Venture Capital and Clean Energy: Green enough for each other?BASE Summit 2006:Positioning Oregon as an International Leader in the Clean Energy Industry

Presenter: Ted BernhardMarch 21, 2006Phone: 503.294.9202tbernhard@stoel.com

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• Stoel Rives corporate and securities attorney in Portland• Founder of the Stoel Rives Energy Ventures and Finance Group• Before joining Stoel Rives: general partner of a venture capital

investment fund focused on energy technology investing• Current law practice focused on equity finance issues

representing involved with renewable and clean energy businesses:– Private Equity Investors

– Clean Energy and High Tech Venture Capital investors

– Startup Energy Technology Companies

– Sub-utility scale, distributed, community, renewable energy projects

Ted BernhardTed Bernhard

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What is a venture What is a venture capitalist?capitalist?

• Pooled fund of investment capital from institutions or individuals

• Invests in new technologies and new markets• Early stage, private companies (only 3-5% in

“raw start-ups”)• Hands-on involvement from Investors via

Board of Directors• High risk/high reward is expected and

demanded• Long investment horizons: 5-7 years

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Venture Capital must be Venture Capital must be distinguished from…distinguished from…

– Self funding– Friends and family– Government grants (SBIR, DOE grants)– Angels– Private Equity Investors (VC subset of PE)– Strategic Investors– Utilities– Public Capital Markets– Commercial Banks

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The Venture Capitalist’s BetThe Venture Capitalist’s Bet

• Market: gigantic market, fundamental shift underway or about to occur

• Technology: a new, proprietary technology that will somehow address the market’s needs

• Management, Management, Management• Timed right for exit on receptive public

markets or acquisition

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The economics of a venture The economics of a venture capital fundcapital fund

• Limited Partnerships– Limited Partners (LPs) provide the capital, General

Partners (GP’s) provide the management– LPs not actively involved in investment decisions– Fund pays GP a management fee (usually 2-2.5%)– LPs get their money back plus an interest like hurdle rate,

then share the profits with GPs (80/20%)– Expectation is that the returns are generated upon EXIT

from individual investments, not from dividends or cash flow from operations

– Overall goal is 45-55% IRR on each deal at the outset, meaning 10x (or more) on capital in 5-7 years

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Venture Capitalists involvement Venture Capitalists involvement with the other “green”: Clean with the other “green”: Clean EnergyEnergy

• Traditionally not a “mainstream” venture capital investment category

• 1999 only 1% of venture capital money was in clean energy

• Venture capitalists are now playing a much larger, key role.

• According to the Clean Energy Trends 2006 (a report prepared by Clean Edge and Nth Power), energy technology venture capital investment in 2005 rose by more than 28 percent from 2004 to almost $ 917 million.

• Investments in energy technology as a percentage of total venture capital investing have now more than quadrupled to 4.2 percent in 2005.

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How do money-focused How do money-focused capitalists intersect with capitalists intersect with clean energy?clean energy?• The common denominator: TECHNOLOGY!• Venture investors’ long term investment horizon allows them

to invest in next generation technologies – New Industries– Order of magnitude improvements in price/performance for all the

clean energy projects in development now

• Venture Capital and Clean Energy experts compliment each other well– Clean energy experts bring technical understanding, concern for the

environmental issues, and market knowledge– Venture Capitalists bring technology entrepreneurial and business

expertise– access to and understanding of financial markets

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Who are the Clean Energy Who are the Clean Energy Venture Capitalists?Venture Capitalists?

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Areas of interest to Areas of interest to venture capitalistsventure capitalists

Segment Description

Energy Intelligence • Data, IT and energy convergence in core energy operations

Related Services • High value specialization, critical services and outsourcing models

Distributed Energy• Demand for low emissions, back-up and

reliable power,renewables , fuel diversity and fuel efficiency (CHP)

Power Reliability • High value electrons for military, medical, and consumer electronics

Materialsand Nanotechnology

• Technology enablers for existing and new markets

Source: Nancy Floyd, Nth Power

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Where venture capitalists Where venture capitalists WILL NOT investWILL NOT invest

• Renewable Energy Power Generation Development Projects– Wind– Solar– Biomass– Geothermal– Hydro

• Lifestyle businesses• Poor management teams• Companies with no proprietary technology

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Clean Energy companies Clean Energy companies that have made it to Initial that have made it to Initial Public OfferingsPublic Offerings• Fuel cell craze ( Late 1990’s - British Columbia Centric – Ballard

Power)– Large initial market caps– Generally floundered since– VCs and public markets taking a look at new generation fuel cell companies

• Solar: best successful in 2005-6– Solar industry has been hot, with initial public offerings (IPOs) such as

SunPower, which went out in late 2005 at a market capitalization of roughly $1.5 billion and was recently trading at a market capitalizations of $2.5 billion.

– There are now 10 publicly traded solar companies, seven of which hold market capitalizations of $1 billion or greater

– Yet to see if those valuations are sustainable

• Next up is biofuels – ethanol and biodiesel– Several biofuels companies, including Pacific Ethanol, have recently gone

public, and more are anticipated soon.

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If you still want to approach If you still want to approach venture capitalists…venture capitalists…

• Don’t send blind e-mails or business plans across the transom

• Venture capitalists are all about trusted personal relationships

• Find a contact that has that personal relationship– Best is a former entrepreneur who made a vc lots of money

– Former vc who still stays in touch with his partners

– Lawyers

– Accounts

– Trade organizations

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When you approach When you approach them, speak the them, speak the language of investorslanguage of investors• Understand the financial landscape (players

and motivations) • Stop talking about:

– government subsidies– tax credits– wind regulatory policy– social benefits of investing (I.e. triple bottom line)

• Start talking about ROI, IRR, Investment Multiples, and EBITDA

• Even simpler, start talking Profits and Revenues and cash flow

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When you make the initial When you make the initial vc pitch, think of Eminemvc pitch, think of Eminem “Look, if you had one shot, or one opportunity to seize everything you

ever wanted – one moment – would you capture it or just let it slip?” - Eminem, Lose Yourself, 8-mile soundtrack

• Usually, you get one 30 minute pitch. Expect to present 10-12 slides for 15 minutes and then answer questions as long as the partners remain interested

• Goal is just to get enough interest during the meeting to move to the next stage of due diligence (which means they are seriously considering it enough to invest resources, I.e. their time)

• Do some dry runs with friendly people who understand venture capital, but for some reason are not likely to invest in your particular deal

• You don’t get a second chance

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ConclusionsConclusions

• Take a serious look at your business and see if it is likely to be suitable for venture capital investment

• Find investors that:– Have common goals– Provide value beyond just the money– That you like working with (it’s a 5-10 year partnership you are entering)

• Once you take outside money, it’s no longer “your company” its more like a long term partnership with many people having vested interests.

• Green is the word – economic and environmental intersection• Where to learn more:

– CleanEdge (www.cleanedge.com)– VentureOne (www.ventureone.com)– National Venture Capital Association (www.nvca.org)

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Thank youThank you

Ted Bernhard

www.stoel.com tbernhard@stoel.com

Pacific Northwest Energy Ventures Blog:

www.energyventuresnw.blogspot.com