January 31, 2012

Green Button Initiative: Great Start, More to Do

By Matthew Nordan

tl;dr: Data about energy consumption = good! Data about rate plans plus meaningful incentives = even better!

I know, I know, I’ve been in absentia from this blog lately: Blame the month of January, in which entrepreneurs emerge from hiding to pitch investors all at once, like cicadas from the earth. As slammed as I am, here’s a quick word on an encouraging smart grid development from a couple weeks back.

At a California event on January 18, U.S. CTO Aneesh Chopra unveiled the first implementations of the Green Button initiative, in which utilities make smart meter data available online for customers via an eponymous button on their web sites. Utility behemoths PG&E and SDG&E debuted the scheme, sharing data in spreadsheet form (for humans) and via the recently-ratified Energy Services Provider Interface standard (for third-party apps). Right on cue, software developers including Tendril and Simple Energy showed how they could import Green Button data into their apps, like energy dashboards and competitions.

Having bemoaned the smart grid’s comedy of errors in the past, I think this could mark a turning point where utilities have been successfully pressured into customer-friendliness. Utilities have no reputation for transparency, but in the wake of billions of dollars in taxpayer-subsidized smart meter rollouts, they’re under pressure to show regulators and ratepayers that all that money is buying something useful (especially as some state regulators continue to challenge smart meter benefits, like in Connecticut recently). And bingo: A treasure trove of data for creative app developers – who previously had to come up with their own screen-scraping code for each individual utility – in record time, only a few months after Chopra challenged utilities to adopt the scheme.

Green Button data is a good start, and I’m excited to see what the likes of Opower, Efficiency 2.0, Simple Energy, and others do with it. To achieve the potential, however, I think two more ingredients are needed:

• Standardized rate plan info. Utility rate plans are byzantine structures that change frequently. Without knowing what rate plan a customer is on and what its specifics are (critical peak tariff? demand charge? prepaid?), apps can do little more than regurgitate back hard-to-parse kWh consumption data. Nearly every app focused on energy consumption has this need; I hear pitch after pitch from start-ups who have to address it by burning resources to reverse-engineer the same utility bills. So I’d like to see the U.S. CTO’s bully pulpit used once more, this time challenging utilities to develop a standard data schema for rate plans and to provide up-to-date descriptions online in machine-readable form.
• Incentives that can compete for mindshare. A couple weeks prior to the Green Button launch, SDG&E announced the results of its pilot Biggest Energy Saver competition (patterned after a similar effort launched earlier in Texas). The good news is that consumers who interacted with a social game as part of the competition saved twice as much as those who didn’t: Score one for energy apps. The bad news is that the winner – one Erica Faunce of Lakeside, CA, who cut her electricity usage by a whopping 46.5% – won… a laptop. In my view, more heavyweight incentives will be required to make apps based on Green Button data engage consumers en masse – we’re competing with Powerball for attention here!

A week after the Green Button reveal, Chopra announced that he’s resigning from the U.S. CTO position (he’s tipped for a VA lieutenant governor run). Aneesh got a ton done in a short amount of time, aided in no small part by his outsized personality. Here’s hoping his successor is equally capable – and willing to take up the gauntlet for energy efficiency.

January 2, 2012

Happy New Year!

By Ray Rothrock

Like always, at the end of the old year and the beginning of the new, there are many articles and magazines that try to capture what just happened.  It’s always fun, but hey, we all did just live through it.

I was feeling inspired Saturday morning looking over some of these year-end reports, so to speak.  In my line of venture capital I’m often asked, what’s going on in energy and venture.  We always seem to do these reflections in December.  So, not only did I reflect but I added a bit of  ”where to now?” in my blog piece.  Feeling sporty, I sent it the HuffPost and they published it.

http://www.huffingtonpost.com/ray-a-rothrock/energy-venture-capital_b_1178721.html

December 17, 2011

Q&A Roundup

By Matthew Nordan

I’ve gotten a ton of feedback on the “state of cleantech VC” series – thanks so much to everyone who reached out! I’ve found myself discussing some of the same points with different people more than once, so I figured it would be useful to follow up on them here.

Q: Do you have a PDF of this stuff? No time to read except on a plane.

Sure, why not – here’s the “state of cleantech VC” series in handy-dandy PDF format. I’m also adding it to the newly inaugurated “tools” page of this blog.

Q: You should really use acquisitions for the exit analysis instead of IPOs, because a lot more VC-backed companies get acquired than go public.

I’d love to do this, but I don’t have the data. I was trying to look at “successful outcomes as a percentage of companies invested in,” for both VC-backed companies overall and for cleantech specifically. While the National Venture Capital Association tallies up total VC-backed acquisitions, I don’t know anyone who does this just for cleantech. Further, only a subset of acquisitions count as “successful outcomes;” undesirable fire sales are common. Because acquirers tend to keep their purchase prices secret, we can’t tell the difference without prodigious research.

Q: The post on share price trajectories was interesting. Is there some kind of template out there that I could use to model the impact of raising money at different valuations?

As you can imagine, this one came primarily from first-time entrepreneurs. When I sit down with folks like this to explore a financing, we typically start with a generic Excel template that has all the formulas pre-wired. So go ahead, have at it with my cap table template (also hitting the “tools” page).

Q: Your third post seemed to indicate that raising money at a high valuation is bad for entrepreneurs. How on earth can that be?

Definitely not the point I was trying to get across. Raising money at a higher price than before is a great thing. The problem arises when you raise money at such an extraordinarily high price that any subsequent round is likely to be down – which selectively dilutes common shareholders (i.e. founders and employees). Get it? Higher valuation = great, stratospheric valuation = dangerous (unless, of course, you’re certain that it’s the last money you’ll ever raise). Which leads us to the last topic…

Q: It’s incorrect that down rounds selectively dilute common stockholders. As long as the price at the end is the same, it’s just a question of whether you want to take your dilution now or take it later. It’s the previous investors who get hurt in a down round, not the management or employees.

No! No! Wrong, wrong, wrong!

I heard this from a couple of first-time CEOs who have successfully raised venture money, and I was frankly surprised by it. The missing element is the impact of anti-dilution provisions which are standard terms in nearly every institutional financing.

In the event of a down round, anti-dilution provisions retroactively reset the share price of previous investment rounds to a lower value. This effectively issues new shares out of thin air to the preferred shareholders who invested in those rounds, but not to the founders and employees who own common stock. So while all existing shareholders get diluted once in a down round (by new money being raised at a lower price), only the common shareholders get whacked a second time (by the anti-dilution provisions).

I think entrepreneurs tend to overlook these very standard terms (until they bite!) for two reasons. First of all, the language is obtuse. Here’s an example from a recent term sheet that crossed my desk:

Antidilution Provisions: The conversion price of the Series A Preferred will be subject to a broad-based weighted average adjustment to reduce dilution in the event that the Company issues additional equity securities (other than shares reserved as employee shares described under “Employee Pool” below and other customary exclusions) at a purchase price less than the applicable conversion price.

The second reason is that these provisions are frequently implemented in the form of a “conversion price adjustment” which only manifests itself upon liquidity. In this scenario, no new shares actually get issued at the time of the down round; instead, when the company goes public or gets bought down the road, the anti-diluted preferred shares get converted into a greater number of common shares than originally specified. This delayed impact makes the effect easy to overlook.

Too little is written about this topic, but if you’d like to dig further, this Startup Company Lawyer post works out a case study, and this post by Brad Feld explores how anti-dilution provisions affect company control.

(A final point mentioned by a VC friend: If you’re a senior management team member and you preside over a big down round, your job security may face as much risk as your ownership percentage – perhaps the greatest reason to avoid these events.)

December 1, 2011

The State of Cleantech Venture Capital, Part 4: Parting Thoughts

By Matthew Nordan

(A version of this post also appeared at GigaOM.)

tl;dr: We’re in the early innings of a long ball game.

This week we’ve analyzed the state of cleantech venture capital and used data to discern myth from reality. In summary, we’ve found that:

• There will be sufficient late-stage capital in the next few years to feed the ’06-’08 “baby boom” of cleantech start-ups, but there may be a corresponding dearth of Seed/Series A money.
• Contrary to conventional wisdom, cleantech VC is not sucking wind compared with VC overall. The two are performing about the same on an interim basis and cleantech investment has actually overdelivered on IPOs.
• Half of successful cleantech start-ups stumble on the way to the finish line, enduring a down round that disproportionately hurts founders and employees. Entrepreneurs should approach fundraising with a long-term orientation and be wary of sky-high valuations.

A few parting thoughts as I muse on these points:

• It’s still really early. Cleantech venture capital investment only became substantial in 2006, and the average VC-backed start-up takes eight years from founding to exit. That means the real fruits of this labor are yet to come. If there is ever to be a cleantech IPO boom, one would expect it to start in the middle of this decade.
• Limited partners should reassess early-stage cleantech. More and more cleantech venture capital is earmarked for late-stage growth equity deals. As a result, these investment rounds are likely to engender price competition that depresses returns. In contrast, Seed/Series A cleantech financing looks to be cyclically underserved, and the enhanced return profile that accompanies scarcer capital could help offset early-stage technology risk. If I were at an LP institution right now, I’d be looking for the sharpest early-stage cleantech investment team that can zig while most investors zag.
• New company founders should weigh alternatives to VC. While CEOs at late-stage firms will have adequate financing options in the next few years, new cleantech founders will find themselves fiercely competing for capital. Think of it this way: Since 2009, about 50 cleantech ventures per year receive Seed/Series A funding. Do you want to place all your bets on being one of the fifty? There are plenty of other underexploited options for cleantech entrepreneurs – including grants from agencies like ARPA-E during initial technology development (case study: FastCAP Systems), funding from a large corporation in exchange for a preferred license or other IP rights (case study: Liquid Metal Battery Corporation with Total), and early sale to a corporation with an executive job in the bargain (case study: Zensi with Belkin).
• The optimal investment vehicle remains to be figured out. I pointed out in the second post that VC firms have, so far, mostly restricted their funding to companies that fit in the venture “box” – i.e., $10-30 million invested over the life of a technology company, all in equity, for an outcome in five to 10 years. By definition, this excludes big-payoff categories with mondo capital requirements (like nuclear fusion), fields that have acceptable capital needs but stretch the timeframe (like advanced materials), adjacent investment opportunities in cleantech value chains (like land deals for biofuel feedstocks), and financing the deployments of technologies versus the technologies themselves (an odd one, since more value tends to get created downstream). All of these omissions leave money on the table. A number of VC firms – mine included – are blazing a trail by shaving these square pegs for the venture model’s round hole, and flexible alternative investors like family offices, superangels, and corporations have a window of opportunity exploit. Despite this, I can’t shake the suspicion that a truly purpose-built cleantech investment vehicle lies in the future, not the present.

Thus ends our whirlwind tour of cleantech venture capital. Studying a fuzzy topic like this keeps a person humble, because most of the predictions you make are likely to be wrong! Please don’t hesitate to contact me with your own, especially if they differ.

November 30, 2011

The State of Cleantech Venture Capital, Part 3: The Companies

By Matthew Nordan

(A version of this post also appeared at GigaOM.)

tl;dr: Half of successful VC-backed cleantech start-ups stumble along the way. Entrepreneurs who raise big financing rounds at sky-high valuations can end up shooting themselves in the foot.

Most cleantech start-ups require a lot of capital. The average VC-backed company that goes public in this sector raises about $120 million through five rounds of financing along the way.

Every time a CEO seeks new investment, she walks a tightrope. On one hand, she wants to raise capital at a high valuation to minimize dilution. On the other hand, she doesn’t want the valuation to be too high, because if the company loses steam it risks a “down round” ahead – i.e., raising the next round of capital a lower share price than before.

Down rounds dilute the ownership of common shareholders (the founders and employees) quite substantially unless they’re explicitly protected. This is because of anti-dilution provisions designed to protect the existing investors, who hold preferred shares; these terms are part of nearly every institutional financing and are too complex to discuss here. Down rounds can dilute those investors as well, but as long as they can pony up their share of the incoming cash, they can maintain their level of ownership. Common shareholders don’t have this luxury.

Conventional wisdom holds that CEOs should strive for the highest possible share price every time they raise money, because their number one job is to prevent dilution, and down rounds are rare events that only happen in mediocre companies.

A while back, I decided to test whether this actually holds true in cleantech. It’s particularly germane in this sector because of the large amounts of money that must be raised and the many rounds of financing required to reach the finish line.

To perform this analysis, we need time-series data on the share prices of privately-held, VC-backed cleantech start-ups. “But Matthew,” you protest, “private companies rarely publicize their valuations, and they certainly make sure to keep down rounds a secret!” In nearly every case, you’re right, but there’s one instance in which companies are legally required to publish a historical record of their private share prices: When they file to go public. In a happy coincidence, we can presume that companies angling for an IPO have also had some measure of business success. So by examining the SEC filings of public and aspiring-to-be-public cleantech start-ups, we can determine whether successful companies always raise money at ever-higher prices, or whether they tend to stumble along the way.

From trawls through SEC filings, I’ve been able to identify 24 such VC-backed cleantech companies for which private share price histories can be reconstructed – 15 that have gone public since 2000, and nine more that have filed an outstanding S-1. (A handful of additional companies didn’t make the cut because they went public on a foreign exchange with different reporting requirements, they raised only one round of private financing, or they had a really complicated history that I couldn’t untangle.) Here they are:

You can chart the share price trajectory of each of these companies on a line chart. The x-axis of the chart is time in months, and the y-axis is share price. Each inflection point on the chart represents a fundraising round (Series A, Series B, etc.) at which capital was raised. The lines between the inflection points represent the intervals of time between fundraising events. For the companies that have filed an S-1 but not yet gone public, the last point on the chart represents the share price at the most recent private financing. For the public companies, the last point is the share price at the IPO.

Looking across these 24 companies, three patterns emerge:

The first pattern is the build, where a company raises successive rounds of financing at steadily higher prices with no single round standing out. This is a good situation for the entrepreneur because it minimizes dilution. A venture investor with 20/20 hindsight would want to play this scenario by investing early and having sufficient follow-on capital to maintain the position, because the earliest investors tend to make the highest returns (both on a cash-on-cash basis and an IRR basis). Biofuels/chemicals company Gevo is a good example of a build:

The second pattern is the pop. In this case, a company raises capital at a modest uptick each time, except for one round where some extraordinary event sends the share price soaring. Entrepreneurs love this situation – particularly if the pop comes late, because it mitigates dilution right when big money is required! A venture investor, in hindsight, would want to get in just before the pop. Demand response pioneer EnerNOC is a great example: Its share price spiked 5.5x from its Series B-1 round to its Series C round, owing (as far as I can tell) to a really hot 2006 summer that broke demand response records.

The third pattern is the stumble. This is the position that no start-up CEO wants to be in, where something goes wrong – unexpected technology hurdle? cancelled deal? management shakeup? – and new financing gets raised at a lower price than before. Theoretically a venture investor with perfect judgment would recognize the dip as a buying opportunity, but in times like these it’s exceedingly difficult to discern a hiccup from free-fall. A123Systems is a good case study: The company attracted more than $100 million at a big uptick in May 2008 in anticipation of an IPO, but had to raise another $100 million at a lower price the next year when the IPO got delayed.

So, of these 24 companies, how often did each pattern occur?

• Builds happened a third of the time.
• Pops occurred one-sixth of the time.
• Half of the companies stumbled. This is the most common pattern. And these are the successful companies that ultimately filed to go public; just imagine the others!

The conclusion for cleantech entrepreneurs: Watch what you wish for – you just might get it.

Every time you raise financing there will be a chorus of voices in the boardroom encouraging you to raise the biggest round possible at the highest valuation. Sometimes this will indeed be the right decision, and if you’re certain that it is, you should shoot for the stars. But often – according to this data, at least half the time – it won’t be. Should you get over your ski tips in valuation, you’ll set yourself and your team up for disproprtionate dilution in the future, where your only defense is the mercy of your board. These are the cases where it’s in your personal self-interest to raise the appropriate amount of money at a sustainable valuation from people that you trust – not the largest amount of money at the highest possible price from whoever’s willing to pay it.

Remember, the share price that really matters is the one at the very end.

Tune in tomorrow for some parting thoughts.

November 29, 2011

The State of Cleantech Venture Capital, Part 2: The Investors

By Matthew Nordan

(A version of this post also appeared at GigaOM.)

tl;dr: There’s a widespread perception that cleantech venture capital must be tanking compared with VC overall. That perception is wrong.

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: VC-backed cleantech start-ups take longer to exit than firms 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 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, 2011.  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%. 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%, 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.

November 28, 2011

The State of Cleantech Venture Capital, Part 1: The Money

By Matthew Nordan

(A version of this post also appeared at GigaOM.)

tl;dr: Plenty of late-stage financing will be available for cleantech start-ups over the next few years, but seed/Series A money is another matter.

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%+ 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% 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% 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.

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.

November 6, 2011

Natural Gas is a Bridge to the Future. But we have to work together.

By Ray Rothrock

David Brooks of the NYT in his op ed on Nov 4, 2011 talks about the shale gas revolution — and what a revolution it is!  Developing and exploiting natural gas through fracking is only the latest technology to come on the scene.  In the mid 1970s the United States figured out how to drill for oil and gas in deep sea.  In the 1990s fracking was perfected by George P. Mitchell (an Petroleum Engineering from Texas A&M ’40, by the way) even though it had been around for some decades.  This event has opened up a whole new source of energy for the United States and many other countries around the world.  (We are a very lucky country, in case you don’t know).  Some say as much as 100 years of fuel is possible.  Further, gas is a key feedstock to many other chemical processes not just a fuel for heating our homes or powering our electric power plants.

Brooks points out that economics drives energy in the U.S.  He is so right.  Now with plentiful gas, a new floor for energy prices has been put in place.  Also what Brooks brings out so well is the demonization and the personal attack element that the various political parties seem to be applying to this find.  His statement that “Especially in the Northeast, the gas companies are demonized as Satan in corporate form.”  Wow.  That’s pretty strong and pretty awful if this what it has all come down to.

Energy is pivotal to modern society.  Without it, we freeze, our economy stops, and basically everything you know will go away — perhaps even the law.  So, rather than going for someone’s throat because they are bringing energy to us, we should open a discussion about how best to do that.  We should make sure it’s done in a way that fairly balances the risks and rewards for the producers and the consumers.  How to have a rationale discussion in this age of political ideology, demonizing things we don’t like, and never listening to the other side is the real question.

We have to start this dialogue now.  We have to embrace this new found source of natural gas from fracking now.  This is a bridge to a new world of cleaner, reliable energy sources.  The road is long and if not taken, the United States will begin to slip.  One day, we’ll wake up and wonder what happened.  I wonder who will be blamed in that day.

October 12, 2011

Questionable Numbers in Rick Perry’s Energy Plan

By Matthew Nordan

tl;dr: Yay for an energy injection into the 2012 primary. Boo for numbers that don’t add up.

In a previous post, I wrote about how we were unlikely to hear substantial discussion about energy in the 2012 Presidential contest unless Texas Gov. Rick Perry became the Republican nominee. It looks like Perry’s playing offense on this issue earlier than I’d expected: He made energy his signature topic at the debate in New Hampshire tonight.

In the first three minutes, Perry opened with his plan to “[put] 1.2 million Americans to work in the energy industry,” and returned to it three times after that. Other candidates spoke about energy only in response to Perry: Rick Santorum piled on shortly after the opening salvo, claiming that “we need to drill” (and making the debatable assertion that Pennsylvania is now the natural gas capital of the U.S.), while Huntsman and Romney made passing comments later on.

So what is Perry actually proposing? All we have to go on is his New Hampshire Union Leader op-ed published this morning. It’s pretty light, so I hope to see more detail soon, but here’s my take:

• Things that seemed perfunctory: An energy strategy described as “all of the above.” This lays the groundwork for a preordained lurch toward the center should Perry become the nominee, in which case he’d be able to tout his wind energy bona fides.
• Things I like: Full hydrocarbon production from shale formations. I admit that it’s kind of a cheap point because the free market is taking care of this anyway, and it’s important to note that there are still substantial long-term issues to work through in shale extraction (particularly the cleanup of flowback and produced water from the wells). With that said, natural gas is an important bridge fuel to a low-carbon future and a vital enabler for intermittent wind and solar generation. Finally, it was refreshing to see a candidate use the world “nuclear,” implicitly acknowledging that the U.S. is, in fact, the world’s biggest nuclear generator by a wide margin, and our plants aren’t going away any time soon.
• Things I don’t like: Drilling in ANWR (a drop in the bucket of consumption with significant environmental cost) and “returning immediately to 2007 levels of permitting in the Gulf of Mexico” – if more stringent safety rules put in place after Deepwater Horizon are slowing down permits for offshore drilling, that’s a delay I’m glad to embrace. Finally, the “job-killing” language with regard to the EPA really rankles: Republicans who claim that CO₂ regulation will reduce economic activity would be wise to look to our country’s pioneering application of cap-and-trade to nitrogen and sulfur oxide emissions, where George W. Bush’s Office of Management and Budget calculated that regulation had a net economic benefit.
• Where I sighed a bit: Perry claims that increasing domestic energy supply will reduce prices, benefitting everybody. I patently dispute this. On the electricity side of the coin, natural gas prices have already been low for some time – and gas accounts for less than a quarter of domestic power production anyway, so marginally cheaper fuel won’t have a noticeable impact. (Plus, electricity prices remain on the low end of the same 8¢ +/- 2¢ per kWh range they’ve been in since 1970.) On the transportation fuel side, crude oil is a global commodity market where U.S. production represents only 11% of supply – so I doubt that we’ll swing prices by growing to, say, 13%.

What I really scratched my head at, though, was Perry’s jobs math. The plan claims that going all-out on mostly-oil-and-gas-plus-some-other-stuff will create 1.2 million new jobs; Perry attributes 425,000 of them to conventional oil production alone (185,000 in Alaska and 240,000 in the Gulf Coast and the Atlantic’s Outer Continental Shelf). But according to the Bureau of Labor Statistics, there are only 179,900 people working in oil and gas extraction in total in the U.S. today. Doubtless the plan expects that there will be lots of pipe-fitters and waitresses ultimately supporting the guys in coveralls – Perry’s number is extremely close to the American Petroleum Institute’s projection of 1.1 million new jobs from aggressive domestic hydrocarbon extraction, a figure that has itself been attacked for implausible exaggeration – but I find it tough to swallow.

September 26, 2011

The Smart Grid Debacle and What to Do about It

By Matthew Nordan

tl;dr: Use less electricity, win valuable prizes.

Look at the picture above. Stare long and hard.

First of all, this is the least-cool protest I’ve ever seen.

Second, is this what the smart grid has bought us? With north of 20 million smart meters deployed in the U.S. and $3.4 billion in ARRA spending committed:

• Utilities got free money. Twenty million smart meters at $200 a pop means $4 billion; the other 40 million currently planned means $8 billion more to go. You are paying for this – either through your federal taxes (for meters subsidized by the ARRA) or rate hikes in your utility bills (for the rest). Further, most U.S. utilities earn revenue in the form of a regulated return on capital invested, i.e. the physical assets they’ve deployed in the field – including smart meters. So at a typical return rate of 11%, they’d collect an additional $1.3 billion every year for the smart meters they’ve deployed.
• Vendors made bank. Take a look at Silver Spring’s S-1. Scroll down to the financials and you’ll find $422 million in deferred revenue. Again, your dollars at work.
• Consumers got worse than nothing. These smart grid investments are supposed to lead to lower prices, better reliability, and more choice. But so far, consumers are seeing little more than ham-fisted rollouts and lightning-fast disconnections if they fail to pay their bills. In this environment, it’s no surprise that largely unsubstantiated fear-mongering about smart meter safety and privacy attracts a growing following.

Don’t get me wrong: Smart grid infrastructure is a vital requirement for the future. But the process of selling it to consumers has, by and large, been awful. At this rate, the utility industry risks permanently alienating multiple generations of people who are all coming face-to-face with energy technology for the first time. If backlash against the smart grid rippled up through public utility commissions to elected officials, it could permanently scuttle future initiatives – a phenomenon already hinted at in Hawaii and Maryland.

If you envision the same kind of future I do – one where the stuff you plug into the wall responds transparently to grid conditions to help balance supply and demand – it will never be realized in the face of popular disdain. In my view, reversing consumer perceptions of the smart grid will require:

• Blindingly obvious consumer benefits. Getting a smart meter shouldn’t be like putting in a new smoke detector – it should be awesome, more akin to unpacking a new iPhone. Benefits like faster outage recovery and deferred transmission construction are too infrequent and vague for consumers to care about, so what can be done? 1) Build simple apps to show consumers their energy usage, 2) suggest what they can change, 3) fund prize pools for those who reduce the most, and 4) trumpet the giveaways Powerball-style. This is proven to work elsewhere – witness companies like HealthHonors and HealthPrize, which give cash prizes to people for taking their prescription drugs.
• Super-low cost. Most utilities have an incentive for consumers to use less electricity, in the form of money they get paid by public utility commissions for every kilowatt-hour reduced. Utilities must deliver the reduction at the lowest cost per kWh. It’s going to be less costly (and, I suspect, more effective) to do this via cheap prize mechanics rather than deploying yet more costly hardware. My quick-and-dirty math below shows why: If a $200 home energy monitor with a $2/month subscription fee yields a 10% electricity reduction, that works out to $0.03/kWh reduced. But if a $2 million prize pool (let’s tack on another $1 million in administration/marketing) gets customers to use 3% less across a 1.7 million household base (I used CT Power and Light), you’re at less than half a cent/kWh – an order of magnitude lower, and on par with tried-and-true CFL bulb giveaways.

• A marketing infusion. To date, smart meters have been the consumer face of the smart grid. Their rollouts have been frequently unfortunate. One much-discussed California utility began deploying smart meters during a blazing summer amidst a change in rate plans: Can you blame angry consumers for thinking that the new meters jacked up their bills? Smart grid initiatives need to be managed like products, stress-tested by PR paranoiacs, and marketed by savvy tacticians recruited from the likes of P&G and Apple.

With this in mind, what am I excited about as an early-stage venture investor?

• Competitions. The Biggest Energy Saver competitions in Texas and San Diego are probably the best examples of this, and the ideal market-testing playgrounds for start-ups with behavioral approaches. Lucid Design Group has done a great job of setting up similar competitions for university and corporate campuses.
• Software disambiguation. I don’t know what I’d do if my smart meter said I use, say, 20% more electricity than similar homes. I do know what I’d do if I was told “the problem is your fridge.” Within a few years, smart meters in California and Texas will start chirping electricity consumption data wirelessly to any device in the home: While there are plenty of logistical wrinkles to iron out, the idea of using algorithms to work out the contribution of each individual load – and make personalized recommendations about what to change – is tantalizing. A bunch of start-up companies are on the case.
• “White tag” markets. In nearly all states, if a company wants to harness smart meter data to enable household electricity reduction, it has to contract with a utility in order to get paid. Utilities can only take on so many of these projects at a time, and they pose notoriously long sales cycles that are poison for start-ups. A better way to encourage innovation would be to establish an open market for residential energy savings credits (“white tags”) and let anyone participate, as long as verified reductions can be demonstrated. This process is underway in Connecticut, Pennsylvania, and Nevada, although it seems to be a long time coming.

A final note: Successful innovation here (at least in the U.S.) is more likely to come from the bottom up than the top down. Americans don’t like being forced to do something, and get outright hostile when they think you’re invading their homes: As National Rural Electricity Co-Op Association VP Jay Morrison said at Gridweek this month, “What Glenn Beck has taught us is that if the government says we have to install something, people will resist it.” Make the smart grid awesome for consumers – using prizes, games, and competition to win a battle for attention – and people will engage on their own.

September 14, 2011

What It Takes to Build a Cleantech Winner

By Matthew Nordan

(A version of this post also appeared at Fortune.com. Thanks Dan!)

tl;dr: It’s the team.

I entered the venture capital business two years ago, focusing on seed/Series A cleantech start-ups. It’s kind of like picking a future NBA draft by watching eighth graders play basketball: There are many years’ worth of development to go, and the subjects will look a lot different once they’re all grown up. The key is excellent pattern recognition – identifying the antecedents of success long before it happens.

Pattern recognition is vital for entrepreneurs, not just VCs – if you aim to succeed, it helps to know what other successes have looked like!

Most of my fellow cleantech VCs came to this field from some other domain – often semiconductors or telecom – and brought their pattern recognition biases along with them. The question I found myself asking was “what if everyone’s biases are wrong?” What if we’re picking the wrong eighth graders?

Coming from a career in the tech analyst business, I wanted to find a fact-based way to answer the question, so I assembled a well-defined set of successful VC-backed start-ups and looked for what they had in common. I picked companies that:

• Had achieved unambiguous success, which I defined as an IPO on a major exchange. That’s far from a perfect criterion, I know, but at least it’s clear-cut.
• Went public after 2000, to rule out the boomlet of ’98-’99 energy IPOs (when the Internet bubble’s rising tide lifted all boats).
• Were backed by institutional venture capital. Note that the majority of public cleantech companies have, in fact, not been venture-funded.

As of today, this sample consists of 18 companies:

(Doubtless there are errors in this data, so please point them out in the comments and I’ll make corrections in a batch. To pre-empt one item, however, note that I included predecessor companies in each firms’ history, which explains First Solar’s founding date.)

What can we learn from this? The average NBA draft pick of cleantech:

• Raised $122 million in equity financing, which excludes grants and debt. The distribution is pretty broad, but I’d note that if you remove Q-Cells and REC as special cases, the floor is ~ $30MM. If a new business plan poses a lower lifetime cash requirement, there should be an airtight argument to justify that claim.
• Went public at a ~ $900 million valuation, also with a broad distribution. If you assumed that investors owned, say, 80% of these companies at the IPO, the lot would have delivered a 5.9x return on capital invested.
• Took 8.3 years from founding to IPO. If you’re signing up to build a cleantech winner, reserve a decade of your life. Note, however, that this elapsed time has shortened for companies that have gone public since 2010, where it averages 6.7 years. Start-ups in this later group received venture financing either right at their founding or soon after it, in contrast to earlier companies which often bootstrapped themselves for years before taking venture capital.
• Survived a 1-in-50 success rate. These 18 companies received their first venture investment between 1995 and 2007. A quick Venturesource search indicates 986 seed/Series A rounds done in cleantech during that period. While there are doubtless further successes to come, particularly from start-ups funded in the later years, the yield so far is 18 / 986 or 1.8% of start-ups funded.

If we include some financial metrics, we learn a bit more. The average cleantech winner also:

• Went public on $72 million in revenue the prior year. With a couple of outliers (SemiLEDs and Gevo), the revenue floor for an IPO has been around $30 million since 2007. This has led to price-to-revenue valuations at IPO in the double digits, transcending their category comparables (for example, A123Systems is still at 4x P/S today despite two tough years, while incumbent battery-makers Exide and Enersys sit well under 1x). Winning cleantech start-ups get valued like high-growth tech companies, not like their incumbent peers, so the latter haven’t informed IPO valuations.
• Was unprofitable at IPO. Only four out of 18 companies – Q-Cells, REC, Solarfun, and Yingli, all in solar – showed an operating profit in the fiscal year before they filed. That situation remained unchanged in the year of the IPO itself, where most companies’ losses widened rather than narrowed.

This analysis tells us what the NBA draft looked like, but it doesn’t say anything about the eighth graders. To learn about them, we need to do some primary research. Here’s how I went about it.

I talked to as many people as I could who were familiar with these 18 companies at their earliest stages. I asked them a simple question: “At the time of the seed/Series A fundraise, how would you have rated [company X] on its technology, its market, and its team – great, middling, or unfavorable?” For each start-up, I strove to speak with at least one investor who did the seed/Series A deal as well as at least one who saw it and passed; however, for many companies I couldn’t pull this off – so let me emphasize that there’s a heaping helping of subjectivity here. With that caveat in place, here were my results:

• Technology doesn’t correlate with success. At the timing of early-stage financing, only about a third of these companies were real technology leaders with strong, differentiated IP (think Evergreen Solar in 1994). If you made picks based on technology alone, you’d have ruled out most of these companies.
• Market attractiveness was anticorrelated. Eight of these 18 firms faced unattractively small markets early on: Demand response was hardly a hot category when EnerNOC and Comverge formed in 2003,  electric vehicles evoked little more than the EV-1’s failure at Tesla’s 2002 founding, and Reagan took the solar panels off the White House two years after First Solar’s predecessor Glasstech started up. Another six firms faced middling markets that were large in absolute terms but exhibited some deal-killing attribute, like low/volatile category margins (chemicals, fuels) or ruthless Chinese competition (batteries, LEDs). In most cases, the bit-flip from an unattractive market to an attractive one was driven by regulation (feed-in tariffs for solar, forward capacity markets etc. for demand response, and subsidies like the Renewable Fuels Standard for biofuels).
• Team matters most. The best predictor of success for this group was a killer team, present from the outset in a majority of these companies. (From my interviews, only one of the 18 was a “we’ll fund if the CEO gets replaced” situation.) The most important observation for me is that, most of the time, the founding CEO was the same one who rang the stock exchange bell years later: Eleven out of 18 never changed CEOs, two started life without any CEO and added one along the way (in both cases the founders stayed on), and only five changed leadership midstream. I frequently hear some of my energy VC peers say that there’s so little executive talent in this sector, replacement CEOs must be recruited as a matter of course; the facts don’t support that view.

So – faced with the daunting task of predicting cleantech’s NBA draft eight years’ hence – what am I looking for?

I’m looking for a great team – people who can defy intimidating odds and who show, rather than tell, how they will shape the world to match their will. I accept that additions will be made over time, but I have to believe that the people in front of me can drive a very large outcome in the roles they’re in now. I don’t care whether the market they’re selling into is big today, but I need to be compelled by their vision of what will change to make it attractive during the period of investment. (That forcing function is probably may often be regulatory.) Finally, no matter how impressive the technology is, I won’t compromise on the people (although I’m likely to accept a tradeoff in the opposite direction).

That’s just my take, and I’m fully aware that the error bars around this analysis are huge. But if you agree with any of it, it follows that the best thing cleantech investors can do is attract the brightest minds to this domain. This should be the greatest creative and collaborative focus of our fledgling community.

September 6, 2011

Where Oh Where have the Green Jobs Gone

By Ray Rothrock

David Brooks in today’s NYT (Sept. 6, 2011) talked about where jobs aren’t.  Great question.  The column dives into the government spending on green jobs and various mechanisms with which it assist companies.  This is worth talking about.

I have heard from every politician from Vice President Biden to every congressman or Administration official I’ve met in my role at the NVCA who says, “The government should not pick winners or losers.”  SO TRUE!  So why does Uncle Same go ahead and pick companies to back in either tax incentives, loan guarantees, and other measures.  This backhanded picking distorts reality. Digging into details as Brooks does reveals some favoritism in the process.   UGH!  I think it is impossible for a government process not to be political, if even only 1% political.  It tries to put in lots of red tape to cleanse a picking process but this is not good either.  The only way to eliminate unnatural forces in picking winners and losers is the private capital markets, or venture capital.

Venture capital is the greatest invention in the history of the world to pick winners and losers.  It is the most efficient allocation of precious capital and human capital towards a problem.  Creating a company is very very hard and the constraints are many.  It is these complications and many moving parts that if a company survives makes it a winner.   Entrepreneurs are special people who see problems and go about solving them in the hopes of profits and doing something great all along knowing that if it works out well, it will create wealth.  You all know the great examples of these successes – Intel, Apple, Genetech, Cisco, eBay, Google and many many more.

Venture capitalists don’t always get things right.   But in the long term over a variety of investment opportunities it gets it mostly right.  Otherwise the industry would die – and it hasn’t.  And it is not going to die.

Since energy companies take more time, usually more capital and have inherently different risk than many other startup companies including the Valley of Death, it would be best to let the professionals take on the task.  So here is my proposal.  Let the USG put in side by side capital into venture-backed energy deals.  Capital is precious and time is a startup company’s biggest enemy.  Vetting by the venture capital industry means that a company has been given a “market” chance to try their business plan.  Red tape is minimum and the risk is shared by all.  This capital will provide time for the startup to get it right.  Some will not work for sure.  But some will.  And when they do, then good things happen.  Jobs, jobs, jobs.  It is early days for Green Tech.  We should not give up now.  We should support investment in energy but through a market mechanism the US perfected – venture capital in partnership with the US taxpayer.

September 1, 2011

Solyndra Observations

By Matthew Nordan

tl;dr: There’s a reason they call it risk capital.

As you’re doubtless aware, Solyndra announced yesterday that it’s shutting down. The CIGS-on-tubes solar module maker raised nearly $2 billion in capital, including more than $1 billion from venture investors and a $535 million government loan. This event is being commentated to death (and will continue to be well into next year’s election, IMHO), but there are a couple of oddly-absent points that deserve raising:

• This was about manufacturing yield, not cheap silicon or China Inc. There’s a common thread running through most of the coverage that goes something like “Solyndra was surprised by a one-two punch of plummeting silicon prices and Chinese solar capacity.” I can’t possibly believe that: Solyndra’s managers and investors were smart people deeply immersed in the solar market and very aware of what economic $/W would be a few years’ hence. My understanding is that the business plan anticipated low-cost competition and expected to win on economics, but manufacturing yields didn’t hold during scale-up and the effective cost of the product ballooned. (I note that Ted Sullivan at Lux Research spotted this in between the lines of the company’s aborted S-1 way back in December of 2009.)
• Failure is a fact of life in venture investing – and energy innovation. VCs provide capital to high-risk businesses that can’t be funded any other way. Most venture investments either fail completely or deliver mediocre returns. Cases like Solyndra come with the territory, and they say no more about all the other VC-backed energy start-ups than Webvan said about Amazon: The whole point is to risk failure, because you have to take on many (informed, balanced, and uncorrelated!) bets for a shot at a big outcome. Those outcomes, in turn, pay for the failures many times over – while improving lives and creating jobs. There’s a legitimate argument about whether taxpayer money should be deployed in this pursuit, but to treat even a very costly cratering like this one as anything other than de rigeur seems silly.

August 19, 2011

You Cannot Save Yourself to Prosperity (Part 2)

By Ray Rothrock

Everything in business starts with selling something.  Some businesses sell cars; some sell turbines; some sell software; some sell groceries; some sell consulting services.  And so it goes on and on throughout the full $14.12 trillion GDP of United States.  Fourteen trillion – the largest production facility in the world is the United States.  This is sometimes called the top line in a business report like an income statement.  This is where our modern economy starts and defines itself. 

As a business’s top line turns down and shrinks, as happens from time to time, in order to stay in business that business must reduce expenses so that it can still make pay its bills with its sales.  If a shortfall is temporary, sometimes that business will borrow money to pay its bills.  And then, when the business recovers it pays the loan back.  If the downturn is longer the business may have to reduce the number of jobs or idle production equipment.

Sometimes business expenses go up for external reasons.  External reasons are things like regulations, taxes, and the like.  This can happen in a normally healthy business.  When it does, it reduces the amount of cash left over after paying all the expenses that the business might be able to invest in itself and grow.

When a top line turns up indicating more sales are possible, a business must invest capital in its production capacity in order to keep up and expand.  This investment can be either machines or people, but to make more you must have more capacity of production, and usually also make things more efficiently.  Everyone benefits in this mode – the business, its employees and its customers all benefit.

In a downturn, sometimes business go into a saving mode.  That works in the short run but the not the long run.  If you are saving, you are not investing.  If the sales continue to decline (for a host of reasons perhaps), then more saving is required.  Ultimately, you cannot save any more.  Your expenses are at their minimum to maintain the business. Drastic action is required.  This action might include ceasing production for some period of time.  You may lay off your sales force or reduce your marketing budgets and even benefits for your employees.  It’s hard to get ahead of the down pressure, so the business must act quickly.  Unfortunately, your employees may lose their interest in your business and go elsewhere, if they can.  Your customers start looking elsewhere, too.  In short, it is a death spiral.   And this is a death spiral that is very hard to recover.

Drastic action is required when the death spiral begins.  The same is required of a country.

 

August 15, 2011

We Cannot “Save” Ourselves to Properity — We Need Growth

By Ray Rothrock

Column: The Reagan stimulus vs. the Obama one

By Paul G. Kengor

When Reagan signed the Economic Recovery Act at his ranch near Santa Barbara, it was the largest tax cut in American history. He also revealed leadership that Democrats and Republicans alike agree we are not seeing currently from the White House. Even TheWashington Post called Reagan’s action “one of the most remarkable demonstrations of presidential leadership in modern history.”

Confiscatory tax policy

The enemy that day was America’s progressive federal income tax system, birthed in 1913 by Congress and President Woodrow Wilson. It was revolutionary, requiring a constitutional amendment. That tax, which began as a 1% levy on the wealthy, would rocket up to a top rate of 94% by the 1940s.

Ronald Reagan personally felt the toll. In the 1940s, the so-called “B”-movie actor was one of the top box-office draws at Warner Bros. Then a Democrat, Reagan saw no incentive in continuing to work — that is, make more movies — once his income hit the top rate. He also realized who suffered from that choice. It wasn’t Reagan; he was wealthy. It was the custodians, cafeteria ladies, camera crew and working folks on the studio lot. They lost work.

Reagan viewed such rates as punitive, confiscatory — “creeping socialism,” as he put it. In speeches in the 1950s and 1960s, he blasted the tax as right out of Marx’s Communist Manifesto.

By the late 1970s, Reagan concluded that out-of-control taxes, spending and regulation had sapped the economy of its vitality and ability to rebound. And so, on that August day in 1981, Reagan, with a Democratic House and Republican Senate, secured a 25% across-the-board reduction in income tax rates over a three-year period beginning in October 1981. Eventually, the upper rate would drop to 28%.

As biographer Steve Hayward notes, even when Reagan compromised with Democrats on tax increases in exchange for promised spending cuts in 1982, he “never budged an inch on marginal income tax rates.” Reagan understood that not all taxes, or tax increases, are equal.

After a slow start through 1982-83, the stimulus effect of the cuts was extraordinary, sparking the longest peacetime expansion in U.S. history. The “Reagan Boom” not only produced widespread prosperity but — along with the attendant Soviet collapse — also helped generate budget surpluses in the 1990s. Carter-Ford era terms such as “malaise” and “misery index” vanished. Only now has America re-approached similar misery-index levels, reaching a 28-year high.

Reaganomics myths

Unfortunately, liberals have so maligned Reaganomics that they are unable to separate facts from myths — to the detriment of their party and president. Among the worst myths is that Reagan’s tax cuts created the deficit, even as the deficit increased under Reagan.

In fact, Reagan inherited chronic deficits. Since Franklin Roosevelt, the budget had been balanced a handful of times, mainly under President Eisenhower. From 1981-89, the deficit under Reagan increased from $79 billion to $153 billion. It peaked in 1983-86, hitting $221 billion. Yet, once the economy started booming, the deficit steadily dropped.

Tax cuts were not the problem. Tax revenues under Reagan rose from $599 billion in 1981 to nearly $1 trillion in 1989. The problem was that outlays all along outpaced revenue, soaring from $678 billion in 1981 to $1.14 trillion in 1989.

The cause of the Reagan deficits was the 1982-83 recession and spending — as is always the case. And, yes, the culprit was not just social spending by congressional Democrats but Reagan defense spending designed to take down the Soviet Union. What a bargain that turned out to be: It helped kill an “evil empire” and win the Cold War, paving the way for a peacetime dividend in the 1990s.

Yet it is clear today that we have refused the proper lessons of history. For one, our problem remains excessive spending. Obama must bear this in mind if he’s considering tax increases (which hamper growth) as part of his “balanced” approach to deficit reduction. More than that, the best “stimulus” relies on the tried-and-true American way: Let free individuals stimulate the economy through their earnings and activity.

Ignoring such realities explains the mess we face in August 2011 — a millennium removed from the wisdom of August 1981.

 

Paul Kengor is a professor at Grove City College in Pennsylvania. His books include The Crusader: Ronald Reagan and the Fall of Communism and Dupes: How America’s Adversaries Have Manipulated Progressives for a Century.

July 12, 2011

CloudFlare is Shining Bright

By Ray Rothrock

Today CloudFlare announced a $20 million equity financing lead by NEA and joined by Venrock and Pelion. For a 15-person company, raising $20 million is a lot of money.  So what’s up?

CloudFlare provides security and web performance for any company with a website.  The company initially targeted the Long Tail, which typically includes small companies that do not have the skills, capital or technology to deal with the ever-increasing security threats that come from everywhere.  Big companies often have the resources to fight the fight, small companies do not.  So, CloudFlare provides security for everyone… for free.  Maybe the most amazing feature is that every attack thwarted by CloudFlare actually makes the service stronger for everyone, to the benefit of all website owners and their visitors.

CloudFlare introduced itself to the world at Tech Crunch last September 2010.  As of this past weekend, CloudFlare has had tens of thousands of customer signups for the service and is serving billions of pages a month presently at a rate of about  seven billion and growing.  This equates 10% of the web page traffic on the Internet.  Let me say again –10%!  This is staggering growth.  Further, these websites are not only more secure, they are also faster.

The engineers at CloudFlare are busy coming up with new ways to improve customer’s websites.  One idea was to improve the code served to anyone’s browser. Another idea was to provide an Apps environment for your website.  There are so many things every website owner wants and serves in addition to security and performance.  It’s as if there is new “real estate” out there on which to build.

Internet security has always been important.  But now, with frequent front page news often above the crease, security is important to anyone operating on the Internet with just about any kind of website.  Everyone knows this is an issue.

CloudFlare represents our 15^th security sector investment and I have sat on the Board since our investment in the company’s first round. In my investment experience over the past 23 years, the world-class companies I’ve help build and those I’ve watch built have a few things in common.  They build excellent product, provide low friction to adoption and acceptance by customers, and make their customers very happy.  Market leaders get many rewards, not the least of which is final valuations 3 to 5x the #2 player in a market.  CloudFlare has all the attributes of leadership in this exploding market as early as it is.  CloudFlare has strong creative management, has established thought leadership, is garnering market share at a prodigious rate, and most importantly, is growing a team that wants to win, that is committed to win, and will.  Adoption by customers is amazingly simple.  And the customers love it.  Without any marketing, the impact of word of mouth has generated all the sign ups the company enjoys.  You don’t get that kind of multiplier if the customers are not happy.

As the name implies, let the light shine from behind the cloud and make everyone’s website safer, faster and better.

June 27, 2011

Aging Nuclear Plants – Overreaction

By Ray Rothrock

Ever since the Fukushima Dia-ichi nuclear power plant crisis resulting from the earthquake and tsunami in March there has been a drumbeat in the press with concern over the age of current nuclear plants. The Dia-ichi plants were within one year of the their design lifetime to being shut down and decommissioned. These 40-year-old plants, designed as state-of-the-art in the 1960s, did a remarkable job surviving events well beyond their design limits after producing pollution free energy for almost 40 years. Though there is still risk and the Japanese are working hard to bring this to a totally safe situation, I must say, something designed 40 years ago, surviving a natural disaster well beyond design limits, is an amazing and remarkable feat of engineering.

The AP recently released a report on their “exhaustive research” into a claim made that time after time, the regulatory body in the United States, the Nuclear Regulatory Commission, has repeatedly relaxed safety standards in operating plants claiming that previous standards were too conservative. The article makes clear that this has created a certain level of anxiety in the public’s mind and indeed even reduced the safety levels at operating plants. They further state that, “Examples abound” to support this conclusion. The article also spends a few hundred words citing examples and then states, “The AP found proof that aging reactors have been allowed to run less safely to prolong operations.” While the NRC may not be perfect, is the AP really qualified to make such a judgment and statement about safety? Where is their analysis to back up such a claim?

It is a fact that in certain countries the regulatory bodies are indeed enmeshed in the industry they regulate – nuclear, oil, electric utilities, transportation, you name it. These problems exist even here in the U.S (offshore oil rig regulation, for example). But, the US NRC is considered the gold standard worldwide in this regard. Is it perfect? No. Is it a failure? Heck no.

In absolute terms, I’m sure some of the items mentioned by AP are true – probably most. However, nuclear power plants are complicated machines built with redundant safety measures, and overdesign – standard engineering practices. The AP did not evaluate all the systems and every item in the plant and their interactions.

Netting it all out, I think the AP could have better served the reading public by not wholesale claiming that all nuclear plants are unsafe because of this handful of troublesome things they found in the “exhaustive research.” I only wish they would have cited the number of problems found and fixed, or the increased retrofit engineering after Three Mile Island required of all plants to make them more safe, or the capital expended on maintenance and upgrades of components and systems, and the better training, or even the incredible safety record of the industry, just to put in perspective.

June 7, 2011

Germany Decides No Nukes – No Sense!

By Ray Rothrock

Germany cancels nukes.  It’s amazing to me how politics trumps logic and economics.  I would have hoped that the German leadership would have looked long and hard at the bare facts about energy, their economy, and the world in which they are living.   Turns out they did within the last year.  Their recent decision to exit nuclear power as a source of electricity, coming so quickly after they planned to expand nuclear, was politically motivated. 

One nuclear plant provides power 24×7 at capacity factors around 90% . . .that’s pretty much all the time, and it can do it for five decades.  Not to rain on renewables parade, but a wind facility or solar facility, on a good year will have 20% capacity factor, and doesn’t provide power when the wind isn’t blowing and the sun is shining, respectively.  So, even if you could coordinate when the wind blows and sun shines, you’d need 5x as much capacity of wind and solar to cover for just one nuclear plant.  At hundreds of square miles per plant for wind and solar compared to one square mile for nuclear, land will be consumed at a prodigious rate to make up the elimination of nuclear power.  Otherwise, Germany will be looking to its neighbors for electricity in short order.  Or burning more fossil fuels which also is hard to imagine given the pollution and impact it has.

I’ve read that Germany plans to buy power when those nuclear facilities start to shut down.  I’m sure France will sell electricity to Germany from their nuclear fleet.  But I wonder at what price?   I’m sure the planners for electricity consumption in Germany are fine tuning their economic models and telling the government of Germany all will be fine.  Economics is a real law.  Electricity is a commodity.  I predict that supply and demand will take over and prices will rise.  Even if German demand remains constant prices will rise because its supply will fall off.

At the end of the day, I suppose it boils down to an optimistic view of one’s economy versus a pessimistic view reflecting a country’s population self-image and plans for the future.   In other words, to grow or not to grow.  Germany has made their bet.

May 3, 2011

Bill Gates: Front and Center on Nuclear Power

By Ray Rothrock

There is a lot written these days about nuclear power. Whether it is comments about the post Fukushima impact on the world’s view of nuclear energy, or the nuclear renaissance in the United States, or just the simple fact that energy demands in the world will be hard to fill without nuclear energy. All those articles and comments are interesting at some level, but Bill Gates is different. Here is a man who is putting his money and reputation to work to solve the world’s energy problems – not just talk about it.

Thank you, Mr. Gates. I applaud your enthusiasm, your understanding of the issues, and your willingness to make a public case that needs to be made. VentureBeat reports an interview with Bill Gates where he points out the obvious (again) that lack of innovation in nuclear energy is an opportunity ripe for transformation by entrepreneurs. I love entrepreneurs. Maybe Mr. Gates is ready to make his mark in energy too.  He’s backing TerraPower.

Gates is an evidence driven guy. He completely understands the “million multiplier” that uranium has to coal in terms of energy density and ability to bring energy to the market. And he understands when economies are growing at 10% (China) or 3% (US) or India (8%) that these economies need energy to keep growing. Further, he understands the energy density issue around industrial economies. This is not trivial and is essential. Dispersed energy production is a good, big deal, but it will not power a car factory, or a battery factory, or an agricultural enterprise. He understands that while nuclear energy in the past was not perfect, he is investing to make it better – a lot better than where it is today. The U.S. has already done a lot to make it better.

Believe me, I’m not anti-wind or solar. I’m a huge green fan. I’ve got 13 KW of solar PV on my roof generating more power than I personally consume at my home during afternoon hours and most of the day. But, the density of wind and solar energy sources and the requirement for storage is such that they are unusable when the fundamental source of wind or sun is not available are obstacles to deployment for growing and developing economies. Just building the grid to connect the sources of wind and solar to the where the people live is a daunting figure and task.

Gates understands the fundamental economics and doesn’t quibble with the need for an improvement in the quality of life. His foundation is all about improving people’s lives so it is not surprising he is personally also on the energy case, and in particular the nuclear energy bandwagon. His personal investment in TerraPower is not only massively important, but massive symbolic. Why can’t the United States make these investments? Why aren’t other billionaires doing this? (turns out they are!)

So, thank you Mr. Gates for taking the podium and pounding home the reality of the need for energy and in particular, the role that nuclear plays on the world stage in improving our lives, and supplying our economies with energy that is green, safe, and economical.  If you need a partner to carry the message, please call.

April 23, 2011

Nuclear Power after Fukushima Daiichi

By Ray Rothrock

The nuclear power plant crisis at the Fukushima Daiichi in Japan is certainly devastating.  A major public health disaster seems to have been avoided, but the disruption to the citizens living in the surrounding area is severe, and will continue for a very long time.

The effects of the nuclear crisis pale when compared to the loss of life and property from the earthquake and tsunami. And, by any and all measures, the affected plants performed better than expected, and the other nuclear power stations in the area of the earthquake reached cold shutdown states without incident.  Nevertheless, these nuclear crises, like the ones in the past, have badly scared people – and have the potential to derail the construction of new nuclear power plants at a time when we need them to meet the world’s growing energy demand.

Nuclear power has always been a polarizing topic for the public.  For decades nuclear power has enjoyed a majority of public support, but the anti-nuclear movement has been loud, sustained and effective. At times nuclear power is a national political issue, sometimes a local political issue, but always an issue based on the fear of what might happen if a nuclear plant had a core meltdown. We’ve seen the images of the effects of radiation on the populations of Hiroshima, Nagasaki and Chernobyl. The health and safety aspects of the debate will likely never end.

At the same time, the need for non-carbon sources of electricity continues to mount all over the world.  Emerging economies can’t get enough electricity and are constructing nuclear plants as quickly and as practically as they can.  Why? Because the scale and concentration of electricity from nuclear power is unsurpassed compared to any alternative.  Nuclear power, even with the handful of incidents of the last 33 years, continues to produce 13-14% of the world’s electricity in an economical, safe and reliable way.  It has a capacity factor approaching 85%, far greater than any other source of electricity, and produces no green houses gases.  By every measure – land use, pollution, fuel cycle impact, human life – nuclear power remains an important source for electricity.

So, while the fear of nuclear power remains in the minds of a minority of the populace, its benefits are measured daily and shared by all – and its presence in our global energy mix is inevitable, at least for the near term.

The lessons from Fukushima are still being learned.  It stands to reason that there will be rethinking about fission as a source of electrical power.  Nations such as Germany, Switzerland and Italy have already drawn a conclusion regarding nuclear power and concluded to ban it going forward. But these bans were already a foregone conclusion – Fukushima only cemented them.

In contrast, just a few days after Fukushima, President Obama reaffirmed that the United States remains committed to nuclear power and that nuclear power must play a role in meeting the future energy needs of the United States along with all the other viable alternatives.  China also quickly reaffirmed its commitment to press ahead with nuclear power – post Fukushima China reaffirmed its Five Year Plan of building 400 GWe nuclear over the next 40 years.  That would be four times the nuclear power output of the United States today.

The United States and China are pressing ahead with their nuclear plans for one simple reason: electricity is essential for growing industrialized economies. As people seek better standards of living, they consume more energy. That energy today can only come in sufficient quantities from electricity or oil.  Those governments have little choice but to proceed with new electric plant construction with the best available technology – nuclear or other.

Consider China. Its economy has been growing 10% per year for a decade, and it can barely keep up with the demand for electric power.  It brings a gigawatt scale coal plant online every week and continues to expand it nuclear fleet now with 26 plants under construction.

The U.S. economy is five times larger than China.  However, the U.S. is faced with the need to replace and upgrade its electric infrastructure.  Though the U.S. GDP is modestly growing at less than 3%, it is central policy of the United States to expand this growth rate.  Taken together, the replacement and the incremental demand for growth puts a demand to the electric base load of the United States, which is projected to increase 50% in the next 40 years.   This is a huge increase.  No single source of base load will provide the answer.  Nuclear must play a role in filling this gap or the U.S. will fall behind.

While there have been no new nuclear plants in the United States for 30 years, the U.S. has continued its leadership in nuclear power research.  New designs continue to emerge, each one better than the last.  Certainly this is significantly based on the belief that someday the United States would begin to build plants again.

Today the state of the art in nuclear power plant designs is known as Generation IV+.  [Fukushima was Gen I.]  Design concepts of walk-away shutdown and passive safety are front and center. The Nuclear Energy Section of DOE budgets approximately $900 million per year and continues its important research on nuclear fission power.  The growth of the undergraduate and graduate programs in nuclear engineering at American colleges and universities has been increasing for years after a nadir in the 1990s.  The apparent belief that nuclear power has a future is clearly evidenced in the priorities of the U.S. government, the research establishment and even the young citizens in our nation’s engineering schools.  Even recent surveys by MIT show a majority support for expansion of nuclear power in the United States.  Similar surveys do indicate increasing concern over the lack of a solution for nuclear waste.

Today there are 438 operating plants in 31 countries with 60 under construction in 13 countries.   Leading the way with 26 under construction is China.  These 438 plants are generating spent fuel waste.  This waste is a growing concern for all nations and must be dealt with.  The production of spent fuel waste products from a potential world fleet of 1000s of nuclear power plants is not sustainable, nor practical without a solution to this problem.  It would be better not to create the waste in the first place but the practical demands of the world economy simply will not allow this to be the case.

Fukushima demonstrated the risk to keeping this spent fuel in bundles in the plants.  Policies regarding what to do with the waste have varied over the decades and Administrations.  Methods for handling of spent fuel waste are often criticized as not practical for the long-term and a political debate with no end ensues.  New methods for removing the long-term dangers of this spent fuel and reducing it to much shorter lives are under development, more in the scope of a nation’s lifetime and capabilities.  There is ongoing research at premier American universities where spent fuel would be reused to produce power and in that process render it impotent at the end of its extended use.  What is clear is that even with a viable method of managing the waste from nuclear fission, it too must also be replaced with a new source of electric power with no long-term transnational impact.

There is no doubt the Japanese will bring a good and proper closure to the Fukushima Daiichi nuclear stations.  Further, there is no doubt the Japanese will clean up the affected areas and bring life back to normal even if it takes a decade and costs upwards of $300 billion as some estimates project.  For an island nation with practically no natural fossil fuel resources and concentrated population centers, nuclear is the only option at Japan’s disposal for base load electric power.  The Japanese have 49 remaining nuclear power plants running after losing the six Daiichi plants, with two more under construction.   Nuclear power generation represented 30% of the base load for the Japanese grid before Fukushima.   Losing Daiichi is significant to the Japanese economy and the world economy because Japan is the source of much of the modern world’s supply chain.  As that nation recovers, it will be challenged to meet the demand for power in the short term.

Like the rest of the developing world, Japan has no choice but to pursue nuclear power in the near-term.  And if the world is going to pursue it, then the United States, a leader in nuclear energy, must again step up to this challenge. The United States must assure itself and the world, through its own example and its own R&D and its own investment, that nuclear power can be deployed in a reliable, economical and most importantly, safe manner.  It is an obligation to ourselves, to our children and to the world that cannot be shirked or compromised.