VC land a coup & A123 loses its CFO

Black Coral Capital, Flybridge Capital Partners, Stata Venture Partners landed a coup when they announced that A123 CFO Michael Rubino was going to join their venture backed firm Digital Lumens.

A123 – The consequence
This move may be a blow to A123 but a great opportunity for Digital Lumens. We wrote about ‘The Past, the now and the future of A123‘ earlier this year. With Michael Rubino leaving we feel that A123 has a lot to answer for. A123’s share price is down some 40% since IPO and the future path is somewhat in limbo. Losing a senior executive certainly adds to the uncertainty. Thus it is not surprising that Wunderlich Securities downgraded the stock. The new target price stands at $6! Now, for a company that was never profitable $6 may be considered good (remember those dot.com valuations?) but it certainly does reflect that the growth trajectory and EV/PHEV adoption curve is likely to be slower than anticipated. Arguably, we could see the stock trade lighter than current levels. However, at some point we would think that some large automotive players East (SAIC) or West (VW, Daimler – Smart) may have an interest in looking at the company.

The hard facts are bleak: A123 posted a loss of some $44m, with revenues at $26m. A turnaround seems still some quarters away.  A $6 share price doesn’t sound too bad when compared to our dot.com friends who may have had similiar costs but nowhere near as interesting revenues.

How does A123 business success relate to the EV sector? One of the interesting electric vehicles we have looked at is Th!nk, the Norwegian EV producer. (A HBR case study can be found here; paid content.) In May 2010, Think  presented an update on its business. It essentially announced that another $40m of equity was provided by the existing shareholder base. Moreover, the company projects that it will be cash-flow positive by 2011. A123, Enerdel (promo video) and Zebra will provide batteries ranging from 18 Kwh to 28 Kwh.

Think and Deutsche Bank provide a chart (see above) that summarized EV model releases over the next few years. So is A123 depending on the speed up model ramp up or are EV manufacturere depending on battery capacity? The interdependence is obvious and securing battery supply has long been a key battle ground.

Digital Lumens – Opportunity in the LED & SSL space
Digital Lumens operates in the energy efficiency segment which we consider is more attractive in the near term than betting on technology backed companies alone. Rather, the opportunity to replace existing stock with better materials seems obvious and makes both commercial and ‘green’ sense. LED lighting in particular appears to be attractive for its energy savings potential. The Department of Energy (DoE) has set up the Solid-State Lightening initiative (SSL) that proposes that it can cut US energy lighting usage by 25%. In March 2010, the DoE published a Muli-Year Program Plan for SSL. The report states that ‘[t]he global lighting fixtures market is expected to reach $94 billion by 2010, and SSL is expected to play a substantial role in the market by that time. Sales of high-brightness LEDs (HB–LEDs), the technology associated with LEDs for lighting applications, were $5.3 billion in 2009.” Siemens‘ Osram’s Sylvania program notably focuses on SSL.

Khosla Venture and General Catalyst have both been active in the LED space: both funded LumenZ, a Boston based University start-up. Checking on Khosla’s website, we fail to find it in their Portfolio section. However, in a presentation delivered in 2009, it is still in the portfolio. Highland Capital Partners made an investment in QD Vision. QD’s pitch is interesting ‘QD Vision is developing quantum dot solutions for efficiently backlighting mobile phones and other mobile displays, as well as LCDs for desktop and notebook computers and LCD television screens. These initial applications alone represent an addressable market exceeding $2 billion by 2014 for quantum dot-based components’. According to some news sources, QD Vision has raised a total of US$33m to date.

Overall, as costs of LED is coming down the adoption curve is likely to increase significantly. For now, technology hurdles, costs, and general consumer/ commercial acceptance are issues that need to be addressed.

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Chinese 12th 5-year plan – New Energy, New Energy Cars

Are the days counted for China’s top-down macro economic decisions and for its state-owned monopolies? The next 5-year plan proposed by the Chinese Government focuses its attention on new energy and clean-energy cars. According to China Daily the government intents to ‘speed up new energy development and promote clean and efficient use of traditional energy, develop hydroelectric and nuclear power, and increase strategic oil reserves’.

Alongside new materials, high-end manufacturing, next generation information technology, and biotech,  these industries form part of the “new magic 7” emerging strategic industries. (The old magic 7 consisted of national defence, telecom, electricity, oil, coal, airlines, and marine shipping.) It appears that the new magic 7 are more focused on bottom-up drivers and allow companies to use their ‘innovation’ process to drive capital allocations.

Ahead of the Chinese party conference, HSBC published a report titled ‘China’s next 5 year plan – what it means for equity markets‘ which investigates the new proposal in some detail. Specifically, the overall objective of the 12th five year plan (2011-2015) lies in the pro-rate increase in domestic demand to total demand and secondly, and as importantly, the overall reduction of the carbon footprint (CO2) by 40%-45% by 2020.

Source: HSBC, China's 12th 5-year plan, New Magic 7

Further, the proposal projects that urbanisation will march on. HSBC estimates that a further 200-300m people could be urbanized over the next 20 years. If the hukou or registration simplification process moves in line with this shift, the projection suggests that consumption should increase significantly. The caveat here is that the property market development should ensure that the property bubble itself can be contained and price movements are more gradual going forward.

More importantly, there appears to be a continued drive to allow private capital to compete in what once were state monopolies or controlled industries. This should be great news for China focused private equity funds. From our view, there are still many low hanging fruits to be harvested by the largest funds in the region, including John Zhao’s Hony Capital for example. The investment pace has slowed a little since 2007 but funds are still putting capital to work. We need to wait and see whether some assets were overpriced and IRRs for Investors will be meaningful. Our views is that funds that put money to work throughout business/ macro cycles will do well for the time being.

We also note the drive to reduce high pollution and high energy consuming industries. For one, any energy price subsidies should be reviewed to allow a ‘fairer’ market price. Regrettably we feel that this process will take longer than currently proposed. We see a risk that some local producers/ polluters input cost competitiveness may be at risk on the global stage. In particular, pharmaceutical, the glass and other high water/power consuming sectors could lose some of their appeal. Can the government afford this – yet?

Source: HSBC, China's 12th 5-year plan, Roadmap

Certainly, the governments objective to double or indeed triple per capita income can only be a welcomed target. With that, domestic consumption levels should raise dramatically allowing for more propensity to consume (let’s hope little will be used for gambling!). Overall, the plan is intriguing and we look forward to seeing particulars.

To sum up, the China Council for International Cooperation on Environment and Development (CCICED) suggests four scenarios for a low carbon economy until 2050. Although not that specific yet, it demonstrates the authorities focus on renewable energy and commitment to cleantech. The four scenarios proposed split into four categories: (i) BaU (business-as-usual) under high growth rate (BaU), (ii) Low Carbon Scenario under high growth rate (HCL), (iii) Enhanced Low Carbon Scenario under high growth rate (HELC), (iv) Low Carbon under high growth rate (LLC). See the link above for more details.

China’s Pathway Towards a Low Carbon Economy

China’s Pathway Towards a Low Carbon Economy

CleanTech Investing in 2009 & 2010

356 investments in CleanTech occurred in 2009, a new high. However the dollar amount is down to $4.85B from $7.6B in 2008 over 350 deals comparatively, according to a new report from GreenTech Media. The downward trend over more deals may reflect the global capital markets as much as it does the CleanTech sector itself. Or, the optimist could point out that overall investment was nearly $5 billion in spite of the global economic crisis!

According to several VC firms spoken to on a recent trip to Silicon Valley by the staff of this blog, investors are seeking less capital intensive opportunities while seeing an influx of opportunities. Partnering with firms that have smaller capital needs, VCs may play a more significant role in their management and development, while lessening the potential for large, future capital re-investments. This trend may in part be a result of the challenge to raise capital most funds are facing as well as their preference to maintain control.

Source: GreenTech Media

The solar sector is generally viewed as capital intensive, but despite this was the largest sector accounted for in 2009 investments with 84 deals over $1.4B. Biofuels was second, and energy storage, smart grid and automotive rounded up the top CleanTech sectors. Water now is on the radar with $130MM over 33 deals.

Things to look for in 2010:

1) Codexis IPO? Tesla Motors IPO? Solyndra IPO? (all 3 have reportedly filed)
2) Will oil price fluctuations help CleanTech?
3) Will a recovery of the capital markets occur to help encourage the flow of seed money?
4) Introduction of more electrified automobiles effect on energy storage and transportation (many new models expected this year)
5) And much more! (water, smart grid, government mandates, materials and infrastructure)

(CMEA Ventures invested in A123, and is also invested in Codexis and Solyndra- a nice, potential 3 firm IPO streak for 2009-2010!)

Clean Energy Patent filings expanding despite capital markets

With less capital flowing from investors to inventors, clean energy patents are still flourishing. According to a recent report from Heslin Rothenberg Farley and Mesiti, the index of Clean Energy Patent Growth (CEPGI) had its best quarter since its inception in Q2 2009 with 274 patents granted, up from 217 year over year. Fuel cells, solar and hybrid/electric were the most active categories of patents filed. Company wise, Honda led with 14 fuel cell patents and 3 hybrid/electric patents. GM was second place with a total of 15 patents granted. Geographically, Japan led with 75 patents, and California was second with 29. This CEPGI is a good indicator of innovation and development providing future opportunities for investors and funds.

patents

Source: http://cepgi.typepad.com/heslin_rothenberg_farley_/

Khosla Ventures announces $1.1 billion cleantech funds

Finally, on 1 Sep 2009, Khosla Ventures has announced that it had raised more than $1 billion for 2 new funds focused on cleantech and renewable energy. Khosla Ventures III and Khosla Ventures Seed raised more than their targets of $750 million and $250 million respectively. The investors include the California Public Employees’ Retirement System, Michigan’s State Employees’ Retirement System and the Regents of the University of California, Vinod Khosla said in an interview.

The $800 million KVIII fund will make initial investments of $5 million to $15 million in early and mid-stage clean energy and information technology companies. The $275 million KV Seed fund will finance what Khosla called high-risk “science experiments” that may exist only in a university laboratory with investments of about $2 million. About two-thirds of the investments will be devoted to green tech, with the remainder invested in more traditional technology firms.

The new funds fly in the face of two of the prevailing investment philosophies in Silicon Valley. In response to diminishing venture capital returns, investors have been advocating small funds of only a few hundred million dollars and staying away from high-cost, high-risk alternative energy companies. Khosla advocates precisely the opposite. Harnessing technology to address climate change will require the big risks that venture capitalists were once known for, he said. “We’re really about reinventing the infrastructure of society, which is the only way we’ll get the carbon footprint down, and we’re not afraid to fail.”

This is the largest amount raised by a VC firm since 2007 and the largest first-time fund raised since 1999, according to the National Venture Capital Association. This was also the first time Khosla Ventures has raised funds from outside investors. Previously the VC firm had invested hundreds of millions of dollars on behalf of its partners, including Khosla himself (which is quite unusual for a VC firm).

But Khosla is more interested in uncovering technology breakthroughs than in latching onto the latest green trend. “Things that are too much in fashion are things that I would shy away from,” he said in an interview. “Whatever the press calls hot are areas that I’m less interested in.” “I like to call it ‘main tech,’ not clean tech,” Khosla said. “We’re doing bioplastics, lighting, engines, water and air conditioning — almost anything that can be made renewable, sustainable, more efficient and cheaper.” “There’s an opportunity basically where technology innovation changes economics. In our business you can’t get in and out when the markets are bad. In some sense, when most people aren’t investing, it’s a good time to invest.”

The chance to invest in a broad-based portfolio was attractive to CalPERS. “Vinod Khosla’s opportunity set is larger than anyone else in the business because it goes beyond alternative energy to materials, water and other areas,” said CalPERS spokesman Clark McKinley. “There’s high risk, but high return. Some companies won’t pan out, but there could be great returns if he’s able to create the next Exxon of the alternative energy field or the next great concrete company.”

“The terms I used to describe our seed fund were, ‘We don’t expect to be fiduciary all the time. We will often invest in things that have a high probability of failure,’ ” Khosla said. Yet to his surprise, there was more interest in that fund than the other. “We insisted on being in a fund like that,” said Joncarlo Mark, head of private equity investing for CalPERS which invested $60 million in Khosla’s riskier small fund and $200 million in the big fund. “The opportunity to partner with Vinod in his science experiments to us is as attractive as having a later-stage fund investing in more established businesses.” One reason Khosla’s investors are comfortable with the firm’s high-risk bets is that the partners have invested at least $100 million of their own money in the fund, Mr. Mark said.

In addition, Khosla Ventures is bringing on 2 new partners to help manage investments: former Facebook CFO Gideon Yu, and former senior partner with CMEA Capital, Jim Kim. Kim has a cleantech background, having worked with A123 Systems, Danotek and Solyndra at CMEA and before that GE Capital. Yu will probably look closely at IT startups, which will get part of the new Khosla funds.

See my previous blogs:
CalPERS invests $60m in Khosla’s closed $250m seed-stage fund
Khosla Ventures

Sources:
Khosla Announces $1B in Funds, Partner From Facebook
Khosla raises $1 billion for renewables, cleantech
Khosla Raises More Than $1 Billion for Energy Funds
Khosla Ventures raises $1.1 billion to invest in green technology
Venture Firm’s ‘Green’ Funds Top $1 Billion