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Trends in Clean Tech Investing

By Paul Holland, General Partner, Foundation Capital

Clean technologies that started merely as pie-in-the-sky ideas are now quickly becoming trillion-dollar markets that established utilities, transportation industries and others are beginning to rely on to put energy efficiency into practice. By the same token, former technology executives are driving new urgency into these markets by combining the pace of high tech with cutting edge science. The result is already benefiting the average consumer on a broad scale and will ultimately transform the future of our global environment.

As a Silicon Valley venture capitalist, the classic cocktail party question people ask me is always, “What are you investing in?” My answer since 2003 has now become a trendy one: Clean tech.

Before Dow Jones started their CleanTech Newsletter and Richard Branson touted flying his jets on butanol, Foundation Capital committed over $150 million to investing in a variety of clean technology companies. Watching this industry grow over the past four years, we’ve seen the landscape evolve quickly.

In that time, we have seen more investors rush to the space in pursuit of the next big deals. Through the first half of 2007, venture capitalists poured $1.9 billion into U.S. and European startups, 10 percent more than the same period in 2006, a record year. New Energy Finance reported that 1,250 capital and private equity funds invested in companies involved in the clean tech market, and the investment in the clean energy market doubled from 2005 to 2006.

When most people think of ‘clean’ or ‘green,’ solar energy and alternative fuels often come to mind. While there are important advancements being made in these areas, we find the most compelling opportunities lie in energy efficiency and green infrastructure. In the U.S. alone, the renewable-energy and energy-efficiency industries generated nearly $1 trillion in revenues last year and employed some 8.5 million workers, according to a July 2007 study by Management Information Services, a Washington, D.C. consultancy. In order to find successful and sustainable businesses, our investment thesis is to scout the next trillion-dollar market, and we believe energy-efficiency alone has this potential.

We categorize energy efficiency and green infrastructure as the ‘demand side’ of the clean tech equation. When you look at the macro trend, our energy supply is not increasing at the same rate as our demand. Two-thirds of energy used today is wasted, whether it’s leaving on lights when you’re out of the room, keeping computers on overnight or cooling buildings in off-peak hours. By mitigating the demand in this equation, we can have a dramatic impact today.

While the debate rages on in state legislatures and congress about car emissions, one area receiving little media attention is how building sustainable homes and buildings can reduce the production of carbon dioxide. According to the U.S. Department of Energy, 37 percent of the carbon dioxide produced by the U.S. is generated through materials that serve commercial and residential building purposes. As the demand for residential and commercial buildings that meet the Leadership in Energy and Environmental Design (LEED) Green Building Rating System continues to rise sharply, the demand for materials that fulfill this certification will also rise. One percent of the residential home market adheres to LEED standards today, and this trend is on the rise.

By comparison, we anticipate that the ‘supply side’ of the equation – such as biofuels – will take much longer to impact the overall clean tech landscape. Implementing new solar technologies and building new plants for the production of alternative fuels like cellulosic ethanol and butanol require substantial capital investments. These technologies often require government subsidies and result in a prohibitive cost. This makes supply side solutions less attractive from an investment perspective as we remain focused on identifying capital efficiencies.

With our eye on energy efficiency and green infrastructure, we’ve found some compelling trends taking shape. As utilities and technology industries compete to deliver the cleanest energy to your house, computer and car, new ventures in the market are trying to solve how you efficiently measure, monitor and manage that energy. In addition, other ventures are reformulating century-old processes for making the core building materials we depend on, such as cement and drywall.

Serious Materials, one of our portfolio companies, is a company that targets the drywall materials market and is one example of a company making an impact in green infrastructure. Drywall production consumes one percent of all energy use in the U.S. and releases 51 million tons of carbon dioxide, a greenhouse gas, every year. By re-inventing the process and materials used to create drywall, they aim to reduce greenhouse gas emission by 90 percent.

Companies like Serious Materials don’t have difficulty finding the support or funding to get started; their biggest challenge is increasing public awareness and accelerating the historically slow pace of change in the utility and construction industries. Just as Sir Francis Darwin said, “In science the credit goes to the man who convinces the world, not the man to whom the idea first occurs.”

Foundation Capital’s roots are in information technology – the software, hardware and networking behind enterprise and consumer products today. Part of our clean tech approach has been to infuse the world of clean tech with the DNA of Silicon Valley, including the fast pace, the drive for efficiencies, entrepreneurial spirit and technical knowledge inherent to the world of IT.

The markets serving the utility giants have typically been slow moving, driven by the pace of the utilities themselves that are weighed down by government regulation, enormous scale and capital investment. Upgrading aging technology is no small feat, and has the potential to affect hundreds of thousands, if not millions of end users.

With our focus on energy efficiency, we saw an opportunity to apply the lessons learned from the networking world to that of the utilities. In a typical IT infrastructure, the network can provide information at a granular level – for example, the CIO at headquarters knows when a server is down in a branch office across the country, or if an order processing application has slowed and created a 30 second delay in online orders. This level of control and information hasn’t existed in the utility world.

We saw Silver Spring Networks as a company that could apply the advancements of networking to the utility infrastructure – with the idea that this level of information could help utilities make important decisions on how energy could be more efficiently used and redistributed on an Internet Protocol (IP) network.

In line with our approach, we’ve brought in proven tech executives to lead Silver Spring Networks. The CEO Scott Lang spent 16 years at Perot Systems, a leading IT and infrastructure company, and prior to that he held management positions at Electronic Data Systems (EDS). Similarly, CTO Raj Vaswani is a veteran of the Internet, software and networking industries, having engineered high-traffic Web sites such as Epinions.com. Just as they have focused on improving efficiency, lowering costs, and ensuring service contracts of Internet and software technology using IP technology, they plan to do the same for utilities.

When looking for someone to lead Novazone, a company focused on water purification, my colleague Warren Weiss found David Cope, who at the time Cope was CEO of BizGenics, a business software company. With 25 years of executive experience with businesses like IBM, Marimba and Extricity, and bachelor’s degrees in Chemistry and Biochemistry, Cope joined Novazone in 2004 as Chief Marketing Officer. Having always thrived in fast-growing companies, Cope made a natural move to CEO of Novazone, and has successfully focused the company’s clean technology on the delivery of high quality food and water products without the use of chemicals.

Paul Holland is a General Partner at Foundation Capital, a venture capital firm based in Menlo Park, CA, where he focuses on cleantech investments such as Serious Materials. His focus is to help early-stage start-ups go from zero to $100M in revenue, having experience taking two venture-funded software start-ups public, including Kana Communications (KANA) and Pure Software (RATL). For article feedback, contact Paul at pholland@foundationcapital.com

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