An Ideal Greentech Portfolio - Part II

Following last week's post (An Ideal Greentech Portfolio - Part I), we will continue to explore the basis for an Ideal Greentech Investment Portfolio.

Last week we mentioned three criteria to ensure a balanced portfolio: Technological innovation, Business maturity and Market. What now?

First of all, let’s talk about dollar amount of investment. It is always preferable to be either a strong investor (owning substantial equity and voting rights) or to be in good company (i.e. follow the big investors). The saying: "money attracts money" is very applicable in this kind of investments, if investors start joining in a particular technology; then results are bound to improve.

By now we have taken a holistic approach to our portfolio. We know we need to look into diverse enough opportunities. We need to have a money strategy. We should have diverse stages of maturity in our companies. Now, let’s assume we are face to face with the CEO of one of our investment targets. What are the things we should look into?

First of all we need to understand the product. What is it for? How does it work? For this step it would be wise to freshen up on basic physics and chemistry knowledge (mostly in thermodynamics principles). Many companies out there are offering the "perpetual motion" machine. Be aware of false promises and the pot of gold at the end of the rainbow.

Next, we need to understand the Competitive Advantage:

(a) Is the product competitive? What is the advantage of this technology? Who would be interested in this product and why? What are the potential savings for end users?

(b) Are there barriers to entry for competitors? What is the cost of production? How complex is the technology to produce? How difficult is it to imitate? Are there any bigger players that may become our competitor?

(c) How does the product fit within the Green spectrum? Is it a technology that is ready for the public? Do we need to wait for further advancements in a specific field to have a market? Is this product an application for the short term or for the long run?

Finally, and certainly not of least importance we need to asses if the company has Strong Management. When you are seating at the table with any member of this company, do they know the basic numbers up and down? Are they well organized? Do they have a positive attitude? Are they open to your questions? Do they seem too enamored with their product to take criticism?

It is important to have “the gut feeling” for the company and for their product. If you feel the product is not good enough, but the management gives you a “good vibe”, then perhaps you should go for it. I always refer to the example of a company in Silicon Valley that set up with a weak product, but their attitude was “we are here to succeed”. They ended up becoming a great success with a different product (I believe it was Hotmail)

I know there are several books out there that talk about investment strategy and about VC investment. I am sure in these couple of entries I have only scratched the surface of this subject. The idea is to keep me and whoever reads this Blog on our toes and to be able to generate a conversation. Its always good to keep these concepts fresh. Feel free to add or comment on the available space.

Until next week, SHALOM!

An Ideal Greentech Portfolio - Part I

If you believe the Greentech wave is being formed; then you would agree that whoever invests in the future of Greentech should do well.

Following this train of thought I would like to propose, what I think, is an ideal portfolio for Greentech investments.

Greentech is a very wide term. To be more specific we will break it down into three areas: (a) Alternative energy; (b) Water;and (c) Waste Management. But, before we dig deeper into these three areas we need to define the investment criteria.

Criteria I - Technological innovation

It would be wise to invest in both, radical innovations, as well as in existing, proven technologies. The key for the success of greentech is based on "change". We need to change our power sources; change the way we use water; change the way we create and dispose of waste. This change will not come fast, it will be gradual. Therefore we need to bet on existing technologies for the short and mid term and radical, new technologies for the future. Be aware that betting on new technology is riskier than placing your money in proven technology, but the returns are inversely proportional.

Criteria II - Business maturity

Many people say that, when you invest in a business you really invest in the people that manage that business. Since we want to have a balanced portfolio, we should look into both companies that have a well established commercialization plan and an organizational structure to manage it, as well as in companies that are basically "newborn" (probably just a scientist and an idea).

Criteria III - Market

Last, but not least, we want to be as diversified as possible in the areas that (we believe) have an opportunity, within greentech to grow. This criteria has many levels of depth. Not only do we want to invest in the aforementioned three main areas of greentech (alternative energy, water and waste management), we also want to invest in different technologies within each one (i.e. within alternative energy: solar, wind, geothermal, etc). If the size of the investment allows for further diversification I suggest to take it one step deeper and invest, within each area in different technologies (i.e. within solar: PV and thermal; silicon cells and alternative light absorbing material cells; thin film and concentrated solar, etc)

Now we are able to place any greentech investment into our "diversified criteria map".

Let’s take two investments as examples:

Investment A - Capital injection to set up a new wind farm in Europe.

Investment B - Seed money for a new technology to create Hydrogen from water that requires less energy than current methods.

According to our criteria I - Technological Innovation: Investment A is a proven technology (as long as the turbines proposed for this new wind farm are already in use somewhere else). Investment B is a new technology. The ability to forecast the return on the investment (ROI) is much easier for Investment A than for B, but Investment B has a potential for higher ROI than A. As mentioned before this criterion is closely related to risk and return levels.

Criteria II: Obviously the wind farm has a more mature business model, it probably also has a management team in place. Depending on the stage the wind farm is in, it should also have permits and a thorough study of power generation forecasts and an appealing deal with the power company to sell the power injected back into the grid. On the other side, Investment B is only a concept from a highly regarded scientist in a recognized university. Investment B needs to go through many stages and overcome different obstacles to become a profitable business, but if it ever gets there... just imagine! This criterion is closely related to the required amount of investment. Investment B requires probably 100 times less investment than investment A for 50% ownership of the business (something like $100k versus $10MM).

Note that, when you analyze business A and B under the criteria of maturity, a different analysis is required for each one. For the wind farm is important to trust the team and the business numbers that are already in place. For investment B the questions are a lot harder, who is the scientist?, has he any proof of the concept?, what are his previous experiences launching a product?, who has seen this technology before?, do any competing technologies exist?.

Finally, under criteria III, we have looked at two investments in two different areas of greentech. Although both are under "alternative energy", one is related to power generation and the other one is related to power storage with multiple application possibilities.

Next week well continue building our portfolio. Until then, SHALOM!

Shifting the Market Balance - The Initiative

People are like water, they follow the easiest path downstream. If you want to introduce a new product in the market you better make it VERY EASY for the customer to acquire. Otherwise you will find yourself soon out of business.

Perhaps it would be useful to make sure that greentech, as a product, covers the basic principles of commercialization.

How do you make a product “easy to acquire”?

First of all, there should be a group of people which you recognize as your “target market” and they should have a real (or created) need for your product. Second, you have to design a very easy path for their money to reach your account and for the product to reach their house or office (or whatever other place they will need it). Whereas you accomplish this by placing your product in the most visible shelves of the top retailers or by having a super well designed website with a full feature checkout process that accepts all sorts of payment methods. The customer needs to feel at ease spending that amount of money in exchange for that product.

Perhaps you think the aforementioned concepts are very simple and easy to follow, but many greentech initiatives lack these principles (at least according to me!)

Look at “alternative energy” as a product. Is it “easy to acquire”? The short answer is: NO. Is there a group of people that want to “buy” it (target market): YES, count me in! Is it affordable? Right now, NO. Can it reach your home or office easily? Right now, NO.

So, can we change the commercialization strategy for “alternative energy” to make it VERY EASY to acquire? YES, I believe so.

The biggest hurdle for alternative energy is competitive pricing. Neither I nor thousands of others are willing to pay more for our electricity than what we are paying right now. So, should we wait for the technology to become more cost efficient or is there something that can be done now?

IF WE INCLUDE THE CONSEQUENCE OF STAYING WITH OIL AND COAL (THE ENVIRONMENTAL IMPACT, PUBLIC HEALTH, AND PERHAPS A FUTURE ENERGY CRISIS) INTO THE EQUATION, THEN WE SHOULD BE ABLE TO MAKE ALTERNATIVE ENERGY COST COMPETITIVE.

One way to achieve this is by implementing the “cap and trade” system. A central authority (usually government) sets a limit or “cap” on the amount of a pollutant that can be emitted. Companies that need to increase their emission allowance must buy credits from those who pollute less (or “trade” with pollution off setters).

By taxing the pollution and giving incentives to the “problem solvers” we could shift the market balance towards alternative energy, making it easier to acquire.

There are BIG RISKS when the balance of the market is pushed artificially. For example, what will happen if, after implementing the “cap and trade” system, a new more efficient source of energy becomes available? The capital available for new power plants is limited, if most of it is captured by the less efficient method, just because it was available before the other one and it leveraged on the “cap and trade” advantage, then we would have created “false demand”. Eventually, the company with the more efficient product could disappear and the company with the less efficient, but sooner to market, product could become the market leader.

On the other hand, it could be a very long road to mainstream for alternative energy if we don’t put some incentives in place. The possible consequences of this scenario are VERY FRIGHTENING. If we wait for alternative energy to become competitive by itself we could risk a worldwide energy crisis or even worst consequences (depending to which scientist you want to believe).

Like everything in life, there should be a balance. Regulators will need to be very smart and flexible and individuals will have to accommodate certain changes in their “consumer patterns”.

Aside from “alternative energy” there are thousands of products and services in the greentech universe that need help to make them “easy to acquire”. It could be argued that money is always the problem solver. But, greentech (unlike Internet, for the “dot com” boom) is not distributed across the world instantly. Most greentech products are born out of an idea, then they require a proof of concept, then it needs to be tested in the field, eventually it should have market acceptance and finally it needs to develop a distribution network to become accessible worldwide. And, although, this process takes considerable amounts of money, they also require “connections”. The inventor needs to connect with strong management; the company needs to connect with an ideal testing site; then the company needs to connect with the best initial market that will help launch its product; many times the company needs to connect with the available incentives for its product; and finally the company has to connect with the best fitted distributors for its product.

Here in Miami we are launching an initiative, which I hope will tap into this opportunity. Our intentions are to help companies “connect” with management, test sites, market, incentives, and distributors as well as finding available sources of funding for promising greentech products and companies. This initiative is in its VERY EARLY stages, but I have the hope that it will become a model of the types of initiatives that can be undertaken by the private sector in each city.

I will keep you posted of future developments in this area.Until next week, SHALOM!

Elections and Greentech, are they related?

As we head to vote here in the US and elect a new president (hopefully, at the end of the week we shall know the results), I wonder what is at stake for Greentech.

Originally, one of my opening arguments for Greentech investment was the great performance of Greentech when compared to regular stocks (see chart below)

Even though the index is bouncing back faster than the S&P500, this argument is not as powerful as it used to be (in September when the Cleantech Index was 20% to 40% above S&P500).

So, why invest on Greentech?. I believe that, in spite of Wall Street's valuation of Greentech, there is still an undeniable wave towards alternative energy, water purification and irrigation, as well as waste management optimization. Because enough people have come to realize we need to get off oil and start finding alternatives. They have also realized we need to treat our environment with respect in order to have a place where to live.

Looking at the hard facts, in today's economy, governments have become the largest corporations. As times get harder for the private sector, the governments (in theory) can print as much money as necessary to keep them afloat. Here in the US, one of the key points of the campaign was "Alternative Energy". Therefore: The largest corporation in the world has promised to pour money into Greentech

Moreover, when both candidates were asked to name plans that will get cut and plans that will remain under the new economic reality; both, Obama and McCain specifically named their Energy Policy plan as being a priority.

So, what is their plan? I will try to be as neutral as possible and list (directly from their website) their Energy and Environmental initiatives:

McCAIN

ENERGY:

• Will Commit Our Country To Expanding Domestic Oil Exploration
• Promoting And Expanding The Use Of Our Domestic Supplies Of Natural Gas
• The Nation Cannot Reduce Its Dependency On Oil Unless We Change How We Power Our Transportation Sector
• Clean Car Challenge: $5,000 tax credit for each and every customer who buys a zero carbon emission car
• A $300 Million Prize To Improve Battery Technology
• Flex-Fuel Vehicles (FFVs): calls on automakers to make a more rapid and complete switch to FFVs (automakers have committed to make 50 percent of their cars FFVs by 2012)
• Alcohol-Based Fuels Hold Great Promise As Both An Alternative To Gasoline And As A Means of Expanding Consumers' Choices
• Today, Isolationist Tariffs And Wasteful Special Interest Subsidies Are Not Moving Us Toward An Energy Solution
• Will Effectively Enforce Existing CAFE Standards (CAFE standards - the mileage requirements that automobile manufacturers' cars must meet)
• The U.S. Must Become A Leader In A New International Green Economy. Green jobs and green technology will be vital to our economic future
• Will Commit $2 Billion Annually To Advancing Clean Coal Technologies
• Will Put His Administration On Track To Construct 45 New Nuclear Power Plants By 2030 With The Ultimate Goal Of Eventually Constructing 100 New Plants
• Will Establish A Permanent Tax Credit Equal To 10 Percent Of Wages Spent On R&D
• Will Encourage The Market For Alternative, Low Carbon Fuels Such As Wind, Hydro And Solar Power
• Proposes A Cap-And-Trade System That Would Set Limits On Greenhouse Gas Emissions While Encouraging The Development Of Low-Cost Compliance Options
• Greenhouse Gas Emission Targets And Timetables:
  2012: To 2005 Levels (18% Above* 1990 Levels)
  2020: To 1990 Levels (15% Below 2005 Levels)
  2030: 22 Percent Below 1990 Levels (34% Below 2005 Levels)
  2050: 60% Below 1990 Levels (66% Below 2005 Levels)
• Will Make Greening The Federal Government A Priority Of His Administration
• Will Move The United States Toward Electricity Grid And Metering Improvements To Save Energy
• Believes We Must Understand The Role Speculation Is Playing In Our Soaring Energy Prices
• Does Not Support A Windfall Profits Tax. A windfall profits tax on the oil companies will ultimately result in increasing our dependence on foreign oil

CLIMATE CHANGE

• Climate Policy Should Be Built On Scientifically-Sound, Mandatory Emission Reduction Targets And Timetables
• Climate Policy Should Utilize A Market-Based Cap And Trade System
• Climate Policy Must Include Mechanisms To Minimize Costs And Work Effectively With Other Markets
• Climate Policy Must Spur The Development And Deployment Of Advanced Technology
• Climate Policy Must Facilitate International Efforts To Solve The Problem

OBAMA

SHORT TERM SOLUTIONS: IMMEDIATE RELIEF FROM PAIN AT THE PUMP

• Emergency Energy Rebate. Will require oil companies to take a reasonable share of their record‐breaking windfall profits and use it to provide direct relief worth $500 for an individual and $1,000 for a married couple
• Crack Down on Excessive Energy Speculation
• Swap Light and Heavy Crude, Release Oil from Strategic Petroleum Reserve to Cut Prices

MID TO LONGTERM SOLUTIONS: NEW ENERGY FOR AMERICA

• Tackle Climate Change
• Implement Cap and Trade Program to Reduce Greenhouse Gas Emissions - 80 percent below 1990 levels by 2050
• Make the U.S. a Leader on Climate Change
• Invest in Our Secure Energy Future and Create 5 Million New Jobs
1. Strategically invest $150 billion over 10 years to accelerate the commercialization of plug‐in hybrids, promote development of commercial scale renewable energy, encourage energy efficiency, invest in low emissions coal plants, advance the next generation of biofuels and fuel infrastructure, and begin transition to a new digital electricity grid
2. “Green Vet Initiative”: more of our veterans can enter the new energy economy
3. Convert our Manufacturing Centers into Clean Technology Leaders
4. Create New Job Training Programs for Clean Technologies
• Make our Cars, Trucks and SUV’s Fuel Efficient
• Increase Fuel Economy Standards: 4 percent per each year
• Invest in Developing Advanced Vehicles and Put 1 Million Plugin Electric Vehicles on the Road by 2015.
• Within one year of becoming President, the entire White House fleet will be converted to plug‐ins as security permits; and
• Half of all cars purchased by the federal government will be plug‐in hybrids or all‐electric by 2012
• Partner with Domestic Automakers: $4 billion retooling tax credits and loan guarantees for domestic auto plants
• Mandate All New Vehicles are Flexible Fuel Vehicles
• Develop the Next Generation of Sustainable Biofuels and Infrastructure: 60 billion gallons of advanced biofuels by 2030
• Establish a National Low Carbon Fuel Standard: fuel suppliers in 2010 to begin reducing the carbon of their fuel by 5 percent within 5 years and 10 percent within 10 years
• Promote the Supply of Domestic Energy
• “Use it or Lose It” Approach to Existing Leases: Oil companies have access to 68 million acres of land, over 40 million offshore, which they are not drilling on
• Promote the Responsible Domestic Production of Oil and Natural Gas
• Bakken Shale in Montana and North Dakota which could have as much as 4 billion recoverable barrels of oil according to the U.S. Geological Survey
• Unconventional natural gas supplies in the Barnett Shale formation in Texas and the Fayetteville Shale in Arkansas
• National Petroleum Reserve‐Alaska (NPR‐A) which comprises 23.5 million acres of federal land set aside by President Harding to secure the nation's petroleum reserves for national security purposes
• Facilitate the construction of the Alaska Natural Gas Pipeline
• Getting More from our Existing Oil Fields: experts believe that up to 85 billion barrels of technically recoverable oil remains stranded in existing fields
• Diversify Our Energy Sources
• Require 10 Percent of Electricity to Come from Renewable Sources by 2012
• Develop and Deploy Clean Coal Technology
• Safe and Secure Nuclear Energy
• Commitment to Efficiency to Reduce Energy Use and Lower Costs
• Deploy the Cheapest, Cleanest, Fastest Energy Source -Energy Efficiency: reduce electricity demand 15 percent from projected levels by 2020
• Set National Building Efficiency Goals: all new buildings carbon neutral, or produce zero emissions, by 2030
• Overhaul Federal Efficiency Standards
• Reduce Federal Energy Consumption: achieve a 15 percent reduction in federal energy consumption by 2015
• Flip Incentives to Energy Utilities: measures will benefit utilities for improving energy efficiency
• Invest in a Smart Grid
• Weatherize One Million Homes Annually
• Weatherize One Million Homes Annually

On a final note I would like to mention the smart effort that Pickens is doing by linking his plan to politics, by signing up people to create political pressure. Regardless of my liking or disliking the Pickens Plan, the idea deserves kudos (details here)

Until next week... SHALOM!

* Not a typo! It is what is written at the website