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Cleantech Investment Insight / Exploring decentralization

This is also posted on Cleantech Investment Insight.

On March 11-13, Cleantech Group is hosting the largest and longest running Cleantech forum in the world, Cleantech Forum San Francisco 2014. This annual gathering of the global cleantech innovation community offers a comprehensive development program along with exclusive opportunities to network and make deals happen. In the lead up to the Forum, we’re chatting with leaders across the resource innovation space to discuss the changes decentralization is causing across different markets, end-users, enterprises, technologies, and business models. 

Andrew Chung is one of six partners at Khosla Ventures, which manages over $3 billion of committed capital and has invested in over 80 sustainability companies.  Andrew serves on the boards of companies that include Lanzatech, Ecomotors, Ambri, Pellion, and BioConsortia, and also leads the firm’s Asia activities.  Prior to Khosla, Andrew helped build the firm’s cleantech practice area at Lightspeed Ventures, which invested in companies like Solazyme, Nest Labs, LS9, Coaltek, Quantumscape, and Stion. Follow Andrew on Twitter: @achung

We’re looking forward to having you participate in Cleantech Forum San Francisco 2014. As you know, the theme is Accelerating system change: towards a decentralized future. Can you tell us about some of the changes you’re seeing underway in our energy and resource systems? 

We’ve believed for a long time that solving the world’s energy and resource problems will require a broad approach – no single technology or central institution can solve the problem alone, and it will require enterprises and consumers to each play an active role.

Large enterprises are embracing new technologies from our portfolio at a faster clip than ever: as customers, putting up solar panels, implementing LED lighting fixtures, installing electrochromic glass, upgrading fleet vehicles with more efficient drivetrains, and using building energy efficiency software.  Also as partners, using their balance sheets to fund commercialization for startup companies and back new financing vehicles for renewables.

Consumers today are more empowered than ever to make a dent in the problem – when they drive their electric vehicle, install a smart thermostat, participate in an energy savings program, or rideshare. Relying on utility-scale projects alone to drive the cleantech revolution is not enough, and the decentralized actors in the system are increasingly more important in contributing to the overall solution. It’s an inspiring movement.

What excites you most about other trends in resource innovation that you’re seeing at Khosla Ventures, and expect to have an impact in 2014?

At Khosla, we’ve always aimed to invest in sustainable technologies across energy, food, and agriculture, and continue to be committed to that effort. With over 80 companies in sustainability, it would take a few hours to discuss all the impactful trends we track in any real depth!  Let me pick a few that I’m particularly excited about.

One major trend is in the area of carbon mitigation – eliminating the release of carbon (CO & CO2) from industrial waste gases to boost air quality and reduce pollution. I work with Lanzatech, a company that will eliminate the world’s smokestacks by converting an industrial factory’s waste gases into valuable fuels and chemicals on-site through a unique biochemical process. Lanzatech’s potential to curb the release of greenhouse gases like CO and CO2 has dramatic consequences in China, which is why #1 domestic steelmaker, Baosteel, partnered with Lanzatech in a joint venture to fully fund their first plant outside of Shanghai.  Zero capital required from Lanzatech. This is cleantech done right. Calera is another company that’s working on solving the carbon emissions problem, by capturing CO2 at factories and converting that carbon into calcium carbonate to produce cement and other building materials.

LED lighting continues to be a fast-growing market as the cost per lumen of LED’s continues to drop with increasing production.  We’re early investors in a company called Soraa, which was founded by Shuji Nakamura, inventor of the Blu-Ray Player for Sony. They’ve developed a material that provides five times more light per unit area than any other LED material out there.  This enables the company to produce bulbs that operate with a single point source of light making it the best performing and more attractive bulb (think Apple-style form factor) to win the market. We’re targeting less than one-year payback, and 80 to 90-percent efficiency.

In the area of food, we’ve invested in startups that are reinventing the way we produce meat, cheese, eggs, mayo, salt, and even candy. Hampton Creek Foods, for example, uses plant science to produce egg-free alternatives for a wide range of food products – including mayonnaise and cookie dough – to disrupt the 1.2 trillion annual egg market that today requires highly energy-intensive and polluting chicken farming. We’re excited about the potential of plant and food science to dramatically reduce the resource intensity associated with raising animals.

In transportation, we’re seeing progress in both vehicle electrification and innovations in the internal combustion engine. Battery technologies like Quantumscape, Seeo, and Pellion continue to get better, with leaps in energy density and faster charge times. The vision of developing a next-generation internal combustion engine is being realized with EcoMotors, which targets 20 to 50-percent better fuel efficiency at relative cost parity to current technologies.

From a geographical standpoint, we’re seeing a big trend with foreign companies and investors looking at clean technologies as a way to ensure their country’s survival. China is leading the pack, recently surpassing the U.S. as the leader in renewable energy deployments and (depending on the source) is spending $40-80 billion per year in developing or rolling out clean technologies.  In the Khosla portfolio, we’re already seeing a trend of large Chinese companies partnering with our companies – including Lanzatech, Ecomotors, GreatPoint Energy,NanoH2O, and Hampton Creek, to name a few – to help the country address their survival-driven demand.

Are there any challenges facing the market in 2014 that keep you up at night?

With cleantech under pressure, I am concerned that fewer entrepreneurs will commit their energies to the sector and that the domestic funding gap will widen further.

It’s important for our entrepreneurs, corporate partners, and policymakers at all levels to recognize that the need to reinvent society’s energy, water, food, and agricultural infrastructure is just too massive and critical to ignore. Taking on the incumbent industries is a multi-decade effort, and we’re only in the 2nd or 3rd inning of an extra-inning game with cleantech. We can’t afford to stand back and do nothing, lest the U.S. fall behind other countries that are willing to take a more progressive, long-term view.

Without a doubt, private funding for sustainability has slowed in the U.S., and public funding has also declined. Companies raising funds in this environment need to understand that the bar has been set much higher. Either their technology needs to be highly disruptive and transformational, or their product/business model needs to create a strong emotional pull with end-users that facilitates rapid decentralization and fast adoption.  More than ever, incremental solutions will have a difficult time getting funded. Later-stage opportunities need to show significant market pull and customer validation with reduced scale-up risk – often with corporate partners that can take a product to market or fund commercialization.

Looking back on the past year, what were some of the highlights?

Despite media reports to the contrary, sustainability is alive and kicking. Companies with “black swan” type potential, resourceful management teams, and innovative business models continue to survive and thrive.  At Khosla, we aim to invest in sustainable technologies across energy, food, and agriculture that meet such demanding criteria and have seen a number of our portfolio companies make great progress on the path to commercialization. As a result, despite significant pullback on the sector from other venture firms, we have stayed committed and been successful at attracting interest for our portfolio companies.

I mentioned Ecomotors earlier in the conversation – we just announced today the signing of a 51/49 joint venture with an engine-producing subsidiary of one of the top three auto OEM’s in China, First Auto Works Jingye (FAWJ). FAWJ will invest more than $200 million into building an engine plant – initially with a 100,000 engine capacity. This follows our first deal done in China a year ago, which was a non-exclusive licensing deal with Zhongding Power group, a large engineering and components business that is in the process of deploying $200 million to build an initial plant for the Ecomotors’ engine.  In both cases, zero capital was required from Ecomotors. This is truly cleantech done right.  Not to mention, Lanzatech recently completed a successful demonstration of its technology at one of Baosteel’s production mills, and companies like Soraa and View moving into production phase. It’s been an exciting year.

On the fundraising front, View, maker of energy-efficient electrochromic glass windows, closed on a $100 million round recently and was one of roughly a dozen companies in our portfolio that successfully raised significant capital in a very challenging financing environment. We’re about to announce another three to five more successful financings in the next month or two.

Tesla’s performance on the stock market was also a big story in 2013 and shows the potential value creation for a sustainable technology that achieves strong product-market fit.  Other notable venture-backed exits included Climate Corporation (backed by Khosla, acquired by Monsanto), and Nest Labs (backed by my prior firm Lightspeed, acquired by Google).

What do you like most about what you do at Khosla Ventures?

I am lucky enough to spend each day looking for transformative technologies and business models that have the potential to change the world for the better – from energy to food, from education to healthcare. It’s incredibly meaningful work that is made more exciting by the opportunity to work closely with partners like Vinod Khosla and Pierre Lamond, who are among the greats in venture capital. Beyond technology and team, what I like most about my profession is the ability to partner with the entrepreneurs and visionaries and work closely with them to build great companies that can overturn industries. It’s a humbling yet fulfilling experience.

Why have you chosen to speak at Cleantech Forum San Francisco 2014? In this digital era, how important is it to connect with peers in person?

I believe it’s important to participate in events like the Cleantech Forum to remind the participants in this critical ecosystem – entrepreneurs, investors, corporate partners, utilities, policymakers, taxpaying citizens – that the cleantech market is not only alive, it’s vibrant. Digital discourse and socialization is important, but it doesn’t replace a live forum in which to trade ideas and debate issues. Given the importance of partnerships to succeed in the cleantech world, I think it’s more critical than ever for key stakeholders to meet face-to-face to build trust and nurture relationships.