Lux Capital’s Josh Wolfe Scored a 43X Venture Return on Kurion’s $400M Acquisition

A 43X return for the investment firm makes the Kurion acquisition one of the most successful VC multiples for a company in this sector that we've seen, perhaps ever. (Nest being acquired by Google for $3.2 billion is a bigger number, but not a bigger multiple.)

We spoke with Josh Wolfe, co-founder of Lux Capital and chairman at Kurion.

GTM: This is easily one of the more successful VC exits in the alternative energy world, or cleantech world, or however you want to categorize Kurion.

Josh Wolfe: Yeah, I leave that categorization to others, but it definitely was contrarian and came in an area where we thought there was a scarcity of capital and a scarcity of attention. We thought that that might lead to an abundance of returns, and that's why we started the company.

GTM: This was a company built to spec, to some extent, right? It's not as if a founder came in and had this idea and asked for your funding. You sort of built it around a need.

Josh Wolfe: Yes. Our preference is to find a founder and fund them. Sometimes, when we think there's a really big problem, and particularly when it's in an "off-the-beaten-path" area, there might not be a founder that's thinking about it. So we'll go and start the company from scratch, and use our time and then our capital to try to find a team as quickly as possible.

In this case, it started with a contrarian idea. I saw an abundance of money, attention and talent...chasing solar and wind and ethanol and biofuels. Part of the reason we invested in nuclear was by eliminating some other areas.

When hype gets high, the cost of capital gets low. When the cost of capital gets low, it's basically free, and people will invest in anything, in any valuation, and way more stuff gets funded than should.

We thought that might happen in solar, where hype was high, the cost of capital was low and hundreds of companies were being funded. You don't have to be a genius to predict that the vast majority of them would fail, and I thought it would be very difficult to pick a winner, because they were all competing on the same merit of dollar-per-watt or efficiency. Then it wouldn't just be a technological meritocracy, but it might come down to which CEO could have the best P.T. Barnum-like spin to raise cheap capital.

So, we told our investors, our limited partners, to sit out the ride in solar, and maybe the best thing to do would be to wait until the failure -- let all of these [startups] get funded, then you can pick up these assets for cents on the dollar, and then maybe bring them to the developing world...and build a recurring revenue, subscription, facility model. But don't take the technology risk.

As for biofuels, we had a lot of famous VCs who were funding stuff here and promoting it, but they were missing that mankind's use of energy follows these eras of progress, [shifting] from carbohydrates to hydrocarbons to uranium. There's no debate that there is a trend toward more and more energy density per unit of raw material.

We reasoned that to go backward in time to an agrarian economy was foolhardy, and that led us to nuclear.

Once we were there, we saw what a lot of people had learned, and for good reason -- most were concerned about this huge regulatory risk or huge capital needs. Those are the two things that can turn off an investor.

I looked at every part of the fuel cycle. We started with uranium miners. (It seemed like a lot of those folks were hucksters and fraudsters, many in New Mexico and Nevada for whatever reason). We declined to look at that area.

We looked at about a half-dozen modular reactors, and that was a promising area too. Instead of building a gigawatt power plant for a billion dollars, we build an array of thirty of them making 30 megawatts each. That seems smart, but it's just too expensive, and you had the regulatory risks, so you're back to square one with that one. Only governments and billionaires can afford the time frame for that, not VC.

I think that left us with the question that I like to ask of every industry, as tongue-in-cheek sophisticated as it is, which is, "What sucks?" The thing that sucked about nuclear is, what do you do about the waste? We started looking first at commercial reactors, and there's a lot of them, 104 domestically, 440 globally, and growing. When you actually pick up the DOE budget and read it (and granted, it does not make for scintillating reading, but it does make for important investment decisions), it turns out that most of the money wasn't being spent on clean and green [energy] but on nuclear waste cleanup -- about 25 percent of the DOE's budget, about $6 billion a year, was going to companies that we really weren't familiar with (such as Fluor).

GTM: And certainly the DOE and the civilian nuclear industry are entwined with the military nuclear industry.

Josh Wolfe: The amazing thing was that it wasn't just about nuclear energy, most of that money...

GTM: It was cleanup, it was Hanford Site cleanup, and things like that.

Josh Wolfe: Exactly right, and that had to do with bomb-making from our Cold War programs.

GTM: How about staffing up in nuclear? It's not exactly a growth industry that attracts millennials.

Josh Wolfe: We encountered an absolute scarcity of people -- the number of entrepreneurs are few and far between. That people thing was a key piece, because most of the people in the nuclear industry are pretty old by entrepreneurial standards. The young MIT-trained nuclear people all went to quant hedge funds like DE Shaw.

We found the very best people who were under 60, although candidly, not by very much. We started a company, named it after Madam Curie spelled with a K. The one thing I think we did intelligently was assemble the right people, have a portfolio of technologies, and really did two things to start. One was isotope separation and one was vitrification. We acquired other things: detritiation and robotics.

GTM: As for the prevailing political winds on the merits of nuclear power?

Josh Wolfe: The key thing that I will credit the Lux team with really thinking about, was we helped set the business model so that no matter what happened, we could win. If you were a solar player, you're betting on more demand for solar energy. If you're betting on biofuels, you're betting on more demand for biofuel. The beautiful thing about nuclear waste is that you win no matter what happens. If there's new nuclear, you have more demand for waste cleanup. If you have status quo, no change, just stasis, the plants get older and produce more waste, plus you have all the defense cleanup. If there ends up being a catastrophe or a sentiment change, with people saying "Shut down nuclear!" for political or populace reasons, it's all decommissioning and deconstruction, which is just another way of saying waste cleanup. If it grew, or it shrank, or it stayed the same, demand for waste technology and services would grow. We were pretty indifferent about whichever way nuclear unfolds.

I have my own views about the virtue of nuclear for a clean and green society that wants to produce a lot of electricity, but it didn't matter. If you told me nuclear was growing, awesome. If you told me it was shrinking, I'd say awesome. Because under any of those scenarios, demand for Kurion technology is going to win.

GTM: Did you go out and find those patents and acquire them? Where did this core technology come from that you wrapped the company around?

Josh Wolfe:  My team had scouted about 30 different technologies that were available for license or acquisition, and some of them were small companies that we felt might not go anywhere. Some were developed by old national lab folks who I literally made a pitch to and said, "You could let this technology die with you, or you can let it live on with Kurion and own a tiny piece of it."

It was us going and finding this platform of technologies, but then the key thing were the early employees, who were the real industry veterans. They were able to say -- really importantly -- "This one is great, but the market is too small. This one is great, but it's like science fiction; it will never work. This one's great, but it will cost too damn much." Down-selected from many different technologies, the first two [isotope separation and vitrification] that you could really come and say, "We can do it better, we can do it faster, we can do it cheaper," and command industry attention, and ultimately the revenue.

GTM: Do you cut ties now that you're no longer on the board? Do you say goodbye to the prodigal son, and move on to other things?

Josh Wolfe: It is a really sweet sorrow, because I sit there watching every day as new headlines are coming out. There was a tritium leak in New York last week. In a sense, it kills me, because you always feel like you sold too early on your winners, right? And probably too late on your losers. You have kids, and you watch your baby grow up and mature; it's a sweet sorrow. I'm excited for our investors and I'm excited for the Kurion team. These things that we created, literally, from nothing to something, true zero to one. At the same time I think I'll be closely involved and connected to...everyone from the Veolia CEO to the Kurion team.

I can't wait to read headlines that they're successful. I think it will absolutely make our world a better place.

***

Wolfe is an investor in Nanosys, Cambrios and Siluria and is on the boards of Shapeways, Kymeta, Kurion and Lux Research. Here's a brief profile of Kurion and some of Lux's other cleantech and advanced energy bets.

Kurion

Kurion's areas of focus include radioactive waste separation, vitrification and robotics for access to difficult sites.

The Fukushima event in Japan accelerated Kurion's development as a player in the nuclear industry, with Kurion serving as the only startup in a big-time multinational consortium treating the contaminated seawater at the nuclear plant operated by Tokyo Electric Power Company. The company would not disclose the revenue generated from that project.

Kurion has been in partnership with Pacific Northwest National Laboratory to test and demonstrate its Modular Vitrification System.

When we last reported on the company, Kurion likened the system deployed at Fukushima to an industrial-scale Brita-type water filter where radioactive water flows through steel vessels filled with its proprietary media to "pick out the isotopes" specified by the customer. When depleted, the vessel/media combination is then removed and stored with replacement vessels/media inserted into the system. That's the first phase of Kurion's business. The next phase is completing the development and commercialization of its vitrification technology: immobilizing the nuclear material (e.g., depleted/isotope-laden media) into a stable, leach-resistant glass matrix.

Kurion's Modular Vitrification System uses inductive energy to convert waste into glass directly inside the final disposal container. The end-canister method is simpler and potentially less expensive than the traditional approach using large joule-heated melters. Developed for high-level waste where waste-form stability overrides cost concerns, vitrification has yet to become economical for the high-cesium-content low-level wastes typically found at nuclear power plants or Fukushima -- but that's a paradigm that Kurion intends to change.

"We had removed 8.4 million curies in the first year" at Fukushima, said a company exec. Putting that into perspective, the entire U.S. nuclear fleet disposes of 500,000 curies in total.

Nuclear power plants don't emit greenhouse gases during operation, and they produce small amounts of low-level waste in their daily operation. While the decision to recycle spent fuel has been resolved in countries like France, the decision of what to do with it in the U.S. remains controversial, despite federal law designating Yucca Mountain in Nevada as its repository. Certainly, unused fuel, radioactive waste and uranium mining cannot be classified as green or renewable.

Unlike in Germany or Japan, which are both scaling back their reliance on nuclear power, nuclear power in the U.S., U.K. and Canada and many existing nuclear-reliant countries is going to continue to be part of the electricity mix for the foreseeable future. For the U.S., that's due to two reasons: first, because the U.S. has so much of it -- it produces more gigawatts of nuclear than any other nation from its 100 reactors. And second, it's because the U.S. nuclear power industry, the Department of Energy, and the defense industry are all intimately linked.

So the U.S. has a huge and mounting problem: millions of gallons of liquid nuclear waste stored at nuclear power plants and large government sites that date back to the Manhattan Project (for example, there are 50 million gallons of waste at the Hanford site alone). Kurion's initial focus is on the commercial nuclear power plant market and its 440 nuclear reactors worldwide. Kurion's other market is waste left over from the Cold War era -- materials that will take 20 to 30 or more years to clean up.

Crystal IS (acquired)

Crystal IS was acquired by the Asahi Kasei Group, a manufacturer of compound semiconductor devices. Crystal IS developed ultraviolet light-emitting diodes on aluminum nitride substrates for germicidal water applications. Crystal IS had been in development mode for over a decade, with technology spun out of Rensselaer Polytechnic Institute in Troy, New York.

Short wavelength UV light below 280 nanometers (C-band) interferes with DNA repair in bacteria and renders water free of live bacteria.

The output from solid-state UV-C light sources remains modest compared to the traditional sources, such as high-intensity discharge lamps. So at the moment, UV-LEDs from Crystal IS and others like SETi are limited to light pens and appliances for consumer water sterilization and fall short of the wattage outputs needed for industrial and municipal water treatment applications.

Crystal IS received venture funding from ARCH Venture Partners, Lux Capital, the Credit Suisse/New York State Common Retirement Fund, Harris & Harris Group, and strategic investment from Asahi Kasei Group and San'an Optoelectronics Company.

At the time, Wolfe told me that the exit was at "a nice multiple." Financial details of the deal were not disclosed.

Gridco Systems

Gridco Systems is one of a handful of companies seeking to bring a new level of digital power control to the increasingly unstable edge of the solar-impacted power grid.

The Woburn, Mass.-based startup’s in-line power regulator (IPR) devices can digitally manipulate the waveform of the alternating current that energizes grid circuits, in ways that traditional electromechanical gear can’t. Controlled with on-board computers and networked to a back-end control system, these IPRs can sense and compensate for voltage drops at the end of long feeder circuits, as well as mitigate reactive power and harmonic disruptions stemming from “noisy” inductive loads or fast-changing inverter-based distributed energy sources like solar PV and batteries.

Among Gridco’s recent accomplishments, the company has deployed multiple emPower solutions (IPR-50 active voltage regulation/power quality devices) at a dozen North American utility partners since early 2014, including Sacramento Municipal Utility District and Canada's Greater Sudbury Hydro. Testimonials from these two utilities indicate that Gridco's technology is a potentially invaluable tool for solving a number of the challenges emerging on the edges of utility distribution grids.

Siluria

Fuel and green chemical startup Siluria is looking to use natural gas as a low-cost feedstock for a variety of other fuels and chemicals that have historically been synthesized from petroleum sources.

To that end, Siluria has raised more than $93 million from Saudi Aramco Energy Ventures, Bright Capital, Vulcan Capital, ARCH Venture Partners, The Wellcome Trust, Alloy Ventures, Kleiner Perkins Caufield and Byers, Lux Capital, Altitude Life Science Ventures and Presidio Ventures.

The U.S. has a newfound abundance of cheap natural gas, which is used extensively for heating and electricity production. Natural gas is arguably greener than petroleum, depending on how it is extracted. It inarguably poses less of a national security risk than foreign oil.

Ethylene is the most widely produced organic compound in the world, according to Chemical and Engineering News, with global production exceeding 107 million tons in 2005. The compound is used to manufacture a broad assortment of plastics and chemicals. But ethylene is currently created via an energy-intensive process based on a petroleum feedstock, which, like most U.S. petroleum, comes from a cartel that likely doesn't have the United States' best interests at heart. Siluria sees its process as providing gas producers and distributors with higher-value markets and consumers with lower prices.

Siluria looks to use a low-temperature catalytic-based process called "oxidative coupling of methane" (OCM), with catalysts identified using high-throughput screening tools and produced with biotech. The startup claims that its process is scalable using commercially available equipment.

Edward Dineen, the former CEO of Siluria, explained that Siluria's processes can be "seamlessly integrated" into existing industry infrastructure. The company believes that OCM has become the "first commercially viable process to directly convert methane to ethylene." Siluria claims that its second process technology "can convert ethylene to liquid fuels such as gasoline, diesel or jet fuel." Those claims will have to be proven out at the firm's 10,000-gallon-per-year demonstration facility in Texas.

The financial and technical gaps between demonstration facilities and pilot production can be immense for a startup. Siluria will require considerably more funding from its VCs -- or the entrance of a more strategic investor (like Saudi Aramco) -- if it is to become a chemicals producer. Considerably less money would be required if the firm supplies the catalyst and licenses the process. Siluria will look to form joint ventures with the bigger players, according to a company spokesperson.

Siluria was spun out of another startup called Cambrios Technologies (also funded by Lux). Much of the company's technology derives from the work conducted by Angela Belcher at MIT, whose team has devised other microbes which can help generate fuel, battery and semiconductor materials.

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. Lux Capital 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 Foundation 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 simplifying the design and manufacturing of motor drives, power supplies and inverters for solar panels, data centers and EVs.