Peter Nieh

Why Peter Nieh Likes Cleantech

February / March 2009 By: Dean Takahashi Volume 7 Number 1

Print this Article

E-mail this Article

The California venture capitalist has more than $2 billion in
commitments

Peter Nieh, a founder of Lightspeed Venture Partners believes that cleantech is a bright spot of the economy. He knows that investments will slow in 2009, forcing startups to find creative financing, but he is also very optimistic about changes that could occur under the Obama administration. His company has more than $2 billion in capital commitments. Lightspeed raised an $800 million fund in May 2008. The fund is the company's eighth. Prior to Lightspeed, Nieh worked in business development at General Magic, a startup that pioneered electronic commerce and media services. About three years ago, he started investing in cleantech. He spoke recently with Dean Takahashi.

Q: What have you invested in over the years?
A: We've invested in companies like Brocade, Ciena, Informatica, Riverbed Technologies. We started cleantech about three years ago. We backed about five companies. One was Stion, a company that is trying to do more efficient solar cells. Two of our companies are in biofuels, Solazyme and LS9. Solazyme is doing bio-engineered algae for biofuel production. LS9 is doing renewable petroleum biofuels. One in batteries called Mobius, which is doing a next-generation lithium ion battery. And a clean coal company called Coaltek, which is trying to convert low-grade coal to high-grade coal. We're also small investors in GreenTech Media as well. They are doing cleantech media and research.

What was it like making that switch?
The venture business is about looking for a new wave coming. We wanted to find areas with a lot of innovation and change. There is a macro backdrop. A lot of technologists—€” the best and the brightest—€”started getting focused on clean energy. We saw an opportunity. The area looked a lot more mature than other areas such as nanotechnology.

Was SunPower (a solar cell maker) going public in 2005 a galvanizing factor for you?
No. It wasn't something we looked specifically at. We tend to look bottom up. We look for growth and value. If there is a big player that goes public and you see they are going to be dominant, that means it's too late. It's not an area where we should invest. A lot of our focus in solar is not for companies that are incrementally better than the dominant ones like a SunPower, which has its own niche locked up. We look for a difference in value.

I see that cleantech is drawing as much as ten times as much money as other venture categories. It seems scary that it is so capital intensive.
That's right. That's one of the risks of cleantech. We knew that when we got into it. This is a lot more than a company building an appliance for a data center. On the flip side, you get your plant at scale and it is economical. There is a lot of money that is available to help you cookie-cut that out. The hard part is where there is a financing chasm. Say you have a pilot project. You haven't proven commercialization. But you need the dollars to go buy the equipment to prove it and build a factory. The ones who filled that gap were private equity firms and hedge funds. But in this environment, a lot of those dollars aren't there. That's a financing gap. It often takes a lot of capital to get past that financing gap. Joint ventures are one way to create a bridge.

What about the strategy of moving to Dubai, a region that is investing heavily in cleantech. Should you focus on the market that seems to be strongest now?
It doesn't have to be capital like that. It could be corporate partners. There are companies that want to build solar factories and they want to do joint ventures with companies that have a unique technology. They see value in being that kind of partner. If you're a big Chinese firm that is making crystalline solar, you might want to find a technology partner that can get you into thin-film solar. That helps you diversify.

What are some of your predictions about the new year?
It's going to get tougher for startups because of this financing chasm. There will be emphasis on joint ventures and trying not to grow too fast. Startups cannot assume the capital will be there for them. The area of energy storage will be an interesting driver of investment. One driver is electric vehicles and another is grid storage.

There are parts of cleantech that are over-funded and some under-funded. What are you pushing into?
Energy storage is one of those. We are looking at other areas like energy efficiency. Venture firms have been focused on energy creation. Not energy efficiency. The tough part of this is getting adoption. There are simple solutions. If you had a button in every building to turn off the lights that weren't needed, you'd save a lot of money. But to retrofit buildings to go and do that takes a lot of effort. Energy efficiency is powerful, but adoption is tough.

There are companies like Green Plug, which is doing chips to making charging more efficient. Again, the question is how do you get adoption of those better charging chips. That's what you're talking about?
We believe cleantech will pick up in places like China. There is a lot of green field development there. When you build a new building there, you build in energy efficiency from day one. My brother David works at one of those companies, Shui Development. He is building developments with energy efficiency built into them from the start. It means that they can adopt it first and startups can target them. In a mature economy like ours, especially in the current environment, it's tough. There is an adoption problem. In China, you have a not-so-invisible hand of the government that is interested in promoting these things. If you have a concrete that creates a lot less carbon dioxide, can use a greater range of water and produces a cement that is lighter and more energy efficient, that's pretty interesting to China. There are concrete startups. We're not involved with them. But it's a big deal if they succeed.

How do you feel about the scale of the whole climate change problem and how much work it takes to produce change? It seems like it would take too long for investors.
One good thing is the markets are so big. You don't need mass adoption for a startup to have a lot of revenue. If you carve out a niche in solar, and you are the best, there is a lot of revenue there because the markets are large. That helps. The other thing is there are distribution channels. One of the most difficult things for a startup to do is build distribution. That's where government can step in.

Will the Obama administration be more active on this front?
Yes, the role of the government is to fund things that the private market, left to itself, will not fund. I think that a really good area for the government to get involved is cleantech. I think they should create a venture-like fund, staff it with venture people, give them venture economics, and address this financing chasm. A different vehicle can be used to stimulate fundamental research. Fundamental research takes time. There is a high degree of failure. Focus on the companies that have proven technology and need that capital to create scale.

Some of what you are saying will spark protests about corporate welfare or government interference in the market. Where should government draw the line?
That brings to mind the tragedy of the commons. If you have free grazing area, everyone over-grazes and no one protects it. If there is something that is good for the public, you have to think about how to get it to the public. It may matter to the country. There may be a financing chasm.

So there is a return for the country. It's not just spending.
That's right. There was concern about Tesla getting loan guarantees for its electric vehicle sports cars. People complained that you would subsidize a millionaire's sports car. Personally, that may not be the right place. But if they were doing a low-cost model, maybe it would be. The government has to be aware of public perception and manage this. Anything you do will create a backlash from someone. You don't want a few voices speaking really loud to kill the party. The government has to step in and do these things. The government does a lot of unpopular things.

Q: Do you predict there will be a bigger government financing role?
A: Yes, I do believe there will be more government involvement in commercialization.

Q: If the Central Intelligence Agency can invest in technologies, then the energy side can do so as well.
A: My prediction is based on what Obama has said and conversations where there are a lot of people thinking about this topic. We think it would be a very good idea for them to pursue a more active role.

Q: Some of the ideas in cleantech are crazy. Do these amuse you or excite you?
A: There are wacky ideas that you ignore. But bioengineering plants so they can create better feedstock or better fuel, those ideas are strange but they have a lot of merit. There are a lot of environmental or philosophical issues around bio-engineered organisms. But there is a lot of value there. The interesting thing about cleantech is that it's hard to see the value some they create when it comes to global warming. But resource utilization is at the heart of the problem.

Q: Is there more danger of investing in things in cleantech where the markets aren't ready?
A: That's a danger for venture capitalists in general. We have to be ahead of the curve. If we are too far ahead, that is a problem. You can't fund something for 10 or 15 years. The cleantech area requires a longer time. For investors, that means there is a greater risk and a greater reward. We have made some calculated bets in cleantech. But our specific strategy is not to become a cleantech-specific fund. It's part of what we do.

Dean Takahashi is lead writer for digital media at VentureBeat. He can be reached at deantaka@gmail.com.