April 11, 2008 Evan Lovell The Cleantech Sector: Opportunity for Innovators and Entrepreneurs.

April 11, 2008

Evan Lovell

The Cleantech Sector: Opportunity for Innovators and Entrepreneurs

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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

3


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



II. Sector Comments

III. Valuation



Agenda

5


Do you recognize these Founders & CEOs?

6


Do you recognize these CEOs?

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How about these?

8


You should….

9


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


Natural Gas -Henry Hub

$2

$3

$4

$5

$6


Corn

Natural Gas ($/mm Btu) Corn ($/bushel)

11


$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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Key Cleantech Venture Capital Investors

13


LTM Indexed Price Performance of Cleantech Stocks


Source: Citigroup

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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


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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


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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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Shift in Perception of How Business and Financial Community Can Impact Global Warming

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• 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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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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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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• 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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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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II. Sector Comments

III. Valuation



Agenda

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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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II. Sector Comments

III. Valuation



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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• 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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• 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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II. Sector Comments

III. Valuation



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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• 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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Global Warming: Opportunity for Innovators and Entrepreneurs

Conclusions

Time to Get to Work!

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Invention to Venture Conclusions

Questions?

Thank You

April 11, 2008 Evan Lovell The Cleantech Sector: Opportunity for Innovators and Entrepreneurs.

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Transcript of April 11, 2008 Evan Lovell The Cleantech Sector: Opportunity for Innovators and Entrepreneurs.