Commentaries
Now raising intellectual capital
Khosla’s bet on cleantech looks speculative
If the world is counting on innovative companies to solve global warming, we may be in trouble. Venture investment in cleantech is slumping. Venture capitalists in the US poured $2 billion into 139 cleantech start-ups in the first half of 2008, according to data from PricewaterhouseCoopers. In the first half of this year, venture investments in the sector plummeted to $513 million in 89 companies.
Of course, venture investment in general has gone off a cliff, from over $15 billion in the first half of 2008 to $6.8 billion this year. But it seems odd that cleantech, the new, new thing that VCs seek, has plunged more than the average.
Some of the slide can be attributed to a sensible response to economics. In the middle of last year oil was north of $120 a barrel. Today it’s $68. That makes alternative energy a much tougher economic proposition, whatever one believes about the importance of reducing carbon emissions globally. What about government regulation to make alternatives more attractive? Drive east on I-580 from Silicon Valley and you’ll get to the Altamont Pass. Nearly 5,000 small wind turbines were installed there in the 1970s because of a favorable tax break for wind power which eventually lapsed, pulling the rug out from under the nascent wind industry. It’s a powerful reminder that fiscal policies can be fickle and a bad foundation for an enduring company.
With energy generation a tougher proposition, the VC investment that remains is shifting to energy efficiency. Some of the Valley’s blue-chip VCs are eager to pump Silver Spring Networks, which makes software and services for a smart energy grid. There’s grand talk about 1.5 billion electricity meters needing to go digital over the next several years. But it’s hard to see Silver Spring or any of the other current portfolio companies being the next Netscape, EBay or Google — the kind of venture home-run that really sets investor hearts beating faster. Given the scale of the energy industry — about $1 trillion in the US alone — there should be plenty of space for that kind of transformational business hit. It hasn’t happened yet.
At the root of the cleantech bust is that there are fundamental science problems that need to be solved before many of the current ideas are investable. For all the strides in solar power, photovoltaic cells are still too inefficient to be cost-effective. No one has cracked the problem of energy storage for solar, wind and tidal energy. Carbon sequestration is a regular mantra in political speeches — particularly for legislators from coal-producing states — but it’s still a largely theoretical exercise.
Venture capitalists, for all their rhetoric about pushing ground-breaking innovation, are bad at science projects. In fact, one of the most damning verdicts a VC can offer is to tell someone that their start-up idea is a “science experiment”.
There’s one Silicon Valley grandee, however, who disagrees. Vinod Khosla made his first fortune as a founder of Sun Microsystems, a famously brainy place in its early years. He went on to be a star partner at Kleiner Perkins Caufield & Byers, with personal hits like Juniper Networks and NexGen/AMD, as well as flops like Dynabook. For the last five years, he has been investing a few hundred million of his own money, in nearly 40 cleantech start-ups as well as IT companies. He told Sarah Lacy earlier this year that cleantech would “clearly” create ten Googles. Now Khosla Ventures has raised $1.1 billion in two funds, the largest first-time fund since 1999 and the largest amount raised by any fund since 2007.
Riding a green tide
PetroAlgae is one of those many clean-tech companies that seem to burn through cash faster than a Hummer goes through a gallon of gas. Yet something curious is going on with shares of this Melbourne, Florida-based company, which is hoping to make money from turning algae into oil.
Over the past month, the stock price of PetroAlgae has rocketed from $8 to as high as $32.75 on ultra-thin trading of the shares (as of late Monday it had fallen back to around $10).
PetroAlgae boasts a rather healthy $1 billion market value — after being as high as $3.4 billion earlier Monday — even though it has no revenues, a $34 million accumulated deficit and its auditor isn’t sure the company can continue as a going concern.
There may be a plausible explanation for PetroAlgae’s surprising surge. Last month, Exxon Mobil announced that it would spend $600 million to study the feasibility of algae-based fuels. There’s no indication PetroAlgae will get any of those research dollars, but that’s never stopped investors from wishing.
But the real winners here are David Grin and Eugene Grin, hedge fund managers who are longtime investors in cash-starved, small-cap companies. A group of funds managed by the brothers, including the $700 million Valens Capital Management series of hedge funds, effectively own a 96 percent equity stake in PetroAlgae.
The brothers Grin sank their teeth deep into PetroAlgae last December. In a series of transactions, a company controlled by Valens and the other funds paid $350,000 for 100 million shares of PetroAlgae, regulatory filings show. Then the Valens funds pumped an additional $10 million into PetroAlgae — a cash infusion that accounted for nearly all the assets on the biotech company’s balance sheet at the end of 2008.
Valens’ investment in PetroAlgae represents nearly a quarter of the hedge funds’ equity, say investors familiar with the fund. So the Valens funds, which were up a modest 4 percent in the first half of the year, should get a big bounce in July from the run-up in PetroAlgae shares.
Dead on, my man. Dead on. More interesting that this clown is pimping one of the owners based on the strength of this company as a portfolio company http://www.ft.com/cms/s/2/bd927694-776b- 11de-8c68-00144feabdc0.html. Is there a way to short a UK hedge fund?
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The Wall
Mike, thanks for that comment. I very much want to see more investment in core science, whether it’s from the public sector or the private sector. So I hope your strategy — and Khosla’s — proves right. It’s also good to hear that there are LPs who are on board for that strategy. We’ll see what works over time. Just because I’m Cassandra on this doesn’t mean that I want it to flop.