Here are my highly subjective highlights:

1: David Ortiz.

A (very fuzzy) David Ortiz at TechStars Demo Day.

There was a bona fide Big Papi moment on stage as the Red Sox superstar and overall Boston-superhero David Ortiz strode on stage to greet Fancred CEO Kash Razzaghi. This startup is building a “social platform” to connect sports aficionados with like-minded fans. Ortiz demanded that Rassaghi “get the Yankees off my cell phone.” (I dropped my phone but recovered in time to get one sub-par shot at left.)

Is there really room for a sports fan platform? Doubtful. But, hey, I’ve been wrong before. And did I mention DAVID ORTIZ???

2: A platform for sustainable, local food

I love the idea behind Freight Farms, which takes shipping crates and retrofits them with water, electricity,  internet access and LED lighting to convert them into compact hydroponic gardens.

The elegant idea is to “take the very structure that makes the global food supply chain possible and make it into a platform for producing local food,” said Brad McNamara, Freight Farms CEO.

Freight Farms CEO Brad McNamara.

They are remotely controlled and stackable which means they take up less real estate. Freight Farms has signed several customers including Katsiroubas Brothers,  a 100-year old Boston produce wholesaler, which is looking for ways to cut transport costs and offer more local product.

“There is nothing better than fresh local food, but the reality is food distribution is a long complicated supply chain — most goods travel 1,500 miles on average to get to your table,” said McNamara.

Freight Farm-grown crops require less water, no pesticides or herbicides. My question: Will their tomatoes taste like other hot-house tomatoes (i.e., like cardboard) or like an actual tomato? If it’s the latter, I’m totally sold.

3: DIY clothing design

In a nod to the burgeoning “maker movement” or do-it-yourself crowd, Mary Huang was to hand to talk up Constrvct, her startup that’s building service that lets you design 3-D clothing onscreen, tweak the size and styling with easy slidebar controls, preview your design on an onscreen mannequin and then make your clothes to order.

“Makers are underserved in the do-it-yourself market — they’re stuck at the same starting point as their grandmothers,” Huang said. Interest in home-designed clothes is rising thanks to Pinterest and Project Runway, she said, quoting a surprising stat: 3 million sewing machines sold last year, double the number from ten years ago.

4: Fixing manufacturing

LinkCycle says it can use its own data science — and existing data — to help manufacturing plants drastically cut their energy costs.

These facilities — many of them rust belt relics — are notorious for wasting energy and to remedy that many spend millions installing meters and hiring auditors to help. Most of that spending is also a waste, according to LinkCycle CEO Sahil Sahni.

“Why spend so much time gathering data when companies are already sitting on heaps of it?” he asked.

LinkCycle instead takes two existing data streams from the ERP systems already running these companies — electricity consumption and total production output. “We developed our own algorithms to take that data and use math — not meters — to save money without having to set foot in the plant,” he said.

Wow, that sounds so easy it makes you wonder why someone else hasn’t done it. Well except for that algorithm part anyway.

So, the new venue was fab but it suffered the same woe as past Techstars events — a lack of reliable connectivity. We soldiered through with personal hotspots and (finally) some intermittent Wifi connections but can’t one of these deep-pocketed sponsors finally figure out how to get reliable broadband into these events? (I’m  looking at you  Microsoft, Rackspace, Verizon and Softlayer.)

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I imagine a similar focus on high volume manufacturing at other successful hardware companies like Intel and First Solar, that make millions of units per month. This is no ordinary feat and is achieved only by a disciplined approach, operational rigor and a clear vision that “he who controls manufacturing eventually controls the market.”

Silicon Valley is the mecca of innovation worldwide, which makes the recent lack of successful greentech hardware startups difficult to comprehend. While there are a variety of reasons for this issue, one thing that might be missing from the greentech ecosystem is this Samsung-style intense focus on manufacturing.

Innovation is good, but scaled up manufacturing matters too.

Silicon Valley startups producing solar panels, batteries, energy efficient windows and other volume hardware products will have to achieve manufacturing at the scale of tens of thousands of defect-free units per month to make a dent in the marketplace. Having a superior product specification might not be enough if the companies are unable to produce the goods cost-effectively in mass numbers. In fact, their very ability, or inability, to do so might end up being the differentiator between survival and failure.

Technology transfer from R&D to manufacturing requires a different crew geared toward an operations-driven mindset and a brute force methodology that can quickly deliver a stable process. The 24/7 lifestyle that is required to deliver, say an 80 percent up-time, is painstaking, time consuming and requires dedication and commitment. At Samsung, the technology transfer engineers were treated like celebrities and provided with five star accommodations at the factory site. Special bonuses and incentives were tied to the speed of progress. One might say that’s an unfair comparison, but the reality is that Silicon Valley is competing against several such cleantech companies from all over Asia. Unless the startups have extremely revolutionary products that can tolerate lower manufacturing yields, there is a need to manufacture as efficiently, if not better, than the competition.

Having said all that, Silicon Valley was the birthplace of the “Intel Way” and has had a rich history of volume manufacturing. But an exodus of semiconductor fabs from the Valley to nearby states has taken the manufacturing focus out of the Valley and along with it, a lot of the manufacturing talent. This, in combination with the rise of Asia and the difficulty in obtaining financing for manufacturing has made it even more challenging for greentech manufacturing startups to scale up.

How to get around the manufacturing learning curve

Here are a few ways that greentech startups could help overcome issues with scaling up to volume manufacturing:

1). Obtain an experienced crew that can transfer R&D processes into a pilot line with an extreme focus on improving yields. Ensure that every employee understands that true success comes not from obtaining one-off records or champion results but from volume data obtained from processing hundreds of samples. At Samsung, no champion results were ever reported as an accomplishment in an upcoming line since those results are meaningless until proven at scale. Companies like Miasole in Silicon Valley took the right approach of involving Intel manufacturing experts for their solar panel factories and it would be wise for others to follow suit.

2). Manufacturing is a costly endeavor and gives the most bang for buck when it’s running 24/7. Hence it’s advisable to not wait for a perfect product but transfer an intermediate process and iron out kinks in the production process. A lower specification product with 90 percent yield might have better economics than having a higher performing product with a 50 percent yield, assuming the market will accept such a product for some time. There is no better example than First Solar who has continued to sell less than 12 percent efficient solar panels for a long time proving that there is room for a lower specification product if you make manufacturing extremely efficient.

3). Excellence in manufacturing depends on the company’s ability to expand and build future lines. For a Silicon Valley startup, a pilot line locally in the area might make sense to be close to the R&D team. But it might be wise to take the cue from other high tech companies and move manufacturing to nearby states given their lower costs of land and permitting, robust manufacturing ecosystem and availability of manufacturing talent. Several companies like Stion, Soladigm and others have already taken that approach, which is a good sign.

The importance of manufacturing to ensure a greentech hardware company’s success cannot be stressed enough. High-yield manufacturing allows a company to reduce the cost of its product and reinvest the profits into newer lines and more R&D. All of this requires a cultural change across the company.

The startups that truly understand the differences of personnel and resource requirements for manufacturing vis-à-vis R&D have a greater chance of success. Those that don’t might perish to the Asian giants who believe it or not, have figured out the art of volume manufacturing.

Kunal Girotra is a Director of Process Engineering at ThinSilicon, a solar cell R&D subsidiary of China Solar Power. Prior to that, he worked in various R&D and technology transfer roles at Samsung’s LCD division for advanced LCD and OLED displays. He can be reached at kunalgirotra@gmail.com.

Images courtesy of Miasole, Shutterstock/Mypokcik, First Solar.

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Image of Zelda courtesy of witness 1.

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But does this necessarily mean that greentech startups eying the public markets in 2012, shouldn’t waste their time? Well, take a look under the hood of most of these companies, and the problem isn’t really about being green or selling into the energy sector, it’s the lack of profits and even revenues in some cases.

As the co-founder of Lux Capital, Peter Hébert, tweeted Friday morning (@peterjhebert):

“Lot of hand-wringing about #cleantech IPOs. No morals in mkts. Should not expect willing buyers of unsustainable, profitless businesses.

So true. I was wondering just how few revenues and profits these firms have been taking in, so I decided to table ‘em up. The ugly truth:

The reality is that Enerkem and Luca Technologies had really no business going public with their current financials — the moves seemed like attempts to raise money to build their operations, and the markets just didn’t want to do that. As soon as BrightSource pulled their IPO plans, likely Luca and Enerkem just saw the writing on the wall.

BrightSource on the other hand, has a growing, though clearly, for the time being, a money-losing business. When (and if) the company builds out its first solar plant, Ivanpah on time and budget, then the firm will start moving into a more financially lucrative position. BrightSource was likely also hampered by the fact that the solar panel markets are really struggling, even though BrightSource builds solar thermal plants and doesn’t make solar cells or panels.

Enphase Energy was the one company that actually went through with their IPO and it’s not surprising that they have the most sound 2011 year financials. Enphase Energy is growing pretty dramatically, but that firm, too, has a lot of new competition in the marketplace, so has a big year ahead of them.

Image courtesy of angusf.

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I realized this after a training run on the roads yesterday. I ran a 7.25 miles in leisurely 61 minutes with my smartphone. When I left the house, I had a fully charged battery. At the completion of my run, the battery was down to 90 percent, so I used one-tenth of the battery in that hour. But with all of the sensors and functions going, I think the handset ran harder than I did.

During the run, I used a mobile application to monitor my pace, distance and location; the app was constantly updated by the phone’s sensors. Which ones? The GPS and Bluetooth radios were constantly feeding the app with key data. That includes my heart rate, which was tracked by low-power Bluetooth 4.0 chest strap. I also listened to music the entire time, with the volume level around 60 percent. Oh, and of course the cellular radio was active for voice and data, although I did turn off the Wi-Fi radio.

Think about that for a second. Between mobile apps, radios, sensors and even occasional screen wakes to see my progress, my phone was able to do a fair number of functions for the entire hour, using one-tenth of the battery capacity.

When I think back to the pre-smartphone days, I remember my PDA devices quickly drained the battery. Some of these had large screens — I bought one of the first color Pocket PCs a dozen years ago — perhaps a Wi-Fi radio and few other sensors or radios. And yet, I might have gotten two full days of battery life at that time, but generally had to charge my devices each night. That’s essentially no different that today.

But what is different is the number of sensors, features and functions found in the devices of today. We can do so much more on a single charge.

Instead of major battery advances, hardware makers have implemented highly integrated chips, such as silicon with 3G, 4G, Bluetooth, Wi-Fi and even FM radio support on a single chip, for example. Plus that Wi-Fi radio pulls double-duty: It’s now a gateway to share a mobile broadband connection with your other devices.

Display technology has improved too, using less power to backlight the screen even as we move to high-definition resolution. And software is far more optimized to work with the chips that power our phones and tablets. The processors on our chips are also smarter, ramping up in power as needed, but slowing down or offloading instructions for smaller or less-intensive tasks, which saves on power.

Sure, I’m just like everyone else and want to see a device that lasts for days on a charge. But I’ll happily take a handset that adds more radios or sensors without a major battery hit too. If I can get more “bang per watt” out of my mobile gadgets, I’m happy.

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Fast forward a week, and the research firm Cleantech Group, which has arguably done more than any other firm to brand the term cleantech, held the 10th anniversary of its annual conference focused on bringing together the entrepreneurs and investors building so-called cleantech companies. In the kickoff presentation by Cleantech Group CEO Sheeraz Haji, Haji said that cleantech is changing and that he and his team are “shifting our thinking in a radical way,” to a discussion about how one day cleantech will be pervasive, with “cleantech inside” everything. Though, for now, he said, his group is still focusing on the more traditional view of cleantech as a grouping of specific sectors made up by clean power, biofuels, energy efficiency, etc.

It’s certainly time for reflection for a sector that has had a difficult past 18 months. As many have noticed by now, a significant segment of venture capitalists, many at generalist firms, have shifted away from investing in new and early stage cleantech companies thanks to the difficulties so far in making that money back through acquisitions or IPOs. There’s also a public sentiment backlash brewing due to the high-profile Solyndra bankruptcy (and others), and the continued spin of Solyndra in an election year.

And those are just some of the problems. Others include the slower than expected roll-out of electric cars, abundant cheap natural gas handicapping cleaner forms of power, and the recession that hit capital-intensive cleantech infrastructure companies harder than most. Cleantech investor Rob Day wrote in a column recently that “the period 2009-2011 will be looked back upon as a real dry season for the sector.”

But maybe it’s not just a dry season. Maybe cleantech as a brand is morphing and splintering into more specific verticals, both because it’s an early and emerging sector, but also because the umbrella brand has gotten tarnished in some circles — for consumers, investors (and their LPs) and entrepreneurs.

The whole debate over which would be the dominant term, cleantech vs. greentech, was being pondered a couple years ago, I think largely because the space is relatively new — sometimes it takes awhile for terms to really stick (Web 2.0, cloud computing, big data). (Also because John Doerr cried during his Ted talk when he brought the term greentech to the world stage).

Cleantech is also just vague enough, that it can be unproductive for certain purposes. At a general cleantech conference, does a solar exec really need to talk to a biofuel exec and vice versa? Web conferences and mobile conferences don’t have this problem, it’s unique to the cleantech sector. As my colleague Adam Lesser put it to me: cleantech is an idea that we should leverage technology for the environment — it’s not an industry.

So in the future, will descriptions of “cleantech” companies stick to the specific verticals — like solar, or biofuels — and not fall under a cleantech over arching brand? Will another generic term take the place of cleantech, like energy tech? Or will cleantech rise again more powerful than it was?

Well, already more specific brands are being created to meet the needs of investors and entrepreneurs. Spring Ventures investor Sunil Paul has coined the phrase cleanweb to describe cleantech companies that are leveraging information technology. Note, he’s not using the term “cleantech IT.”

But, then again, perhaps cleantech has been around long enough that it’s not necessarily fading away, it’s just laying low until the market turns up a bit. Paul himself, whom I chatted with after his cleanweb-focused onstage interview this week, thinks cleantech as a moniker is here to stay, it’s just in a down cycle. He was one of the first investors in cleantech and backed Nanosolar and Solazyme early on.

It’s clear that the industry is in flux, whether that’s a transition, growing up, or cycling down. And it’s not just for cleantech, it’s everything related to climate change, sustainability and clean power. At Bloomberg’s New Energy Finance conference last week CEO Michael Liebreich laid out a 7 point plan, emphasizing the need for the clean power industry to tackle new ways or marketing, messaging and PR. At the Wall Street Journal conference marketing execs of large consumer brands seemed to agree that calling a product “green” could be a liability these days.

Energy tinkerer Saul Griffith perhaps had the most marketable (if hard to implement) advice at the Cleantech Group event, saying “you’re in defensive mode right now;” instead “all of you need to make the future of energy sound awesome.”

Image courtesy of Adam Jones, PhD.

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Do these struggles represent the beginning of the end for green technology?

Overall, it looks like business as usual for Silicon Valley, which, of course, is good. Only one in ten start-ups ever make it, VCs like to say. Failure makes you stronger. Some CEOs are visionaries and others are professional managers geared toward scaling up companies, etc. etc.

Remember all of those articles with journalists yammering about how green technology needs a Netscape moment? Well, this is it. But it’s not the moment when Netscape zoomed in its IPO. It’s the moment when it got absorbed into the gaping maw of AOL. Netscape became irrelevant, but life went on. The Internet, in fact, became even larger. Netscape’s demise simply proved that the so-called First Mover Advantage is vastly overrated.

Computing didn’t die with Sperry Rand either.

The analogy between green and computing isn’t perfect. Green technologies often require far more capital and time to get to market. Many also have to compete against existing technologies — like coal and incandescent light bulbs — that have spent decades winnowing out costs and building up manufacturing infrastructure. But VCs have thrown away large amounts of capital on companies serving the web, too. Anyone remember Akimbo? @Home? AltaVista?

Green technologies tend to get subjected to a higher level of scrutiny. Some critics seem emotionally dead set against the industry. Incumbents want to undermine it. Many entrepreneurs also grossly underestimated the technological challenges. Still, the reaction seems to go over the top. The founder of Friendster didn’t have to commit the public equivalent of self-immolation because Facebook succeeded and Friendster didn’t. But the public seems to want blood from every green company that fails to achieve corporate immortality.

Case Studies

Examine the two prominent collapses. Aptera wanted to make three-wheeled cars. Both Google and NRG Energy invested in it while Darrell Issa, the Republican Congressional Representative that championed investigations into Solyndra, sought to get federal loan guarantees for the company.

The Aptera 2e was a blast to drive. After emerging from the car during a test drive in San Francisco in 2009, individuals on the sidewalk stopped to take my picture and ask me questions. I felt like the Man of the Future: if only I had worn my silver skin suit.

But buy it? Three-wheeled cars have been nonstarters for years. Buckminster Fuller’s Dymaxion crashed during its public debut. Sidecars as a fashion statement went out with the Third Reich. The only truly successful three-wheeled vehicle has been the wheelbarrow. Aptera had one really interesting aspect to it: the body was made from a high-tech composite that is stronger than metal but far lighter.

Range Fuels, meanwhile, wanted to produce cellulosic biofuel with a variant of the Fischer-Tropsch process. FT, however, has only been popular with countries and regimes — Apartheid-era South Africa and again the Third Reich — cut off from oil imports. Companies with arguably more advanced processes leveraging biology — Solazyme, Gevo, and Amyris — all pulled off IPOs.

Range Fuel’s success in landing VC fund and government loans was to some degree due to its fortunate timing. It emerged at the dawn of green tech investing, when VCs and others were optimistic and desperate for new ideas to fund. At the time, many also mistakenly believed that the same skills required to succeed in computers would directly map to green. Mitch Mandich, a former Apple exec, served as CEO. Few people would now think, “Fuel additives, all-in-one desktops that come in five designer colors. It’s all just sales. Hire him.”

Now look at Google terminating the RE<C Program, an initiative to develop technologies that could produce electricity at cheaper prices than coal. A noble ambition, but not one for a software company. Google was building heliostats, or mirrors, for solar thermal power plants. Imagine being an engineer on that project. You’re in the company cafeteria where everyone is talking about deep linking and you’re trying to steer the conversation to reflective surfaces. All of your closest peers are at Brightsource Energy, 3M and DuPont. You might as well have a hairy mole on your upper lip.

Google, however, is not giving up on green energy. It desperately needs to get a handle on its energy consumption. It will continue to invest in solar farms, as well as use Google Ventures to get an early look at technologies like the AC-DC converters from Transphorm. In other words, it will begin to act more like Intel Capital than a nonprofit.

China’s trade war? Things will get cheaper and the case will drag out until everyone has forgotten it.

Only a few hit it big

And now for the positive news: Siemens will buy eMeter. For years, eMeter has been one of the most promising and successful start-ups in smart grid. If eMeter were a cloud company, it might have been able to stay independent for a longer time.

But the smart grid is an unusual market with a very, circumscribed client base. Only around 3,000 utilities exist in North America versus the hundreds of thousands of customers that want cloud services. Utilities also tend to be quite conservative. An acquisition was the logical, inevitable outcome.

Expect more to follow. Conglomerates like Siemens, Areva, Schneider, Toshiba and ABB have been on an extended shopping spree in the U.S.

So cheer up. This is par for the course.

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In yesterday’s post, we looked at the amount of capital that’s been invested in cleantech start-ups to date. Today, we’re going to look at what that money is returning. This may seem like a topic of interest only to start-up investors, but it’s important to entrepreneurs too: Without returns, the money spigot eventually gets shut off.

The conventional wisdom about cleantech venture capital goes something like this:

“Cleantech VC must be performing much worse than VC overall. First, very few exits have occurred relative to the large amount of money invested. Second, cleantech companies are time-consuming to develop – so when exits do occur, they’ll take longer. Finally, during the same time period that cleantech VC got under way, Internet VC investment yielded big wins like LinkedIn and Groupon. Doubtless, cleantech returns must look awful by comparison.”

Every part of the statement above is incorrect.

Myth #1: Few VC-backed cleantech exits have occurred.
Reality: Relative to its level of funding, cleantech has actually overdelivered on exits.

In order to assess this myth, we need two data sets. First, we need to know the total amount of VC financing each year as well as the share of it that went to cleantech start-ups. Second, we need some proxy for exits – again, for VC-backed companies overall and for the cleantech ones specifically. I’m going to use the gold standard of VC exits – IPOs on major stock exchanges (i.e. NYSE, Nasdaq, etc.) – because the data is both readily available and unambiguous. The two data sets appear below.

In any given year, we can compare cleantech’s share of VC-backed IPOs with its share of VC financing. If the former exceeded the latter, then cleantech start-ups would exhibit a better batting average than VC-backed start-ups overall.

There’s one complication: Because companies go public many years after they first get funded, we need to introduce a time lag to the financing data. This way, our “proportion of IPOs” and “proportion of financing” numbers will compare the same group of companies. Strictly speaking, the time lag should equal the average amount of time from funding to IPO, which in cleantech happens to be 8.3 years. But because that interval has shortened for the most recent crop of public companies like Gevo and Kior, I’m going to use five years. (Note that this will make cleantech look worse, not better).

Here are the results:

Since 2004, VC-backed cleantech companies have been generally overrepresented in the IPO markets relative to their share of venture capital financing. This pattern has persisted in 2011, during which non-cleantech companies like LinkedIn and Groupon went public. The trend isn’t perfect – it didn’t hold true prior to 2004, it hiccupped in 2008 (when only six VC-backed companies overall went public, none cleantech-related), and it may not continue in the future (in 2012, it will require one out of ten VC-backed IPOs to hail from cleantech, versus one out of 14 so far this year). Regardless, the claim that cleantech has suffered to date from proportionately few exits is patently false.

Myth #2: Venture-backed cleantech start-ups take longer to exit than companies in other sectors.
Reality: So far, they take less time.

This one’s easy. As previously mentioned, the average time from founding to IPO for venture-backed cleantech start-ups is 8.3 years. For venture-backed companies overall, it’s 9.4 years, according to the National Venture Capital Association.

(After this gets posted, I expect a deluge of emails saying “Matthew, haven’t you argued quite publicly that cleantech innovation requires more time, not less?” I still believe this is true overall. What the present analysis shows us is that VCs have done a good job of restricting their funding to the subset of companies that fit their model.)

Myth #3: Cleantech VC funds must be doing worse than VC overall, because they’re not exposed to ballooning valuations in the Internet and digital media sector.
Reality: Cleantech-only VC funds have about the same valuation metrics as VC funds overall.

So far we’ve assessed the number of big exits that have occurred in cleantech and looked at how long they’ve taken to occur. But perhaps we just had a flash-in-the-pan of IPOs for cleantech start-ups that will never occur again. Maybe the few good companies in cleantech VC portfolios have all gone public already, and the majority left over all stink.

How could we test this? Well, VC funds are required to regularly report their interim performance – the current value of their investments compared with the amount of money paid for them – to the limited partners that provide the money to invest (mostly pension funds, foundations, and trusts). Unlike the IPO data, which shows us who crossed the finish line, these interim performance numbers show us who’s leading mid-race. If we could get at these numbers and compare the interim performance of cleantech-only VC funds with VC funds overall, we’d have a more comprehensive and predictive measure of how this cleantech venture thing is working out.

Venture capital firms don’t typically post their performance for the public. However, we have a back door to get at this data for a subset of VC funds. There are a few big pension providers out there which supply money to lots of VC funds and are also required by charter to report the interim value of each holding. One such institution is the California Public Employees’ Retirement System (CalPERS), which happens to have invested in 19 cleantech-only VC funds – those from firms like RockPort and U.S. Renewables Group that back cleantech companies exclusively. CalPERS reports its numbers with a six-month lag, meaning that the most recent data is from March 31, 2010.  This is the best sample available that we can use to judge cleantech VC’s interim performance. Here’s what the raw data looks like:

Let’s run through the columns:

• Fund is an arbitrary identifier for each cleantech-only fund that CalPERS has put money into. While I have anonymized them for this post, CalPERS’s site identifies them by name.
• Vintage year is when each fund started making investments. This will be important later on.
• Size is the amount of money that each fund has to invest. This column doesn’t come from CalPERS; it’s culled from press releases. You can use it to see whether big funds or small ones tend to do better.
• Stage indicates whether a fund tends to invest early or late in portfolio companies’ life cycles. This is also not CalPERS data, but rather my best guess for each fund.
• Value-to-paid-in-capital is the value of each funds’ investments as of March 31, 2011, divided by the amount of money initially paid for those investments. If I invested $10 in a company two years ago and it’s worth $15 now, my value-to-paid-in-capital is 1.5x. This number is net to LPs, meaning that it accounts for the management fees and the share of profits that the VC fund keeps for itself.
• IRR is the internal rate of return of the fund – i.e., the performance expressed like an interest rate. If I invested $10 in one company two years ago and it’s worth $15 now, my IRR is 22 percent. This is also reported as net to LPs.

What do we learn from this?

• As a group, these cleantech-only funds are slightly “below water” – meaning that their investments are presently worth slightly less than what was paid for them. On a fund-weighted basis, the average value-to-paid-in-capital ratio is 0.95x.
• Eight out of 19 of the funds, or about 40 percent, are “above water.”
• The best fund is at 1.6x value-to-paid-in-capital while the worst is at 0.4x.

This might seem really bad at first glance, but remember that the average fund in this group is only four years old. Venture funds typically run for 10 years, and they almost always exhibit a “J-curve” of performance – meaning that they are under water for their first several years (when some portfolio companies die and go to zero, but the others haven’t appreciated much in value), and they only get above water in the back half. With that in mind, we ask: Is cleantech doing better or worse than VC overall?

As it happens, we can get the data to make this comparison. The National Venture Capital Association publishes the same kind of data that we have above from CalPERS, except that they do it for the entire landscape of venture capital funds. By comparing our cleantech-only fund performance data from CalPERS with our all-of-VC data from the NVCA, we can determine how the interim performance of cleantech-only funds stacks up to VC overall. When we do this, we should only compare funds of the same vintage year, to account for the amount of time that the funds have been running and to rule out year-to-year disruptors like the 2008 financial collapse. The results look like this:

As you can see, we can’t learn much for the vintage years 2005, 2009, and 2010, because in each we’re comparing all of VC to just one cleantech-only fund. But from 2006 through 2008, we have a decent basis for comparison. And you know what? In each case, cleantech is a little better or a little worse than VC overall. Across the entire time period, the cleantech-only funds have a fund-weighted value-to-paid-in-capital ratio of .95x, whereas VC overall is at 1.07x. Given that both values are within ten percentage points of flat – and, moreover, that we are talking about funds that are at most five years old – this is not a large difference.

Further, we’re unfairly handicapping cleantech in this analysis. Why? We’re comparing the entire VC universe with cleantech-only funds. We’ve omitted the cleantech practices of generalist funds like Kleiner Perkins, DFJ, and Khosla Ventures, because there’s no place where we can get data on their cleantech performance carved out from everything else. This impacts our analysis because some of cleantech’s biggest VC-backed IPOs have been supported solely by these generalists – for example Kior, which had Khosla as its lone VC and delivered a $1 billion+ return that only shows up in the “VC overall” side of our comparison.

With this in mind, we can conclude that cleantech VC performance is roughly equal to the VC asset class overall (so far). Reasonable people can argue about whether the whole venture capital shebang is doing well or poorly, but can’t claim that the cleantech bit is bombing.

This analysis has, by necessity, been very investor-centric. What does life look like if you’re a CEO inside one of these cleantech portfolio companies? We’ll tackle that in tomorrow’s post.

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.

Image courtesy of Irwin-Scott.

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There’s been a pile of negative news about cleantech start-ups recently. I’ve heard it said more than once in the past month that venture-backed entrepreneurship clearly isn’t working here, so maybe we should all pack our bags and go home. Given the human bias to extrapolate individual events into overarching trends, I figured now would be a good time to review the data so far about cleantech VC performance – and I stress data, not anecdote or assertion! – to see what we can learn.

This is a meaty topic, so I’m going to cover it in four posts. Today I’m going to focus on the money – how much capital has been available for cleantech start-ups so far, and what we can expect in the next few years. Two subsequent posts will address the VC investors that are supplying this cash, as well as the experiences of start-up companies that have achieved liftoff. In the final post, I’ll wrap it all up with some parting thoughts.

The chart below shows cleantech start-up investment from 1995 through 2010. My data set is cobbled together from multiple sources, aiming to capture the breadth of the energy, environmental, materials, and agricultural technologies that most people refer to when they say “cleantech.” Varying definitions mean that these figures won’t equal those from the Moneytree survey or the Cleantech Group, but the trends should be the same. I divide this era into four periods. During each, cleantech start-up investment had a different driver:

• 1995 to 1999: Baseline. This period shows us what cleantech start-up financing looks like when there’s no external forcing function to influence it. The answer is $200 million +/- $100 million per year in 30-50 transactions annually. During this period the venture capital industry as a whole grew dramatically – from about $7 billion invested per year to more than $50 billion – so cleantech accounted for a shrinking percentage of the total.
• 2000 to 2005: Bubble fumbling. The year 2000 saw the peak of the Internet bubble and a commensurate peak in total venture capital investment: An all-time record of nearly $100 billion went into start-up companies that year, mostly of the Internet variety. But the bubble promptly burst, and VC firms that had just raised billions of fresh dollars had to find something other than dot-com start-ups to invest them in.

I’d characterize what happened in the years that followed as “fumbling around for another bubble,” marked by broad interest in the physical sciences instead of cleantech per se (you may recall this as the time when nanotechnology became an investment meme). Cleantech benefited considerably from the fumbling, however, and in 2005 start-up investment in the field broke $800 million – several times greater than in the late ‘90s.

• 2006 to 2008: Gold rush. Starting in 2006, cleantech became a major VC focus area, and start-up financing rose by 50 percent + annually for three years. You might think this happened because all the venture capitalists went to see “An Inconvenient Truth” on the same night, but I think a different sort of herd mentality was at work: In Q4 2005, three solar companies went public, all at valuations around $1 billion – namely Q-Cells, SunPower, and Suntech – and hundreds of VC firms hopped on the bandwagon. (You may mock the VC asset class for collectively deciding that cleantech was the next big thing, but you may also respect it for recognizing the intersection of favorable secular trends with a quarter-century of neglected tech innovation!)

As a result, cleantech start-up financing skyrocketed to exceed $4.5 billion in 2008. Note that toward the end of this period, after initial bets were placed, money began to shift away from brand-new companies: Seed/Series A financing fell by 29 percent from 2007 to 2008.

• 2009 to now: Retrenchment. In September 2008, Lehman Brothers filed for bankruptcy and the stock market went into free-fall, losing 30 percent of its value by year-end. This spooked investors of all types, venture capitalists included, and cleantech start-up investment dropped by a third in 2009. For entrepreneurs launching new businesses, the more significant development was that Seed/Series A funding fell by half, returning to 2006 levels.

2010 brought a substantial recovery, but not a new peak, while Seed/Series A funding for new start-ups stagnated. As for 2011, the year’s not over yet, but based on current figures this year will be flat or down overall with a level of Seed/Series A investment comparable to 2010.

Now let’s zoom in and look at just the last five years. Three big trends come into focus:

• Financing rose sharply to a peak in 2008 and bounced around after that.
• Late-stage financing has ballooned as more companies have “graduated” to big Series D and later rounds, where they need lots of cash to build factories, hire sales forces, establish distribution channels, etc.
• Seed/Series A financing for brand-new businesses has fallen substantially.

So far we’ve been looking at this data by dollars invested. We can also look at it by rounds completed:

This evens out the visual a bit because the late-stage investments aren’t weighted up by their disproportionate value. However, they still predominate: Sixty-six Series D and later rounds were raised last year, more than other stage. In contrast, the number of early-stage investment rounds has plummeted. Nearly 100 new cleantech companies per year received seed/Series A funding in 2007 and 2008, but only 50 or so did in 2009 and 2010.

What’s next?

All of this rear-facing stuff is fine and good, but if I’m an entrepreneur, I want to know what’s going to happen in the future. If my cleantech business will require lots of late-stage capital down the road, what is the competition for that money going to look like?

We can answer this question by using yesterday’s financing data to project tomorrow’s capital requirements. We know, historically, the percentage of companies that have “graduated” from Seed/Series A to Series B, B to C, and so on. We also know the proportionate amounts of money that companies tend to raise in each round, and we can make an informed guess at how long each round of funding lasts.

Equipped with these numbers, we can build a simple forecast of how much cleantech start-up financing will be required in the future. I used the assumptions below. (One big thing to note: For simplicity’s sake, I’ve assumed that the number of new companies raising Seed/Series A financing each year – as well as the average Seed/Series A round size – will remain at 2009-2011 levels. This obviously won’t happen, but it’s not important to the argument I’m going to make.)

When we apply these assumptions about the future to the population of companies launched in the past, we generate this forecast:

You can see the big takeaway here: There will be a path-breaking requirement for late-stage financing in 2012-2014 as the “baby boom” of companies formed in the last five years plays out. In 2008-2010, an average of $1.8 billion per year went into Series D and later rounds – but during 2012-2014, an average of $3.3 billion per year will be needed. That’s an extra $1.5 billion in late-stage financing annually, or $4.5 billion across the three years.

So will this money be available? Or will otherwise-auspicious cleantech start-ups go begging?

I’m betting that the money will be there. I posit that a number of VC and private equity pros all ran this spreadsheet a year ago, reached the same conclusion, and started raising late-stage funds. Examples include:

• VantagePoint is reportedly in the market for a $1.25 billion cleantech growth fund.
• Silver Lake Kraftwerk, a new vehicle also raising money now, is said to have a $1 billion target.
• BlackRock and NTR announced a new late-stage cleantech fund back in February. I’m not sure where this one stands, but if it goes forward, a fund smaller than $1 billion would be out of character.
• Kleiner’s $500 million Green Growth Fund – first allocated in 2008 – has apparently been re-upped, since it’s now self-described as a “$1 billion initiative”.
• Khosla’s new $1 billion fund is half-allocated to cleantech, and I’d bet most of that portion is aimed at late-stage investment – perhaps $300 million?
• Hudson Clean Energy’s $1 billion first fund, raised in 2009 and focused exclusively on late-stage investments, should still have some fresh capital – and in the meantime the firm appears to be raising a second one worth $1.5 billion

The entities above would get you near $4.5 billion all by themselves, and the shift to later-stage allocations among all the other VC investors should be sufficient to cover any shortfall. So I think we can conclude that there will indeed be adequate late-stage financing for cleantech start-ups in the next few years – and happily so, since the need will be unprecedented.

My concern, as you might expect, is that there may be insufficient Seed/Series A capital available to fund new cleantech enterprises. The limited partners who supply VC firms with money to invest are putting less and less capital into VC overall, and the share of that money that will be allocated to cleantech is unlikely to grow in the near term. If shrinking cleantech allocations get disproportionately earmarked toward late-stage investment, Seed/Series A capital will be thin on the ground. I’m self-interested in this because our team at Venrock invests early, we prefer to do so in conjunction with peers, and we already have fewer co-investors available to us now than we did two years ago.

This brings us to a different question: What would have to happen for LPs to pump more money into cleantech rather than the same or less? That depends on returns, which I’ll address in the next post.

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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