april 11, 2008 evan lovell the cleantech sector: opportunity for innovators and entrepreneurs
TRANSCRIPT
April 11, 2008
Evan Lovell
The Cleantech Sector: Opportunity for Innovators and Entrepreneurs
2
Invention to Venture
I. Virgin Green Fund Background
II. Sector Comments
III. Valuation
IV. Future Landscape
V. What Really Matters
Agenda
3
Invention to Venture
Investments to Date
Virgin Green Fund: Investing growth and expansion capital in renewable energy and resource efficiency companies in North America and Europe
www.virgingreenfund.com
VGF
4
Invention to Venture
I. Virgin Green Fund Background
II. Sector Comments
III. Valuation
IV. Future Landscape
V. What Really Matters
Agenda
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Invention to Venture
Do you recognize these Founders & CEOs?
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Invention to Venture
Do you recognize these CEOs?
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Invention to Venture
How about these?
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Invention to Venture
You should….
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Invention to Venture
You should….
• Combined market cap of over $100 Billion
• Consistent top line growth of over 30%
• The next 50 years will be determined by these and similar companies
Don Enders
LeRoy Nosebaum
Michael Ahearn
Randall Hogan
Nabeel Gareeb
Dick Swanson
Anton Milner
Patricia A. Woertz
Zhengrong Shi
Alf Bjørseth
10
Invention to Venture Macro Sector Overview
• Sustainable demand side pull vs. supply side push….
• ….leads to traditional resources responding with unprecedented price increases…
• …coupled with a Chinese menu of legislative acronyms (RPS, PTC, ITC, CAFÉ, AB32, Kyoto, Kyoto II, EU Directive)
4th Industrial revolution?$45
$55
$65
$75
$85
$95
$105
$115
Jan-06 Jan-07 Jan-08
Crude Oil -WTI
Oil ($/bbl)
$3
$4
$5
$6
$7
$8
$9
$10
$11
Jan-06 Jan-07 Jan-08
Natural Gas -Henry Hub
$2
$3
$4
$5
$6
Jan-06 Jan-07 Jan-08
Corn
Natural Gas ($/mm Btu) Corn ($/bushel)
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Invention to Venture
$1.5
$2.1
$3.2
$1.0
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
2005 2006 2007 2008 YTD
$ in billions
Global New Venture Capital Investment in Clean Energy
Source: New Energy Finance
Macro Sector Overview
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Invention to Venture Macro Sector Overview
Key Cleantech Venture Capital Investors
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Invention to Venture
LTM Indexed Price Performance of Cleantech Stocks
Macro Sector Overview
Source: Citigroup
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Invention to Venture
According to the US Department of Energy, Cleantech accounts for about 3.5% of the energy currently consumed, with tremendous growth expected
Global Electricity Generation U.S. Electricity Generation
Global Energy Consumption Forecast by Fuel
Qu
ad
rillio
n B
TU
Source: Wall Street Research
Source: EIA, 2007
Macro Sector Overview
15
Invention to Venture
Population Growth
Top Oil Producing Nations
Global Energy Prices
0.6
0.8
1.0
1.2
1.4
1.6
1980 1990 2000 2010 2020 2030China India
Population (billions)
Source: United Nations, 2007
2.3 2.83.4
4.14.7
5.66.7
0.0
2.0
4.0
6.0
8.0
2004 2005 2006 2007 2008 2009 2010
Chinese Passenger Vehicle Sales
Source: Oliver Wyman analysis, 2007
Units (millions)
19.5% CAGR
(thousands of barrels per day)Saudia Arabia 10,665 Venezuela 2,803Russia 9,677 Norway 2,786United States 8,330 Kuwait 2,675Iran 4,148 Nigeria 2,443China 3,845 Brazil 2,166Mexico 3,707 Algeria 2,122Canada 3,288 Iraq 2,008United Arab Emirates 2,945
Source: EIA, 2006
(2006 dollars per Btu) 2006 2007 2008 2009
Crude Oil $11.42 $11.60 $14.46 $13.31% change 13% 2% 25% -8%
Natural Gas $6.24 $6.03 $6.39 $6.56% change -18% -3% 6% 3%
Coal $1.21 $1.25 $1.28 $1.29% change 3% 3% 2% 1%
Electricity $26.10 $26.08 $26.56 $27.39% change 6% 0% 2% 3%
Source: EIA, 2007
Macro Sector Overview
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Invention to Venture Macro Sector Overview
U.S. Mid-Range Abatement Curve
Carbon Dioxide EmissionsForecast
5.9 6.2 6.6 6.9 7.4
4.4 4.54.6 4.6
4.6
5.0
8.04.1
4.7
4
6
8
10
12
14
1990 2004 2010 2015 2020 2025 2030
United States OECD Europe
Source: EIA, 2006
Source: McKinsey, 2007
Billion metric tons of C02
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Invention to Venture Macro Sector Overview
Shift in Perception of How Business and Financial Community Can Impact Global Warming
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Invention to Venture
• Biofuels
• Biomass
• Solar energy
• Wind energy
• Energy efficiency & Energy Storage
• Monitoring & management systems
• Water / Waste management
• Emissions reduction
Renewable Energy Resource Efficiency
• Hydro energy
• Geothermal energy
• Fuel cells
Mapping of Sectors
Growing demand for technologies, services, products that provide cleaner or more efficient use of existing resources resulting in environmental benefits
and/or reduced reliance on fossil fuels
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Invention to Venture
PE / VC Investment in Solar
• 2006 1.7 GW, $6.2B market, 42% growth
• 2007 3.9 GW, $12.6B market, 88% grid connected
• By 2010 7.7 GW installed, 66% Germany, 25% in the US
• Germany created the rebirth of renewables with Euro50c/kWh subsidy and real feed in tariff programs
• $15B sales in total industry:
• Solar companies fully contracted out 3-4 years
• Strong margins (30-40%)
• Implied valuations (assuming growth are reasonable). Lowest growth estimate is 35% 5 year CAGR. 20 P/E+1, PEG<1 but Spot silicon $25/kg now $350/kg
Capital markets supporting strong secular growth
Sector Comments - Solar
Private Investments
Public Markets
Source: New Energy Finance. 2008 represents YTD
Installed Capacity
Source: Factset
($ in millions)
4/6/07 6/6/07 8/7/07 10/5/07 12/7/07 2/7/08 4/9/08
50
100
150
200
250
Index
ed P
rice
69.71%
-4.93%
65.03%
Light Crude Oil S&P 500 Solar Index
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Invention to Venture Sector Comments - Solar
The Tale of Two Solar Companies
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Invention to Venture
Most developed of the renewables markets due to price point of wind power leading to strong growth
Sector Comments - Wind
• Historically largest investment area, largest M&A area, lowest cost renewable (ex-hydro)
• Challenges: Wind blows off peak- reserve margin issues, no ability to get capacity payments, transmission lines used only 1/3 of the time
• Inefficient due to lack of storage and dispatch
Over 200 GW installed by 2011
Large installed base
Strong Investor Appetite
($ in billions)
$0.02 $0.03$0.20
$0.83
$2.54
$0.88
$1.28
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
2001 2002 2003 2004 2005 2006 2007
VC PE PIPE OTC
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Invention to Venture Sector Comments - Biofuels
• Too little midstream distribution and too much production
• ETOH pricing: 77% BTU content + 23% energy content + tax benefit – refiners taking their margin
• Macro data seems more positive than choppy capital markets imply
United States Europe
Historical Commodity Prices
1.00
1.50
2.00
2.50
3.00
3.50
4.00
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
$/g
all
on
1.001.502.002.503.003.504.004.505.005.506.00
$/b
us
he
l
Ethanol Gasoline Corn
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Invention to Venture Sector Comments - Water
• Aging infrastructure: Assets depreciating faster than rate of investment (city sewers are 100 years old, suburbs 60 years), all reaching well past useful life
• Large spend: EPA estimates $25B/yr over next 10-15 year, or $300B total. Right now spend rate is $2.5B annually
– Fundamentally betting on the failure of governments to tackle the problem.
• Convergence: Water and Power (delivery and treatment of water is the 4th largest consumer of power)
• Price inelastic demand: Whether economy is up or down, people flush toilets
• Role for technology: Drip Irrigation, Advanced Metrology, Blue Star Program
• The colors work: Yellow and Blue make Green
Water is behind the walls, under ground. Its not sexy but is the largest, most fragmented of renewables
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Invention to Venture
• Ben Franklin: ‘We’ll know the worth of water when the well’s run dry’
• Over $250 Billion annual spend worldwide to reach UN safe water standards
($25-50 billion annually required in the US), but will it be enough?
0
200
400
600
800
1,000
1,200
1905 1925 1955 1975 1995 2015
Water withdrawalsPopulation
Danger
0
20
40
60
80
100
120
140
Europe N. America Medt./N.Af India Middle East
2000 2025F
Crisis
Caution
Sector Comments - Water
Water Withdrawals Relative to World Population
Water Usage as a % of Availability
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Invention to Venture
0
5
10
15
20
25
30
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003$0
$5
$10
$15
$20
$25
$30
1000 m3/day US$/m3
0.0
3.0
6.0
9.0
12.0
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
0
500
1,000
1,500
2,000
1997 1998 1999 2000 2001 2002
$0.00
$0.50
$1.00
$1.50
Million Cubic Meters per Day
1985 - 2005E CAGR = 14% Global
Middle East
Unit Cost ($/m3)
RO Capacity 1,000 m3/day
Cost of Water ($/m3)
Sector Comments - Water
Technology helping to drive down costs
Reverse Osmosis vs. Cost of Water Reverse Osmosis vs. Cost of Water
Projected MSF Desalination Costs
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Invention to Venture
I. Virgin Green Fund Background
II. Sector Comments
III. Valuation
IV. Future Landscape
V. What Really Matters
Agenda
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Invention to Venture
More than 75% of all deals are now require larger dollars ~ is this
expansion or valuation driven?
Investments cut across all sectors~ there is no one
bullet
Investment Environment
Factors Driving New Deals
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Invention to Venture
I. Virgin Green Fund Background
II. Sector Comments
III. Valuation
IV. Future Landscape
V. What Really Matters
Agenda
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Invention to Venture Future Landscape
• Long-established VCs, historically focused on the information technology and biotech sectors, have expanded into this sector, which is now generally referred to as ‘cleantech.’
• Focus on: high-quality entrepreneurs and mgmt teams, disruptive tech, and deep market knowledge as they move from company formation to product development to commercialisation.
• These funds typically invest from $5-$20 million in a single company over its lifetime.
• Examples: Nth Power, Chrysalix, Emerald Tech, CMEA, DFJ, Khosla, KPCB, MDV, Norsk Hydro, SCATEC.
Project/ InfrastructureProject/ InfrastructureFinanceFinance
Expansion/ GrowthExpansion/ GrowthCapitalCapitalEarly Stage/Venture CapitalEarly Stage/Venture Capital
• Specialized funds as well as larger investment buyout funds with a special allocation into the sector.
• Focus on: proven business models and products or services that have been validated by the marketplace. As companies reach their growth inflection point, these opportunities usually require significant equity investments beyond the scope of traditional early-stage venture capital, however, they entail market, execution, and/or team risks.
• These funds typically invest from $20-$50 million in a single company.
• Examples: Mission Point, Demeter, 3i, Masdar, Climate Change Capital, Perseus.
• Funds investing in energy assets and development projects.
• Focus on: asset base intensity for downside protection and asset aggregation to achieve equity-like returns.
• These funds typically invest more than $50 million in a single company.
• Examples: Riverstone, USRG HG Capital, Arclight, Hudson Capital, Citibank, Goldman, GEF.
• $2-5 billion allocated over 100+ funds
• $10-15 billion allocated over 25+ funds
• >$5 billion allocated over 20+ funds
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Invention to Venture
• Renewables can learn from Biotech and Pharma industries:
– Utilize incumbent channels to market and distribute new products
– Existing companies realize additional revenue opportunities and increase ROIs while diversifying risks of dependence
on traditional’s
– Bridge gap between innovation and market distribution
– Examples: transformation of the lighting industry, roofing companies installing solar
• CEOs and Boards asking how to become more green
– Leverage economic/political/social momentum now to make investments that at other times would not have been done
– Focus not only on bottom line (how do companies reduce their costs), but now on the top line (how do I sell more green
products to meet customer demands)
• Financial Markets evolving
– Valuation concerns: Solar the new Ethanol? What’s next?
– Valuations in today’s markets: Multiple lifts, higher leverage, take more risk (management, technology, non-US, non-
correlated industries, earlier stage)
-Technology drives down costs dramatically; sets up efficient frontiers but government subsidies create disequilibrium
between demand and supply (e.g. what is the true cost of water?)
Future Landscape
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Invention to Venture
• History has some lessons to teach us:
– Seen the renewables stories a decade ago: fuel cells/fly wheels/microturbines/thermal coupling
– Projections then were we would have 1 teraWatt of power from new sources by 2005
– Industry has burned investors- 95% of projections failed; over-promised under delivered
• What’s different now?
– We’ve seen oil at these levels before (inflation adjusted in ’78/79)
– Then is was a supply shock (ME) vs demand shock (China/India)
– Real climate issues (global warming debate moving from speculation to hard science)
– Energy security/independence has a special meaning post 9/11
– Unbelievably strong management teams
• Changing Role of Oil
– $24.73 avg cost/barrel in 2006
– $43.62 avg revenue/barrel
– 45% increase in 2005 to 2006 and again in 2007 of spending to buy/find/develop more oil and gas
– These efforts yielded a 2% increase in reserves; this is a huge negative arbitrage
Future Landscape
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Invention to Venture
I. Virgin Green Fund Background
II. Sector Comments
III. Valuation
IV. Future Landscape
V. What Really Matters
Agenda
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Invention to Venture What Really Matters
• Insight only gets you so far:
“I’d put my money on solar energy…I hope we don’t have to wait ‘till coal and oil run out before we tackle that.”-Thomas Edison 1931
“Conservation may be a sign of personal virtue but it is not a sufficient basis for a sound comprehensive energy policy”. Dick Cheney 2001
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Invention to Venture What Really Matters
• Make products people want to buy
• Cost matters
• This is the energy industry and its capital intensive: Google built with $25mm of VC capital (GOOG Market Cap $145B. First Solar built for $250mm of private Capital FSLR Market Cap: $21B.
• There are no silver bullets to the energy problem/global warming. Multiple problems/multiple solutions.
• Don’t rely on government incentives…if you don’t believe this look at the wind industry and what happened when the PTC was not renewed.
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Invention to Venture
• Growth by any metric: $ invested, valuations, deal size, number of companies
• Silicon Valley or “Green Valley” DNA: Serial entrepreneurship, focus on end markets, easy access to capital, VC culture
• Multiple ways to play this sector: supply and demand solutions. Opportunity to think outside the box: solutions to reduce cost often are “hidden under rocks”.
• Increasingly competitive: Number of funds, assets under management, number of companies attacking similar problems. Large strategics are coming.
• Be prepared to raise significant capital and be in this for the “long haul”.
• Cost curve is still difficult. Government incentives still matter in many areas. The easy problems are often the most difficult markets to penetrate.
A Great Industry… …However
Conclusions
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Invention to Venture
Global Warming: Opportunity for Innovators and Entrepreneurs
Conclusions
Time to Get to Work!
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Invention to Venture Conclusions
Questions?
Thank You