But there’s also the question of how to measure the market or the value. Do we count the devices themselves? The dollars spent on platforms and services that tie connected devices together? What about subscriptions to wireless networks? In GE’s case it’s counting dollars saved by implementing better data gathering systems. But the whole idea of trying to measure what is fundamentally a technological shift as a market baffles me.

There’s no question the internet of things is going to be big, but to separate the reality from the hype its worth looking for hard data. If not at market size or potential profits, then let’s just try to see where people are in terms of interest in the products. For example, check out these numbers from a March Yankee Group survey of about 2,300 people.

That seems like a relatively small percent of the population planning on buying a new connected device in the next six months. And the numbers are somewhat odd, in that I don’t think even 5 percent of users are planning to buy a new smart meter –something utilities tend to provide. So I’m taking this data with a grain of salt, but I am looking for good ways to think about the market size and understand how rapidly people and companies are adopting connected devices into their homes and business processes.

This is a real trend, but it’s clear we’re still at the beginning of the massively hyped shift that will lead to real value creation. I just don’t know how to measure how much.

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The deal is focused around 600,000 smart meters in Sweden. But E.ON is one of the largest power and utility companies in the world and operates in 30 countries with 26 million customers, so clearly its a relationship with a lot of potential.

Ericsson competes with GE, Siemens, ABB and others to sell software, services and hardware to utilities and power companies. Increasingly utilities and power companies are interested in buying more data analytics tools as their networks are becoming IT networks that need to monitor, digest, and analyze data to run more efficiently. As global electricity grids add more clean energy (solar panels and wind turbines), and energy storage (battery farms), better data analytics and predictions tools will also be needed to keep the grid stable.

Some of the power gear vendors are turning to the big data startup leaders for partnerships around the latest analytics. For example, earlier this week Siemens announced that it’s working with data warehouse veteran Teradata.

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For Electric Imp the partnership is a validation of its approach to the internet of things and a chance to help bring a proven model of innovation to the hardware hackers trying to build products for the internet of things. It’s also a showcase for the new hardware development model pioneered by Quirky and taken even further by crowdfunding sites such as Kickstarter and Indigogo.

Last Thursday, GE said it would open up its hardware patents for a Quirky-sponsored design competition. The goal of the competition it to bring a few connected devices from idea to physical product in time for the 2013 holiday season. From the blog post announcing the partnership:

GE will open thousands of its most promising patents and new technologies to the Quirky community for the development of new consumer products; and a co-branded product development initiative to build a full line of app-enabled connected devices for the home in areas such as health, security, water or air that will be developed using advanced manufacturing tools and technologies. This new line of products will be co-branded Wink: Instantly Connected.

GE will open up patents in the areas of optical systems, including holographic and fast-focusing lens technologies, GE’s Ultra-High Barrier thin-film technology to protect electronics form the elements and GE’s telematics and asset tracking technology. Add in Electric Imp’s connectivity modules and the cloud backend and inventors can create connected products that could become powerful monitoring applications that could be used for environmental scanning, security and a variety of other purposes.

The collaboration between GE and Quirky has an April 17 deadline, which is pretty quick, but there will be later iterations of the competition as well. The idea reminds me somewhat of the Innocentive model, where corporations post research challenges online in the Innocentive community and entrepreneurs or researchers post answers.

The challenge in the research business was in finding ways to crowdsource solutions to complicated problems in a way that enticed people to participate. In the burgeoning hardware development movement there are several challenges, including a possible patent thicket innovators have to clear. There are also the complexities of getting connectivity into devices and then building out services that can use that networked hardware. Designing a physical product for manufacturing is another area where startups can fail.

Thus, this partnership tries to eliminate as many stumbling blocks as possible, which is why it’s worth watching.

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C3 is a four-year-old startup that develops data grid analytics tools for utilities like PG&E, and is the software behind GE’s Grid IQ Insight product. The company was founded and is led by Siebel System’s Tom Siebel, and had been largely in stealth mode until earlier this year when it talked a bit about its smart grid plans at the DistribuTECH event in February. Previously C3 had focused more on collecting data about corporations’ carbon emissions and energy, but has seemed to veer away from that in recent years.

C3′s current big data software platform collects disparate data about buildings, energy generation and energy consumption from a variety of places like publicly-available data scraped from the web, utilities’ energy use info from its customers, and weather data from weather information companies. For PG&E, C3 aggregated at least 8 terabytes of data, which C3 normalized and loaded at 500 million records an hour. The data product helped PG&E do a year’s worth of energy audits on the commercial and industrial buildings in its footprint, said Siebel at DistribuTECH.

C3 plans to launch another five projects like this in 2013 and another five in 2014, and its other customers include Entergy, Northeast Utilities, Constellation Energy, NYSEG, Integrys Energy Group, Southern California Edison, ComEd, Rochester Gas & Electric, and DTE Energy.

Silver Lake Kraftwerk is private equity firm Silver Lake Kraftwerk’s clean energy growth fund, and it has a thesis to invest in later stage growing clean energy, waste and other types of cleantech companies. The fund, which also is looking to invest aggressively internationally, has raised at least $350 million, though I’ve heard the fund is closer to having raised $600 million at this point. Silver Lake Kraftwerk has invested in a later round in SolarCity (before it went public) and German recycled plastics processing and manufacturing company Friedola Tech.

Zoi spoke at our Green:Net event back in 2011. She also joined the Board of Makani Power, the high altitude wind power startup in Alameda, Calif.

This post was updated at 10:45AM PST on April 4th 2013, to change that C3′s data for PG&E was loaded at 500 million records an hour, instead of 5 million records an hour.

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The organizers of the first Industrial Internet Quests have since received more than 3,000 submissions and were expecting to announce on Wednesday the contestants who will receive a total of $600,000. One submission for the flight competition has earned $100,000 for its developers, a five-person team from Singapore.

Kaggle has hosted data-science competitions for several other brand-name companies, from Facebook to Ford. Its publicly available leaderboards make data science a bit like a spectator sport, and open-source education on machine learning and natural-language processing makes it possible for lots of people to compete.

Demand is sky-high for data scientists and application developers, and farming out one-off projects is a common practice in all sorts of industries. That’s why it’s not surprising to see even big companies like GE turning to the crowd for data science solutions. And it’s why this sort of news could become more common in the future.

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Founded in 2007 and incubated in Bill Gross’ Idealabs, eSolar has already raised a lot of money over its lifetime. It’s raised at least $170 million from a combination of Indian telecom and solar company ACME group, power company NRG Energy, Oak Investment Partners, Quercus Trust, Google.org, and GE.

To its credit, the company built one of the first solar thermal power plants in the U.S. in Lancaster, Calif. We covered the launch of the Sierra SunTower back in the summer of 2009. That project was small, at 5 MW, and a pilot, but is still in operation. However, commercial scale versions of these projects are on the hundreds of megawatts level like the one BrightSource is building near Las Vegas called Ivanpah.

eSolar also told Greentech Media last summer that it has a live solar power tower project in Bikaner in India, which it said has been in operation since April 2011. I’m not sure the size of that project, but will update this when I hear more. ACME has an exclusive license to build power plants with eSolar’s technology in India.

After its Sierra SunTower was built, eSolar appears to have spent some time regrouping and focusing on using molten salt storage technology to make its gear more cost competitive with solar panels. The price of solar panels have plummeted over the past two years, making solar thermal less competitive. According to this article, eSolar has been hoping to deploy its first commercial solar power tower with molten salt storage in the 2014 and 2015 timeframe.

It’s hard to track if eSolar still has claim on some of the deals it announced over the years. The company announced a 245 MW project with Southern California Edison back in 2008, but I think that project was sold to NRG Energy in this deal in 2009. Back then, eSolar decided to become an equipment supplier and not a project developer, and now works with big companies to manage project development. It’s not clear, but NRG might have sold that one off or switched the technology it will use to solar panels. I’ll update this when I hear more.

eSolar also had announced a whopping deal with Chinese power equipment maker Penglai Electric to build 2 GW of solar thermal projects in China over the next decade. eSolar still lists Pengali Electric as a partner on its site, but also writes that the first solar plant out of that deal in China would be a 92 MW project that would break ground in 2010. I haven’t heard that that was under construction.

Over the past year, it’s been hard for solar thermal technology to compete with solar panels because solar panels have gotten so incredibly cheap. Solar thermal can be more cost competitive if it’s built on a massive scale like BrightSource’s Ivanpah, but many power developers are opting to use solar panels instead of solar thermal tech these days.

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Much has changed since then. With 2012 numbers done and dusted, I figure it’s time to revisit this topic – again, under the light of data. I’ll frame this analysis with the questions I’ve gotten from VCs and entrepreneurs who’ve asked me for an update.

What’s happening to cleantech venture capital?

It’s receding.

• Investment fell 30% in 2012 – and even further at the early stage. The Moneytree survey numbers had cleantech VC investment falling from $4.6 billion in 2011 to $3.3 billion in 2012 – a 28% drop. Further, they showed first-time funding of new start-ups plummeting 58% to just $216 million, and shrinking as the year progressed: By Q4, first-time funding was just 4% of capital invested.
• Limited partners are backing off. VC firms get the money they invest from limited partners (LPs) like foundations and pension funds. Last December Preqin called up 31 LPs that were invested in at least one cleantech-focused fund and asked if they planned to back any new ones in 2013. Only 22% said yes (down from 31% a year before).
• The people are changing. Many VC firms parted ways with their cleantech teams in 2012. While February’s ARPA-E conference had a record number of attendees, venture investors were scarce – replaced by a bumper crop of corporate types.

Why is this happening?

Cleantech VC performance is substantially lagging venture capital as a whole. This wasn’t true in 2011, but things changed fast in 2012.

I arrive at this conclusion by comparing two data sets. On one hand, we have data on the interim performance of 19 cleantech-only VC funds as reported by the California Public Employees’ Retirement System (CalPERS), a big LP. On the other, we have equivalent data for the entire universe of VC funds from the National Venture Capital Association. (The data are expressed as “value to paid-in capital, net to LPs,” which means “the current value of the funds divided by the money put into them, accounting for what VCs pay themselves.”) By comparing cleantech-only fund performance with the full VC universe at the same points in time, we can see whether cleantech is doing better or worse than the asset class.

The answer is that cleantech went sideways in 2012 while VC overall did well. In September 2010, the cleantech VC funds were worth 0.90x the money paid into them while comparable VC funds overall were at 0.96x – roughly the same. Six months later the gap had widened, but both had risen in value and remained within spitting distance. By June of 2012, however (the most recent data available), the cleantech funds had declined slightly while the overall VC universe climbed to 1.23x.

This is why investment is stalling, LPs are hesitating, and cleantech VCs are thinning: Capital invested in other domains is showing a greater near-term return.

If minimal money had gone into cleantech, or if the macro environment were rosier, there might be more willingness to forge ahead. But today, fund managers assess the $25 billion worth of cleantech VC invested since 2003 against a backdrop of shale gas and climate apathy – and tighten the purse strings.

OK, but why is that happening? What’s driving weak cleantech VC performance?

Two factors. First, there have been too few exits.

Let’s consider the gold standard of VC wins – an IPO on a major exchange. When I last did this analysis, cleantech was overperforming on the IPO front: In 2009, 2010, and 2011, cleantech’s share of VC-backed IPOs exceeded its share of VC funding. (Note: One must apply an appropriate time lag applied to the latter – I used five years, which is informed by deal-by-deal fundraising data by cleantech start-ups).

This ended in 2012. Just as in the prior year, three cleantech IPOs took place out of about 50 VC-backed IPOs in total (6%). But cleantech’s corresponding share of VC funding rose to 10% – so cleantech was now underperforming on exits relative to capital invested, instead of overperforming.

(Of course, most VC-backed companies exit through acquisition, not an IPO. But the M&A front looks no better for cleantech. When merchant bank Jane Capital counted up every acquisition of a VC-backed cleantech start-up worth more than $50 million in the last 10 years, it found just 27 of them.)

Second, the winners have disappointed post-IPO. When a start-up goes public, its VC investors rarely get to sell their shares immediately: They have to wait out a lockup period that typically lasts six months. Of the nine VC-backed cleantech start-ups that have done major-market IPOs since 2010 and have been public for more than six months, eight were trading below their IPO price at the 180-day mark.

In four of those cases, the 180-day share price was also lower than the price at the last venture round. That means VCs who bought shares in that round were under water when the lockup expired.

So is the pullback in cleantech VC justified?

Well, it’s certainly expected. The cleantech gold rush of the late 2000s saw hundreds of start-ups funded – many with identical propositions – that greatly exceeded the carrying capacity of their industries: For example, there’s no way that more than a handful of the 219 solar start-ups counted by Greentech Media in 2009 could possibly succeed. This dynamic isn’t unique to cleantech. The Internet VC bubble of the late 90s was the same story, albeit on a much larger scale.

But just as the boom-and-bust in dot com investment didn’t mean this whole Internet thing was a waste, the same is true for energy and environmental technologies. It’s very likely that multiple billion-dollar companies lurk among today’s cleantech VC portfolios. The question is – given the current retrenchment of capital from the field – how many of them will get the fuel to reach the finish line.

In the main, energy and environmental start-ups need outsized time, money, and risk tolerance to reach a big outcome. (That’s not true of IT-meets-energy “cleanweb” companies like Opower or Venrock-backed Nest Labs, but it holds for the deep-tech start-ups that comprise most of the category.) As our case study, let’s take First Solar, the pioneering thin-film solar maker. The company’s first instantiation was founded in 1990; it took 12 years to ship a product, was restarted in 1999, and consumed $150 million of equity investment (all Walton family money) before its 2007 IPO. But at that outcome, First Solar was worth $1.4 billion valuing the Walton stake at 8.4x. Two years later at the peak of the solar boom, it was worth 199x!

If this is what success looks like – that is, if the majority of cleantech start-ups will need more time and money to reach big outcomes compared with VC-backed companies overall – a few conclusions follow:

• Funds focused solely on cleantech will have a longer and deeper “J-curve” of returns compared with VC as a whole. When they reach the same final return multiple, they will take longer to do so (impacting IRR). Midway through the journey, their performance will look like an “L-curve.”
• To the extent that cleantech start-ups’ time to exit will be 10 years or more, it’s too early to call success or failure on the current crop – because most of them were founded in 2007 or later. Check back in five years.
• Because the time frames to an outcome are longer and the amounts of capital required are greater, cleantech investment should be less spikey compared with investment in, say, Internet start-ups. And lo and behold, that’s pretty much what we see:

Cleantech VC now is like Internet VC in 2001: on the downward slope of a bubble, albeit with a more gradual climb and a gentler descent. Note that Facebook was conceived in 2003 – the lowest point for Internet investing post-bust – and that in 2004, Google’s IPO kicked off the renaissance that persists today.

So is the cleantech pullback justified? The data says it’s too early to call. However, it also suggests that the time frame required to reach a conclusion will greatly stretch 10-year closed-ended funds.

(A diligent reader may point out my own numbers showing that when VC-backed cleantech start-ups have gone public, they’ve mostly done so in less than 10 years. My take is that most of these companies were rushed to public markets before they were ready – explaining the awful aftermarket performance.)

What happens now?

Cleantech innovation is about to take a walk in the woods. Justified or not, the established path of VC-backed investment is narrowing for a generation of start-ups. Some of those companies – and some of the investment managers that have backed them – will break off into the wilderness to find a new route.

In this environment, I see opportunities in:

• Selective recaps. About 270 cleantech start-ups can be characterized as “late stage” (they’ve raised Series C rounds or later). Of those, about 150 have demonstrated proof of economics and are focused on scale-up. If capital keeps receding, there won’t be nearly enough money to fund them to exit – enabling savvy late-stage financiers to pick off the best of the bunch in recaps that reap disproportionate returns. In 2011 I thought this capital gap wouldn’t persist, because the likes of VantagePoint and Silver Lake Kraftwerk were out raising huge funds aimed at it; the failure and scale-back of those efforts leaves the opportunity open.
• Cross-border plays. The U.S. dominates cleantech innovation, but China and other overseas nations dominate deployment. New vehicles are mobilizing to provide cleantech equity investment coupled with cross-border JV creation and operational help – including Formation8 and a stealth-mode firm I can’t reveal.
• Strategic investment, rethought. Large corporations in industrials and energy have strategic motivations to foster cleantech start-ups: The likes of GE and General Motors want an innovation pipeline, while utilities want a stream of new equipment to rate-base. Institutions are forming to organize this activity in a merchant banking model, like Broadscale at the late stage and OnRamp Capital at the early.
• Foreign techno-colonialism. While U.S. investors bemoan a lack of capital for cleantech, many foreign institutions are awash in it – and view American assets as being generally cheap. To U.S. start-ups, they will play a role somewhere on a continuum between savior (e.g. Japanese trading houses bankrolling cleantech start-ups to get the inside track on project financing) and reaper (e.g. Wanxiang’s A123Systems deal).
• Philanthropic capital. The cleantech projects that would most change the world – think electrofuels, solar antennae, advanced nuclear power – are also the least likely to be funded, because they combine long time frames with extraordinary risk. There is a case to be made for impact investment in these fields using philanthropic capital as a charitable activity. A new effort called PRIME, backed by four visionary family foundations, is leading this charge.

It’s hard out there for cleantech. The woods are scary and the journey is uncertain. But pioneers are charting a new path through the thicket – blazing trails that others will follow.

Matthew Nordan (@matthewnordan) is an energy VC investor at Venrock, one of the oldest and best-performing VC firms. Earlier, he co-founded and led the energy tech analyst firm Lux Research and forecasted technology futures at Forrester. There’s more where this came from at mnordan.com.

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Cree makes the bulk of its revenue from of selling LED chips and components to other LED bulb and lighting makers. The company is profitable and doing well.

On Tuesday Cree also announced a better-than-expected earnings, raising its guidance for its fiscal third quarter, and reported better than expected profit and revenue for the current quarter. Cree earned $20.4 million on revenue of $346.3 million for the most recent quarter. Along with those strong earnings Cree saw its shares jump 12.5 percent in morning trading (as much as 19 percent earlier this morning).

Cree is selling three new LED bulbs: 1). a 40-watt, warm white replacement for $9.97, 2). a 60-watt, warm white replacement for $12.97, and 3). a 60-watt day light for $13.97. Cree says the bulbs save 84 percent of the energy that would be used by comparable incandescent bulbs, last 25 times longer, and come with a 10-year warranty.

As we explained in our research report for GigaOM Pro (subscription required), the LED market has hit a turning point, particularly for commercial and industrial building owners who are installing LEDs because it makes financial sense. Check out our report on LEDs (digest here), written by Ucilia Wang, and here’s our podcast discussion about the report.

It’s been a harder sell to get consumers to buy LEDs, but with new cheap products like this line from Cree that will slowly change. Still, consumers expect super cheap bulbs — compact fluorescents can sell for a buck or two, and incandescents for well under a $1.

Other companies that sell low cost consumer LEDs include GE (which bought LED startup Albeo last year), Philips and Lemnis Lighting, which introduced a bulb last year for under $5. Worldwide sales of LEDs rose 2.1 percent to $13.7 billion in 2012 from $11.3 billion in 2011, and will grow to $16.4 billion by 2017, according to Strategies Unlimited.

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Apple’s massive solar farm in North Carolina, photo by WCNC-TV

Here’s the 7 projects:

• A solar financing model: NREL and solar financing startup Clean Power Finance will use $2.26 million to analyze data from 1,300 solar installation companies to try to create new types of community and regional financing methods.
• A publication and patent reader: SRI International, the University of Toledo and GE will use $600K to create software that can read and analyze science publications and patents to unearth innovations that can lower the cost of solar.
• Articulate a solar theory: Gordan Moore had his own law for chips, and some in the solar sector talk about a Swanson’s Law for the dropping cost of solar, but folks at MIT will use close to $500K to study the tech evolution process of solar and to create an overarching theory.
• Better forecasting of production costs: Researchers at the University of North Carolina at Charlotte, Arizona State University and the University of Oxford will use almost $950K to analyze data about patents, prices and production to create better forecasts of solar cell, wafer and panel prices.
• A model for solar markets: Sandia National Labs, the University of Pennsylvania and the California Center for Sustainable Energy will use $2.3 million to process data about solar markets and to create a model looking at how economic and social issues impact solar installations.
• Better strategies for community-led solar purchasing: Yale and SmartPower’s New England Solar Challenge will use $1.9 million to develop new strategies to that can make community solar buying programs work better.
• More effective solar installation in Texas: The University of Austin will use close to $500K to collaborate with six Texas utilities to create more strategic ways to install and interconnect solar in the state.

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That’s one of the reasons why some smart grid startups struggle and are sold off for smaller amounts than they or their investors had originally hoped, are forced to dramatically downsize, or eventually fold. There’s a chasm between when a startup launches and raises venture funding, and when a company reaches velocity with utility sales. That Valley of Death can take years of long utility sales cycles to cross, and many startups don’t make it through.

But as the smart grid industry matures, there’s players that have emerged on the other side of the Valley of Death that can help out the younger startups looking to develop innovation in the ecosystem. It’s one of the ways that real innovation can actually survive in a sector that is so conservative and slow moving.

Silver Spring Networks is one of these players. This week at Distributech, the massive power grid conference in San Diego, Silver Spring announced that it’s reselling startup AutoGrid System’s software, which helps utilities quickly deploy energy efficiency programs for its customers. To utilities that may not be familiar or comfortable with the two-year-old venture-backed startup, Silver Spring’s partnership gives AutoGrid some more weight.

Silver Spring, which itself was VC-backed and founded in 2002, works with a lot of startup and big company partners. It announced ten new partnerships at Distributech this week, and more than 30 of its partners are showing off tech at the conference this week.

For Silver Spring, working with the latest innovative startups is a good way to keep on the cutting edge and also see what is out there to either learn from or even acquire. Of course, this is a common practice in the internet ecosystem, where companies like Google, Facebook or Cisco, routinely keep an eye on the hot new VC-backed players. But the smart grid industry isn’t as mature and progressive, so this can be a relatively rare phenomenon.

The more traditional power grid firms are more commonly doing this now, too. Siemens, ABB, and GE all have various startup-focused initiatives. The older IT companies — like a Cisco or an Oracle — that are looking to get into the utility sector, naturally do this as well, as they’re used to doing it with their core IT divisions.

But more of these large key players are needed to take a more active role in shepherding and acquiring the most promising startups. It’ll be needed to keep innovation alive in the smart grid over the next few years.

If there aren’t success stories for these startups, they’ll be decidedly less innovation coming into the space. 2012 was a year that saw a smaller amount of venture capital deals for smart grid companies. According to a report from Mercom, there were 40 smart grid startup investment deals in 2012, compared to 50 deals in 2011. The overall funding by dollar amount was higher in 2012 than 2011, but that was skewed by a large fund raise from Alarm.com, which is more of a home automation and security company than a smart grid startup. There were only 66 investors that put money into smart grid startups in 2012, down from 92 investors in 2011.

If innovation doesn’t come from the younger startups, it’ll have to come from within the big power companies. But we all know how well most huge companies innovate.

Image courtesy of Shutterstock/Dusit.

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