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VC viewpoint on cleantech
11/04/2007. Source:IVCJ. Sanjay Wagle, VantagePoint Venture Partners
 Sanjay Wagle, vice president at US venture firm VantagePoint Venture Partners, offers his perspective on the fast growing cleantech industry in an interview with IVCJ’s Tania Hershman.
Cleantech was added in 2002 as a fifth industry investment group for this Silicon Valley-based, global-investing venture firm, joining communications and wireless, biotech and healthcare, semiconductors, and software and Internet.
IVCJ: How do you define "cleantech"?
Wagle: We define CleanTech as the application of "Silicon Valley" style innovation, technologies, and entrepreneurship to opportunities in energy, water, and advanced materials.
IVCJ: When did cleantech first appear as an industry?
Wagle: We began to see venture investment in cleantech in the mid-1990s, but it was at a low level, less than one percent of all venture capital investing. Over the last few years, cleantech has risen to more than six percent of venture capital investing, making it the seventh largest area of venture capital.
Just as there was a first wave of investment in the Internet ("Web 1.0") and then a subsequent wave ("Web 2.0"), we have seen a first wave of investment in cleantech, including wind, siliconbased solar, and corn-based ethanol – all technologies that have been around for a while. Now, cleantech is experiencing a second wave of investment in a new generation of technologies, such as non-silicon thin film solar and cellulosic ethanol.
IVCJ: Why has cleantech become a hot area for investment?
Wagle: Venture capital firms are doing in cleantech what they have done in IT, telecommunications and biotech. CleanTech is a set of technology- based business opportunities that address large, existing markets. This is a classic case for venture capital investing. The standard criteria that apply in venture capital investing also apply in Cleantech.
We see four trends that are driving the growth of the cleantech sector. The first is the volatility of oil and natural gas prices, which has focused people’s attention on alternative sources of energy. The second is the rapid growth of China and India, which is leading to increased demand for all commodities, from energy to materials. The third is energy security.
Europe and the US are recognizing the need to reduce oil dependence and diversify energy sources. And the fourth is global warming, which is leading policymakers to require changes in the ways we produce energy and use transportation. Any two of these four trends would be sufficient to sustain the cleantech sector. Another important factor is cost reduction.
For example, the cost of wind energy dropped 86 percent from 1980 to 2000, and now wind is costcompetitive with fossil fuel-based power generation. Solar is still quite expensive without subsidies, but there, too, costs are coming down rapidly. New materials and new ways of making solar products, such as the non-silicon thin film technology being developed by our portfolio company, Miasolé, will bring the cost of solar down dramatically in the next few years. In general, costs in cleantech have been coming down as volumes increase and technologies move further down the learning curve. A lot of factors are coming together to drive the growth of Cleantech.
IVCJ: How large are the major cleantech industries now, and what are the projections for future growth?
Wagle: Worldwide, solar is today an $11 billion market, wind is $12 billion, and biofuel is $16 billion. Each of these markets is forecast to reach $50 billion in the next ten years, according to Clean Edge, a cleantech consultancy firm. The solar market has grown by more than 35 percent annually over the last few years and, absent supply issues with regard to silicon, this is expected to continue.
IVCJ: As with every investment, there is always some risk. Where do the challenges lie in cleantech?
Wagle: Two of the main challenges right now are the relative dearth of serial entrepreneurs in this field, as compared to traditional venture areas, and the capital-intensive nature of cleantech. On the subject of management, you do see people who are experienced in industry, but there are relatively fewer in cleantech who are experienced in running multiple venture-backed companies. Now you are starting to see more experienced entrepreneurs coming into the field, often from other related industries such as semiconductors or IT.
A lot of cleantech is quite capital-intensive, compared to software, for example, which can be scalable without a lot of capital. Cleantech businesses often depend on "putting steel in the ground," such as building ethanol plants, which require significant capital. One of our portfolio companies, New Energy Capital Corp., finances renewable energy projects and currently has three large corn ethanol plants in construction in the midwestern US.
IVJC: What are the hottest areas within cleantech?
Wagle: One way to answer that is to look at where the venture capital firms are investing in cleantech – in solar, biofuels (primarily ethanol), fuel cells, advanced batteries and sensors, and water purification. Another way to answer this is to look at where the IPOs are happening, which is what venture investors are aiming towards. In 2005, there were five large solar IPOs in Europe, the US and Asia: Conergy, Ersol, Q-cells, Sunpower and Suntech.
All of these are solar cell manufacturers except for Conergy, which is a major European solar installer and integrator. There also has been a lot of activity in ethanol. Pacific Ethanol, for example, has a $1.3 billion market cap, and it has not yet completed construction of its first ethanol plant. Two large ethanol production and distribution companies, VeraSun Energy and Aventine Renewable Energy, filed for IPOs in March. In the water sector, there was an IPO recently by Basin Water, whose focus is treating contaminated groundwater.
IVJC: Is government support driving the cleantech industry?
Wagle: There is increased government support for cleantech. In general, regulatory policy is important in cleantech, just as it is important in telecom, biotech, and other fields. In the US, in addition to national policy, you see individual states such as California taking the lead. One way many states are encouraging cleantech is through renewable portfolio standards (RPS), which require that a certain percentage of the electricity in the state must come from renewable sources. There is also the federal renewable fuel standard, which mandates that by 2010, the US must use at least 7.5 billion gallons of biofuel per year, as compared to the 4 billion gallons used last year. People believe – and I believe – that even more than that mandated amount will be used in the market by that time.
This biofuels policy is consistent with President Bush’s most recent State of the Union address in which he talked about ethanol as a solution to oil dependency in the US and proposed reducing US Middle East oil imports by 75 percent by 2025. This is happening in Europe, too. In Sweden, for example, the government has pledged to entirely eliminate the need for oil in the economy by 2020. In the United Kingdom, new policies in many cities require that 10 percent of new housing developments be renewably powered and zero emissions.
IVCJ: What can VantagePoint offer cleantech companies?
Wagle: VantagePoint was one of the first major venture capital firms to create a dedicated cleantech practice, 0which includes eight team members. In addition, we can draw specialist resources from VantagePoint’s four other practice groups: communications and wireless, biotech and healthcare, semiconductors and components, and software and Internet.
For these new technologies to succeed, they ultimately have to reach large scale, and they have to be able to be global in scope. Because of this, we realized the importance of involving large global corporations that are active in the cleantech industries. We created a group of ten strategic partners, such as BP and DuPont – as well as Mekorot, the Israeli water company – that are truly committed to cleantech as part of their business strategy. These strategic partners are able to work with our portfolio companies on joint technology development, as channel partners, as customers, and potentially as strategic acquirers as well.
IVCJ: So global corporations are also seeing the potential in cleantech?
Wagle: Global corporations are becoming very active in cleantech. This is important because cleantech isn’t going to succeed until global players are committed to it. Major corporations are now investing more in research and development in cleantech and are becoming customers of cleantech companies.
For example, BP formed BP Alternative Energy, a billion dollar business focusing on solar and biofuels. GE has its "ecomagination" initiative to grow its clean energy, water, and transportation businesses, and Goldman Sachs plans to invest $1 billion in renewable energy and recently bought Zilkha Renewable Energy, a developer of wind power projects. Wal-Mart has committed to buying $500 million of cleantech products and services to improve its energy efficiency and reduce its greenhouse gas emissions. This level of commitment indicates to us that cleantech is more than just a temporary trend.
This article appeared in the Israel Venture Capital & Private Equity Journal (IVCJ). IVC Research Center publishes the Israel Venture Capital & Private Equity Journal, a quarterly review of trends and developments in the Israeli-related venture capital industry. IVCJ, distributed worldwide, is dedicated to provide wide-range coverage of Israel's venture capital industry. For more information please visit www.ivc-online.com
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