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On The Bubble

Cleantech start-ups and investors weigh the odds of growing during a downturn

by Melody Voith
March 9, 2009 | A version of this story appeared in Volume 87, Issue 10

Cheap And Shiny
Credit: Cool Earth Solar
Cool Earth Solar constructs solar balloons that use only thin plastic and aluminum to concentrate the power of the sun.
Credit: Cool Earth Solar
Cool Earth Solar constructs solar balloons that use only thin plastic and aluminum to concentrate the power of the sun.

THE DAY BEFORE the start of the Cleantech Forum in San Francisco late last month, foggy weather prompted airport officials to dramatically slow the arrival of approaching airplanes. Low visibility in the economy had a similar dampening effect on the start-up green technology firms that gathered there in hopes of gaining financing from venture capital funds.

Despite the awful economy, the forum attracted a record 800-plus attendees, most of them venture capitalists. "There are more venture capitalists here than you probably knew existed," one participant joked. But the VCs and the entrepreneurs who need their money seemed to be in a holding pattern. They are caught between the economic downturn and the recently passed stimulus package, which may or may not create momentum in cleantech, as the entrepreneurs' energy-saving, pollution-reducing technology is known.

"I'm here to stay engaged and get the latest buzz on the financial crisis," said Eric Hansen of Boise, Idaho-based August Ventures, a funder of companies in their early stages. "How is it affecting the initial investments, the company valuations, and the availability of money for projects?" He wondered how many cleantech firms will be around long enough to successfully "exit" through an initial public offering (IPO) of stock or acquisition by a larger company.

With Hansen were many other venture capitalists who left their checkbooks at home in favor of window shopping among the diverse menu of green businesses. They had plenty to choose from. Presenters at the conference included businesses focused on solar and wind energy, waste-derived syngas for heating and power, biofuels, energy storage, water purification, green building materials, engine technologies, and transportation.

For their part, the entrepreneurs made the most of the opportunity to show off their technology and market research. But taking a signal from the economy, many claimed they would hold off on trying to raise more capital until the end of the year.

In a crowded breakout room, Rob Lamkin, chief executive officer of two-year-old start-up Cool Earth Solar, gave what he called his "stump speech" to investors. The company manufactures 2.5-meter-diameter solar balloons from thin plastic sheeting. The balloon interior is coated with aluminum to form an inexpensive but rigid mirror. The mirror concentrates radiant energy by a factor of 400 and reflects it onto a 15-cm-diameter solar cell.

Last February, Cool Earth Solar raised $21 million in its first round of funding. The money will be used to construct its first plant, an 8-acre installation of 1,000 concentrators, totaling 1 MW of solar power. Eventually, Lamkin will be looking for financing to build a 1-GW installation. But, he told C&EN, "we're not raising money right now."

Similarly, PowerGenix CEO Dan Squiller would love to put his company's nickel-zinc batteries into hybrid electric cars. "We're looking for potential investors that believe in the electrification of vehicles," he said. But Squiller is not counting on raising the significant capital he would need anytime soon. Instead, PowerGenix will use the more than $60 million it raised in four rounds of funding to enter three other markets: power tools, consumer electronics, and lightweight electric scooters.

Squiller claims his firm's batteries are both smaller and more powerful than comparable nickel-cadmium or nickel-metal hydride batteries and are more stable and easier to recycle than lithium-ion batteries. On a whim, the company placed its battery in a Toyota Prius, where it "performed well beyond our expectations," he said. But that application will have to wait.

"People are trying to delay the need for venture capital," said Dallas Kachan, managing director of the Cleantech Group, the market intelligence firm that sponsors the event. "Companies are battening down the hatches and trying to last as long as they can without having to dip into the well and give up more of their company than they would otherwise have to," he said.

Still, a few of the entrepreneurs in San Francisco needed to raise capital now. One was Capra J'neva, whose company, Veranda Solar, has prototyped small consumer-friendly solar panel modules that can be snapped together and installed on a balcony or deck. The device transmits power though a regular wall socket. "We've been featured on the BBC and so have gotten requests for panels from all over the world," she told C&EN. In her presentation to investors, J'neva said she hopes to raise $1.5 million to begin production.

Christophe H. Schilling, president of Genomatica, is raising funds to build a pilot plant for the biosynthesis of 1,4-butanediol. Genomatica uses computer modeling to design microorganisms and processes that make chemical intermediates from sugar. The company recently announced a new process to make methyl ethyl ketone in idled corn ethanol facilities.

Schilling is confident about his firm's chances. "Venture capitalists are in the business of building companies. They are looking to identify companies that can transform industries," he said. He added that prices for chemical products are less volatile than those for energy. "VCs today are going to be much more judicious. The bar has been set higher, but that can be a good thing for some," he said.

One other factor is working in Genomatica's favor, Schilling said. The company does not intend to build its own plants but rather license its processes and organisms to existing firms—likely the chemical companies that already make the products via conventional means.

In contrast, companies that plan to build, own, and operate manufacturing facilities find themselves in a difficult spot, Cleantech's Kachan said. To become price-competitive, the technologies "will need to achieve massive scale, which is hard to do with venture capital," he pointed out.

FIGURING OUT how the cleantech industry will finance plants that would make enough solar panels, wind turbines, or energy-saving devices to be profitable was the burning question at several of the forum's panel discussions.

Equity and debt markets are very difficult sources of money these days, said Partho Sanyal, a director at Bank of America. "There have been only two IPOs since August. The public equity markets are very cautious to contribute capital." And interest rates are high, around 15% for many firms. "That rate is not viable for, say, solar farms," Sanyal said. "Only tax subsidies can make it happen, but that can't last forever."

Nick Allen, cleantech research analyst for Morgan Stanley, is confident that the government spending outlined in the stimulus package will help fill the gap between VC investors and large-scale production. The package includes $6.9 billion in renewable energy block grants and $8 billion in loans to finance renewable energy projects. "With an agreement with a regulated utility and a stream of steady cash flows, these projects will soon become attractive to banks," Allen predicted.

PowerGenix' Squiller is certainly pleased with the bill's $4 billion for research in renewable energy and advanced batteries. "Energy storage is a great place to be. Washington is raining down money," he said, noting that it would be another three or four weeks before his firm learns how the money would be distributed.

And that's not all. "The stimulus package is just the tip of the iceberg," Allen promised. "If you look beyond that, at the attitudes of Congress and the agencies, we are likely to see significant discussion around a broader energy package."

But at all the panel discussions, every promise of government assistance came with a warning. As Michael L. Goguen, general partner of VC powerhouse Sequoia Capital, put it, "We say a company can't depend of the kindness of strangers. The stimulus [funding] could feed into the delusion of some companies that they have an economically viable business model."


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