What follows are some thoughts about a recent Mass Hydrogen Coalition meeting on CleanTech financing.  The meeting was packed, with maybe 100 people crammed into a conference room at the Foley Hoag Enterprise Center in Waltham. The presenters were VCs or investment bankers.  Most of the attendees where consultants, like me, or small businesses looking to get into the CleanTech space, a small handful of larger players were there.

My general comment is that everyone’s saying that the world has changed for this sector, but most of the rhetoric sounds more like  lessons learned than any real philosophical change among investors.

Of special note was the repeated claims that with the current stimulus plan’s emphasis on CleanTech, the government is now the largest CleanTech VC investor.  That seemed like an opportunity to reconsider how to build businesses in this space, but the rhetoric from the VCs and the small companies sounded like a colloquium at the Rush Limbaugh institute for economic theory.  ”Anything the government does is bad.  I don’t want them choosing which technologies will win in the renewable energy space.  They’re idiots and they don’t know what they’re doing.”  (I’ll note parenthetically that nobody thought that an incentive that helped their specific sector was ill-conceived or stupid.)

Now, is this any way to talk about the largest new entrant into the CleanTech finance sector?  I think not (at least if you’re looking for money to fund your startup).  What will be required, however, is a change on the part of businesses to understand what “return” means to a government program funding a small early stage company, and how to distinguish this from the purely monetary return that VCs have trained entrepreneurs to discuss ad-nauseam in their business plans and pitch decks.

Here’s a new thought.  When pitching your business to a government funding program, make a thoughtful attempt to calculate not just revenues and EBITDA (as you would for a VC), but the number and kind of jobs that will be created.  Ask a typical chief executive how his (<- intentional gender choice) company is performing and he will likely offer financial performance numbers. “Profits are up!  We’ve cut costs and our margins are bigger than ever!”  I doubt you’ll ever hear “we’ve expanded our workforce by 10%” or “we’ve raised wages by twice the cost of living this past year.”  But if the government is your funding source, these are exactly the kinds of metrics, the kinds of returns that they are likely to be seeking.

The government has no real interest in picking technology winners.  They’re interest is in maximizing the political capital that can be achieved with a given amount of funding.  Putting people to work in stable high-skill good paying jobs is the kind of thing that gets politicians elected, and it’s the kind of thing they’ll fund.  Make that case and you’ll get the money (of course you have to have your technology worked out as well).

The loss of quality jobs is a generational problem for the US.  Paying for low-skill “shovels in the ground” will only delay the broader problem.  Creating and training a new workforce to make things and to engage in continual retraining is the name of the game. CleanTech provides that opportunity, and finds a ready and willing partner in the newest big VC in town: the government.

some random snippets from the evening’s presentations (words and ideas you may want to be familiar with when talking with the grown-ups).

• CleanTech is a systems field (you must consider the end-to-end consequences of any new technology)
• It’s hard to do something capital efficient on the generation side. This is the lesson learned by the early stage investors.  Creating a fuel to replace gasoline requires enormous scale, and thus enormous capital before achieve a return (the same is true for large wind and solar).
• Because of the above, most new projects are on the demand side because they are less capital intensive (efficiency is an example)
• VCs looking less for end-to-end and more for innovation licensing.  This is a business model question, and mirrors the biotech model, get the technology to the stage where it can be scaled, and let one of the big-boys scale it (they’ve already made that investment).
• Water is a hyper-local issue (it is the new oil).
• “The game is not worth the candle.” Definition: what we would get from this undertaking is not worth the effort we would have to put into it. The saying alludes to a game of cards in which the stakes are smaller than the cost of burning a candle for light by which to play.  (<- a nice piece of jargon to impress your VC friends, though I believe the actual quote was the “candle is not worth the game,” which makes less sense to me).

1. moving and making making water
2. dealing w/CO2
3. create more distributed electricity
4. large scale energy storage
5. electric vehicles
6. design and build sustainable products
7. IT to manage energy use
8. smart grid, smart consumer
9. efficient land use
10. what to do with waste

Interesting Statistic

• US Navy is largest purchaser of renewable energy (cost of moving fuel is 60% of cost of war).

I’ve posted a link to a recent review and comparison of alternative energy sources that seeks to rank the various options, including allied choices we can make about transportation.  The study includes many factors for each energy source, including energy security and mortality risks, attempting a cradle-to-grave analysis for each.  This kind of study is required to really understand the implications of choosing a particular energy source.  For example, while Nuclear is “non-emitting” at the stage of power generation, the study analyzes the impacts of emmissions throughout the process from mining to waste disposal.  The study also includes the resource and terrorism risk associated with each competing technology, and nuclear scores near the bottom when all of these factors are tallied.

Like every study, there is much to debate (a nicer word than argue), but the study is well done, well referenced (so you know where the conclusions are coming from), and well worth referencing in any business plan that seeks to discuss the strategic merit of particular renewable energy technologies.

The bottom line: Wind and solar thermal, in combination with battery-electric vehicles are at the top of the list from a technical, environmental, and energy security standpoint.  At the bottom?  Clean Coal, Nuclear and photovoltaics (the current generation anyway).

The review can be found at the Journal of Energy and Environmental Science:  Review of solutions to global warming, air pollution, and energy security.

People often ask “isn’t oil at $40/barrel (or fill in your favorite number) going to kill all this CleanTech investing?”  The subtext is that we’ve been through all of this before in the 80s, when oil prices came down and consumers went back to purchasing large cars without regard to mileage.  The easy answer would be “yes, the same thing wil happen this time as happened in the 80s.”  In this post I’ve listed some of the major arguments that have been presented for why the current situation is different and why history will not necesarrily repeat itself.

1) Oil prices are currently low because global demand is low, and when the world economy begins to expand again, oil prices are certain to rise as they did during the 2000s. 

This is a simple supply and demand argument, the price has gone down not through an increase in supply, but because of shrinking demand.  This was not the reason for the fall in oil prices in the 1980s.  When demand returns it will press up against supply limitations and the price will likely rise sharply.  

2) There was not a global concern about carbon emissions in the 1980s.

You can believe what you want about the causes of global warming, man-made, sunspots, planetary expansion, martians or any combination.  The fact is that the world has reached a  consensus that human emission of greenhouse gases is a significant cause, and world governments, including the U.S.,  are working on greenhouse gas legislation and treaties that will provide a significant incentive to CleanTech businesses.  Any CleanTech executive who does not accept this proposition is leaving money on the table (a very un-businessman like thing to do).  By the way, if you have a non-man-made theory I’d love to hear it, I’m collecting them as a sort of hobby.  Leave a comment and don’t forget your primary references.

3) Energy Security = Economic Security = National Security.

A country that consumes more energy than it produces becomes reliant on others for a vital component of their economic well-being.  This presents a basic strategic problem and students of history will know well that governments pay mightily to maintain ready access to needed resources.  In an increasingly crowded world, securing resources becomes more expensive thus making domestic production, reduced consumption and increasing GDP per BTU (i.e. efficiency) the obvious strategies in response.  This was not a consideration in the 1980s, in part for the reason listed next.

4) The developing world is developing which means more global competition for energy.

When developing nations begin to create a middle class, energy consumption in these nations increases dramatically.  As the middle class gets a taste for meat and cars and more modern homes and amenities energy consumption per capita rises.  In the case of India and China, the standard of living has a long way to go for a large number of people, and the increased energy demand will be enormous.  These new market actors compete in markets for oil, and form relationships with oil producing governments to supply oil, in some cases removing it from the broader market.  This increased global demand was not in place in the 1980s.

5) Green jobs are the acknowledged future for labor and national competitiveness.

CleanTech companies create more that new gadgets.  They create industrial jobs.  These are the jobs of the future industrial base of the global economy, and the in-coming U.S. administration has pledged $150B over the next ten years to creating companies and thus jobs in this sector.  No such job-creation incentive existed in the 1980s.  P.S. $15B/year, that’s a lot of money.

6) A corollary to #5, economic stimulus = funding green-collar jobs.

The current economic crisis has led to increased unemployment, with the U.S. auto industry and the many skilled jobs it creates teetering on the brink of collapse.  Every economic stimulus package currently being discussed to deal with the crisis contains as a primary goal, the creation of the “green jobs of the future.”  CleanTech companies should position themselves as the engines of worker retraining and redeployment that is necessary for us to emerge from the other side of this crisis.  Again, this was no the situation in the 1980s.

This still begs the question, will the nation ignore all of these strategic and economic reasons for avoiding a repeat of the 1980s response to lower oil prices?  Only time will tell.