Hundreds of venture capital firms invested tens of billions of dollars in cleantech over the last decade. But only a few VCs made money or built lasting companies in the process.
We'll be speaking with the surviving and thriving cleantech VCs in a new GTM Squared column called Letters from Sand Hill Road.
In our premiere installment, Steve Vassallo of Foundation Capital (which isn't even close to Sand Hill Road) explains how his firm deployed its capital to scale fast-growth businesses in billion-dollar energy sectors.
But first, some background
Cleantech venture capital, as measured by societal impact, has been a spectacular success. Cleantech VCs have jump-started moribund markets such as EVs and created new markets such as residential solar finance. That success comes despite the smoking craters where most cleantech VC funds and startups once stood.
Cleantech exits include M&A events of consequence such as Google's $3.5 billion acquisition of Nest, Siemens' acquisition of eMeter, SolarCity's purchase of Zep, and Flextronics' $330 million acquisition of NEXTracker. Now-public, VC-funded cleantech firms include:
| Company | Business | Market Cap |
| Tesla | Electric vehicles, energy storage | $34B |
| SolarCity | Financing, installing distributed PV | $4.7B |
| Vivint | Financing, installing distributed PV | $1.35B |
| Sunrun | Financing, installing distributed PV | $1.12B |
| SolarEdge | Module-level solar panel electronics | $1.065B |
| Silver Spring | Smart grid systems | $678M |
| Opower | Energy-efficiency programs | $505M |
| EnerNOC | Demand-response programs | $283M |
| Enphase | PV microinverters | $206M |
| Aspen Aerogels | High-performance insulation | $205M |
Foundation Capital had a hand in three of these IPOs and one of these acquisitions.
"Foundation had a different approach"
I first met investor Steve Vassallo of Foundation Capital in 2008 at the world's most depressing solar conference. Somewhere in Arizona, we attended a solar event that Vassallo likens to the Spinal Tap puppet show scene. He was new to investing. I was new to reporting. He had a cellular modem that I coveted.
The event had no attendees -- just a few presenters filing to the podium to present to other presenters in an empty, cricket-filled hall. Professionals that we are, Vassallo and I kept straight faces and shared our thoughts -- but nothing could undo the sadness of that room.
Fast-forward to 2015.
Foundation Capital has been one of the more disciplined VC firms in greentech investing. The firm has actually won venture returns in cleantech by making select demand-side investments in a modernized grid, consumer choice, and new solar business models. And Foundation has largely managed to avoid the billion-dollar solar factory, algae biofuel, and fuel-cell investments regretted by some of Silicon Valley's current and former greentech VCs.
"Foundation had a different approach. We made 13 investments over the course of 12 or 13 years on the order of over $250 million. We're permanently in the money in our cleantech practice by virtue of just the outcomes we’ve already had," said Vassallo.
He's on the board of Aquion Energy, AutoGrid, Bolt Threads, Sentient Energy, and Sunrun and was an investor in Control4, a now-public home automation company.
Here's Vassallo's take on his time in cleantech and Foundation Capital's cleantech practice.
"I didn't think I was going to be an investor"
Vassallo: "When I came into Foundation, it was May of 2007. I was actually on the path to starting a company and had no plans to be an investor. I was actually working on my own idea for the first few months, and then the partners said, “You keep bringing in all these interesting projects. Why don’t you think about investing?”
"Cleantech, as you recall, in those days was just this mess, right? You could pretty much recategorize any company as a cleantech company if you wanted to.
"No one really knew what it meant.
"In fact, in our own firm, we talked about it as 'advanced industrial processes.' It encompassed supply and demand and semiconductors and water and agriculture and IT. The first thing I did -- and I’d actually been working on it before I came here -- was I came up with my own taxonomy. Frankly, I think it was part of the reason I'm here. They looked at this, and they said, 'Holy shit. You have actually thought about this.'”
Bet on new business models -- not against silicon
Vassallo: "Any time one of our semiconductor companies had bet against silicon, they lost. That kind of weighed pretty heavy on us."
"But what we had seen through EnerNOC was that there could be an interesting way of using business models and innovation around distribution to be able to crack open the market, and that had really been overlooked in downstream solar, particularly for the residential markets."
Sunrun grows from 20 to 87,000 systems
The now-public Sunrun was Vassallo's first investment at Foundation. He met the startup in its fourth month of operation when it had sold a grand total of 20 residential solar systems.
Vassallo said, "We invested $8 million. That was a big check, at least, at the time -- for 30-something percent of the company at a $15 million pre-money valuation." Foundation had a 19.6 percent ownership of Sunrun prior to the recent public offering.
"I met them on a Friday afternoon, and it was just completely obvious to me: this is the team. You had to get the finance piece figured out, and Ed Fenster [founder and chair] is a financial savant. Lynn Jurich [founder and CEO] was leading sales and partnerships. You had to get those two pieces together, but then the third piece, which no one had figured out, which was really sort of in Ed’s head, was how you are going to manage the regulatory affairs, the sort of broader ecosystem construct, like how do we put ourselves in the best position for the ITC, which was ending in December 2008 -- all of the political jiu-jitsu that needed to happen to make this business work, at least at first."
"I’m just hugely proud of how we've gone from 20 systems to 87,000 systems, and yet we’ve only just begun.
"The entire industry is still figuring out exactly what are the right units of equivalence or ways to measure ourselves. Is it retained value? Is it something else? How do we talk about securitization? Is the SolarCity and Sunrun model the right one, or is it the YieldCo route? I look at the SunEdison-Vivint acquisition and I think that’s great for both parties. I think this market is enormous -- and that was a great price."
FIGURE: Leading U.S. Residential Solar Financiers, 2014
Source: GTM Research report U.S. Residential Solar Financing 2015-2020
Sunrun raised approximately $220 million in its August IPO, but Jurich has told GTM, “I think a lot of people look at an IPO as the endgame. It’s not. It’s just a financing.”
Vassallo said, "When you talk to [Sunrun CEO Lynn Jurich] about her mission and her vision for what the company is, Lynn talks literally in terms of decades."
Sunrun expects to install approximately 205 megawatts for the full year 2015.
Opower: The one that got away
Vassallo said, "When we look back and say, 'What have we missed in digital energy and smart grid-related markets?' -- the only company that I wish we’d invested in, that we didn’t, was Opower."
"We tried to.
"I was introduced to Dan Yates -- and he had literally just closed his financing with Mark Sugarman [of MHS Capital]. We stayed really close to the next round and the price ran away, and Jon Sakoda [of NEA] turned out to be right, and we were wrong.
"Opower demonstrated that energy efficiency can be an interesting business with a lesson learned: you’ve got to worry as much about selling regulators as you do about selling utilities or selling end customers. They did a great job of that."
Can Silicon Valley disrupt the utility industry?
The $300 billion investor-owned utility industry is going through deep institutional change, driven by carbon regulation and the economics of distributed generation. Isn't this the time for investors to spur disruption?
Vassallo said, "It's naive of us to assume that the big idea and Silicon Valley optimism will transform 150-year-old industries. Silicon Valley has historically been wildly successful in the markets that are not obvious to anyone else, and it’s the ones that basically get created because the company existed. I have definitely come to believe that necessity is not the mother of invention; it is invention that is the mother of necessity."
"How do these little companies fight 100 years of path dependency and the wrong market constructs? How do you get that set straight? The CEOs of the top 30 utilities are people who, on average, have probably had their jobs for 25 years. What other business do you know of where you get a guaranteed return on whatever you spend every year?" [Editor's note: military contracting?]
How does a startup work with the utility?
"Our investments had to be businesses where we felt like we had more control over our own destiny. In the case of EnerNOC, we were able to accelerate sales by building out a salesforce. We could actually go and sign up more commercial and industrial customers. And with those assets, we could then effectively sell the service back to the utility. There was something beautiful about that business model where our little, young startup, led by force-of-nature founders, didn’t have to wait for the utility PO to come over the wire.
"I think what we struggled with were some of the companies that only have utilities as their customers. You’re a startup in Silicon Valley; all the companies around you are moving quickly. You’re trying to hire people who are also getting recruited to Google and Facebook and LinkedIn -- you’re trying to maintain the metabolism of a hummingbird, and at the same time, your customers have the metabolism of a rhinoceros. So figuring out how to control your own destiny and still create a high-velocity business is incredibly important for us.
"Pure utility experience is so great for opening doors and building credibility and understanding sales cycles and being able to talk to the right people in the right way. But the DNA of enterprise software, next generation SaaS models, ability to iterate very quickly, building products in weeks instead of years, all that is just -- it’s born into the marrow of the Silicon Valley culture. We love to see a marriage of the two."
***
General Partners Warren Weiss, Bill Elmore and Paul Holland make up the rest of the grid/energy team at Foundation. Holland notes, "When Steve first joined Foundation Capital in 2007, he executed the 'lead from below' strategy perfectly. He started investing in digital energy and has since continued his forward thinking with investments in this space, and more broadly across other industries like design, analytics and consumer services. Steve's background in product design and engineering give him a truly unique perspective."
Here's a quick tour of Foundation's greentech and energy-related investments.
Aquion Energy (an early-stage battery innovator)
Aquion Energy is an early-stage energy storage startup that still must prove its technology, cost structure and time-to-market.
The battery developer has raised more than $150 million in VC, debt and grants from Bill Gates, Yung’s Enterprise, Nick and Joby Pritzker, Bright Capital, Gentry Venture Partners, KPCB, Foundation, ATV et al.
Aquion claims its sodium-ion battery technology can deliver round-trip energy efficiency of 85 percent and a 10-year, 5,000+-cycle lifespan, with an energy storage capacity optimized to charge and discharge for multi-hour applications. The firm has a price target of $250 per kilowatt-hour. Aquion’s battery chemistry uses an activated carbon anode, a sodium and magnesium oxide cathode, and a water-based (i.e., aqueous) electrolyte. Other battery startups working on aqueous-based electrolytes include Eos Energy Storage, which is targeting a zinc-based, grid-scale battery.
The grid-scale energy storage market is ripe with innovation and opportunity -- but plenty of market, technology and regulatory risk remains.
AutoGrid (utility data analytics startup)
The company's demand response optimization and management system has been deployed by U.S. utilities including Palo Alto’s municipal utility, Sacramento Municipal Utility District, Oklahoma Gas & Electric and Austin Energy. The platform is also being used by smart grid vendors including Silver Spring Networks and Schneider Electric.
Last year, AutoGrid landed a strategic investor in German utility E.ON, which joined Foundation, Voyager Capital and Stanford University, for a total funding to date of nearly $20 million.
Azure Power (Indian solar developer and power producer)
Indian solar developer and power producer Azure Power won funding from Foundation Capital, Helion Ventures, IFC (the World Bank's investment firm), and German development bank DEG. Diane Farrell, president at U.S.-India Business Council, is board director. Foundation's Bill Elmore is on the board, as is Robert Kelly, former CFO at SolarCity.
According to CEO Inderpreet Wadhwa, as reported by IBN, the company is "not in the business of selling solar power plants; we only sell power.”
CalStar Products (developing green building materials)
With investments from Foundation, ClearPoint, EnerTech Capital, Westly Group and Nth Power, Calstar is building bricks and pavers made from fly-ash, a coal plant waste product. CalStar claims that its brick-building process requires far less energy and produces far less emissions than traditional kiln-fired bricks. The company lists hundreds of completed projects in the Eastern U.S. on its website and claims that its revenue numbers have doubled every year over the past four years.
CalStar raised $15 million in 2010 and $18 million in 2012 to 2013. The company's leadership has been fluid; Marc Porat founded the company and its CEOs have included Michael Kane, Tom Pounds, Joel Rood and the current boss Craig Ratchford.
EMeter (acquired by Siemens)
Late in 2011, Siemens acquired eMeter, a meter data analytic startup that had raised a total of $70 million from Foundation Capital, Sequoia Capital, Siemens and Northgate Capital. The sale price was never disclosed.
EnerNOC (IPO in 2007 for the demand-response aggregator)
EnerNOC and fellow demand-response aggregator Comverge were the first pure-play smart grid firms to go public.
EnerNOC raised more than $28 million in VC from Foundation Capital, Draper Fisher Jurvetson, Braemar Energy Ventures and DFJ New England.
Like Silver Spring Networks, EnerNOC is being pushed to diversify its revenue streams and move to new services as the power and grid markets slowly transform.
Sentient Energy (distribution grid sensor startup)
Sentient Energy is led by CEO Michael Bauer, a former EIR at Oak Ridge National Laboratory for the DOE and Foundation. The company has been quiet about its capital raises but has taken more than $45 million from Foundation Capital, General Electric and other investors.
Silver Spring is reselling Sentient's sensors, which are being used by multiple utilities, with hundreds of sensors deployed. As GTM has reported, grid sensors are an important part of the distribution automation landscape, with plenty of startups and niche players contending against grid giants like GE, Siemens, ABB, Toshiba and Schneider Electric.
According to Sentient, “The MM2 generates its own power from the electromagnetic field around the conductor." That makes for deployment that’s “very cost-effective, taking only minutes to install and designed for zero physical maintenance.”
Silver Spring Networks (IPO 2013)
Smart meter and smart grid player Silver Spring Networks went public in 2013 (it announced plans to go public in July 2011) after raising more than $300 million from Foundation Capital, KPCB, Northgate Capital Partners, Google, EMC and Hitachi. Foundation owned 27 percent of the company after the IPO and private placement. KP owned 12.5 percent.
Facing a slowdown in the U.S. smart-metering market, Silver Spring is moving to international markets and new products. The company expects to break even on a non-GAAP earnings basis on revenues of between $275 million and $287 million in 2015.
Sunrun (IPO for the solar installer and financier)
In early August, Foundation-funded solar installer Sunrun rang the bell at the Nasdaq stock exchange with its IPO priced at $14 per share.
Foundation had a 19.6 percent ownership of Sunrun prior to the offering; Accel Partners had a 13.2 percent ownership.
Transphorm
Here's an instance of investors violating the "don't bet against silicon" law.
Transphorm is an early-stage semiconductor company that has raised more than $160 million to develop its gallium-nitride (GaN) power devices.
Foundation invested along with KKR, Innovation Network Corporation of Japan, Japanese semiconductor manufacturer NIEC, Quantum Strategic Partners, a fund managed by Soros Fund Management, KPCB, Google Ventures and Lux Capital.
GaN is able to improve the efficiency of electric power conversion. Transphorm claims its power devices and modules can reduce energy loss by more than 40 percent, as well as simplify the design and manufacturing of motor drives, power supplies and inverters for solar panels, data centers and EVs .
Serious Materials (now-shuttered building materials and software aspirant)
Serious Materials (alias Serious Energy) was a green drywall and windows company that moved into building energy-efficiency software and efficiency financing.
The startup went out of business in 2012 after raising more than $100 million from Foundation, New Enterprise Associates, Mesirow Financial, Rustic Capital, EnerTech Capital, Navitas Capital, Cheyenne Partners, Saints Capital, VantagePoint Partners and Staenberg Venture Partners. An inexperienced team trying to break into the building construction industry with an expensive product at the bottom of a recession proved to be too much for this startup to bear.
