Weekly Insider (Petro Parity, Biofuels or Biofools)

Our latest premium Forbes report was just released to subscribers. Some choice quotes from Robert Tjian, founder of Tularik:

The best scientists I know share one common denominator: a willingness to take risks.

And from Nobel laureate Bob Grubbs, a pioneer in catalysts:

It's really easy to start a company, but it's harder than hell to get any money out of it.

Meanwhile, I’ve long lamented biofuel ventures, dubbing them “biofools”.

Well, the expert analysts at Lux Research have an open webinar on the issue LIVE on Feb 10th at 11:00am EDT. It’s called, “Biofuels' and Biomaterials' Path to Petroleum Parity”

You can register here

Environmental and economic problems posed by petroleum are spurring the search for renewable, bio-based alternatives. To date, most biofuels and biomaterials developers have focused on lab- and demonstration-scale studies to improve performance and reduce cost so they can compete with petroleum products, and those goals are coming within sight. The hurdle on the horizon, however, is scale: Today’s biotechnologies would need an area the size of Russia to replace the 30 billion barrels of oil consumed annually. Complementing or replacing oil will require integrated, dual-use facilities in the biofuels value chain, and bio-based carbon capture to move from the realm of science fiction into science.

Join them to hear Lux Research’s first-of-its-kind analysis of how bio-based materials will compete with oil, and when and how they’ll reach the elusive goal of “petroleum parity.” Learn:

• How biofuels and biomaterials costs stack up against petroleum-based products

• What performance metrics biofuels and biomaterial stack up on – and where they fall short

• Whether biofuels and biomaterials technologies have the potential to scale up to match petroleum’s output

• Which biofuel and biomaterial technologies look most promising in the areas of cultivation, processing, and production

• How to follow the path toward petroleum parity and where the opportunities to profit will arise

Weekly Insider (Guest Column- Cleantech & VC)

Proud to have my Lux Capital partner Peter Hébert provide a guest column this week. His insights on cleantech and VC must be heeded. Enjoy!

To paraphrase Warren Buffett: As prices fall, a huge amount of financial folly is exposed. You only learn who's been swimming naked when the tide goes out - and the financial shrinkage we're witnessing is uglier than George Constanza's worst nightmare.

It was in 2007 that adjustable-rate, subprime mortgages issued during the boom years began resetting to higher interest rates. During prior years, cheap capital from no-money-down Option ARMs (adjustable rate mortgages) helped flood the housing market with new buyers and pushed prices vertical. But when rate resets dramatically increased the cost of capital, buyers defaulted and home prices fell or were foreclosed.

I believe 2009 will bring a rate-reset for the cleantech investment sector (albeit, nothing close to the same scale!). When the cost of capital is low, investment dollars abound and valuations skyrocket. Too bad the process works in reverse too. Or as recent analysis from Lux Research (full disclosure: Lux Capital is an investor) summarized it, "The current bonanza in which all players are winners will come to an end."

If resetting the cost of capital pricked the real estate bubble, I expect cleantech's coming 2009 reset in this financing tundra to force scores of flimsy companies out of business, cause investors to realize losses, and significantly reduce unrealized IRRs.

Over the past few years, VCs and angels funded far too many undifferentiated business plans in a race to get "exposure" to cleantech. Solar, Biofuels, Wind. Touting cleantech credibility to their LPs left some VC portfolios with more "plays" than Bill Belichick on Sunday morning. Lux Research counted more than 1,500 start-ups operating in cleantech worldwide. All ventures had one thing in common-the cost of capital was far too low. This enabled turkeys to fly and hundreds of competitive imitators to gain funding, driving down long-term returns for all participants. But 2009 will see many of these companies return to the market for financings, to get to commercial scale or in many cases, just to survive the storm. It won't be pretty.

Value Trap

In my March 2008 post Something's Gotta Give, I said "I do not believe the disconnect between public and private prices can last much longer. Watch for a downturn in valuations for later stage VC deals when new market realities finally sink in."

Throughout 2008, as credit markets rumbled before the coming quake, VC-backed cleantech companies raised billions of dollars at valuations that increasingly departed from public equity comps. While blue chip shares plummeted by upwards of 75%, privately held solar companies with nary a dime of revenue, closed multi-hundred million dollar rounds with valuations pegged in the billions (yes, BILLIONS) of dollars. I know at least 3 private solar companies with post-money valuations over $1B-and dozens of other no/low-revenue solar, biofuel and battery ventures with values pegged in the hundreds of millions. Pity those late stage investors who bought the dream scenario and no margin of safety.

Why is tapping into a cheap cost of capital a bad thing? It's not-until the company seeks its next financing or a liquidity event. Later stage energy companies are capital vacuums. But the project finance well is dry and the cost of capital has surged. The need for money has forced punishing cram-down financings-for those still fortunate to receive fresh money. The resets are not just in price, but expectations. Most business plans I see still quote comps and commodities with pre-September 2008 prices. It's with no small irony that many of the private cleantech valuations now dwarf the prospective buyers mentioned in their pitch decks!

Stuck With You

While a 50% haircut on a subsequent round might still leave some early VCs in the black, it will be a hard pill to swallow for the later stage investors who signed up for what they were told were pre-IPO prices. During the cleantech boom, many early-stage VCs embraced two types of late stage investors willing to price up their earlier rounds by as much as 10x. On the one hand, the ultra-aggressive (and impatient) hedge funds and investment banks who adopted the "your price, my terms" philosophy. And on the other hand, bundler bankers who assembled less sophisticated doctors and dentists-perhaps under their own anesthesia, they were just happy to be there, much less negotiate the price they paid. The goal was seemingly: price the round up, take the company public and everyone wins. But now companies and their VC backers are stuck with both types of venture visitors...with no end in sight. Early investors should consider themselves lucky if the hedge funds or lenders do not take the keys to the company-and remain wary about lawsuits from individual investors who might feel they were sold a bad bill of goods.

The only sure thing: re-pricings will turn back the clock on paper profits (and IRRs) and require funds to choose: ante-up or get washed out.

The Opportunity

The irony: in spite of all of this, I could not be more excited about investing today in energy and environmental technologies.

Sure, the market stinks-but company valuations will at last approach levels at which investors can earn attractive risk-adjusted returns. The thinning of the herd will also separate the serious companies with scalable technologies from the pretenders. Imagine you had just been offered a $1 million house in Bakersfield, CA and just 12 months later, for the same price, you can get beachfront in Malibu.

The opportunity to apply new technologies to solve critical issues with multi-billion dollar addressable markets has never been riper. Breakthroughs in batteries and utility-scale energy storage, more efficient power electronics, and generation technologies like advanced nuclear and clean coal will yield billion dollar companies.

Bubbles get blown from too much trust and lofty expectations. The same forces that stimulate investment in a sector also leave naïve investors holding the bag. When the punch is flowing, judgment is impaired. A more sober environment is often the best time to invest in creative entrepreneurs to use capital judiciously and build extraordinary companies. I'll toast to that.

Peter is a Co-Founder and Managing Partner of Lux Capital, focusing on investments in advanced materials and energy. In 2003, Peter led the spin-off of Lux Research.

Weekly Insider (Biofools, Commodidiots & Invitation)

Special Invitation: Join Steve Forbes, Josh Wolfe, Robert Kiyosaki and a lineup of investing experts in Forbes.com's Investor iConference, "All-Weather Portfolio Strategies." Click here for details.



I’m rushing back from travels to be in New York because from this Sunday until Tuesday (May 4-May 6)—you’re invited to join me, Senator John Kerry, Congressman Bart Gordon and the who’s who of the nanotech sector 7th Annual NanoBusiness Alliance Conference www.nanobusiness2008.com Thanks to the tireless and tremendous efforts of my friend Vince Caprio and Sean Murdock this is one of the must-attend nanotech/cleantech events. Hope to see you there….



Meanwhile as I’ve been tirelessly quipping, the “biofools” and “commodidiots” are starting to feel pain. I’m hearing claims of biofool boondogglers having committing crimes against humanity for the poorly thought out unintended consequences and the resulting food crises their swindle has caused. And the latter have startups and investors chasing commodity markets that they mistook for technology problems (when they’re simply just US dollar problems). Most of the so-called ‘drivers’ justifying crazy startup valuations aren’t really a technology thing—it’s a dollar thing. The US government’s plan is clear: inflate our way out of debt crises. When you owe a fixed number of dollars to someone, that lender loses when those dollars become worth less in real terms. But be sure by year end 2008 interest rates will be higher. And remember the flood of speculative and easy money that's flown into 'green' could just as easily go from ‘green with envy’ to ‘green with nausea’. As I wrote three months ago:



“…So, what disasters loom? Start with what everyone takes as granted? What would take people by surprise? Will Gold, oil and every other commodity you can name continue their ascent? Is it more likely the Chindia demand narrative and gospel keeps people in the pews? Or do already high expectations and fewer incremental buyers on the margin mean vulnerability for surprise? Why is their virtually no media coverage of the rise in Oil as primarily a function of dollar decline and speculation? Over time, commodities approach their marginal cost of extraction. And being commodities: they’re undifferentiated and compete on price. When have VCs ever in history made money chasing ways to produce a commodity? Why do people keep insisting that solar is attractive when Oil is at $100 when we barely produce any electricity from oil? 50 years ago, sure—but oil is a declining piece of our energy pie as more and more things become electrified. What effect would an “unexpected” decline in commodity prices have on emerging markets?...”



Famed hedge fund manger Julian Robertson has a protégé Dwight Anderson who manages a commodity hedge fund. He’s baffled by the prices in the commodities market. Why? Because commodities are basically supply and demand. And the to-date accelerating price trends assume accelerating demand without a corresponding supply response. It’s shocking to me how the correlation between the dollar decline and commodities ascent is woefully (and soon to be painfully) underappreciated. Tread carefully and be sure to read this month’s premium issue and cover story that answer the question: How many environmentally friendly companies does it take to screw in a compact fluorescent light bulb? If the sheer (growing) number of TV & magazine ads--proclaiming how every company is now or has always been "green"--isn't enough to make you suspicious of "green washing", than you're just a sustainability-sucker for sad Polar bears adrift on floating ice. Accounting and accountability is what matters. Find out how it really is hitting the bottom line and ‘double bottom line’….

Weekly Insider (Cynic's Conference Guide to Cleantech & Nanotech)

Last week’s nanotech/cleantech event was phenomenally well-attended. Ira Ehrenpreis of Technology Partners makes a persuasive case for “cleantech” and advocated why “green” is the new red, white and blue. Ira was joined by some prominent industry executives. Most of the prior year high-profile investors and startups were busy at work—some with breakthroughs, other falling through.

Before I give a cynic’s playbook for making the most of such events, here’s some straightforward observations:

The cost of capital for any technology for which there’s sufficiently high enthusiasm is close to zero. The two are inversely correlated. This means the marginal entrant has low barriers—which means the number of entrants grows exponentially. This characterizes “solar” today. The ecosystem cannot support the sheer number of companies competing to turn sunbeams into electrons, along the same points of differentiation: cost per watt and efficiency. Companies that got public early will use their stock currency to acquire those with interesting technologies as they postpone their own IPOs, face investor fatigue and eventually falter. It is a predictable pattern in capital markets. And the four most dangerous words are “this time it’s different”. It never is.

The same is said of biofuels—at the event there was growing laments of this arena. And despite what critics say of “Mr. Ethanol” Vinod Khosla—if anyone figures this tough field out, my money would be on him. As a consumer, I absolutely applaud all the alternative approaches being tried and think we’ll be the better for it. As I’m fond of reciting from Jim Surowiecki, “In greed and avarice, lies the hopes for progress.”

Like nanotech a few years ago, the cleantech audience is a mix of investors and entrepreneurs swimming in a sea of service-providers. Year after year the battle of attrition rages fiercer as a few legal, lobbying, accounting and boutique investment banking firms vie for position and client dollars.  Today’s cocktail party for me is paid for by tomorrow’s client for them.

The good news for them: the early ones will benefit from client referrals and positive feedback loops. The bad news: the laws of competition don’t cease. The service-provider supply imbalance means only a few remain to pin next year’s shiny translucent name badge to their lapels-- fewer still will get the privilege of affixing the coveted fabric sticker elevating them above the undistinguished masses declaring them “Speaker” or “Sponsor”.  Behold.

If you’re a service-provider, here’s your attack plan for success for any new field: for the first two years, come in full force. Senior partners, associates, secretaries—even the janitorial staff. If they can move, dress them up and send them out with business cards. Get their names on the attendee list. Try to make up 10% of the attendees. But remember your competitors might do the same thing, so send people with unusual last names—they’ll stand out more. During breaks, establish position early. Move in a swarm formation, gather in circles and spontaneously laugh. It will attract curious onlookers. Remember: some of those onlookers have investors’ money to spend and it could be yours. Do this near bathrooms and coffee machines. If there is a plate of cookies, take as many as you can, pile them in a napkin, stick them in your pocket. Offer them out to people that look like potential clients. It’s called reciprocity—it works. And everyone loves sweetness.

Sponsor a table. Again, you must stand out. Give away something amazing: like mints—in a tin can. Put your name on it so that everyone knows you’re not just any old service-provider. Try a plastic pen—a good one screams out, “excellence”.

Have a few key lines to show you’re an expert and you know what you’re talking about. If its nanotech, try this: “we’re helping our clients with some major partnerships and helping them build a really strong IP portfolio.” If its cleantech try this: “the debate is over. We need to act.” If someone asks you what debate, look at them despondently and say, “don’t you have kids?” Pull out a picture of yours. If you’re childless, use a polar bear on an ice raft with sad eyes. Mention that you’re carbon neutral, have stopped exhaling and only wash your undergarments every other week to save water—which by the way is the Oil of the 21st century.

Show thought leadership through whitepapers and dole out some witty comments on panels. If the moderator asks you a question you don’t have a good answer for—just answer one you do. The audience only remembers what you look like and how loud you talk—not what you actually say.

When your assault team returns, immediately send emails to all the new contacts you made. Send them a PDF with images of windmills, solar cells, a water droplet and multicultural people shaking hands. It will show you when it comes to cleantech—you mean business. If someone writes to you, start your email message with “Thanks for your note.” Mention that you hope to find “ways to work together”.