State clean energy fund hires angel expert
BYLINE: Mavis Scanlon
The California Clean Energy Fund, established to help finance early-stage clean energy companies, has hired an expert in angel investing to boost interest from the under-the-radar sector.
Susan Preston, an author and entrepreneur, will work with CalCEF to explore how to get seed money to very young companies or entrepreneurs with promising ideas in clean technology and renewable energy. Two options under strong consideration are an investment fund for angel investors and an angel investing network whose members would make investment decisions.
But Preston's role is broad in that she is challenged to come up with ways to better prepare clean technology entrepreneurs to get their products into the market. She is also working with labs and environmental entrepreneurs to better understand how innovative technology can be commercialized; trying to connect policy decisions with the financial markets; and drumming up interest among institutional investors.
"We need to get more money into early-stage" clean energy companies, said Preston, who wrote "Angel Financing for Entrepreneurs: Early-Stage Funding for Long-Term Success," which hit bookstores last month. Preston is the founder of Seraph Capital Forum in Seattle, an angel investing group for women.
Preston expects to make a decision on CalCEF's next steps as soon as the end of April, she said.
Her work will, in essence, help CalCEF meet its original stated goals: to invest in emerging clean energy technology companies.
CalCEF was formed in 2004 as a result of Pacific Gas & Electric Co.'s bankruptcy settlement negotiated with the California Public Utilities Commission. The settlement called for PG&E to contribute $30 million to the fund over five years, beginning in 2004. Those funds would be invested in private companies creating technologies that reduce dependence on fossil fuels.
To date, PG&E has kicked in $16 million of its total commitment. It will contribute another $4 million in mid-2007 and $10 million next year. The fund was structured so that CalCEF became an active limited partner in the funds of three venture capital firms that in turn act as investment managers.
So far, between $7 million and $8 million of the $16 million in the fund has been invested in at least 10 companies, including Bay Area companies Fat Spaniel Technologies, which makes energy monitoring systems, and electric car maker Tesla Motors on the Peninsula. It sounds like slow going, but the investment pace depends on the deals.
"You don't want to invest in every deal that comes through the door," said Dan Adler, vice president of CalCEF.
Although some of the CalCEF investments were early-stage, many were made at a later stage in the venture cycle, Adler said,
"We have to do a better job of priming the pump," he added. "There is a need for seed stage-funding."
Venture capital funds typically make multimillion-dollar investments in companies later in their development and take an active role in managing a company. Angel investors, on the other hand, provide relatively small amounts of capital for a startup or expansion of a business venture or concept.
"One of the things (CalCEF) found out after having money in venture funds was that the venture capital firms really aren't doing the very early stage investing that they wanted to see," Preston said.
As a group, however, angel investors are investing as much as venture capitalists, and can be a powerful force in developing new companies. In 2006, venture capital investments in U.S. companies reached a five-year high of $24.8 billion, in 2,454 deals, according to Ernst & Young LLP and Dow Jones VentureOne.
Angel investors, meanwhile, poured $25.6 billion into 51,000 deals last year, according to the Center for Venture Research at the University of New Hampshire's Whittemore School of Business.
The largest share of angel dollars, 21 percent, went to the health care sector, while the next-largest chunk went to software. Software attracts capital as it is a highly replicable product after initial costs, said Donald Simon, an attorney at Wendel Rosen Black & Dean LLP who co-founded the firm's Green Business Practice Group.
Since some clean technology companies rely on consumer adoption, it may take longer to build the business. Angel financing can help very young companies get their products to that stage.
"The idea is to bring these things outside the lab to get it to a point that investors will look at it and see there is a potential revenue stream," Simon said.
Angel financing for clean tech "is a huge need," he added. "Now that we have so much attention on energy issues and climate change it is really starting to turn the lights on for brilliant entrepreneurs out there."
For all the attention on clean technology and renewable energy, much of the money that goes to the sector comes from venture funding rather than organized angel groups. Alternative energy companies attracted $538 million in venture capital financing in 2006, an increase of 190 percent compared with 2005.
Angel groups are starting to recognize the potential in clean tech. Jonathan Bonnano, an entrepreneur and a member of the Keiretsu Forum, the Lafayette network of angel investors with 10 U.S. chapters, earlier this year approached Keiretsu CEO Randy Williams about starting a clean tech committee. About 65 Keiretsu members attended the "discovery meeting" to explore the possibility, Bonnano said, six or seven times as many as attended other discovery meetings.
Bonnano has been involved in clean tech informally since about 2000, but in 2004, after he sold his third startup, he decided to dedicate all his energy to the environment. Over the years it became very clear "there was a massive gap in the financial ecosystem of clean tech," he said.
Having energy experts with the energy know-how and experience to assess potential deals will be an issue. Preston will rely on the expertise of the CalCEF board, which includes Michael Peevey, president of the California Public Utilities Commission; Arthur Rosenfield, the California Energy Commissioner, Mark Levine of Lawrence Berkeley Laboratory; and Ralph Cavanaugh, senior attorney and energy program director for the Natural Resources Defense Council.
Of course, not every clean energy startup will make it, despite the explosion in interest. Ian Sobieski, a founder and managing director of Band of Angels, the Silicon Valley organization dedicated to funding and advising seed-stage companies, says his fund has looked at plenty of clean tech deals among the 100 deals a month it considers, but to date it has only invested in two.
"My prediction is most investors will lose money chasing this new important sector," he said. "But very important companies will come from it."