Showing posts with label renewable energy. Show all posts
Showing posts with label renewable energy. Show all posts
Thursday, August 31, 2017
Alfidi Capital at Intersolar ees SEMICON West 2017
I attended the mighty tripartite conference of Intersolar North America, ees North America, and SEMICON West 2017 at San Francisco's Moscone Center. The south hall of the convention center is undergoing a massive renovation, so the SEMICON folks had to cram into the west building with Intersolar. The reduced expo floor area was tolerable given the action-packed schedule. It's action-packed from my perspective, because I love sitting through long seminars and briefings that lesser mortals lack the fortitude to endure.
The Intersolar opening ceremony is always the first shin-dig on my calendar for this colossal conference. The main Intersolar conference has lots of finance seminars on the first day but I am too cheap to pay. These people had better invite me to speak someday. Anyway, CALSEIA and NREL celebrate their 40th anniversaries this year. I did not see any cake but that's okay, we all need to stick to our diets. Expect to hear more about behind-the-meter consumer-driven storage, because that's the industry term for how building owners are installing their own systems on-site. Everything in capitalism is of course consumer-driven, but the twist in renewable energy is that smaller storage systems give customers a lot more options than utilities have ever provided before. I wanted to hear from California politicians about how the state's proposed Energy Storage Initiative would affect the market but the usual big shots were not on hand. Maybe our mayor and governor had something better to do than promote solar energy, one of the Golden State's biggest growth industries.
The opening ceremony left me with more questions than usual. Do solar energy companies really have thin profit margins (compared to, say, fossil fuel energy generators)? If PV costs keep dropping and PV panel volume GW installation keeps rising, why would solar companies have thinner margins than the broader energy sector? Will the solar sector shrink if the federal government cuts spending on solar R+D? If the energy grid evolves past net-metering to accommodate location-based price signals, will this drive demand for beacons and other IoT devices in the grid? Can blockchain tech really enable both on-grid energy trading and PPA investments? I mulled these questions while I was chomping on free food after the opening ceremony. They served roast beef this year, a step up from the usual turkey.
The SEMICON West welcome keynotes and opening ceremonies were next on my hit list. The hits just keep on coming. The assumed CAGR of 5-7% for the semiconductor sector through 2057 is a long forecast, but it seems reasonable if IoT adds to a mature sector. Anyone who thinks IoT won't drive the next wave of semiconductor volume growth needs to read everything I've ever blogged about both IoT and semiconductors. I keep hearing predictions about AI making the singularity either a decade or two away, but there's no consensus among gurus. We all get to learn some new buzz phrases: edge computing (now with IoT and AR/VR) and fog computing (I've heard that one before). The progression goes from edge to fog to cloud, and into your brain at some point once we hit that singularity. One brilliant executive shared his insights into "Neumann and Neuromorphic" innovation to create intelligence that reminded me of Transhumanism.
I came away from SEMICON's opening presentations with a few original insights. I would post them on SemiWiki but I don't work in the sector. I think that when gross payroll grows faster than headcount at semiconductor enterprises funded as public/private partnerships, it shows the creation of high-income, value-added jobs. The semiconductor sector now uses more elements of the periodic table than ever, so materials sourcing will soon become a crucial "table stakes" factor. The entire tech sector needs to take supply chain security seriously, and that means not taking single sources in the developing world for granted, especially if those sources rely upon transportation links that will be at risk during geopolitical instability. Check out the South China Sea tensions for a glimpse of near-term supply chain insecurity.
The ees people gave us a look at their market, regulatory environment, and some business policies. I would like them to explain why they don't capitalize themselves as EES, but I don't run their part of the show. It's their world of batteries and I just live in it. There should be little concern about backsliding if one speaker is correct about state governments doing 80% of the policy work in renewable energy. I just wonder how they measure that impact, and whether the remaining 20% is crucial stuff like the DOE SunShot Initiative. There is no policy initiative imaginable that will force solar power into the baseload category, because it is physically impossible for the sun to shine at night. Policies favoring storage linked to solar and wind power do not change nature. Power grid management with distributed storage will require revisions to the standard installed capacity (ICAP) the ISOs calculate for their markets. Adding BIPV and and other new tech to generation reduces the ICAP demand-related charges, thus adding value to a property owner's business model.
I want to throw some more red meat buzzwords out there to show the ees people that I paid attention. Electric energy storage used for load leveling is "energy arbitrage," using time shifting to make stored energy available during higher demand periods. Its corollary is "peak shaving," encouraging reduced energy consumption during high-demand periods. California and New York are among the states pushing "distributed resource tariffs" that enable utilities to install more generating capacity on their customers' sites. Virtual power plants will aggregate these distributed generation resources into a cloud-based management model. Anyone making or selling distributed generation or storage solutions must know the NERC critical infrastructure protection (CIP) standards and FERC guidance for CIP implementation. The US Midwest's wind corridor is an underserved market for storage solutions and grid connectivity. Cogeneration (CHP) and trigeneration (CCHP) present a wide array of product choices that storage solutions vendors can adapt into sales pitches.
The ees finance and bankability sessions built on the above policy topics. Vendors who get on a project finance company's pre-approved list of trustworthy service providers have a big leg up in getting customer referrals. Refer to my blog articles on previous Intersolar conferences for PACE explanations, and know that PACE applies to both residential (RPACE) and commercial (CPACE) properties. Storage systems with a useful life less than the typical PACE payback period are probably not worth selling. The bottom line from banks authorizing loans and leases for energy products is a provable revenue stream; no stream means the project developer must seek equity investors rather than issuing debt. Energy storage is now considered a "front of meter" function requiring new metrics for assessing charges, compared to "behind the meter" generation's demand charges.
One dude from a leading semiconductor equipment supplier had a free e-book for those of us attending his talk. I didn't sign up for his e-book because I have way too much stuff to read through already. Early concern among SEMI manufacturers that Moore's Law would stop at one micron no longer applies. He shared a few platitudes on good management and organizational culture. The dude needs to go work at Uber where those factors are deficient. SEMI held their annual awards presentation afterwards and someone mentioned the Hybrid Memory Cube Consortium pushing the next big thing in DRAM design. I'll have more to say about that consortium if they have events offering free food.
The SEMICON keynotes tend to be slick sales pitches from major sponsors, but once in a while some worthy tidbits appear. Leading IoT and cloud providers have latched onto autonomous vehicles as their next big cash cow target because those cars generate continuous large data streams. Expect services and advertising focused on consumers sitting passively in self-driving cars for hours. I expect these cars to converge with the sharing economy, whose consumers are too poor to own their own cars. Most ads they will see will probably be for other sharing services, like grocery coupons. You heard it here first at Alfidi Capital.
I went back to the ees stage to see what tech advancements are maximizing ROI. Track the GTM US Energy Storage Monitor for the latest industry developments. I mentioned peak shaving above, and storage capacity determines its flexibility. The industry claims that storage manufacturing costs have fallen in recent years, similar to PV manufacturers' cost trajectories, as delivered units have risen. Utility tariff structures and time of use (TOU) policies determine use cases that demonstrate demand charge management that storage system vendors can offer. Most states allow net metering of solar but not storage, so using storage means time shifting, peak shaving, and load balancing to manage power costs. Residential HVAC activation and EV charging are primary drivers of daily household power use spikes. It is clear to me that distributed generation and storage will severely threaten the business models of utilities that do not rapidly move to adapt. Utilities that survive should evolve to finance, install, and manage residential generation and storage, just to capture part of those revenue streams.
I enjoyed attending the Intersolar Orange Button Software Launch, and not just because they had free coffee. The SunSpec Alliance Open Solar Data Exchange (SunSpec oSDX) sponsored the launch because it is part of DOE's Orange Button initiative for standardizing solar bankability data. Getting Alfidi Capital into this program is a bonanza for name recognition. I don't offer financing or provide any other client services to program participants. My interests include knowing which tools programmers must use to be compatible with Orange Button APIs.
The SEMICON West Bulls and Bears Industry Outlook was something I could not miss. I would be perfectly willing to present my own sector views at this forum someday. I just don't want other analysts stealing my work. Gartner and other research purveyors still forecast semiconductor sector growth. There's a widespread expectation that IoT will be part of that growth; you know, maybe these analysts have been stealing that insight from me since I've blogged it for years. I believe the IoT automotive apps driving chip demand are also enabling other value-adding services like fleet management and stolen vehicle recovery (tied to insurance coverage). The semiconductor content in AI is hard to predict, with analysts uncertain about higher CAGR forecasts, and they have no idea which processing architecture will win AI. Hey analysts, I'll do you a favor and point you in the direction of the Hybrid Memory Cube Consortium I mentioned above. Now that I've said it, I will fight any lazy analysts who try to steal it. Fighting begins at a time and place of my choosing.
The last major conference event for me was the Joint Forces for Solar 16th PV Briefing. I learned a ton of stuff at past events thank to heavy participation from industry association leaders and DOE subject matter experts. This year was disappointing due to their absence. The solar market's dynamics show tons of solar installed here in California, not including municipal utilities. I asked a question about how geospatial analysis tools would be good sales prospect generators for installers, especially when used together with Orange Button financing data. Whoever answered me said that utilities are indeed building such tools to show customers where they can install distributed generation assets. I thus contributed some massive genius to the briefing that day. One final insight I gleaned from a presenter is that good accountants specializing in solar policies and incentives can add value to business customers installing large energy assets through off-balance sheet financing.
I did prowl all of the expo floors but I did not have time to query enough exhibitors on their business pain points. I did score an armload of free reading material, a handful of free candy, and a brain dump of interactive tech experiences. I even met a local steampunk enthusiast working for one of the exhibitors. Those folks must be all over the tech sector. They go into hibernation when they're not at the Maker Faire or big hackathons.
Intersolar and SEMICON West are always winners for me. I also like ees, and I would like them even more if they adopt proper capitalization. I shall return next year to see if that happens.
The Intersolar opening ceremony is always the first shin-dig on my calendar for this colossal conference. The main Intersolar conference has lots of finance seminars on the first day but I am too cheap to pay. These people had better invite me to speak someday. Anyway, CALSEIA and NREL celebrate their 40th anniversaries this year. I did not see any cake but that's okay, we all need to stick to our diets. Expect to hear more about behind-the-meter consumer-driven storage, because that's the industry term for how building owners are installing their own systems on-site. Everything in capitalism is of course consumer-driven, but the twist in renewable energy is that smaller storage systems give customers a lot more options than utilities have ever provided before. I wanted to hear from California politicians about how the state's proposed Energy Storage Initiative would affect the market but the usual big shots were not on hand. Maybe our mayor and governor had something better to do than promote solar energy, one of the Golden State's biggest growth industries.
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| It's the Alfidi Capital badge for Intersolar, ees, and SEMICON West 2017. |
The opening ceremony left me with more questions than usual. Do solar energy companies really have thin profit margins (compared to, say, fossil fuel energy generators)? If PV costs keep dropping and PV panel volume GW installation keeps rising, why would solar companies have thinner margins than the broader energy sector? Will the solar sector shrink if the federal government cuts spending on solar R+D? If the energy grid evolves past net-metering to accommodate location-based price signals, will this drive demand for beacons and other IoT devices in the grid? Can blockchain tech really enable both on-grid energy trading and PPA investments? I mulled these questions while I was chomping on free food after the opening ceremony. They served roast beef this year, a step up from the usual turkey.
The SEMICON West welcome keynotes and opening ceremonies were next on my hit list. The hits just keep on coming. The assumed CAGR of 5-7% for the semiconductor sector through 2057 is a long forecast, but it seems reasonable if IoT adds to a mature sector. Anyone who thinks IoT won't drive the next wave of semiconductor volume growth needs to read everything I've ever blogged about both IoT and semiconductors. I keep hearing predictions about AI making the singularity either a decade or two away, but there's no consensus among gurus. We all get to learn some new buzz phrases: edge computing (now with IoT and AR/VR) and fog computing (I've heard that one before). The progression goes from edge to fog to cloud, and into your brain at some point once we hit that singularity. One brilliant executive shared his insights into "Neumann and Neuromorphic" innovation to create intelligence that reminded me of Transhumanism.
I came away from SEMICON's opening presentations with a few original insights. I would post them on SemiWiki but I don't work in the sector. I think that when gross payroll grows faster than headcount at semiconductor enterprises funded as public/private partnerships, it shows the creation of high-income, value-added jobs. The semiconductor sector now uses more elements of the periodic table than ever, so materials sourcing will soon become a crucial "table stakes" factor. The entire tech sector needs to take supply chain security seriously, and that means not taking single sources in the developing world for granted, especially if those sources rely upon transportation links that will be at risk during geopolitical instability. Check out the South China Sea tensions for a glimpse of near-term supply chain insecurity.
The ees people gave us a look at their market, regulatory environment, and some business policies. I would like them to explain why they don't capitalize themselves as EES, but I don't run their part of the show. It's their world of batteries and I just live in it. There should be little concern about backsliding if one speaker is correct about state governments doing 80% of the policy work in renewable energy. I just wonder how they measure that impact, and whether the remaining 20% is crucial stuff like the DOE SunShot Initiative. There is no policy initiative imaginable that will force solar power into the baseload category, because it is physically impossible for the sun to shine at night. Policies favoring storage linked to solar and wind power do not change nature. Power grid management with distributed storage will require revisions to the standard installed capacity (ICAP) the ISOs calculate for their markets. Adding BIPV and and other new tech to generation reduces the ICAP demand-related charges, thus adding value to a property owner's business model.
I want to throw some more red meat buzzwords out there to show the ees people that I paid attention. Electric energy storage used for load leveling is "energy arbitrage," using time shifting to make stored energy available during higher demand periods. Its corollary is "peak shaving," encouraging reduced energy consumption during high-demand periods. California and New York are among the states pushing "distributed resource tariffs" that enable utilities to install more generating capacity on their customers' sites. Virtual power plants will aggregate these distributed generation resources into a cloud-based management model. Anyone making or selling distributed generation or storage solutions must know the NERC critical infrastructure protection (CIP) standards and FERC guidance for CIP implementation. The US Midwest's wind corridor is an underserved market for storage solutions and grid connectivity. Cogeneration (CHP) and trigeneration (CCHP) present a wide array of product choices that storage solutions vendors can adapt into sales pitches.
The ees finance and bankability sessions built on the above policy topics. Vendors who get on a project finance company's pre-approved list of trustworthy service providers have a big leg up in getting customer referrals. Refer to my blog articles on previous Intersolar conferences for PACE explanations, and know that PACE applies to both residential (RPACE) and commercial (CPACE) properties. Storage systems with a useful life less than the typical PACE payback period are probably not worth selling. The bottom line from banks authorizing loans and leases for energy products is a provable revenue stream; no stream means the project developer must seek equity investors rather than issuing debt. Energy storage is now considered a "front of meter" function requiring new metrics for assessing charges, compared to "behind the meter" generation's demand charges.
One dude from a leading semiconductor equipment supplier had a free e-book for those of us attending his talk. I didn't sign up for his e-book because I have way too much stuff to read through already. Early concern among SEMI manufacturers that Moore's Law would stop at one micron no longer applies. He shared a few platitudes on good management and organizational culture. The dude needs to go work at Uber where those factors are deficient. SEMI held their annual awards presentation afterwards and someone mentioned the Hybrid Memory Cube Consortium pushing the next big thing in DRAM design. I'll have more to say about that consortium if they have events offering free food.
The SEMICON keynotes tend to be slick sales pitches from major sponsors, but once in a while some worthy tidbits appear. Leading IoT and cloud providers have latched onto autonomous vehicles as their next big cash cow target because those cars generate continuous large data streams. Expect services and advertising focused on consumers sitting passively in self-driving cars for hours. I expect these cars to converge with the sharing economy, whose consumers are too poor to own their own cars. Most ads they will see will probably be for other sharing services, like grocery coupons. You heard it here first at Alfidi Capital.
I went back to the ees stage to see what tech advancements are maximizing ROI. Track the GTM US Energy Storage Monitor for the latest industry developments. I mentioned peak shaving above, and storage capacity determines its flexibility. The industry claims that storage manufacturing costs have fallen in recent years, similar to PV manufacturers' cost trajectories, as delivered units have risen. Utility tariff structures and time of use (TOU) policies determine use cases that demonstrate demand charge management that storage system vendors can offer. Most states allow net metering of solar but not storage, so using storage means time shifting, peak shaving, and load balancing to manage power costs. Residential HVAC activation and EV charging are primary drivers of daily household power use spikes. It is clear to me that distributed generation and storage will severely threaten the business models of utilities that do not rapidly move to adapt. Utilities that survive should evolve to finance, install, and manage residential generation and storage, just to capture part of those revenue streams.
I enjoyed attending the Intersolar Orange Button Software Launch, and not just because they had free coffee. The SunSpec Alliance Open Solar Data Exchange (SunSpec oSDX) sponsored the launch because it is part of DOE's Orange Button initiative for standardizing solar bankability data. Getting Alfidi Capital into this program is a bonanza for name recognition. I don't offer financing or provide any other client services to program participants. My interests include knowing which tools programmers must use to be compatible with Orange Button APIs.
The SEMICON West Bulls and Bears Industry Outlook was something I could not miss. I would be perfectly willing to present my own sector views at this forum someday. I just don't want other analysts stealing my work. Gartner and other research purveyors still forecast semiconductor sector growth. There's a widespread expectation that IoT will be part of that growth; you know, maybe these analysts have been stealing that insight from me since I've blogged it for years. I believe the IoT automotive apps driving chip demand are also enabling other value-adding services like fleet management and stolen vehicle recovery (tied to insurance coverage). The semiconductor content in AI is hard to predict, with analysts uncertain about higher CAGR forecasts, and they have no idea which processing architecture will win AI. Hey analysts, I'll do you a favor and point you in the direction of the Hybrid Memory Cube Consortium I mentioned above. Now that I've said it, I will fight any lazy analysts who try to steal it. Fighting begins at a time and place of my choosing.
The last major conference event for me was the Joint Forces for Solar 16th PV Briefing. I learned a ton of stuff at past events thank to heavy participation from industry association leaders and DOE subject matter experts. This year was disappointing due to their absence. The solar market's dynamics show tons of solar installed here in California, not including municipal utilities. I asked a question about how geospatial analysis tools would be good sales prospect generators for installers, especially when used together with Orange Button financing data. Whoever answered me said that utilities are indeed building such tools to show customers where they can install distributed generation assets. I thus contributed some massive genius to the briefing that day. One final insight I gleaned from a presenter is that good accountants specializing in solar policies and incentives can add value to business customers installing large energy assets through off-balance sheet financing.
I did prowl all of the expo floors but I did not have time to query enough exhibitors on their business pain points. I did score an armload of free reading material, a handful of free candy, and a brain dump of interactive tech experiences. I even met a local steampunk enthusiast working for one of the exhibitors. Those folks must be all over the tech sector. They go into hibernation when they're not at the Maker Faire or big hackathons.
Intersolar and SEMICON West are always winners for me. I also like ees, and I would like them even more if they adopt proper capitalization. I shall return next year to see if that happens.
Monday, November 23, 2015
Mastering The Cleantech Open Global Forum 2015
I have attended the Cleantech Open's events for three years now and I always come back for more. I had to jump into the CTO's Global Forum 2015 last week to see what this year's class of startups had done. Badge selfies are my bona fides because they prove I am not some AI bot randomly generating blog content.
Driving down to the CTO's home at GSVlabs is always worth my time. The co-working trend is now a serious thing. Startups eschew privacy and security by taking open-space collaboration to an extreme. I think the next trend could be co-working outdoors, where startups can plot their huge markets on picnic tables. Nah, just kidding. I wouldn't want to do office work outside because wild animals like bears and coyotes run around out there looking for people to eat. Smart VCs won't fund a startup where the founders risk getting devoured by packs of wild beasts.
The Investor Connect speed-dating round had a table reserved for yours truly, the CEO of Alfidi Capital. Someday I'll be #1 but this time I was at the #2 table. I am usually the #1 genius on hand wherever I go in life. Most normal people recognize this as soon as they meet me. Serious VCs and angel investors were at the other tables and I had the chance to interact with a few of them during breaks between meeting startups. Sharing insights helps me understand how much startups learn during their early phases.
I will share what I learned from the startups I met at my table. These are general impressions that cover many verticals. Addressing a scalable market means going after a big demographic whose price points and buying power are easily understood. Going after boutique markets with fragmented demographics (like organic farmers, for example) means a startup's marketing channels will be less efficient. Lowered efficiency in anything, especially finding a marketing channel, means a startup needs a longer runway to profitability. Proprietary technology must be difficult to duplicate. A simple device with common components is easy for a competitor to reverse engineer.
I also attended the CTO's Celebration Day in San Francisco's Herbst Theatre. It was my first visit to the Herbst since the Veterans Building's renovation. The drinking fountains on multiple floors actually work now after several years of inactivity. The downstairs bar looks pretty snazzy. Dag-nabbit, I should have taken photos.
The winners and finalists ran the gamut of tech. I heard pitches from startups doing biomass gasification, carbon nanotubes, pollution tracking, and SaaS analytics. I can't connect with businesses outside the United States because my personal prerogative is to only work with companies located in the US that American citizens own. I'm sure there are plenty of those to find.
Famed VC Ira Ehrenpreis gave his keynote that doubled as a highlight reel of his favorite investments. I'm pretty sure I heard him give this talk before at a conference down in Silicon Valley at least a year ago because I recognized many of the slides and themes. He told us that the best time for tech investing is right after a sector bursts its bubble, because the final survivors are in the best position to be long-term winners. I think the solar sector is still in the middle of its shakeout, so anyone making panels or modules after the last low-quality Chinese producer goes bankrupt will be in a sweet spot. I also think solar suppliers that adhere to all of the DOE EERE SunShot Initiative's standards will have an easier time convincing developers to include them in supply chains. Ira also mentioned the "second bottom line" importance of ESG criteria, another set of guidelines our aspiring startups must adopt if they want to attract impact investors.
I noted one concluding quote with interest: "There's no such thing as a bad contact, but there is such a thing as a bad way to follow up on a contact." Well, I had plenty of bad contacts when I worked in sales, and plenty more when I was between jobs trying to make a career for myself. There really are tons of bad people in the world and they succeed in spite of themselves. I avoid those types because I'd rather meet the ambitious folks populating the cleantech sector. If I get rich after investing in one of these startups, then I could finally afford to be a big-shot sponsor of the Cleantech Open.
Driving down to the CTO's home at GSVlabs is always worth my time. The co-working trend is now a serious thing. Startups eschew privacy and security by taking open-space collaboration to an extreme. I think the next trend could be co-working outdoors, where startups can plot their huge markets on picnic tables. Nah, just kidding. I wouldn't want to do office work outside because wild animals like bears and coyotes run around out there looking for people to eat. Smart VCs won't fund a startup where the founders risk getting devoured by packs of wild beasts.
The Investor Connect speed-dating round had a table reserved for yours truly, the CEO of Alfidi Capital. Someday I'll be #1 but this time I was at the #2 table. I am usually the #1 genius on hand wherever I go in life. Most normal people recognize this as soon as they meet me. Serious VCs and angel investors were at the other tables and I had the chance to interact with a few of them during breaks between meeting startups. Sharing insights helps me understand how much startups learn during their early phases.
I will share what I learned from the startups I met at my table. These are general impressions that cover many verticals. Addressing a scalable market means going after a big demographic whose price points and buying power are easily understood. Going after boutique markets with fragmented demographics (like organic farmers, for example) means a startup's marketing channels will be less efficient. Lowered efficiency in anything, especially finding a marketing channel, means a startup needs a longer runway to profitability. Proprietary technology must be difficult to duplicate. A simple device with common components is easy for a competitor to reverse engineer.
I also attended the CTO's Celebration Day in San Francisco's Herbst Theatre. It was my first visit to the Herbst since the Veterans Building's renovation. The drinking fountains on multiple floors actually work now after several years of inactivity. The downstairs bar looks pretty snazzy. Dag-nabbit, I should have taken photos.
The winners and finalists ran the gamut of tech. I heard pitches from startups doing biomass gasification, carbon nanotubes, pollution tracking, and SaaS analytics. I can't connect with businesses outside the United States because my personal prerogative is to only work with companies located in the US that American citizens own. I'm sure there are plenty of those to find.
Famed VC Ira Ehrenpreis gave his keynote that doubled as a highlight reel of his favorite investments. I'm pretty sure I heard him give this talk before at a conference down in Silicon Valley at least a year ago because I recognized many of the slides and themes. He told us that the best time for tech investing is right after a sector bursts its bubble, because the final survivors are in the best position to be long-term winners. I think the solar sector is still in the middle of its shakeout, so anyone making panels or modules after the last low-quality Chinese producer goes bankrupt will be in a sweet spot. I also think solar suppliers that adhere to all of the DOE EERE SunShot Initiative's standards will have an easier time convincing developers to include them in supply chains. Ira also mentioned the "second bottom line" importance of ESG criteria, another set of guidelines our aspiring startups must adopt if they want to attract impact investors.
I noted one concluding quote with interest: "There's no such thing as a bad contact, but there is such a thing as a bad way to follow up on a contact." Well, I had plenty of bad contacts when I worked in sales, and plenty more when I was between jobs trying to make a career for myself. There really are tons of bad people in the world and they succeed in spite of themselves. I avoid those types because I'd rather meet the ambitious folks populating the cleantech sector. If I get rich after investing in one of these startups, then I could finally afford to be a big-shot sponsor of the Cleantech Open.
Friday, March 13, 2015
Stranded Assets Of The Carbon Bubble
I attended a Climate One talk at the Commonwealth Club this week about how an alleged carbon bubble in the valuation of oil and gas companies will eventually lead to stranded assets remaining unextracted. I am no stranger to this subject since I blogged about another Commonwealth Club session on natural resources in June 2014. It's a complicated argument with more than one side.
The Carbon Tracker Initiative's Carbon Bubble report is one renowned reference for the pro-bubble case. Here's the theory in a nutshell. The argument contends that burning hydrocarbons raises the earth's carbon budget beyond a threshold that human civilization can tolerate. Avoiding this threshold and the climate catastrophe it will cause requires sequestering discovered hydrocarbon energy reserves in the ground forever. These reserves thus become stranded assets that cannot contribute economic value to an energy company's balance sheet. The financial markets' expectation that these unavailable assets will still become available implies that energy companies' stocks trade at an unsustainable "carbon bubble" valuation.
A contrary analysis in the Wall Street Journal from January 2015 argues that the world economy will still need significant hydrocarbon energy for the foreseeable future. I have enough financial expertise to see wisdom in realistically calculating economically recoverable energy reserves. Energy and mining companies are always engaged in a complex pursuit of exploration, discovery, and write-down of reserves that has more to do with local geography and logistics than with global carbon regulation. Carbon bubble proponents should remember that when they estimate large amounts of uneconomical reserves. They should also remember than even the IPCC caveats its climate warnings with probabilities, not certainties.
Some of the carbon bubble logic falls apart in the face of project economics. If energy company executives are truly incentivized to replace depleted reserves as the driver of share price, and if difficult projects are indeed only profitable at higher energy prices, then it follows that stringent carbon controls that drive up oil prices will revive those abandoned projects that have unfavorable break-even points.
Carbon bubble proponents and critics need to revisit the US DOE EIA's Annual Energy Outlook. Consider that population growth, energy use per capita, and energy use per dollar of GDP are all very relevant in forecasting the amount of reserves the energy sector must discover and develop. Tighter carbon rules will make less energy available in the short term before any dramatic supply increase from renewables comes on line to save us.
The financial sector has begun pricing securities that make lower contributions to the world's carbon budget. Fossil Free Indexes has made a stab at finding benchmarks for portfolio managers. Clean Energy Victory Bonds are a proposed category of US Treasury Bonds that individual investors could buy. The victory bonds' emphasis on funding widely available technology distinguishes them from the Clean Renewable Energy Bonds (CREBs) that public utilities have issued to develop specific commercial-scale projects.
The movement encouraging divestiture from energy companies should not concern long-term value investors. It is music to the ears of bargain hunters who seek undervalued securities with reduced demand. Thank institutional investors for making energy stocks cheaper. We can also thank the water-energy-food security nexus for making those three inputs more expensive, and thus more profitable for natural resource companies developing new projects.
The World Bank's World Development Report (WDR) from 2010 is a good reference for analysts pursuing insights into how the energy sector will change, with or without carbon bubbles. Analysts must also compare the competing market valuations of the sectors for oil/gas, coal, nuclear, and renewables both inside and outside the US. The ongoing WDR series reveals opportunities for direct investment and portfolio rebalancing. The energy sector's component valuations will reveal opportunities for arbitrage. Count on Alfidi Capital for continuing insights into companies that deliver ROI, with or without carbon limitations.
The Carbon Tracker Initiative's Carbon Bubble report is one renowned reference for the pro-bubble case. Here's the theory in a nutshell. The argument contends that burning hydrocarbons raises the earth's carbon budget beyond a threshold that human civilization can tolerate. Avoiding this threshold and the climate catastrophe it will cause requires sequestering discovered hydrocarbon energy reserves in the ground forever. These reserves thus become stranded assets that cannot contribute economic value to an energy company's balance sheet. The financial markets' expectation that these unavailable assets will still become available implies that energy companies' stocks trade at an unsustainable "carbon bubble" valuation.
A contrary analysis in the Wall Street Journal from January 2015 argues that the world economy will still need significant hydrocarbon energy for the foreseeable future. I have enough financial expertise to see wisdom in realistically calculating economically recoverable energy reserves. Energy and mining companies are always engaged in a complex pursuit of exploration, discovery, and write-down of reserves that has more to do with local geography and logistics than with global carbon regulation. Carbon bubble proponents should remember that when they estimate large amounts of uneconomical reserves. They should also remember than even the IPCC caveats its climate warnings with probabilities, not certainties.
Some of the carbon bubble logic falls apart in the face of project economics. If energy company executives are truly incentivized to replace depleted reserves as the driver of share price, and if difficult projects are indeed only profitable at higher energy prices, then it follows that stringent carbon controls that drive up oil prices will revive those abandoned projects that have unfavorable break-even points.
Carbon bubble proponents and critics need to revisit the US DOE EIA's Annual Energy Outlook. Consider that population growth, energy use per capita, and energy use per dollar of GDP are all very relevant in forecasting the amount of reserves the energy sector must discover and develop. Tighter carbon rules will make less energy available in the short term before any dramatic supply increase from renewables comes on line to save us.
The financial sector has begun pricing securities that make lower contributions to the world's carbon budget. Fossil Free Indexes has made a stab at finding benchmarks for portfolio managers. Clean Energy Victory Bonds are a proposed category of US Treasury Bonds that individual investors could buy. The victory bonds' emphasis on funding widely available technology distinguishes them from the Clean Renewable Energy Bonds (CREBs) that public utilities have issued to develop specific commercial-scale projects.
The movement encouraging divestiture from energy companies should not concern long-term value investors. It is music to the ears of bargain hunters who seek undervalued securities with reduced demand. Thank institutional investors for making energy stocks cheaper. We can also thank the water-energy-food security nexus for making those three inputs more expensive, and thus more profitable for natural resource companies developing new projects.
The World Bank's World Development Report (WDR) from 2010 is a good reference for analysts pursuing insights into how the energy sector will change, with or without carbon bubbles. Analysts must also compare the competing market valuations of the sectors for oil/gas, coal, nuclear, and renewables both inside and outside the US. The ongoing WDR series reveals opportunities for direct investment and portfolio rebalancing. The energy sector's component valuations will reveal opportunities for arbitrage. Count on Alfidi Capital for continuing insights into companies that deliver ROI, with or without carbon limitations.
Saturday, September 20, 2014
Climate on the Brain is Powering Innovation to Create Climate Wealth
Three recent Commonwealth Club events on how our brains understand climate change, how to promote sustainable innovation in the energy sector, and how to create wealth from climate change prompted me to think about how they all tie together. Notice how I strung the titles of those talks together to make the title of my own blog article. Good artists borrow, and great artists steal, so yeah I'm taking a page out of old William Shakespeare's playbook.
George Marshall's Don't Even Think About It is heir to a long tradition in psychology that describes how the human brain has difficulty comprehending abstractions. Emotion-based arguments usually overcome cognitive barriers in the majority of humans. Appeals to authority also help. This is why faith-based organizations like Alliance of Religions and Conservation and Catholic Climate Covenant will play a key role in winning conservatives over for the climate change argument. Bernays' techniques matter in selling climate change to low-information, high-emotion masses with large cognitive deficiencies. A "master narratives" study of how tribes communicate in the climate change debate would reveal much. The human evolutionary bias to underappreciate risks for abstract things like climate change probably has much in common with behavioral finance's understanding of poor investor behavior.
Climate change is like any innovative concept, where early adopters form a beachhead that proves a viable market exists. Social psychology and persuasive technology can produce enough compelling stories to reach the late adopter market in climate change. The Citizens Climate Lobby should be an excellent channel for storytelling targeting late adopters. Human interest stories matter more than narratives using facts or fear. Talented national politicians have dropped names of average schmucks into their major speeches during the Internet Age. Average people can see themselves in those average stories.
Once the narrative frames consumers for adoption, industry must have a minimum viable product ready for purchase. Industry's problem is that it has offered few tangible moneymaking products addressing climate change. Utilities invest in carbon capture because raw carbon is a viable feedstock in automobile tires, advanced fuels, and construction materials. Scaling problems have hindered the promise of carbon capture. Commercializing carbon ideas from government laboratories would be more successful if the tech developers follow the NSF I-Corps model.
Government research is more effective in powering energy innovation than government loans, as we all saw with the Solyndra debacle. Some in government and the energy sector learned nothing from that failure. BrightSource Energy got a $1.6B DOE loan guarantee for a solar thermal project that lowers the cost of capital for NRG Energy and Google. What a sweet deal. NRG also benefits from this $1.2B DOE loan guarantee for a solar PV project. These loan guarantees are a central-planning approach to funding energy innovation. The capital markets now have a better way to fund energy with the "yield co" publicly traded structures.
Large projects do not suffer from lack of funding with Google, Warren Buffett, and George Soros throwing money around. Smaller projects still need a push from entrepreneurs seeking wealth. Too much conflicting information on the risks and rewards of sustainable business models poses a problem for entrepreneurs. Advocates of social entrepreneurship ignore the higher costs of capital and higher risks inherent in many community-based business models that will never scale up to address large markets. NREL published several guides to community solar as good foundation references, available by searching DOE's OSTI archives.
Cleantech entrepreneurs need many baseline references because too many self-serving pontificators on both sides of the climate change debate have muddied the water. I have heard "experts" claim at the Commonwealth Club that China and India value US carbon capture technology because they are still building coal plants. I have also heard the Club's invited experts claim that China's prospects of "Peal Coal" and India's poor quality coal mean they will need expensive coal imports. These positions are reconcilable if developing countries' energy plans balance increased generation capacity with increased resource exploration. Give engineers and economists in those countries the credit they deserve.
The key to wisdom is understanding where each side in a debate gets their basic data. Utilities constantly iterate their supply adjustments to meet demand, using real-time data and decades of modeling experience. If coal and gas power plants cannot spin up turbines individually in sufficient time to smooth out "duck curve" evening demand in the US, then it makes sense for utilities to invest in transmission lines across time zones. A true national grid would not allow gaps between the eastern and western parts of the US to limit supply flexibility. Closing the gap is a matter of time, and in the meantime utilities buy energy futures contracts to hedge their demand forecasts. Utilities also have a strong interest in grid storage, smart grids, and predictive analytics that together make smoothing the duck curve more efficient. Anyone who shorts utility stocks in the face of the sector's incoming tidal wave of innovation has been reading too much gloom and doom literature.
I have argued before that hedging civilization's bets on climate change is much like Pascal's Wager. The worst outcome of preparation is a more efficient use of limited natural resources, even if climate change proves to be groundless. The best outcome is the preservation of the only known biosphere in this corner of the galaxy. I trust our elites to get the programming correct so Spaceship Earth stays on the right course.
George Marshall's Don't Even Think About It is heir to a long tradition in psychology that describes how the human brain has difficulty comprehending abstractions. Emotion-based arguments usually overcome cognitive barriers in the majority of humans. Appeals to authority also help. This is why faith-based organizations like Alliance of Religions and Conservation and Catholic Climate Covenant will play a key role in winning conservatives over for the climate change argument. Bernays' techniques matter in selling climate change to low-information, high-emotion masses with large cognitive deficiencies. A "master narratives" study of how tribes communicate in the climate change debate would reveal much. The human evolutionary bias to underappreciate risks for abstract things like climate change probably has much in common with behavioral finance's understanding of poor investor behavior.
Climate change is like any innovative concept, where early adopters form a beachhead that proves a viable market exists. Social psychology and persuasive technology can produce enough compelling stories to reach the late adopter market in climate change. The Citizens Climate Lobby should be an excellent channel for storytelling targeting late adopters. Human interest stories matter more than narratives using facts or fear. Talented national politicians have dropped names of average schmucks into their major speeches during the Internet Age. Average people can see themselves in those average stories.
Once the narrative frames consumers for adoption, industry must have a minimum viable product ready for purchase. Industry's problem is that it has offered few tangible moneymaking products addressing climate change. Utilities invest in carbon capture because raw carbon is a viable feedstock in automobile tires, advanced fuels, and construction materials. Scaling problems have hindered the promise of carbon capture. Commercializing carbon ideas from government laboratories would be more successful if the tech developers follow the NSF I-Corps model.
Government research is more effective in powering energy innovation than government loans, as we all saw with the Solyndra debacle. Some in government and the energy sector learned nothing from that failure. BrightSource Energy got a $1.6B DOE loan guarantee for a solar thermal project that lowers the cost of capital for NRG Energy and Google. What a sweet deal. NRG also benefits from this $1.2B DOE loan guarantee for a solar PV project. These loan guarantees are a central-planning approach to funding energy innovation. The capital markets now have a better way to fund energy with the "yield co" publicly traded structures.
Large projects do not suffer from lack of funding with Google, Warren Buffett, and George Soros throwing money around. Smaller projects still need a push from entrepreneurs seeking wealth. Too much conflicting information on the risks and rewards of sustainable business models poses a problem for entrepreneurs. Advocates of social entrepreneurship ignore the higher costs of capital and higher risks inherent in many community-based business models that will never scale up to address large markets. NREL published several guides to community solar as good foundation references, available by searching DOE's OSTI archives.
Cleantech entrepreneurs need many baseline references because too many self-serving pontificators on both sides of the climate change debate have muddied the water. I have heard "experts" claim at the Commonwealth Club that China and India value US carbon capture technology because they are still building coal plants. I have also heard the Club's invited experts claim that China's prospects of "Peal Coal" and India's poor quality coal mean they will need expensive coal imports. These positions are reconcilable if developing countries' energy plans balance increased generation capacity with increased resource exploration. Give engineers and economists in those countries the credit they deserve.
The key to wisdom is understanding where each side in a debate gets their basic data. Utilities constantly iterate their supply adjustments to meet demand, using real-time data and decades of modeling experience. If coal and gas power plants cannot spin up turbines individually in sufficient time to smooth out "duck curve" evening demand in the US, then it makes sense for utilities to invest in transmission lines across time zones. A true national grid would not allow gaps between the eastern and western parts of the US to limit supply flexibility. Closing the gap is a matter of time, and in the meantime utilities buy energy futures contracts to hedge their demand forecasts. Utilities also have a strong interest in grid storage, smart grids, and predictive analytics that together make smoothing the duck curve more efficient. Anyone who shorts utility stocks in the face of the sector's incoming tidal wave of innovation has been reading too much gloom and doom literature.
I have argued before that hedging civilization's bets on climate change is much like Pascal's Wager. The worst outcome of preparation is a more efficient use of limited natural resources, even if climate change proves to be groundless. The best outcome is the preservation of the only known biosphere in this corner of the galaxy. I trust our elites to get the programming correct so Spaceship Earth stays on the right course.
Sunday, July 06, 2014
Alfidi Capital Supports Cleantech Open National Academy 2014
I am entering my second year as a mentor for startups in the Cleantech Open accelerator. I had a great experience last year and I'm taking things to a whole new level in 2014. This year's crop of startups competing for venture investments started off with last week's CTO National Academy West Coast, held at a hotel in Burlingame. I attended and snapped the pic below as proof. The presenters shared some great information that will help entrepreneurs build their businesses. Stand by for my synopsis.
Read The Rainforest: The Secret to Building the Next Silicon Valley to see how other locales can replicate a successful ecosystem fro entrepreneurs. T2 Venture Creation's contribution to this theory is an update to Alex Osterwalder's Business Model Canvas that policy makers can implement in their region. It's a terrific insight but startups aren't the ones who need to hear it, unless a founder is considering relocating to a more hospitable region. City chambers of commerce need to hear about this kind of rainforest if they're serious about attracting news businesses. Conscious Capitalism shows us the way.
The accelerator's alumni had good lessons to share about how market leaders protect themselves from competition. Leaders' disinclination to disrupt their own market positions by adopting startup tech means startups often pivot to different verticals. I'm pretty sure I've said before that third-party validation gives a new product some credibility. I think the most compelling data on cost savings will be confined to some cleantech verticals, specifically hardware, network services, and system retrofits. I was very pleased to hear CTO alumni mention the Federal Laboratory Consortium "user facilities" program, which can be an alternative to an SBIR proposal. I looked for a consolidated description of user facilities online and found several. Here's the National Nanotechnology Initiative's description of user facilities. Argonne National Laboratory has its own rules for user facilities. The alumni also mentioned DOE's NREL Industry Growth Forum, a pitchfest open to cleantech entrepreneurs.
Several CTO participants referenced SolarCity as a benchmark for a cleantech business model. My caveat to enthusiastic entrepreneurs is that Elon Musk helped start SolarCity and they became residential market leaders in California within one year. Those are two success factors most startups can't count on obtaining.
I've heard Steve Blank speak before and he did not disappoint at CTO's Academy. There's no need to repeat his wisdom here for those of us who have his book and read his blog (yeah, that would be me). Startups must iterate products using CustDev, make rapidly revocable changes to business plans that meet sales forecasts, and have advisory boards in addition to governance boards. The one thing entrepreneurs needed to hear most from Steve is that technology is not the same as a business. I tend to tune out prospective founders who talk up their tech without a financing strategy, a go-to-market plan, and the other things they need to run a business. Prequalifying prospects by need and budget is an art but I think a lot of tech-focused founders don't understand it. That's why Steve tells them to get out and talk to 100 customers.
The marketing experts on hand define "traction" as a repeatable sale, with dominant market position in a single segment, and multiple sales to customers within that segment. Folks, that's the only kind of traction that matters. I did not know that a marketing budget should follow the S-curve of product adoption, so it was important to hear that marketing spending matters most after the S-curve accelerates. I heard a lot at this Academy about the importance of picking exactly one market segment to dominate. The implication is that dominance comes after pivoting into a segment that has weak leaders who can't outspend the startup, or one that has secondary market "followers" who will adopt the startup as suppliers. I did the Crossing the Chasm positioning statement exercise last year for Alfidi Capital, and nothing has changed except that my genius is more compelling than ever. Startups need to do that exercise, plus the give-get analysis for partners one of the CTO organizers presented.
I had to choose one of three breakout sessions, and I am glad I chose to pursue sector knowledge of energy and transportation. I now have a firm appreciation for the difficulties facing battery technology startups. Batteries face fundamental limitations in material science. One key to a successful pivot is a controlled burn rate, hence the importance of conserving marketing spending until the path to segment dominance is obvious. The presenter on tidal power mentioned some renewable energy market studies at Altprofits but much of their data needs an update for more recent years.
Transportation is even more difficult to innovate because of slow decision cycles in public infrastructure. Tesla succeeded in addressing the automotive market, once they raised the huge amounts of capital it would take to break high barriers to entry. I see an emerging dichotomy in disrupting transportation. The shared economy in transportation supports high-density urban development, but advances in personal transit like autonomous driving support urban sprawl. Only one of these perspectives will win! I suspect it will be the shared economy, which has already found mass adoption among consumers with severely constrained incomes. The personal transit advances will likely remain confined to niche applications, like traffic in areas where pedestrians are rare.
The breakout session did identify some accelerators I had not noticed before. Prospect Silicon Valley, Transportation Technology Ventures, CalCharge, and SfunCube all want new companies to succeed in energy and transportation. I have every intention of steering startups I think will succeed into those accelerators.
Day two of the Academy brought me another new vocabulary term from a positioning expert: "brand audit." Do a Google search of that term and see all the pretty charts businesses use to boil such an audit down to a positioning statement with Moore's positioning exercise. Presentation tools like Prezi and Keynote offer alternatives to PowerPoint, and entrepreneurs need to know how to use them/
The VC guy giving the second day's keynote said VCs still want to disrupt the huge energy market but the source of cleantech investment is shifting to corporate venture arms and family offices. This money is chasing later-stage startups. I can infer that VCs are increasingly reluctant to commit to early-stage startups after having been burned in the past few years.
I had to reflect on my own business experience during the CustDev workshop. One marketing truism I learned in financial sales is to use open-ended questions to explore a prospect's need and then use closed-end questions to close the sale. That only works if people think you're trustworthy. Being trustworthy has little to do with being honest or competent. Inveterate liars are able to build trust immediately by manipulating people emotionally. The paradox of trust is the difficulty of building a trustworthy relationship by telling the truth. Most humans are uncomfortable with the truth. Lies and shared myths are more comfortable. I do not tolerate lying. I have had extreme difficulty building trust with people who don't want to hear the truth. That's why I'm an analyst who spews truth at the world. People who can't handle the truth won't benefit from my knowledge anyway.
The elevator pitch speaker mentioned Moore's positioning exercise once again. I hope you all see a pattern emerging here. There's no "right audience" that will immediately get the pitch. Any pitch must be able to hook a general audience of investors customers, and distribution partners. A public relations pitch is different; that one is specifically targeted to media outlets that will carry a story. Building a media contact list must be a prerequisite.
I have to pause to reflect once again. Startups carry tons of risk. De-risking tech means validating it with certification for industry standards and synching it with the business model's validation. In plain English, show data proving the tech works and show sales revenue proving customers want it. A risk matrix connecting the probability and severity of each business risk category is a template for management decisions that will mitigate each risk. Student interns are an underappreciated source of risk if they haven't signed IP assignment agreements giving tech ownership to the enterprise. Think twice before you accept a university professor's offer to let his students work for you for free so they can earn academic credit.
I won't restate the details of the financial modeling presentation. Suffice it to say that some expenses drive revenue and the business model canvas must show links from a startup's financial model to its business model. VCs have their own metrics in mind for customer acquisition costs and healthy internal ratios. The VCs on a startup's board will want to see more frequent budget presentations than the board of a public company. KPIs driving revenue and expenses are the only things worth tracking. I believe different market segments will have different metrics for costs. That's why it's better for a startup to focus on dominating one segment.
The block of instruction on sustainability would seem at first glance to be obviously mandatory for this crowd. That is not necessarily the case. Steve Blank is probably correct to say sustainability doesn't belong in startups. Here comes my own explanation of why that is true. It raises costs, limits supply chain flexibility, and slows decision speed. Big corporations can easily afford sustainability. Small companies selling premium goods to rich idiots (organic vegetables, artisan chocolate) can afford to make sustainability a selling point because their dumb customers have emotional investments in do-gooder business models. Otherwise, in data-driven startups that aim for market dominance among technically savvy buyers, sustainability destroys scalability!
The third day of this Academy started with important tips for startups who want to win the CTO competition and the larger competition for business success. I'm pretty sure that any entrepreneurs who don't take this seriously won't benefit from my mentorship. The morning VC keynote from one awesome investor named Bill Reichert revealed that VC decisions are just as laden with emotion as the decisions of ordinary investors. I guess all those associate analysts they employ to crunch numbers on segment metrics don't matter as much as whether a VC likes a startup's team. VCs fall in love with a team, its tech, and their vision, in that order. Garage Technology Ventures' "Getting to Wow" and Skillshare's "Art of the Start" curriculum offer tips for crafting this approach.
I'll make a few more original observations on corporate culture based on some material presented at this Academy. Culture is primarily the product of leadership behavior and visible rewards for desired results. Good management deliberately seeds rituals and symbols into a culture that will reinforce desired behavior. I think the concept of a corporate social contract is cute but seeing it violated breeds cynicism. Nothing drives productive people away faster than watching management behavior that contradicts stated organizational goals. Highly compensated labor will remain loyal to a paycheck only so long. Their compensation partly represents the network of clients and contacts they've built, and they take those books of business with them wherever they go.
The attorney panel covered the absolutely necessary legal housekeeping that entrepreneurs ignore at their peril. The lawyers said VC investments set periodic "cliffs" where founder shares will vest, incentivizing them to stay on board. They also warned about miscellaneous people who make minor contributions early on and then show up later as "stealth founders" demanding more equity. These people can derail growth with ownership disputes, and lawyers have strategies for minimizing their disruptions. I do not see the attorneys' point about creating SPVs for single projects somehow ring-fencing these early contributors. I actually think a simple employment agreement will suffice so long as the stealth founder disclaims any subsequent equity claims not covered in the agreement, but of course I'm not an attorney. Startups need to know what constitutes "qualified financing" and why it solves valuation questions early. I've blogged before about the decisions entrepreneurs face in filing their IP. The attorney panel discussed this in the context of the Patent Cooperation Treaty.
I was surprised to hear the lawyers say they think options and warrants are better for sweat equity investors than stock. Those provisions obviously require sweat equity participants to contribute cash in later rounds if they want to realize their rewards. They'd reserve stock for professional investors, not for people contributing in-kind services. One panelist thought a convertible note was okay for sweat equity contributors. Once again, these early agreements prevent the emergence of "stealth founders" later as the IPO approaches.
Some folks at this Academy shared some jarring lessons. One speaker thought a startup should raise the absolute minimum amount of capital needed to execute a project. That contradicts most conventional wisdom to ask for as much money as possible. Perhaps it depends on the stage of the product development life cycle where the startup is raising capital. Another presenter thinks stand-alone pitch decks (i.e., those sitting on the Web not used in a live pitch) are hard to get right. I think crowdfunding portals make these more common than ever and the good pitch decks will stand out. Another comment that VCs care about headcount was left hanging without context. I think headcount matters because it impacts burn rate. Compensation expenses will rise as startups hire more people and spend more on the free goodies common in VC-backed Silicon Valley startups. All of those gourmet food courts serving free arugula salads aren't free to investors. Even VCs track revenue per employee and costs per employee, and I expect them to probe founders on these metrics every quarter.
The final comments on funding were very instructive. Cambridge Associates restated their statistics on cleantech company performance. Like any other investment opportunity, it pays to buy cleantech when everything is cheap and competition is weak. Capital efficiency wins the day because scaling later requires more capital raising. There's plenty of venture money waiting to invest but they like "scaling" from sales growth. One speaker mentioned bank-hosted investment panels as a great opportunity to present to investors. I agree, but they are also expensive because a startup has to hire a good investment bank just to get access. The annual JP Morgan health care conference is a classic example. The startups presenting there already have lots of money from VCs, which is why they can afford to be there to present to even more VCs. I also agree with the speaker who said there are plenty of chambers of commerce between San Francisco and Silicon Valley that hold high-quality meetings all week long. Those venues are a lot cheaper for startups that can't afford to buy their way into a major investment bank's conference.
I blogged about my first attendance at the Cleantech Open National Academy in 2013. Once again, a lot of the participants' knowledge was proprietary and I have been very careful not to reveal details that attendees shared with me in private. Just focus on the common themes: pivot to a segment that allows a dominant position; conserve cash for capital efficiency; construct a detailed positioning statement; focus marketing spending after sales accelerate; protect IP and equity very early; sales fixes everything. Get your startup into an accelerator like the Cleantech Open if you want me as a mentor.
Read The Rainforest: The Secret to Building the Next Silicon Valley to see how other locales can replicate a successful ecosystem fro entrepreneurs. T2 Venture Creation's contribution to this theory is an update to Alex Osterwalder's Business Model Canvas that policy makers can implement in their region. It's a terrific insight but startups aren't the ones who need to hear it, unless a founder is considering relocating to a more hospitable region. City chambers of commerce need to hear about this kind of rainforest if they're serious about attracting news businesses. Conscious Capitalism shows us the way.
The accelerator's alumni had good lessons to share about how market leaders protect themselves from competition. Leaders' disinclination to disrupt their own market positions by adopting startup tech means startups often pivot to different verticals. I'm pretty sure I've said before that third-party validation gives a new product some credibility. I think the most compelling data on cost savings will be confined to some cleantech verticals, specifically hardware, network services, and system retrofits. I was very pleased to hear CTO alumni mention the Federal Laboratory Consortium "user facilities" program, which can be an alternative to an SBIR proposal. I looked for a consolidated description of user facilities online and found several. Here's the National Nanotechnology Initiative's description of user facilities. Argonne National Laboratory has its own rules for user facilities. The alumni also mentioned DOE's NREL Industry Growth Forum, a pitchfest open to cleantech entrepreneurs.
Several CTO participants referenced SolarCity as a benchmark for a cleantech business model. My caveat to enthusiastic entrepreneurs is that Elon Musk helped start SolarCity and they became residential market leaders in California within one year. Those are two success factors most startups can't count on obtaining.
I've heard Steve Blank speak before and he did not disappoint at CTO's Academy. There's no need to repeat his wisdom here for those of us who have his book and read his blog (yeah, that would be me). Startups must iterate products using CustDev, make rapidly revocable changes to business plans that meet sales forecasts, and have advisory boards in addition to governance boards. The one thing entrepreneurs needed to hear most from Steve is that technology is not the same as a business. I tend to tune out prospective founders who talk up their tech without a financing strategy, a go-to-market plan, and the other things they need to run a business. Prequalifying prospects by need and budget is an art but I think a lot of tech-focused founders don't understand it. That's why Steve tells them to get out and talk to 100 customers.
The marketing experts on hand define "traction" as a repeatable sale, with dominant market position in a single segment, and multiple sales to customers within that segment. Folks, that's the only kind of traction that matters. I did not know that a marketing budget should follow the S-curve of product adoption, so it was important to hear that marketing spending matters most after the S-curve accelerates. I heard a lot at this Academy about the importance of picking exactly one market segment to dominate. The implication is that dominance comes after pivoting into a segment that has weak leaders who can't outspend the startup, or one that has secondary market "followers" who will adopt the startup as suppliers. I did the Crossing the Chasm positioning statement exercise last year for Alfidi Capital, and nothing has changed except that my genius is more compelling than ever. Startups need to do that exercise, plus the give-get analysis for partners one of the CTO organizers presented.
I had to choose one of three breakout sessions, and I am glad I chose to pursue sector knowledge of energy and transportation. I now have a firm appreciation for the difficulties facing battery technology startups. Batteries face fundamental limitations in material science. One key to a successful pivot is a controlled burn rate, hence the importance of conserving marketing spending until the path to segment dominance is obvious. The presenter on tidal power mentioned some renewable energy market studies at Altprofits but much of their data needs an update for more recent years.
Transportation is even more difficult to innovate because of slow decision cycles in public infrastructure. Tesla succeeded in addressing the automotive market, once they raised the huge amounts of capital it would take to break high barriers to entry. I see an emerging dichotomy in disrupting transportation. The shared economy in transportation supports high-density urban development, but advances in personal transit like autonomous driving support urban sprawl. Only one of these perspectives will win! I suspect it will be the shared economy, which has already found mass adoption among consumers with severely constrained incomes. The personal transit advances will likely remain confined to niche applications, like traffic in areas where pedestrians are rare.
The breakout session did identify some accelerators I had not noticed before. Prospect Silicon Valley, Transportation Technology Ventures, CalCharge, and SfunCube all want new companies to succeed in energy and transportation. I have every intention of steering startups I think will succeed into those accelerators.
Day two of the Academy brought me another new vocabulary term from a positioning expert: "brand audit." Do a Google search of that term and see all the pretty charts businesses use to boil such an audit down to a positioning statement with Moore's positioning exercise. Presentation tools like Prezi and Keynote offer alternatives to PowerPoint, and entrepreneurs need to know how to use them/
The VC guy giving the second day's keynote said VCs still want to disrupt the huge energy market but the source of cleantech investment is shifting to corporate venture arms and family offices. This money is chasing later-stage startups. I can infer that VCs are increasingly reluctant to commit to early-stage startups after having been burned in the past few years.
I had to reflect on my own business experience during the CustDev workshop. One marketing truism I learned in financial sales is to use open-ended questions to explore a prospect's need and then use closed-end questions to close the sale. That only works if people think you're trustworthy. Being trustworthy has little to do with being honest or competent. Inveterate liars are able to build trust immediately by manipulating people emotionally. The paradox of trust is the difficulty of building a trustworthy relationship by telling the truth. Most humans are uncomfortable with the truth. Lies and shared myths are more comfortable. I do not tolerate lying. I have had extreme difficulty building trust with people who don't want to hear the truth. That's why I'm an analyst who spews truth at the world. People who can't handle the truth won't benefit from my knowledge anyway.
The elevator pitch speaker mentioned Moore's positioning exercise once again. I hope you all see a pattern emerging here. There's no "right audience" that will immediately get the pitch. Any pitch must be able to hook a general audience of investors customers, and distribution partners. A public relations pitch is different; that one is specifically targeted to media outlets that will carry a story. Building a media contact list must be a prerequisite.
I have to pause to reflect once again. Startups carry tons of risk. De-risking tech means validating it with certification for industry standards and synching it with the business model's validation. In plain English, show data proving the tech works and show sales revenue proving customers want it. A risk matrix connecting the probability and severity of each business risk category is a template for management decisions that will mitigate each risk. Student interns are an underappreciated source of risk if they haven't signed IP assignment agreements giving tech ownership to the enterprise. Think twice before you accept a university professor's offer to let his students work for you for free so they can earn academic credit.
I won't restate the details of the financial modeling presentation. Suffice it to say that some expenses drive revenue and the business model canvas must show links from a startup's financial model to its business model. VCs have their own metrics in mind for customer acquisition costs and healthy internal ratios. The VCs on a startup's board will want to see more frequent budget presentations than the board of a public company. KPIs driving revenue and expenses are the only things worth tracking. I believe different market segments will have different metrics for costs. That's why it's better for a startup to focus on dominating one segment.
The block of instruction on sustainability would seem at first glance to be obviously mandatory for this crowd. That is not necessarily the case. Steve Blank is probably correct to say sustainability doesn't belong in startups. Here comes my own explanation of why that is true. It raises costs, limits supply chain flexibility, and slows decision speed. Big corporations can easily afford sustainability. Small companies selling premium goods to rich idiots (organic vegetables, artisan chocolate) can afford to make sustainability a selling point because their dumb customers have emotional investments in do-gooder business models. Otherwise, in data-driven startups that aim for market dominance among technically savvy buyers, sustainability destroys scalability!
The third day of this Academy started with important tips for startups who want to win the CTO competition and the larger competition for business success. I'm pretty sure that any entrepreneurs who don't take this seriously won't benefit from my mentorship. The morning VC keynote from one awesome investor named Bill Reichert revealed that VC decisions are just as laden with emotion as the decisions of ordinary investors. I guess all those associate analysts they employ to crunch numbers on segment metrics don't matter as much as whether a VC likes a startup's team. VCs fall in love with a team, its tech, and their vision, in that order. Garage Technology Ventures' "Getting to Wow" and Skillshare's "Art of the Start" curriculum offer tips for crafting this approach.
I'll make a few more original observations on corporate culture based on some material presented at this Academy. Culture is primarily the product of leadership behavior and visible rewards for desired results. Good management deliberately seeds rituals and symbols into a culture that will reinforce desired behavior. I think the concept of a corporate social contract is cute but seeing it violated breeds cynicism. Nothing drives productive people away faster than watching management behavior that contradicts stated organizational goals. Highly compensated labor will remain loyal to a paycheck only so long. Their compensation partly represents the network of clients and contacts they've built, and they take those books of business with them wherever they go.
The attorney panel covered the absolutely necessary legal housekeeping that entrepreneurs ignore at their peril. The lawyers said VC investments set periodic "cliffs" where founder shares will vest, incentivizing them to stay on board. They also warned about miscellaneous people who make minor contributions early on and then show up later as "stealth founders" demanding more equity. These people can derail growth with ownership disputes, and lawyers have strategies for minimizing their disruptions. I do not see the attorneys' point about creating SPVs for single projects somehow ring-fencing these early contributors. I actually think a simple employment agreement will suffice so long as the stealth founder disclaims any subsequent equity claims not covered in the agreement, but of course I'm not an attorney. Startups need to know what constitutes "qualified financing" and why it solves valuation questions early. I've blogged before about the decisions entrepreneurs face in filing their IP. The attorney panel discussed this in the context of the Patent Cooperation Treaty.
I was surprised to hear the lawyers say they think options and warrants are better for sweat equity investors than stock. Those provisions obviously require sweat equity participants to contribute cash in later rounds if they want to realize their rewards. They'd reserve stock for professional investors, not for people contributing in-kind services. One panelist thought a convertible note was okay for sweat equity contributors. Once again, these early agreements prevent the emergence of "stealth founders" later as the IPO approaches.
Some folks at this Academy shared some jarring lessons. One speaker thought a startup should raise the absolute minimum amount of capital needed to execute a project. That contradicts most conventional wisdom to ask for as much money as possible. Perhaps it depends on the stage of the product development life cycle where the startup is raising capital. Another presenter thinks stand-alone pitch decks (i.e., those sitting on the Web not used in a live pitch) are hard to get right. I think crowdfunding portals make these more common than ever and the good pitch decks will stand out. Another comment that VCs care about headcount was left hanging without context. I think headcount matters because it impacts burn rate. Compensation expenses will rise as startups hire more people and spend more on the free goodies common in VC-backed Silicon Valley startups. All of those gourmet food courts serving free arugula salads aren't free to investors. Even VCs track revenue per employee and costs per employee, and I expect them to probe founders on these metrics every quarter.
The final comments on funding were very instructive. Cambridge Associates restated their statistics on cleantech company performance. Like any other investment opportunity, it pays to buy cleantech when everything is cheap and competition is weak. Capital efficiency wins the day because scaling later requires more capital raising. There's plenty of venture money waiting to invest but they like "scaling" from sales growth. One speaker mentioned bank-hosted investment panels as a great opportunity to present to investors. I agree, but they are also expensive because a startup has to hire a good investment bank just to get access. The annual JP Morgan health care conference is a classic example. The startups presenting there already have lots of money from VCs, which is why they can afford to be there to present to even more VCs. I also agree with the speaker who said there are plenty of chambers of commerce between San Francisco and Silicon Valley that hold high-quality meetings all week long. Those venues are a lot cheaper for startups that can't afford to buy their way into a major investment bank's conference.
I blogged about my first attendance at the Cleantech Open National Academy in 2013. Once again, a lot of the participants' knowledge was proprietary and I have been very careful not to reveal details that attendees shared with me in private. Just focus on the common themes: pivot to a segment that allows a dominant position; conserve cash for capital efficiency; construct a detailed positioning statement; focus marketing spending after sales accelerate; protect IP and equity very early; sales fixes everything. Get your startup into an accelerator like the Cleantech Open if you want me as a mentor.
Monday, August 19, 2013
Natural Capitalism Puts A Price Tag On The Planet
Who says you can't put a price tag on Mother Nature? Not me, folks. Everything has a price, except my own personal integrity.
The World Business Council for Sustainable Development (WBCSD) put out its Vision 2050 report on how to make the world sustainable by, you guessed it, 2050. I find their draft architecture for integrated reporting in the financial sector to be fascinating. The WBCSD's work matches up with similar work the World Resources Institute is doing on markets. Businesses that adhere to these frameworks and the Sustainability Accounting Standards Board protocols will have a leg up in attracting capital.
These initiatives aren't some pipe dream from radical agitators. They are the product of capitalists who believe in true prosperity. Read Nature's Fortune by the former investment banker who now heads the Nature Conservancy. These folks don't walk around chewing granola while they sabotage bulldozers in some rain forest. They make investments in nature that pay off. I want to make a buck too so I'm jumping on this bandwagon. Stanford University's Millennium Alliance for Humanity and the Biosphere has a consensus statement from super-smart pointy-hat scientific types who've studied the heck out of the biosphere's living systems.
This is the kind of stuff I read late at night when I'm not thinking about attractive women. Mother Earth is certainly attractive and she's worth every penny we can spend on her, just like a real woman.
The World Business Council for Sustainable Development (WBCSD) put out its Vision 2050 report on how to make the world sustainable by, you guessed it, 2050. I find their draft architecture for integrated reporting in the financial sector to be fascinating. The WBCSD's work matches up with similar work the World Resources Institute is doing on markets. Businesses that adhere to these frameworks and the Sustainability Accounting Standards Board protocols will have a leg up in attracting capital.
These initiatives aren't some pipe dream from radical agitators. They are the product of capitalists who believe in true prosperity. Read Nature's Fortune by the former investment banker who now heads the Nature Conservancy. These folks don't walk around chewing granola while they sabotage bulldozers in some rain forest. They make investments in nature that pay off. I want to make a buck too so I'm jumping on this bandwagon. Stanford University's Millennium Alliance for Humanity and the Biosphere has a consensus statement from super-smart pointy-hat scientific types who've studied the heck out of the biosphere's living systems.
This is the kind of stuff I read late at night when I'm not thinking about attractive women. Mother Earth is certainly attractive and she's worth every penny we can spend on her, just like a real woman.
Sunday, June 23, 2013
Alfidi Capital Debut at Cleantech Open Academy 2013
I was privileged to officially begin my participation today in the Cleantech Open, one of America's most distinguished startup accelerator programs. I have been accepted into their Mentor Program and I am available to cleantech startups as a free advisor on general business topics. I spent this weekend attending my first-ever Cleantech Open Academy (down in Santa Clara) listening to eminent guest speakers help entrepreneurs jump-start their business plans. I can't describe many of the details because much of the information shared was proprietary with rights reserved. I am committed to protecting the confidentiality of the entrepreneurs' efforts. There are some lessons to learn nonetheless from sources the general public can access.
I entertain myself by running through my own version of popular business exercises. Here's my interpretation of Geoffrey Moore's positioning exercise, describing Alfidi Capital's position in the marketplace:
For (target customers): Geniuses such as Yours Truly
Who (have the following problem): Need supremely intelligent financial commentary with sarcasm
Our product is (describe the product or solution): Investment research
That provides (cite the breakthrough capability): Honesty and humor, free of charge
Unlike (reference competition): Anybody else who takes finance seriously
Our product/solution (describe the key point of competitive differentiation): Ridicules people who do stupid things with money
That was fun. I'll bet cleantech entrepreneurs get just as much as I do out of those kinds of thought drills. They might also get a lot out of tax equity financing, a project finance vehicle unique to the renewable energy sector. Chevron Technology Ventures no doubt gets a lot out of its sponsorship of the Cleantech Open, and startups can check Chevron's YouTube channel for helpful videos. Here's a free tutorial on perfecting your elevator pitch.
I'd like to see firm metrics on what drives revenue in cleantech. Other sectors have fairly common terms. Truck transportation has "yield" in revenue per hundredweight. Airlines have revenue passenger miles. Hospitality has revenue per square foot. The energy sector in general sometimes refers to BTU use but renewable energy has to account for subsidies like feed-in tariffs. Non-energy green tech should IMHO borrow tonnage-based metrics from construction, recycling, and related industries. I do not agree with VCs' use of metrics like EBITDA to evaluate a startup's viability. They made that mistake with dot-coms in the '90s and their investors are still paying the price. I think cleantech should learn from IT. We've all heard about cloudonomics. We need to hear more about "greenonomics."
Cleantech entrepreneurs have long reading lists. This includes Simon Acland's Angels, Dragons, and Vultures; Randall Bolten's Painting With Numbers; anything on customer development and lean startups; Osterwalder et al.'s Business Model Generation; and of course the incredibly insightful wisdom available here on the Alfidi Capital Blog. Yes, people, I really do deserve to rank among thought leaders and the people who invite me to these conferences are starting to recognize me.
I'm looking forward to mentoring my entrepreneurial charges. I expect to learn from them as well because I'll need to get spun up on details for sub-sectors I've never touched before. This is worth doing if it saves the planet, ensures America's economic vitality, and someday makes me a buck or two.
I entertain myself by running through my own version of popular business exercises. Here's my interpretation of Geoffrey Moore's positioning exercise, describing Alfidi Capital's position in the marketplace:
For (target customers): Geniuses such as Yours Truly
Who (have the following problem): Need supremely intelligent financial commentary with sarcasm
Our product is (describe the product or solution): Investment research
That provides (cite the breakthrough capability): Honesty and humor, free of charge
Unlike (reference competition): Anybody else who takes finance seriously
Our product/solution (describe the key point of competitive differentiation): Ridicules people who do stupid things with money
That was fun. I'll bet cleantech entrepreneurs get just as much as I do out of those kinds of thought drills. They might also get a lot out of tax equity financing, a project finance vehicle unique to the renewable energy sector. Chevron Technology Ventures no doubt gets a lot out of its sponsorship of the Cleantech Open, and startups can check Chevron's YouTube channel for helpful videos. Here's a free tutorial on perfecting your elevator pitch.
I'd like to see firm metrics on what drives revenue in cleantech. Other sectors have fairly common terms. Truck transportation has "yield" in revenue per hundredweight. Airlines have revenue passenger miles. Hospitality has revenue per square foot. The energy sector in general sometimes refers to BTU use but renewable energy has to account for subsidies like feed-in tariffs. Non-energy green tech should IMHO borrow tonnage-based metrics from construction, recycling, and related industries. I do not agree with VCs' use of metrics like EBITDA to evaluate a startup's viability. They made that mistake with dot-coms in the '90s and their investors are still paying the price. I think cleantech should learn from IT. We've all heard about cloudonomics. We need to hear more about "greenonomics."
Cleantech entrepreneurs have long reading lists. This includes Simon Acland's Angels, Dragons, and Vultures; Randall Bolten's Painting With Numbers; anything on customer development and lean startups; Osterwalder et al.'s Business Model Generation; and of course the incredibly insightful wisdom available here on the Alfidi Capital Blog. Yes, people, I really do deserve to rank among thought leaders and the people who invite me to these conferences are starting to recognize me.
I'm looking forward to mentoring my entrepreneurial charges. I expect to learn from them as well because I'll need to get spun up on details for sub-sectors I've never touched before. This is worth doing if it saves the planet, ensures America's economic vitality, and someday makes me a buck or two.
Friday, February 15, 2013
Tuesday, September 04, 2012
Monday, January 02, 2012
Algae.Tec (ALGXY) Growing Algae For Energy
Algae.Tec (ALGXY) has designed a prototype bioreactor that uses carbon dioxide and sunlight to drive algae growth. The algae is supposed to be harvested for conversion into fuel. Let's walk through their technology to see if their business model is viable.
One metric ton of algae has an energy content equal to seven barrels of oil, according to this company. One Algae.Tec 40-foot container can produce 250 tons of algae per year (they claim). The company's projections envision a configuration of 500 containers producing 125K metric tons algae per year. That configuration will be difficult to reliably achieve due to the space required for sunlight collection. Algae.Tec's parabolic solar collection system requires about 1/2 of a hectare to emplace the collectors. Their business model envisions these container installations adjacent to existing fossil fuel power plants so the carbon dioxide captured from the plant's generation can feed the algae reaction inside the containers. How many mixed-use power plants in the world have at least 250 hectares of empty real estate around their plants for the assembly of these containers and their solar collectors? That, and the willingness of utilities to buy adjacent land for expansion, will determine whether Algae.Tec's plan is scalable.
Consider the potential financial returns. Oil is now priced at about $100/bbl, so one Algae.Tec container can yield (7x250) no more than 1750 bbls/yr, worth $175K/yr in gross revenue. That's the equivalent of a small oil well. Algae.Tec claims an all-in cost of production at around $47/bbl (perhaps lower), so one container will yield ($53x1750) about $92,750/yr in net income at current oil prices. It's important to remember that the oil will probably have to be trucked to refineries because most coal/gas power plants don't have petroleum pipelines leading out from their facility. Trucking small batches of algae oil to refineries will be costly, unless the company can further refine the algae oil on site directly into biodiesel. If the final product from these cogeneration facilities is biodiesel, it can be sold directly to local gas station franchises. The amount of algae each container will yield also depends on regular sunlight and carbon dioxide inputs. Power plants in cold northern climates will not have year-round sunshine. Algae.Tec's facilities will thus be most viable in places like the American Southwest.
My analysis does not include the value of other products like animal feed that can come from this process. That can add to the net income of $92,750/container. Algae.Tec is thinking big by planning 500-container installations that can produce a net income stream of over $46M/yr by my math, but space requirements are everything. Their pilot plant in Australia needs to prove that the whole integrated concept can work before they pursue cogeneration and carbon capture agreements with utilities.
This stock is very thinly traded for something with a market cap over $100M, with daily volume in the mere hundreds. The inventors of their core technology hold 78% of the stock. That makes it difficult for individual investors to exit a long position. It appears that their Pink Sheet listing is brand new.
Frankly, I find this stock intriguing. Most of its initial installations will be small and geographically limited to sunny climates but the income per container is valuable to utilities that need affordable cogeneration options and carbon capture tax credits. I'm skeptical that the 500-module configuration will work everywhere, but as long as Algae.Tec keeps its costs low and has accurately estimated its production then the concept can attract the interest of utilities. This one actually has some promise. Let's see if they deliver.
Full disclosure: No position in ALGXY at this time.
One metric ton of algae has an energy content equal to seven barrels of oil, according to this company. One Algae.Tec 40-foot container can produce 250 tons of algae per year (they claim). The company's projections envision a configuration of 500 containers producing 125K metric tons algae per year. That configuration will be difficult to reliably achieve due to the space required for sunlight collection. Algae.Tec's parabolic solar collection system requires about 1/2 of a hectare to emplace the collectors. Their business model envisions these container installations adjacent to existing fossil fuel power plants so the carbon dioxide captured from the plant's generation can feed the algae reaction inside the containers. How many mixed-use power plants in the world have at least 250 hectares of empty real estate around their plants for the assembly of these containers and their solar collectors? That, and the willingness of utilities to buy adjacent land for expansion, will determine whether Algae.Tec's plan is scalable.
Consider the potential financial returns. Oil is now priced at about $100/bbl, so one Algae.Tec container can yield (7x250) no more than 1750 bbls/yr, worth $175K/yr in gross revenue. That's the equivalent of a small oil well. Algae.Tec claims an all-in cost of production at around $47/bbl (perhaps lower), so one container will yield ($53x1750) about $92,750/yr in net income at current oil prices. It's important to remember that the oil will probably have to be trucked to refineries because most coal/gas power plants don't have petroleum pipelines leading out from their facility. Trucking small batches of algae oil to refineries will be costly, unless the company can further refine the algae oil on site directly into biodiesel. If the final product from these cogeneration facilities is biodiesel, it can be sold directly to local gas station franchises. The amount of algae each container will yield also depends on regular sunlight and carbon dioxide inputs. Power plants in cold northern climates will not have year-round sunshine. Algae.Tec's facilities will thus be most viable in places like the American Southwest.
My analysis does not include the value of other products like animal feed that can come from this process. That can add to the net income of $92,750/container. Algae.Tec is thinking big by planning 500-container installations that can produce a net income stream of over $46M/yr by my math, but space requirements are everything. Their pilot plant in Australia needs to prove that the whole integrated concept can work before they pursue cogeneration and carbon capture agreements with utilities.
This stock is very thinly traded for something with a market cap over $100M, with daily volume in the mere hundreds. The inventors of their core technology hold 78% of the stock. That makes it difficult for individual investors to exit a long position. It appears that their Pink Sheet listing is brand new.
Frankly, I find this stock intriguing. Most of its initial installations will be small and geographically limited to sunny climates but the income per container is valuable to utilities that need affordable cogeneration options and carbon capture tax credits. I'm skeptical that the 500-module configuration will work everywhere, but as long as Algae.Tec keeps its costs low and has accurately estimated its production then the concept can attract the interest of utilities. This one actually has some promise. Let's see if they deliver.
Full disclosure: No position in ALGXY at this time.
Tuesday, September 27, 2011
Time To End All Energy Subsidies And Feed-In Tariffs
The collapse of Solyndra will hopefully put a nail in the coffin for government loan guarantees targeted at specific industries. Unfortunately, hope is not a method. Solar technology is actually becoming extremely cost-effective completely on its own and probably won't need any subsidies. We should take the same approach with funding other energy developments.
The oil depletion allowance is the mack daddy of energy subsidies. Read that IRS publication carefully and you'll note that it also covers minerals and timber. The depletion allowance is not merely a freebie handed to deep-pocketed industries that fund political campaigns. It is easy to see how this tax break encourages accelerated reductions in our nation's vital economic resources that would otherwise be uneconomical without a tax break. It makes no sense to help oil producers pump more crude than their sales forecasts and long-term contracts will justify.
Nuclear power gets plenty of free help. That should end along with the design preference for lightwater reactors. Thorium-salt reactors are the future and allow for safer, smaller designs.
I suppose we'd have to phase out feed-in tariffs just to be fair. Such a mechanism distorts a free market in electricity by mandating different cost structures for renewable sources than for non-renewables. The government's proper role, as guarantor of "the commons," is to invest in infrastructure like long-distance transmission lines that bring renewable sources within everyone's reach. Good transmission lines that bring Montana's wind and the Southwest's sunlight to every grid operator are a much more appropriate public policy objective than cost-diluting tariffs.
Full disclosure: No investments in any energy companies at this time, with the exception of a sweat equity investment in a wind energy startup that never paid me for my services, has had no contact with me for about three years, and looks like it has had no real activity after I left. Oh well.
The oil depletion allowance is the mack daddy of energy subsidies. Read that IRS publication carefully and you'll note that it also covers minerals and timber. The depletion allowance is not merely a freebie handed to deep-pocketed industries that fund political campaigns. It is easy to see how this tax break encourages accelerated reductions in our nation's vital economic resources that would otherwise be uneconomical without a tax break. It makes no sense to help oil producers pump more crude than their sales forecasts and long-term contracts will justify.
Nuclear power gets plenty of free help. That should end along with the design preference for lightwater reactors. Thorium-salt reactors are the future and allow for safer, smaller designs.
I suppose we'd have to phase out feed-in tariffs just to be fair. Such a mechanism distorts a free market in electricity by mandating different cost structures for renewable sources than for non-renewables. The government's proper role, as guarantor of "the commons," is to invest in infrastructure like long-distance transmission lines that bring renewable sources within everyone's reach. Good transmission lines that bring Montana's wind and the Southwest's sunlight to every grid operator are a much more appropriate public policy objective than cost-diluting tariffs.
Full disclosure: No investments in any energy companies at this time, with the exception of a sweat equity investment in a wind energy startup that never paid me for my services, has had no contact with me for about three years, and looks like it has had no real activity after I left. Oh well.
Wednesday, August 24, 2011
Solar Developers Making Huge Mistake Near Blythe
The rush into clean energy will generate mistakes on the way to generating power. Solar Trust of America is about to make a big mistake near Bythe, California. It has decided to redesign its planned solar installation around photovoltaic technology rather than solar thermal technology. This is a bad move on two counts.
First, solar thermal technology is a more resilient approach. It is simpler to manufacture than photovoltaics; no billion-dollar clean rooms are needed to keep impurities out of panels. Polished mirrors and steel girders are easier to source and maintain than PV cells. Mirrors also last a lot longer (sometimes decades) than PV panels.
The project team is also forgoing a $2B loan guarantee simply because it claims its investors find PV more attractive. That is simply stunning. These genius investors have not done their homework on the technology at all. It's worth noting that the project retained Citigroup and Deutsche Bank to seek investors. Those two financial institutions were not exactly known for their adroit management of their own balance sheets during the 2008 credit crunch. Can you see the sales pitch now? "No, you don't want those boring mirrors. PV is what you really want because it's more exciting." Bankers are skilled at putting words in the mouths of the gullible rich with whom they have profitable relationships.
I am grateful not to be an investor in a complicated energy installation that will require a complete redesign of its enabling technology and supply chain. I'd rather hold out for a decent solar thermal project that investors are smart enough to see through to completion.
Full disclosure: No positions in the two banks mentioned, or in this energy project.
First, solar thermal technology is a more resilient approach. It is simpler to manufacture than photovoltaics; no billion-dollar clean rooms are needed to keep impurities out of panels. Polished mirrors and steel girders are easier to source and maintain than PV cells. Mirrors also last a lot longer (sometimes decades) than PV panels.
The project team is also forgoing a $2B loan guarantee simply because it claims its investors find PV more attractive. That is simply stunning. These genius investors have not done their homework on the technology at all. It's worth noting that the project retained Citigroup and Deutsche Bank to seek investors. Those two financial institutions were not exactly known for their adroit management of their own balance sheets during the 2008 credit crunch. Can you see the sales pitch now? "No, you don't want those boring mirrors. PV is what you really want because it's more exciting." Bankers are skilled at putting words in the mouths of the gullible rich with whom they have profitable relationships.
I am grateful not to be an investor in a complicated energy installation that will require a complete redesign of its enabling technology and supply chain. I'd rather hold out for a decent solar thermal project that investors are smart enough to see through to completion.
Full disclosure: No positions in the two banks mentioned, or in this energy project.
Friday, April 15, 2011
Algae Biofuels' Promise Deserves Serious Scrutiny
The green energy revolution was supposed to have arrived by now. That's what we were promised back in the 1970s or so by the Whole Earth Catalog and other friends of sustainable development. Renewable energy gets sidetracked whenever wishful thinking and pipe dreams distract public policymakers from the most promising technologies. Algae-based biofuels may or may not be one of those promising technologies, depending on where and how it's produced.
Mainstream scientific thought endorses algae-based biofuels but with realistic expectations. People who've done the math know that replacing a small portion of America's liquid fuel would require devoting enormous amounts of farmland to algae crops with very low yields. This does not mean algae-based biofuel should never be produced under any circumstances. It means there is a niche somewhere for limited production that doesn't crowd out food crops. Seaweed-based biofuel may avoid a food vs. energy tradeoff.
People who haven't done research take the easy way out and seek government subsidies. The algae-fuel industry is pushing for federal tax incentives that will put it on the same footing as the ethanol industry. That is very premature and probably a poor use of public money. Ethanol is a controversial energy source because it does not always produce a positive EROEI. Factoring in energy used in fertiliser added to crops gives ethanol a negative EROEI. Growing it organically gives it a positive EROEI but, like all things organic, limits the yield. Algae-based fuel must not fall into the same trap if it is to be viable.
Full disclosure: No investments in biofuel companies at this time.
Mainstream scientific thought endorses algae-based biofuels but with realistic expectations. People who've done the math know that replacing a small portion of America's liquid fuel would require devoting enormous amounts of farmland to algae crops with very low yields. This does not mean algae-based biofuel should never be produced under any circumstances. It means there is a niche somewhere for limited production that doesn't crowd out food crops. Seaweed-based biofuel may avoid a food vs. energy tradeoff.
People who haven't done research take the easy way out and seek government subsidies. The algae-fuel industry is pushing for federal tax incentives that will put it on the same footing as the ethanol industry. That is very premature and probably a poor use of public money. Ethanol is a controversial energy source because it does not always produce a positive EROEI. Factoring in energy used in fertiliser added to crops gives ethanol a negative EROEI. Growing it organically gives it a positive EROEI but, like all things organic, limits the yield. Algae-based fuel must not fall into the same trap if it is to be viable.
Full disclosure: No investments in biofuel companies at this time.
Tuesday, November 23, 2010
Ceres' Hidden Agendas
Everything in high finance happens for a reason. Ceres, an alliance of institutional investors and environmental interest groups, recently released a ringing endorsement of investments in low-carbon technologies:
Institutional investors don't line up behind public policy changes unless there's money to be made. There are probably several hidden agendas at work here. Carbon credit trading is a potentially a huge new market in derivatives for global investment banks. Any expansion of the physical market for carbon capture and carbon control technologies will mean more market participants in the bid-ask spread on carbon credits.
Don't forget the importance of infrastructure investing to market makers. The more national governments spend on infrastructure to lower national carbon production, the more creative financing they'll need. Pushing $100mm blocks of Build America Bonds would make any underwriters' day. Ceres should be careful what it wishes for, as some low-carbon investments can easily become boondoggles. Take this U.S. Department of Energy loan to an unproven company that purports to develop a natural gas powered van for wheelchair users. Only Uncle Sam would be dumb enough to give a loan to a startup and not ask for a convertible feature that turns it into equity.
Go green. Collect the green (money). Nice business model.
Citing potential climate-related GDP losses of up to 20 percent by 2050 and the economic benefits of shifting to low-carbon and resource-efficient economies, investors released a major statement today calling for national and international policies that will spur private investment into low-carbon technologies.
The statement was signed by 259 investors from North America, Europe, Asia, Australia, Latin America and Africa with collective assets totaling more than $15 trillion—more than one-quarter of global capitalization. Signatories included Allianz, HSBC, APG and a dozen U.S. public pension funds and state treasurers. It is the largest-ever group of investors to call for government action on climate change.
Institutional investors don't line up behind public policy changes unless there's money to be made. There are probably several hidden agendas at work here. Carbon credit trading is a potentially a huge new market in derivatives for global investment banks. Any expansion of the physical market for carbon capture and carbon control technologies will mean more market participants in the bid-ask spread on carbon credits.
Don't forget the importance of infrastructure investing to market makers. The more national governments spend on infrastructure to lower national carbon production, the more creative financing they'll need. Pushing $100mm blocks of Build America Bonds would make any underwriters' day. Ceres should be careful what it wishes for, as some low-carbon investments can easily become boondoggles. Take this U.S. Department of Energy loan to an unproven company that purports to develop a natural gas powered van for wheelchair users. Only Uncle Sam would be dumb enough to give a loan to a startup and not ask for a convertible feature that turns it into equity.
Go green. Collect the green (money). Nice business model.
Monday, October 04, 2010
Lots Of Energy Out There
Here's a quick stream-of-consciousness capture of recent energy developments.
Romania is launching a wind park that will become the largest of its kind in the world. China is also a big market for wind energy and U.S. firms can deliver the infrastructure they need. They're all prepping for some form of Peak Oil. The good news is that Peak Oil may be delayed if supermajors like Shell keep increasing production in North America. Note to Americans: Get over your NIMBY attitudes towards energy exploration in any form.
The Gas Exporting Countries Forum is a pale imitation of OPEC. The funny thing is that the world is swimming in gas right now thanks to giant new discoveries. Even the U.S. has plenty of natural gas in shale deposits. Cartels are supposed to limit production; good luck doing that with a glut of supply.
Full disclosure: No position in any companies mentioned.
Romania is launching a wind park that will become the largest of its kind in the world. China is also a big market for wind energy and U.S. firms can deliver the infrastructure they need. They're all prepping for some form of Peak Oil. The good news is that Peak Oil may be delayed if supermajors like Shell keep increasing production in North America. Note to Americans: Get over your NIMBY attitudes towards energy exploration in any form.
The Gas Exporting Countries Forum is a pale imitation of OPEC. The funny thing is that the world is swimming in gas right now thanks to giant new discoveries. Even the U.S. has plenty of natural gas in shale deposits. Cartels are supposed to limit production; good luck doing that with a glut of supply.
Full disclosure: No position in any companies mentioned.
Saturday, August 01, 2009
Feel The Pain Of 2008's Revised Data
If this doesn't convince the average equity analyst that the data inputs for their models have a serious upside bias, then nothing will. New numbers show just how bad off we all are:
The real pain will begin later this year when the federal stimulus money starts to run out. We will discover to our chagrin that very little of the money we've spent went to things like high-speed rail, solar panel arrays, or other stuff that might actually generate revenue for more than a quarter or two.
We'll be seeing a lot less of happy stories like this one about winning streaks in the stock market.
Nota bene: Anthony J. Alfidi is short uncovered calls on SPY and IWM because these disappointing results will eventually be reflected in falling stock prices.
The world’s largest economy contracted 1.9 percent from the fourth quarter of 2007 to the last three months of 2008, compared with the 0.8 percent drop previously on the books, the Commerce Department said yesterday in Washington. Gross domestic product has shrunk 3.9 percent in the past year, the report said, indicating the worst slump since the Great Depression.
The real pain will begin later this year when the federal stimulus money starts to run out. We will discover to our chagrin that very little of the money we've spent went to things like high-speed rail, solar panel arrays, or other stuff that might actually generate revenue for more than a quarter or two.
We'll be seeing a lot less of happy stories like this one about winning streaks in the stock market.
Nota bene: Anthony J. Alfidi is short uncovered calls on SPY and IWM because these disappointing results will eventually be reflected in falling stock prices.
Wednesday, October 08, 2008
Looking for a Solar Energy Play (Long Term Only!)
I like renewable energy, but I have serious doubts about the long-term viability of some energy technologies. Solar energy sure sounds like a neat idea, especially when you read articles like this:
Chinese solar companies aren't the only ones optimistic about the future:
That all sounds really great, but there's a problem with this latest asset bubble scenario. Thin film solar makers like First Solar depend on rare source materials, and First Solar in particular depends on cadmium telluride. This rare material isn't available in quantities large enough to sustain First Solar's long term economic viability. Solar companies predicting rapid, massive market share growth might be right for maybe the next three years, but after that they will hit a resource supply wall that make them look like low-yield, no-growth utility companies after 2011.
I like Jack Lifton's articles on rare metals. I met him at the Las Vegas Hard Assets Conference this September and I listened closely to his thoughts on resource availability. Read this for some solar sanity:
And this for some more stuff to chew on:
Demand for solar panels still exceeds supply despite a global financial crisis, allowing solar power company Suntech Power Holdings Co Ltd to keep 2009 price declines in the range it had previously forecast.
Chinese solar companies aren't the only ones optimistic about the future:
Solar cell maker First Solar Inc has felt no immediate effect on its business from the financial markets crisis and could take on a role in financing new projects or buying into new technologies, Chairman and CEO Michael Ahearn said on Wednesday.
That all sounds really great, but there's a problem with this latest asset bubble scenario. Thin film solar makers like First Solar depend on rare source materials, and First Solar in particular depends on cadmium telluride. This rare material isn't available in quantities large enough to sustain First Solar's long term economic viability. Solar companies predicting rapid, massive market share growth might be right for maybe the next three years, but after that they will hit a resource supply wall that make them look like low-yield, no-growth utility companies after 2011.
I like Jack Lifton's articles on rare metals. I met him at the Las Vegas Hard Assets Conference this September and I listened closely to his thoughts on resource availability. Read this for some solar sanity:
There is simply no possibility of increasing the production of cadmium, indium, gallium, tellurium, or selenium to any volume remotely near what would be needed to make enough thin film solar cells to make even a dent in total global demand for electricity production. The US today has an installed capacity of 4,200 gigawatts. Of this total, the current total from solar of all types is 0.6 gigawatts.
And this for some more stuff to chew on:
Therefore, assuming that all of the new indium produced in the world could be utilized to produce CIGS thin-film PVSCs, the result would be the production of an additional 10 gigawatts of electricity annually. Although the first year would mean a multiplying of the contribution of ‘solar’ to the electricity supply by 20; the contribution would only double the second year when compared with the first year, and so on until by the 20th year the additional contribution yearly would be less than 5% of the total supply of solar generated electricity.
Thanks, Jack. I get the point. Solar photovoltaic cells in any form have limited utility in the future due to the scarcity of resources used in their production.
I would like to propose the following general rule: The least complicated technology that uses the most widely available source material has the greatest likelihood of long-term commercial viability. I'm looking for investments in renewable energy that apply this principle.
How about solar thermal technology? Mirrors are simple and cheap to produce, so the materials involved in building the control systems for heliostats are the keys to viability. Google invested in eSolar, a solar thermal startup. More about this technology in a future blog posting.
Nota bene: Anthony J. Alfidi does not hold any position in GOOG, FSLR, or eSolar at the time this commentary was published.
Wednesday, August 27, 2008
Pickens' Plan Possible Pickings
T. Boone Pickens' plan to move the U.S. economy from petroleum to wind/solar/natural gas has been getting plenty of attention. What's been absent is how investors can play this move if it grows beyond Pickens' initial order of 667 wind turbines from GE.
Which companies are best positioned to supply a new building boom in wind towers? That isn't clear yet. Let's say the next presidential administration needs to put a lot of out-of-work former homebuilders and mortgage brokers into some new WPA-type program building renewable energy infrastructure. Any such undertaking would presumably, for political reasons, look first to U.S.-based sources for materials and expertise. Some potential players:
GE: Great 5yr ROE, subpar 5yr EPS growth. Too much exposure to the broad U.S. economy to be a good wind pure-play.
Trinity Industries: Subpar 5yr ROE. Not for me, thanks.
Broadwind Energy: Too young to have good long-term data! No thanks.
But if the priority is for rapid build-up of capacity and not political sensitivity, maybe Vestas and other foreign wind suppliers would get a piece of the action. Hard to say at this point, so I'll wait until some large utilities start placing big orders. The next few years may see dot-com-like enthusiasm for anything green, in which case solar and wind ETFs might make sense.
Nota bene: Anthony J. Alfidi does not hold a position in any of the companies mentioned here at the time this commentary was published.
Which companies are best positioned to supply a new building boom in wind towers? That isn't clear yet. Let's say the next presidential administration needs to put a lot of out-of-work former homebuilders and mortgage brokers into some new WPA-type program building renewable energy infrastructure. Any such undertaking would presumably, for political reasons, look first to U.S.-based sources for materials and expertise. Some potential players:
GE: Great 5yr ROE, subpar 5yr EPS growth. Too much exposure to the broad U.S. economy to be a good wind pure-play.
Trinity Industries: Subpar 5yr ROE. Not for me, thanks.
Broadwind Energy: Too young to have good long-term data! No thanks.
But if the priority is for rapid build-up of capacity and not political sensitivity, maybe Vestas and other foreign wind suppliers would get a piece of the action. Hard to say at this point, so I'll wait until some large utilities start placing big orders. The next few years may see dot-com-like enthusiasm for anything green, in which case solar and wind ETFs might make sense.
Nota bene: Anthony J. Alfidi does not hold a position in any of the companies mentioned here at the time this commentary was published.
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