Swinging for a home run in green tech (Q&A)

Stephan Dolezalek of VantagePoint Venture Partners takes the pulse of the venture-backed clean-tech industry and explains what's at play for companies trying to go public.

Green tech is growing up. Billions of dollars have been poured into green-tech start-ups over the past eight years, but now promising young companies--and their investors--are looking to transform into durable, profitable enterprises.

A number of companies in green tech plan to go public this year, which would allow them to raise money and to scale up their commercial operations. How well they do this year could go a long way in determining how investors view the entire sector.

Stephan Dolezalek, VantagePoint Venture Partners

One company that's deeply invested in the success of green tech is venture-capital company VantagePoint Venture Partners. Its portfolio has a number of advanced and well known green businesses, including electric carmaker Tesla Motors, electric car services company Better Place, solar power plant producer BrightSource Energy, thin-film solar company Miasole, and LED lighting chip maker Bridgelux.

If the companies seeking to go public, such as Tesla Motors, deliver solid financial returns, funding will flow to others. For consumers, their success in scaling up will help bring green technologies home to consumers, whether it's less-polluting cars, solar power, or efficient appliances.

Stephan Dolezalek, who heads up VantagePoint's Clean Tech Practice, doesn't know which one of his company's picks will deliver a home run. But he has a good grip on the factors at play, and how the technology, the financing, and the policy picture is different from IT.

At the ARPA-E Summit in March, I sat down with him to take the pulse of venture-backed clean-energy businesses.

Q: There's a lot of attention on the first clean-tech companies seeking to go public because they could set the mood toward companies in the sector. You were on a panel where people worried out loud about a bubble forming . Are they jumping the gun?
Dolezalek: A lot of these companies have more meaningful products and technologies that what we saw in the (Internet bubble) of the 1990s. Tesla has real revenues, a real product. Now, it's going to work on a new product--a four-door sedan--so yes, there's some technology risk in this model. But that's no different than the risks of any car manufacturer. So I think as a category, in a lot of ways, the risks are lower because companies have more meaningful products and technologies than lot of what we saw in the 1990s.

The question is what should the valuations be. Having any of these worth more than a billion dollars, seems bubble-like. Well, what are you comparing to? Companies in IT? A billion dollars seems high. But as (energy companies), they are addressing a market that's 10 times as large.

The jury is still out. I think we're overly bubble conscious. When we first started doing this in 2000 and 2001, everyone said, "You techies, don't even think about changing energy as fast as you did IT. It's a 100-year (technology) change cycle." Eight years later, we've done some amazing thing, Tesla by itself--you couldn't have made it believable in 2004 and 2005.

Change is actually happening way faster than anyone on the incumbent side said.

There are ongoing questions whether tech-oriented venture capitalists are a good fit for energy businesses given that they require more money than Internet or software. Do you think the venture model has to change to fit clean tech?
Dolezalek: I think it does need to change. We look at the venture model for life sciences and it never worked all that well...Then people have said the venture model (overall) is dead. If you want to graft the model used for software and the Internet, well, yeah, that's broken. Is the concept of financing innovation dead? Absolutely not. So it's all about fitting the needs for the kinds of companies we are funding.

So what has to change?
Dolezalek: If you talked to a venture capitalist in 1980, they'd say they were a technology investor and a single guy would do life sciences, semiconductors, and software deals. In 2000 or 2005, a person would say clean tech. Within the next five years, people will say I'm a solar guy, or lighting, or electric transport. We're going to get the same specialization.

Some early energy companies have gone public and many more are lining up to go public . Are the returns attractive?
Dolezalek: We're still too early to know what these companies will be worth in the long run. If you take a look at First Solar, where it was trading a year and a half go, that's a good ratio. If you look at (battery maker) A123 Systems, that's OK, not great.

The other question is how many can you build. We built a ton of solar companies. If you put $5 million into Internet companies and 90 percent of them fail, I can live with that. But if solar companies have $200 million in and fail at that same rate, that doesn't work. So you can't do "spray and pray." We spent much more time and picked one company in every sector (of clean tech).

It seems as if you're almost counting on government funding as part of how you grow these companies. BrightSource and Tesla both got big loan guarantees.
Dolezalek: Yeah, but that's not fair because we certainly weren't counting on that when we got started. In every one of those cases, it was founded under the notion that could stand on own two feet. There is a backdrop of infrastructure that needs to be put in place.

The government has always funded certain kinds of infrastructure. We would not have the car industry without funding the national highway system. We wouldn't have the Internet without infrastructure investment.

You then have to indicate that you are serious about this. One thing that's missing is what I refer to as the Y2K (forcing function). We had a mandate that we had to deal with this issue. Because there was no way around, IT departments at virtually every major corporation had to upgrade.

If we actually put a tax on carbon and said we are going to get serious about carbon, you'd have a similar effect. You'd have people say, "Oh, now that you told me I need to do something about this, I might as well go ahead and invest in the best technologies"--solar on the roof or whatever it is.

In this country, we're living without forcing function, but we're living in world where there are forcing functions, whether it's feed-in tariffs in Europe (for renewable energy) or the stimulus program in China .

One of the dangers is most of the inventions get made here in the United States, but most of the money is the rest of the world . The real question is are we going to export the jobs, the industries, and the economic benefit of clean tech to the rest of the world. Companies will naturally migrate to where they have the best economic conditions.

Are there specific technology areas that have emerged in the last couple years that are more attractive?
Lighting. It's so straight forward. We've optimized these LEDs in flat-panel displays, so it's relatively mature technology. And if run the numbers, it's far cheaper than to hand out light bulbs than to build new power plants.

At the heart of it, we have the Pentium chip for lighting with Bridgelux . Now what we need is the computer around it... You have a bunch of companies saying they can take advantage of this new form factor. There's a whole industry coming to take advantage of what LEDs do in lighting.


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