Told you so!

Every investment niche has its superstars — the tech geeks who anticipated the dot-com boom, the biologists and chemists-turned-venture capitalists who continually pick winning pharma plays and now the engineers and environmental scientists who got into cleantech at the ground level.

Back in the early 1990s, when Palo Alto, Calif.- based firm Technology Partners earned its reputation as the first to invest in cleantech, it was a high-risk venture. Even in 2001, when the dotcom boom was deflating and the firm moved half its capital into cleantech, many people in Silicon Valley thought it was a rash move [see “Dawn of the next dot-com?” SI, June 2006]. When Nth Power, a venture fund focused solely on energy, launched 10 years ago, it was considered an inconsequential niche fund. Today, it manages $400 million and has backed some of the bigger initial public funding (IPO) success stories of the past year. The Cleantech Network, a market research firm focused on cleantech investing, reported a $1 billion surge in investment in the space in 2006, and investment in the category surpassed investment in semiconductors in 2007.

The first cleantech startups began to go public in 2005, and more companies in the space are now reaching maturation. Many are either being acquired by larger companies or going public with such success that even their own board members are surprised. When solar company SunPower Corp. (Nasdaq: SPWR) went public in 2005, its stock jumped 41 percent in its first day on the market. Energy demand-response technology company EnerNoc’s stock jumped 20 percent when it went public in 2007, while its competitor Comverge saw stock jump 22.5 percent after its IPO. The Cleantech Network reported in August 2007 that 19 cleantech companies had gone public in the second quarter of 2007. Market research firm Cleantech Network estimates the cleantech mergers and acquisitions deal count at 117 between 1990 and 1995, increasing to 613 between 1996 and 2003.

Meanwhile, early stage investment continues to grow. Funds tend to get involved in solar and biofuels first, according to Marianne Wu, a partner in Mohr Davidow Ventures’ (MDV) cleantech practice, because firms have seen a number of such companies grow, go public and succeed. Now, early investors, such as MDV and Technology Partners, are diversifying, investing in everything from so-called “clean coal” to water to electric vehicles. This month, Sustainable Industries profiles five venture capitalists who saw the cleantech wave coming and have continued to ride it.

From Silicon Valley stalwarts John Doerr and Vinod Khosla, who both gained notoriety in the dot-com days; to Technology Partners’ Ira Ehrenpreis; Draper Fisher Jurvetson’s Raj Atluru, who was looking into solar in the 1990s as part of his degree in environmental engineering; and Mohr Davidow Ventures’ Marianne Wu, who studied the now-hot emerging technologies years ago as part of a doctorate in engineering at Stanford and is now one of the few women providing leadership in the cleantech space, the five profitable prophets share with Sustainable Industries the history of cleantech investing, where it’s heading and why the phrase “cleantech bubble” is a joke.

Ira Ehrenpreis
General Partner, Technology Partners
Ira Ehrenpreis has been the mastermind behind Technology Partners’ cleantech charge since the 1990s. During 2007, his schedule has been packed with interviews, conferences and speaking engagements, as the investor crowd struggled to catch up and clamored to ask him where the cleantech space is heading.

Technology Partners decided to really dive into cleantech in 2001, when the fund’s partners eliminated information technology (IT) from its portfolio and focused solely on cleantech and life sciences. “Cleantech was one of few sectors in the venture asset class that was underinvested at a time when IT was in many ways oversaturated with capital,” Ehrenpreis says. “In the venture industry, it’s always about being early and finding trailblazing opportunities.”

Ehrenpreis says he was drawn to cleantech because emerging technologies in the sector targeted fundamental problems and were applicable all over the world. Additionally, technologies addressing energy, electricity and water were innovating within industries that had seen little technological change for decades. “In IT, it’s not unusual to see a company spend 10 to 15 or 20 percent of its revenue back into research and development [R&D],” he explains. By contrast, he says, R&D investment in the energy industry is roughly 0.2 or 0.4 percent of revenue. “Mostly because the leaders in energy, fuel and water are oligopolies whose mission is the status quo, not innovation to change underlying market dynamics,” he explains.

The combination of an underinvested space, widely applicable technologies and innovation in previously stagnant industries made cleantech an irresistible investment opportunity, although Ehrenpreis says the decision to devote so much time and capital to the sector was controversial at the time.

While the same driving forces are still at play in today’s cleantech sectors, Ehrenpreis points to a handful of other factors that helped create the buzz around cleantech in 2007, including a shifting political environment and popularization of clean technologies, from alternative fuels to energy efficiency. “You can’t pick up a paper or turn on the television without seeing something related to one of the cleantech sectors,” he says.

Ehrenpreis says we are in an unprecedented time for cleantech entrepreneurs. “For so many years, the best and brightest in VC focused on IT and life sciences,” he says. “Now cleantech has become a magnet for the best and brightest, and it’s these people who are really the trailblazers for making things happen. There has never been a better time for recruiting in the cleantech community.”

The corporate paradigm has also shifted since the days when energy companies weren’t investing in innovation, Ehrenpreis says, listing off some of the large U.S. corporations with energy and “green” initiatives: GE (NYSE: GE), Wal-Mart (NYSE: WMT) and Google (Nasdaq: GOOG) among them.

“There are investment banks with multi-billion-dollar investments in sustainability,” he says, “and this shift in the corporate environment has provided an ecosystem and a foundation that enable startups that are innovating to sell into and partner with big corporations.” The shift has increased the opportunity for investors to see a return on their investments.

“We’ve gone from a time when people were questioning whether there could be exits in cleantech to a time when multi-billion dollar exits and big successful IPOs are occurring in every sector under the cleantech umbrella,” Ehrenpreis says, “and we’re seeing companies in the IPO pipeline that are reaping the benefits of the breadth of cleantech.”

While others worry about a cleantech bubble, making comparisons to the dot-com investment boom, Ehrenpreis says neither is a concern. Technology Partners announced the formation of a $300 million cleantech and life sciences fund in August 2007.

“We’re at the tip of the iceberg, even with solar, which has received the most attention by far,” he says. “We’re still at the most nascent part of the solar story. If we saw solar experience a growth rate of 30 percent through 2025, it would still represent less than 3 percent of the entire electricity generation in the United States.”

Now, first-generation technologies are being replaced by second-generation technologies that drive down costs and increase efficiency, a natural progression in the development of any new technology, according to Ehrenpreis.

So where is the trailblazer looking next? “The convergence of cleantech and life science,” he says. “Nanotech, biofuels, biomass, advanced materials (nano or not), new drug reformulations — many of these are biological advancements targeting cleantech application, or advanced materials targeting life science,” Ehrenhpreis explains. “The nexus of the two is an emerging area that will become increasingly important.”

Vinod Khosla
Founding Partner, Khosla Ventures
Labeled one of the nation’s most influential ethanol advocates by Fortune magazine, Vinod Khosla is widely regarded as one of the preeminent champions of cleantech.

The founding CEO of Sun Microsystems and a successful venture capitalist with Kleiner Perkins Caufield and Byers (KPCB), Khosla set off on his own in 2004 to launch a venture fund devoted almost entirely to cleantech. When he began, Khosla was investing only his own money, which allowed him to take bigger risks than other funds. Since then, Khosla has worked tirelessly to raise the profile of clean technologies. Perhaps more than any venture capitalist working in the space, Khosla is on what seems to be a personal crusade to end the world’s dependence on oil.

He has also personally invested in a number of so-called “bottom of the pyramid” technologies, which aim to provide low-cost goods and services to the global poor — at a profit. The bulk of Khosla’s investments aim to provide clean, affordable water and electricity to the rural poor in his home country of India.

Khosla started out focusing almost entirely on ethanol — first corn-based and now predominantly cellulosic. The bulk of his firm’s investments are still in the category, with multiple plays in biological companies looking at using microbes to convert organic matter to fuel, as well as corn and cellulosic ethanol companies in Brazil, the United States and India.

Khosla’s enthusiasm for ethanol made him a favorite whipping boy among anti-ethanol bloggers throughout 2006 who thought he should be using his influence to champion more sustainable alternatives to fossil fuels. And some of his early comments about solar — that it was not likely to replace coal-fired electricity because coal is cheap and there is a nearly infinite amount of it — didn’t do much to improve his rep with the blogosphere. In 2007, Khosla Ventures’ portfolio broadened considerably and now includes solar, battery technology and solid-state lighting. Khosla has also said on numerous occasions that he favors butanol to ethanol, and has been looking for related startups to fund.

The firm made a late-August 2007 investment in Pasadena, Calif.-based GEVO, a startup that uses the research of CalTech professor Frances Arnold to produce biobutanol using genetically modified micro-organisms. Though other venture capitalists have spoken about the need to influence policy, few have concentrated as much energy and time on Washington as Khosla — fighting aggressively for renewable energy mandates, as well as an increase in the skilled-worker visa cap to help cleantech companies recruit the global talent needed to get technologies to market [see “ CEOs look to plug brain drain,” SI, March 2007]. Of course, in the cleantech space, influencing policy is beneficial to the bottom line.

Raj Atluru
Partner, Draper, Fisher, Jurvetson
Raj Atluru was looking into solar long before he thought about investing in it. As an environmental engineering Masters student at Stanford University, Atluru’s research focused on small-scale solar projects in the university’s energy lab. His research background has informed his approach to cleantech investments, and in part his interest in foreign companies.

In the mid-1990s, prior to joining Draper Fisher Jurvetson (DFJ), Atluru invested in a few energy technologies, and then at DFJ in 2003 he began looking into nanotechnology, which was the gate through which DFJ entered the cleantech race. Now the firm is investing in a variety of solar technologies, including photovoltaics, thin film and thermal concentrators, as well as so-called “clean coal,” electric vehicles and energy demand-response monitoring [see “A Clean Shave” page 25]. Atluru says the firm’s philosophy when it comes to cleantech is to invest in those technologies that utilize resources more efficiently and more effectively.

In the coming year, Atluru says he is looking into energy storage and utility-scale solar; energy efficiency, grid reliability, and demand-response technologies; and alternative building products that help developers to achieve and go beyond green building certification by radically improving efficiencies. Overall, though, “the biggest bang for your buck in terms of financial payback is in data center efficiency — anything you can do to improve energy efficiency in the data center is going to have a major impact on a company’s bottom line.”

While Atluru admits areas such as solar and biofuels are well-funded, he says there’s no way the entire sector is overfunded. “It’s such a broad category and some of the sectors included under cleantech have absolutely nothing to do with each other,” he says. “If you make an investment in water, it has nothing to do with other investments in solar.”

On the heels of an announcement about DFJ’s partnership with London-based Esprit to form DFJ Esprit, Atluru says the fund is looking outside the United States for cleantech investments, and foreign investments will likely increase in the coming years — both because of DFJ’s global presence and, he notes, because the cleantech industry is inherently global.

Still, Atluru says the United States remains the primary driver of technological innovation and entrepreneurial activity surrounding cleantech, due in part to the amount of research being conducted by U.S. cleantech companies.

While Europe is strong in research, especially in advanced materials, and several U.S. companies have licensed technology from universities in Europe, Atluru says China and India remain strong manufacturing and end-user countries, with a large percentage of solar manufacturing happening in China.

Atluru sits on the board of several companies in the United States but is also involved in a handful of startups in India, both in the cleantech space and in more general technology companies. Like Khosla, he points to bottom-of-the-pyramid investing as the next great trend in cleantech.

“In India, 600 million people are not connected to electricity and have no access to clean water, and the same sort of opportunity exists in China,” he says. “That’s the world’s challenge, notwithstanding global warming: Get power, electricity, education, communication, water to developing countries.”

John Doerr
Partner, Kleiner, Perkins, Caufield & Byer
John Doerr, perhaps the patron saint of startups, is often referred to as the most influential venture capitalist of our time. His early tech investments are the stuff legends are made of, with prescient and wildly successful investments in Sun Microsystems (Nasdaq: JAVA), Amazon (Nasdaq: AMZN) and Google (Nasdaq: GOOG), amongst others. Such successes have made Doerr a sort of Pied Piper in Silicon Valley — where he goes, others follow.

Though Doerr was not at the very front of the cleantech charge, he was a relatively early champion of the sector’s potential, and it may well have been his decision to allot a large percentage of KPCB’s fund to what he likes to call “green technology” that sent the rest of the Silicon Valley venture funds into a feeding frenzy. What set Doerr on the course, as has been the case with various CEOs, investors and government officials, was his daughter. In a passionate and much-talked-about speech at the 2007 Technology, Environment, Design (TED) conference, Doerr talked about a conversation with his friends and colleagues about global warming during which his daughter interjected “Dad, your generation created these problems, and you’d better fix it.” Doerr calls the moment his turning point, and the story may help explain why his speeches about green technology are so passionate.

When Kleiner Perkins announced its $100 million green tech fund, Doerr said the firm would not only invest in individual ventures, but (like longtime colleague Vinod Khosla) would also “advocate for policies that reduce the climate crisis and increase energy innovation.” To that end, the firm awarded its first KPCB Prize for Greentech Policy Innovators in July 2007 to the California Global Warming Solutions Act and Brazil’s Ethanol Revolution.

Doerr has also pointed to Asia’s expanding economies as part of a huge potential growth market for emerging green technologies. “This is the mother of all markets,” Doerr told the Associated Press in 2006. “As the Asian economies rise, people will move from rural to urban settings,” he explained, “and all those people will want the same things that you and I want — clean water, power and transportation.”

Though Doerr and KPCB are notoriously tight-lipped about potential future investments, Doerr has said recently there needs to be more investment in technologies that can remove carbon dioxide from the atmosphere. Carbon sequestration, anyone?

Marianne Wu
Partner, Mohr Davidow Ventures
“Personally, I’ve been interested in cleantech since grade school,” says Marianne Wu. The engineer-turned-venture capitalist began investing in the space in 2004, joining Mohr Davidow Ventures (MDV) in 2005 to focus solely cleantech investing with Erik Straser, who leads the fund’s cleantech team.

Wu is used to being one of the few women in the room. She has a Ph.D. in engineering from Stanford University and worked in communications technology before transitioning into cleantech — a shift she says is common these days in Silicon Valley. “A lot of people with relevant skill sets from IT and biotech are transferring to cleantech,” she says, “They have the skills necessary to move cleantech along to the next phase.” Wu was one of the first to make the transition, and she has quickly gained the respect of her colleagues in the cleantech venture space.

Although she looks at companies across the cleantech spectrum at Mohr Davidow Ventures, Wu says she is seeing a lot of work in industrial biotech these days — not just for fuels, but for plastic and other materials. “Petroleum is used for more than just gasoline,” she points out, adding the new technologies are likely to piggyback on the progress made in alternative fuel technologies.

MDV is also looking domestically into coal technology, Wu says. “We have a tremendous coal resource, and we’ve seen some really exciting things that could truly be “clean coal,” she says. “There’s a lot of opportunity there.”

In addition to predicting more cleantech IPOs over the course of the next few years, Wu says she expects to see a lot more mergers and acquisitions as large companies become increasingly interested in emerging technologies. The nascent interest from big players is one reason she thinks it’s way too early to call the recent surge in cleantech investment a bubble, although she says there have certainly been overvaluations that could qualify as their own “microbubbles.”

“Overall, if you look at technology breakthroughs applied to the industrial sector, and then look at the magnitude of the industrial sector — power, transport, water — these are massively large industries, and the amount of investment in cleantech is so small in comparison,” she says.

Wu goes on to explain that while cleantech investment numbers have surpassed investment in the semiconductor industry, the statistic is a poor indicator of a bubble. “The semiconductor industry is a very small subset of IT, while cleantech is a mixed bag of technologies and is very, very broad,” she says. “The fact that we still talk about all these different industries as one thing, one investment area, and compare it to something so specific as semiconductors shows how early we are in the investment cycle.”

The big difference between investing in cleantech and investing in pretty much anything else? “Regulatory and legislative risk doesn’t typically play into IT investments, but what happens in the Farm Bill impacts the growth of biofuels and biochemicals,” she says. “You also have to worry about things like commodity risk because the price of electricity or gas or coal matters to your market scenario if you’re a cleantech company.”

Cleantech companies also have to deal with massive existing markets, Wu points out. Whether a new technology can disrupt a mainstream technology will depend not only on the classic market drivers of supply and demand, she says, but also on what the government does and on the prevailing price of power.

Wu says she thinks the majority of cleantech VC capital will continue to be invested in solar and biofuels during 2008. However, she says MDV and other early-stage funds will continue to diversify their portfolios. In particular, she spots potential for growth in a few categories: water, green building technologies and, perhaps most surprisingly, nuclear.

“Obviously this is a touchy one,” Wu says. “But it does have the potential to have a tremendous impact should a good solution emerge.”