layout of any wind farm. Alternatively, the FloDesign wind turbine uses a shroud around the turbine blades to funnel wind into the turbine. See above video for best explanation and illustration.

Wind Cost Curve (cents/kWH) from NREL

The cost curve to the right shows why this technology is such a disruptive technology. Clearly advancements in wind energy are improving yet at a decreasing rate (a negative double derivative). Thus- the jump to jet engine design turbines could push wind costs in cents/kWH down much further than anticipated by most experts analyzing traditional wind. What this implies is wind energy that is competitive or cheaper than fossil fuels in many more locations than previously available.

On the business side, FloDesign recently secured $34.5MM of funding from investors led by Kleiner Perkins and joined by Technology Partners and VantagePoint Venture Partners. Additionally, Lars Andersen, former President of Vestas China, signed on as CEO. The funding is intended to begin commercial production of the turbines. IPO in 3-4 years?

FloDesign Turbine, Courtesy Mass. Clean Energy Center

Ok so what is the Achilles heel of the FloDesign? It’s ugly! (Zoning challenges) Personally I find traditional wind turbines to be beautiful- especially when you consider it is providing clean and renewable energy and replacing a fossil fuel generator. Fans of wind energy realize not every land owner shares these views and some find the light humming noise and gentle roll of the blades to be very unsightly. Well- if folks object to a beautiful, white, 3-bladed turbine- how would they ever accept essentially a jet engine hanging out by itself somewhere? Somehow I am skeptical the FloDesign turbine could dot the countryside and farming communities as well as a giant 1.5MW turbine. Perhaps the FloDesign turbine could find greater acceptance in industrial zones atop existing buildings or nearby towers. Or, maybe FloDesign will design a more aesthetically appealing cover that does not affect turbine performance.   Debates on appearance aside- the company truly has a remarkable, ground breaking technology which no doubt will help foster a giant leap forward for the wind sector.

Denmark leads the world in CleanTech

Using both wind and efficiency plays, Denmark leads the world in CleanTech on a GDP weighted ranking according to a recent report commissioned from the World Wildlife Fund and written by Roland Berger.  The ability to produce and sell products and services that reduce CO2 emissions is the key metric used to rank all 27 EU member states, BRIC and G7 countries.

Clean Technology recently passed pharmaceuticals for industry size, and is expected to be the third largest in the world by 2020 at (EUR 1,600 billion.) Between 2000 and 2008, wind grew at 24% and solar at 53%. It is this growth rate, and related demographic factors that form the backbone of the CleanTech investment thesis that this blog strongly supports.

Other notables: 2nd Brazil, 3rd Germany, 6th China, 10th Israel, 19th USA, 20th UK

Anything is possible (in some places)

The Institute for Local Self Reliance based in Minneapolis, USA has just produced an interesting map of the United States suggesting that 31 of the 50 states can be self sufficient for electricity if using only in state, renewable resources. Only 5 states were at 30% or less. The map makes an interesting point- while not likely, or in some occasions the best, overall economic solution, it is feasible for most US States to be able to adhere to more modest renewable energy portfolio requirements. If technology continues to improve the economics in the future, this percent of renewable requirements could increase to satisfy energy loads.

Non-Americans may find this interesting as the geography of the US is almost as varied as that of the world. The map also suggests that some areas are renewable resource poor, and will need alternative plans if they intend to clean up generation. See the link to read about the study and its assumptions.

RE Map

RE Potential for the US

Source: http://www.newrules.org/sites/newrules.org/files/ESRS.pdf

Ramco Energy: Paradigm Shift – transforming to Wind Energy Pure Play

Source: Company

Source: Company

Ramco Energy (or soon to be SeaEnergy Renewables) provided an interesting news item. Per BBC Report, Ramco plans to sell off its Oil & Gas business to focus exclusively on Wind energy. Nothing to special here but Stephen Remp (Executive Chairman) laid out the rationale: “cleantech and green-focused investment funds were reluctant to invest in the group while it retained its focus on oil and gas”.

This provides an interesting case study for many ‘traditional’ energy companies. In principal, CEOs are likely to come under more scrutiny to make a commitment either or. Although Investment Dollars clearly sit with CleanTech funds today, and this is likely to increase rather than decrease, the choice is not easy.

As I mentioned in my last post, IDC Report on Electric Utilities, today is more about long-term strategy and Organizational Change than short-term Shareholder concerns around near-term profitability. The question is are market forces agreeing with the change? I guess the future share price will tell us.

Goldwind rushes to list in HK

China’s largest maker of wind turbines, Xinjiang Goldwind Science & Technology Co, has announced plans on 2 Sep 2009 to float shares worth about $1 billion on Hong Kong’s main board. Goldwind joins more than 30 companies announced in Hong Kong in the past month to raise estimated $25 billion in the coming months in the territory and on the mainland.

Goldwind will issue shares no more than 15% of its enlarged equity capital after the HK share offer to overseas institutions, corporate and individual investors. Goldwind has total capital of 1.4 billion outstanding shares now. Proceeds would be used to fund 3 wind power projects in the country and supplement the firm’s working capital.

In Dec 2007, Goldwind launched its $244 million IPO on Shenzhen Stock Exchange.

Comment: As the equities market look favourable to raise funds, Goldwind will be able to tap the markets for its aggressive expansion especially after the Chinese government’s pledge to fight climate change and look to increase its renewable energy sources. Watch out Vestas, Goldwind may strike the golden No. 1 spot within a decade.

Sources:
China’s Goldwind plans to list in HK’s main board
Xinjiang joins rush to list in HK