Bruce Pasternack

Can Government and the Private Sector Actually Work Together?

February / March 2010 Volume 8 Number 1

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Bruce Pasternack, 62, was dubbed a whiz kid when he served, in his mid-20s, as principal staff to the White House Energy Resources Council during the administration of President Gerald Ford. He later became the senior energy policy official in the executive branch while at the Federal Energy Administration (a predecessor to the DOE). For nearly 30 years, he was a senior vice president at Booz Allen Hamilton Inc. and served as managing partner of the firm's energy, chemicals and pharmaceuticals worldwide business and its organization and strategic leadership practice. Most recently, he was president and CEO of Special Olympics, Inc. He now works in cleantech venture capital in Silicon Valley. Pasternack has co-authored two business books, The Centerless Corporation and Results.

This interview was conducted by Ken Castle following Pasternack's appearance as a speaker at SDForum's annual conference, "State of Clean Energy: Global Challenges and Opportunities," which was held in January on the campus of Advanced Micro Devices in Sunnyvale, Calif.

In 2009 we saw a substantial decline in clean-tech investing, on the order of 33 percent worldwide, from $8.47 billion to $5.64 billion. And there were failures among a number of startups. What went wrong?

2009 was a tough year in general for the industry because exits weren't happening, and that's traditionally how investors get their money back. With the lack of exits and with less funding available than before, venture capital firms have had to focus on making sure that the companies they had already funded had the best possible chance of success. While we continued to look at prospective deals every week, and we made some investments during 2009, we spent as much time as we could on the existing portfolio, preparing them to be full fledged companies and to have good exits.

Do you think there will be more VC funding in clean-tech industries this year? Are there any positive signs on the horizon?

I think there have been a couple of key developments. One is that we have started to see exits. The first company to exit in 2009 was A123 Systems, which went public, and there are several others that have already filed S-1 documents for IPOs. A123 Systems has a market cap today of about $2 billion. Clearly, the pace has picked up. A number of venture capital firms are getting their companies ready for some kind of exit, through mechanisms such as an IPO or an acquisition. At the same time, a lot of venture firms are deploying more capital into new companies. The industry got through a tough period and is back in the direction that it was going some years ago: being aggressive in a number of areas. But it's hard to say how many IPOs we'll see this year. I've had conversations with industry people who think that the range may be on the order of five to 10, but it will depend upon market factors.

Some VCs have suggested that the era of the big capital intensive plays may be over, because of the high investment and risk. Do you sense any reluctance to fund more of these deals? What's the comfort level likely to be for the VC community this year?

Venture firms will continue deploying significant amounts of capital in a number of companies. But investors are focused on using this capital efficiently, so that we don't have to put in enormous amounts of money or build big syndicates of players to provide the necessary funding. Alternative sources, including government grants or guarantees, make it less painful to raise the money that clients need. On early stage deals we ask what it will take to get to a fully functional company in terms of the capital, technology and management team. At the end of the day, it's about making sure that the game plan has a good chance of success.

Speaking of game plans, what has changed in the VC playbook for clean-tech investing?

I think the external supply of capital from the federal government has been a sea change. Also, there's more willingness to link up with corporate partners that are in the same technology or business space as your portfolio client. There are oil companies investing heavily in venture-backed biofuels companies. There are power utilities investing in solar, wind and other technologies. Thus, portfolio companies seeking startup capital may be able to engage a mosaic of sources. From our perspective, this diversified approach removes some of the pressure that might otherwise confront a single investment entity.

Not all VCs are happy about this new partnership with the federal government. Some are worried that it could be disruptive, that it could inject uncertainty into the exit timelines, since it's hard to predict the commitment of future administrations. One VC has said that he won't touch a company with major federal backing. What's your view on that?

Most VCs in the clean-tech space know that there are opportunities in the federal government. But they also realize that you can't rely solely on government, as they look at both the sources of capital and the deployment of that capital. And these strategies are not the same for every company. Some companies utilize corporate partners and/or federal partners. You might have a corporate partner interested in one aspect of your business that might not be fundable from DOE. What this variety of options has done is to force the leadership teams in these companies to figure out how to allocate their time, set priorities and pursue a path that has the greatest likelihood of success.

How do you see this new paradigm unfolding?

There is no one-size-fits-all model; it is really sector- and company-specific. Every company we look at within energy has a different story. Whether it's solar, wind, smart grid, biofuels or batteries, you have to think about what is special about that segment and who are the most likely players to attract as investors or customers. You have to think about how this is going to unfold in terms of sources of capital, technical breakthroughs required and the business model. You also have to look at the support that might be needed from investors. Some of these factors are more important now than they were before. And I think it's important to ensure that the boards of these companies understand the nuances. Sometimes the composition of the boards needs to change over time as the company evolves.

Many venture capital firms are getting their baptism by fire in juggling private capital with a sizeable federal loan guarantee, especially in meeting government deadlines. What advice can you give to other VCs and portfolio companies that might consider a similar strategy

Last year, the loan guarantee process was, in effect, a new source of funds for these companies. And the rules were being written by DOE in real time. With a new administration and new players in the agency, the challenge was in finding something that would make your company stand out. Companies that wanted federal backing had to develop new processes, contacts and relationships. They had to adjust to rapidly changing rules and connect with a new set of people in the government. For the past year, companies were learning on the fly, jockeying for one of the early grants or loan guarantees. This has required more time of CEOs, because they have to fly back and forth to Washington if they're going to understand the opportunities and requirements. And, clearly, they have to figure out how to satisfy various constituent investors. A CEO's job is a lot more complex now than it used to be.

One of your panel members at the SDForum conference said that it's too soon to tell whether these federal initiatives will be successful or whether they will constitute, in his words, "a train wreck." Clearly, there is skepticism in the VC community about the ability of the government to make the right decisions, since so many embryonic technologies may quickly become obsolete or companies may fail to reach commercial viability. Since you've had years of experience in Washington, what's your assessment of the situation?

This administration has had to build a team, just like corporations. Whether you look at DOE or other agencies, most of them didn't have all the talent they needed when they began this process of creating incentives and giving out money. Every agency had to rethink the team they had and to bring in new talent—€”people who understood the financial implications of these business models and technologies. And they had to do it on a fast track. When you're scaling at hyper speed, you're going to make mistakes both in hiring and in decisions, but on the whole you're trying to have a success story. The staff of the DOE has been under significant pressure to get some things out quickly. People I know in the agency are working night and day on these rush projects, doing 70- and 80-hour work weeks, and (DOE) Secretary Steven Chu is pushing them hard. Because of the volume of project applications, they've had to enlist consultants and other outsiders to help them.

Is the government getting the right people on board?

Well, Matt Rogers, whom I hired at Booz Allen Hamilton, is now senior advisor to the secretary in DOE with the responsibility of getting the stimulus money out. If he is the archetype of whom DOE is bringing in, I feel pretty good about the government's direction. Matt is someone who has excellent academic credentials and a successful track record of management consulting in the energy field. He understands and appreciates the need for speed and quality. And I know that he and his team are working extraordinarily hard to get as much money out as quickly as possible and to make sure that it's deployed as intelligently as possible.

While a lot of VC money has been flowing to high-profile technologies, such as solar and biofuel manufacturers, it seems that energy-efficiency plays have been flying under the radar. And yet companies such as EnerNOC, which helps utilities manage their power demands, seem to be reaching profitability more rapidly. Going forward, do you think the VC community will focus on these lesser-known areas of opportunity?

When you look at a company like EnerNOC, I'm reminded of an old adage about energy: It's cheaper to save a BTU than it is to create one. And that's probably still true. If you can reduce the demand, or the need, then you are avoiding certain expenses you would otherwise have. Yes, there are attractive opportunities in smart grid and reducing demand. But whatever investment you make in the early stage, you have to ask the same types of questions: What is the technical differentiation? How enduring is this technology likely to be? How well is the company protected on intellectual property? What's the timing of each phase of development from concept to commercialization? What capital and resources does the company require to be successful?

There are skeptics who question the scalability of solar and wind, who say that we can't get there fast enough to meet international demands or to slow global warming. There is a sense that what we're doing is too little and too late. What's your view?

The needs that we have in dealing with the energy issue and climate change are staggering, in terms of the scope. There is no one technology winner, no magic bullet. So we're going to require a concerted effort across a whole range of technologies on both the supply side and the demand side. And we'll need the political will of many countries around the world to deal with this problem, or opportunity. Therefore I don't see any one thing being the answer. Even if we do everything that we're talking about investing in, we still won't necessarily be where we should be. It's that large of a challenge. We're not going to solve it with one or 10 or 100 venture capital projects. But we will make a significant dent in the problem.