CMEA Capital's on the prowl (page 2)

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With the stimulus package, who stands to gain the most and who do you believe will get left out, and why?

To the extent the stimulus package enables the funding of basic research, there will be some mistakes and some failures. The U.S. Department of Energy (DOE) will have to set expectations straight in terms of the outcomes of funding basic research. What is most important is to maintain an economy rich in science and avenues for training of scientists. A rich reservoir of science will provide the necessary framework for the development of new technology and products. After
all, who could have predicted the computing industry or the Internet as outcomes of the invention of the transistor at Bell Labs in 1947?

Innovation doesn’t come if you don’t have the basic science that’s driving the technologies. I think Obama has recognized that, when he talks about "an innovative economy."

I believe that the best clean energy projects will be selected for government support to facilitate scaling. There will undoubtedly be political considerations such as the perception that it is essential for the U.S. to maintain an auto industry as a part of the perceived need to maintain our competence in manufacturing. Clearly, some people will feel left out when their industries or capabilities are not perceived as worthy of support.

What are some of the challenges you’re seeing companies face in applying for DOE loans and government funds?

A big challenge for companies is to justify their ability to devote scarce resources to applying for loans and government grants in the face of probable fuzzy responses and unknown outcomes from the government. The government will be hard-pressed to recruit, motivate and sustain the staff required to manage this activity. A big challenge will be to achieve clarity in terms of expectations for product specifications and scalability requirements.

Which companies in your portfolio are you seeing seeking government funding, and why do they need it?

Virtually all of our U.S. companies developing products and processes for clean energy are seeking government funding. The need is to obtain support for technology development related to new products or scaling the manufacturing of products already introduced to the market. This need is exacerbated in the current credit-constrained business environment.

Which ones have been successful in being approved, and how do you want to see the funds used? How do you believe the infusion of funds will speed your return on investment?

Solyndra and A123Systems are making good progress toward obtaining loan guarantees for projects to facilitate scaling of production (see Solyndra nabs $535M DOE loan guarantee for 500 MW factory and Cash shortage? Not in wind). A number of other companies have recently applied for funds under the Advanced Research Projects Agency-Energy program for technology development being administered by the DOE. It is too early to tell the outcomes from these applications.

Funds should be used namely for new product development or scaling the manufacturing of products already introduced to the market.

Return on investment is an exponential function of time. Whatever we can do to reduce the time to market will improve the return on investment from a successful scaling project or a new product development. Support in the form of loan guarantees for scaling is critical in these times of constrained credit. Successful projects will create dividends for the government in terms of increased employment and the increased income and sales tax revenues from newly employed
folks. For example, it is reported that Solyndra’s project to scale manufacturing of its innovative solar panels will employ 6,000 people during the peak of the plant expansion project.

Are you seeing a need for cleantech startups to find incumbent partners in order to commercialize their offerings, and is this a good or a bad thing?

This is a good thing—and something we have always encouraged our portfolio companies to do. As noted earlier, the scaling of these clean energy processes and products will require significant capital due to the vast size of the market for energy. This requirement is occurring now in the face of one of the most difficult credit environments in more than 50 years. Upstream and downstream partnerships will ensure the most efficient allocation of capital. Our investments should focus on the development of a robust technology platform that can attract the interest of the upstream and downstream partners.

As investors, this approach maximizes our return on investment due to the allocation of capital to what we do best and to what our partners do best. It is incumbent on us to select only the very best platforms for development. For example, Codexis is applying a platform to the development and manufacture of biofuels that was originally created for the development of pharmaceutical products by its parent company Maxygen. This platform is protected by about 500 patents. Our
partners will be comforted by this robust intellectual property position.

Do you have any advice for cleantech companies looking to raise funds in the current environment?

They have to be very cognizant of the capital requirement, the road map enabling them to obtain the capital they are going to need, and scale. They have to really understand who their customer is, and empathize with that customer and recognize the cost and performance equation that they have to satisfy to meet that customer’s needs. They have to be customer centric. I do not think a "build it and they will come approach" will work.

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