The Silicon Valley Entrepreneur – Investing in Clean Technology

good evening and welcome to the Silicon Valley entrepreneur a series of conversations with startup founders and the investors work with them to help turn their companies into viable fundable businesses i’m chris gill president and CEO of s-phase the Silicon Valley Association of startup entrepreneurs the largest and fastest-growing not-for-profit for entrepreneurs in Silicon Valley and this week I’ll be interviewing Paul Holland the general partner who coordinates clean technology for his venture firm foundation capital Paul good to cease thank you for coming along thank you and welcome to the circum Valley entrepreneur first can i ask i know you started out at the SLI Institute Stanford Research Institute so how did you go from there to venture capital and then clean tech right it’s a security story but I’ll do it as quickly as I can i started at Stanford Research Institute esri international in 1984 and while I was there I was doing research on a variety of topics that’s what it was it was a think tank and as time went by more and more of our clients were interested in more technology related information advanced technologies things like advanced structural ceramics ultra large scale integrated circuits optical storage so I became the person responsible for monitoring some of those technologies as I moved up in my career at sr i– i then got an opportunity to go to a smaller boutique firm that was focused in one of those areas while I was getting my MBA at night at Berkeley and when I was finishing my MBA I got a phone call from a friend of mine my best friend from sr I and he connected me up with this young entrepreneur who was my age a guy named Reed Hastings and so we talked and Reed said I’ve invented this new form of software called purify do you want to come and help me take this product to market and I joined him in full time in 1992 we took that company public in 1995 as pure software he and worth about a billion dollars after a while did that during the course of that time moved over europe r and europe for them for a couple of years which was very fun and then finished that gig went and did a sabbatical traveled the world with my wife who went to we’ve been to 50 countries together so nice nice time grew my hair out got the ponytail the whole thing came back to the venture capitalists who funded pure software auntie rackleff from now benchmark capital and said what do you have for me to do next and he said I got this thing called kana you should go check it out and I became the head of worldwide sales for a company called kana communications 18 months later we took that company public it was worth nine billion dollars for about 15 minutes during the boom which was very exciting and when I was finished with that I got a call from a friend of mine at foundation capital and said we’re thinking of adding a partner in your area of discipline do you want to come and join us so i ended up moving over there in 2001 wow that sounds awfully simple straight floor I’m sure it wasn’t that I wasn’t that I had a lot of sleepless nights along the way but it end up with some good outcome okay so how did you go from there to now being the lead on the on the cleantech practice yeah well cleantech i handled from a bunch of different angles basically i give it from one describe the first element of it was really around luck back in February of 2002 a friend of mine from Cana who had been a professor at Stanford had moved to Dartmouth College in Hanover New Hampshire to run the Entrepreneurship program for the business school there so he called me and said Paul would you come and do a one-day kind of teaching gig and I done these before at Harvard and Stanford just one day on how to start companies and grow revenue and so forth so after an arduous trip to hanover new hampshire which i thought was just a suburb like we were just outside of boston i didn’t realize it was a long long way and i drove through a snowstorm I got there and taught my class did the office hours had dinner with some students and in each one of those increments to students joined fellow named Tim Healy was was the key guy and in his partner David Brewster and they had come up with this idea now this is going back again to 2002 that they called demand response and to be honest with you I didn’t quite get it when they first explained it to me and I’ll tell you what happened to the thing later but they said well we’ve done this project it’s our class project and we won the business plan competition for demand response and I said well how does that work and they said we’re using Southern Connecticut as our proving ground so we

went around to all the large users of energy in Southern Connecticut the Safeway stores the community colleges and so forth and we said Chris you run operations force a place up in Connecticut you’ve got 150 stores let me sign a contract with you where maybe up to 4 hours at a time four or five times a year I’m going to take you off the grid I’m going to kick on your backup power generation I’m going to dim the lights in your store I’m going to raise the temperature in your freezer but again for only four or five hours at a time and I’m only going to do that a handful at times a year to which you’d reply and i’ll pay you 150 thousand dollars for that by the way to which you replied where do i sign because you were doing all that work anyway as far as your backup strategy that’s part of your job so these young guys went and they signed up safeway they signed up these various different places then they went to the head of local utility and they said Joe you run Southern Connecticut utilities I’ve got 20 megawatts of power I can deliver it within a half an hour’s notice and it’s from your existing customer base that’s a very reliable source and I can deliver that to you at any time and is that interesting and Joe who had been testifying before Congress because of brownouts and his facility said yes it’s very interesting and i’ll pay you ninety thousand dollars a megawatt per year for that capability so that was februari 2002 later after a bunch of twists and turns my partner Adam grocer ended up making an investment in this company now called EnerNOC an turnock went public was worth a billion dollars last year after its IPO company with him somewhere north of a hundred million dollars in sales this year I believe those are their public numbers so it’s a very exciting company and that was my first introduction to to clean tech at that level okay now from being a niche area only a few years ago most VC firms now have a clean tech practice and investments in clean tech according to pricewaterhousecoopers looks set to exceed software in the not-too-distant future we have the software bubble in two thousand is this another bubble in the making I think yes and no there are certainly areas of cleantech that are very very heavily invested and at foundation capital we’ve done our level best to stay away from those but I’m sure we won’t be unscathed at some level very broadly speaking the way we thought about this is this notion of the difference between supply side and demand side so on the supply side you have the fairly traditional things you’d think about ethanol biodiesel solar and so forth we’ve done a little bit of work there but the vast majority of the work that we’ve done is on the demand side and the demand side for us are things like smart grid green materials energy efficiency those type of things we think saving a watt is a lot easier and a lot more cost-effective than creating a new one and we’ve made most of our investments on that thesis and knock wood it’s worked out quite well for us okay so but end of it is it is there a bubble or is this going to have have legs and continue to be an evolving area for the next several years I think that what you’ll see like you saw on the internet time period is a rolling series of bubbles that will happen in different categories I think if you go back 18 months ago there was a bubble that developed around ethanol absolute ocean that everybody had to have an ethanol investment and so you looked at many many companies and they had ethanol investments that bubble has largely burst we saw some failures we saw some companies unable to go public and so forth well we’re probably perhaps in the midst of a solar bubble now it’s a little bit hard to tell that one’s hard to read because there’s tremendous demand if we look forward into the coming decades see solar is going to be a bigger and bigger part of the energy equation so it’s hard to bet against it at some level and yet within specific cases they’re probably pond times when it’s overvalued we haven’t yet seen a bubble in the areas that we’ve concentrated on the smart grid energy efficiency demand response those are areas in which we still see very robust demand now on the public markets all of those stocks and most all of those stocks have seen some pretty significant deflation but that’s a little bit of a sign of the times ok so I’ll definitely come come come back to that but it’s something that came up when i was up at stanford recently one of the differences demand for energy between industrialized nations and those without power distribution networks because there are different opportunities in those countries can you keep talked to that little bit sure so if you think about very broadly speaking the two worlds the world of the grid you know where the grid is well established and in place and so forth and the world in which the grid is not well established it’s either spotty it’s unreliable in some places is just fundamentally doesn’t exist so in the world that’s called the advanced world lack of a better way to describe it where the grid is well established we’ve had rural electrification for close to 100 years in some cases in some cases a little more in some cases little yes in the US such a large land mass it took until the 30s and 40s to really get to where you had ubiquitous electrical power capability for residences all across the board if we look at where we are now in the advanced world from from a utility perspective we’re about to see a very major change over really the most significant one in the last hundred years and that’s the difference between analog technology and digital technology so at the level of the meter itself

where you and I grew up with this notion of the thing that spun round and round there was always a gentleman that would drive this truck up and you mark down how much was used that’s about to go away in its entirety the companies like Proctor dub procter and gamble like of the civic gas and electric from gamble on a different way but PG&E yeah companies like Southern California Edison companies like farter Power and Light have already made large-scale commitments and large-scale public pronouncements PG&E is an example is committed they’re going to convert their entire meter infrastructure to digital meters by the year 2012 that’s a massive change over and a huge opportunity of the neighborhood of a trillion-dollar opportunity just in that segment alone hmm so okay but what happens to the requirement for clean technology in a country with a distributed power capability and one without it right such as India or China yes so what what are the differences that you’re seeing in opportunities in those two two types of countries so I think in the in the first case and in the places where the infrastructure is already in place we’re seeing huge opportunities to upgrade and modernize that infrastructure it’s it’s almost medieval it’s it’s the technology is so faulty and so inefficient at some level some of the grid has really not been updated for decades yeah and it’s right for that now both from a regulatory environment from the cost of energy from the moral imperative around global warming from government regulation it’s all going in one direction and that’s to really modernize the grid in the in the developed world in the less developed world I think what we’re seeing are or distributed sources of power that are being generated you see small you know hundred kilowatt plants you see half a megawatt plants you see things like that that are being done small-scale hydropower to take advantage of places where their villages where there might be running water but no other logical source of power we’re seeing interesting variants of this now we’re seeing solar-powered water purification systems that are going in to some of the really rural environments in China China already leads the world and solar thermal technology is as you probably know if you go around in most of the world China virtually every house has a solar hot water heater on the roof with solar thermal panels to heat the water so we’re already seeing a lot of that happen it’s not yet grid connected and certainly not digital and a full-scale network along the lines of what’s happening in in the West but over time all of that has to has to move in that direction okay so just to go back and that you youyou said earlier that you’re tending to focus on opportunities as far as your investments are concerned where you can save energy right rather than do new energy so guess so on most of your investments happening in North America and indeed in the industrialized area and can you give some examples so yes most of our investments are in North America but nearly every one of our companies will have a global reach it either has it today or it will have a global reach so I’ll give you a handful of examples in different categories one is broadly speaking the smart grid so we have three companies that are very active in the smart grid and our NOC the one I mentioned before that does demand response technologies which now has contracts all across North America has contracts in Australia has contracts in Europe so it’s becoming a global company very quickly to give you a sense of the scale when we think about the energy that can be saved by kind of repurposing energy the way that inter not does but its demand response system they’ve occupied somewhere in the neighborhood of a couple of gigawatts of power we think that the world capacity for that is north of 760 gigawatts okay so there’s an a massive massive market out there that will be populated over time by these demand response companies in some form or another another area that that we focus on around smart grid is as I mentioned the digital metering technology yes so we have a company called silver spring networks that makes the operating system and networking software for the last mile of metering which has always been the really hardest point to crack many many companies have attacked this and the one who succeeded yet silver spring is in a position that is tremendously wonderful for them from an opportunity perspective they’ve sold both pacific gas and electric and Florida Power and Light the two largest contracts to date and this is a company that will have literally hundreds of millions of revenue in their backlog and with tremendous opportunity ahead of them internationally and then finally within that category we have a company called e-meter and what e-meter does is very simple they make the middleware solution that connects up all these smart meters e so when the utility wants to do something like differentiated pricing around certain times a day or certain types of usage e-meter creates the software that allows them to do that to measure it to analyze it and to make it actionable so that’s in that one category and smart grid those are a few examples okay so you mentioned earlier there’s obviously considerable pressure to move away from fossil fuels certainly in the industrialized world but some of the previous darlings of cleantech like the biofuels like hydrogen fuel cells I

seem to become tarnished of late what’s the current status and trends in these areas right so I think if you if you look at the area of the supply side which is what you’re referring to you know there been a number of false starts and I think I don’t question anybody’s passion around it I question the timing and quite frankly I question the appropriateness of venture capital as a model for some of these things because really these are large-scale almost governmental level initiatives that are required to get a hydrogen infrastructure in place to get a biofuels infrastructure in place and yet there are some very intriguing investments people have made in that arena I think that places on the supply side that seemed to me at least personally more intriguing are around solar are around what are called ppas or power purchase agreements there’s a company called Sun run that we recently invested in it out of San Francisco and they’re the leading provider of residential ppas or power purchase agreements here’s an easy way to think about that you’ve got a home and you want to put a 8 kilowatts of power on your home you could call up and spend thirty forty thousand dollars to do that or you can call SunRun they’ll bring all the people in they’ll do the installation for you they’ll charge you a fraction of that and then they share the proceeds for a period of years they essentially create the equivalent of a private utility that type of thing is growing very very rapidly now on the supply side we’re intrigued by that we’re intrigued by solar still tremendous amount of opportunity there we’re intrigued by geothermal we retrieved by nuclear I mean those are all things that are very very interesting the demand for new sources of energy is unfathomable I mean it’s it’s almost limitless and so someone is going to be a big winner in that space but we’ve already identified who some of the losers are already and that’s that’s difficult okay so um and I’ll biofuels and hydrogen fuel cells losses in in in your mind for the foreseeable future I wouldn’t say for the foreseeable future I’d say largely for the past up until today it’s been a very very challenging area for investment in part because everybody got out ahead of themselves they said well there we go build this with building refiners build the factories then we’ll be able to get it out into the distribution network in some cases that succeeded in many other cases it hasn’t there’s been some notable failures there I think the other thing that was unanticipated when you come to things like ethanol certainly corn-based ethanol is nobody really quite anticipated what was going to happen with the food markets and the explosive prices that have occurred in food so now you’re in a situation where you’re having to make a trade off between do I use corn for food or to use it to create energy and that’s just not a great place to be when there are so many other alternatives available right and that’s a good lead-in to the another question that’s been batted around along again recently the same meeting up a Stanford some leaders in the energy field up there believe that at least in the medium term nuclear energy is a much better bet than almost any other potential energy source particularly industrialized countries where you have the distribution network what’s your view on that you mentioned nuclear what’s what’s your view on that well I think nuclear is a complicated arena one the waste issues have been solved completely and so that’s still going to be stand in the way of large-scale adoption within established areas within the advanced world because there frankly that’s it’s the not in my backyard the NIMBY complex is going to kick in shul and so people are very concerned about that aspect they’re concerned about safety and so forth however in places such as France that have maids large-scale infrastructure investments there in France generates somewhere in the neighborhood of seventy percent of its power from nuclear sources they’re proving to be very prescient and have really seen over the horizon what the right move to make was in the United States we had a very bored of attempt to do broad scale nuclear we had three mile island we have other issues that came into place that caused us to step back again looking at the magnitude of the need nuclear is going to be part of the solution in some form or another I think one of the biggest challenges with nuclear is the lead time associated with it if you and I agreed today we’re going to go fund a nuclear power plant we’re 10 to 15 years before we turn it on so that’s a long way down the road and I think a lot of things will have to happen as intermediate steps between now and then okay so switching gears on this fellow quite away California is rightly famous for its wind farms there’s also experiments with ocean wave generators and these got a lot of press for the innovation they seem to be struggling to reach a viable critical mass are these just interesting projects for a small group of enthusiasts or can they really be major contributors to the grid I think when you look at when there’s no question that wind is going to be a big factor it depends on where you are if you’re in the Altamont Pass you get a lot of wind all the time so that’s great where i live in portola valley we don’t get so much win so it’s not a great local generator for us if you’re on the Texas coast it’s a tremendous amount of wind if you’re as you know if you’re in the North Sea anywhere around me would see you have a tremendous amount of wind and those are places where I think you can see large scale wind generation become a significant part of the solution but it’s not for everywhere and

it’s not for every situation I think when you look at that versus say ocean wave power that the notion of the equivalent of hydroelectric power but done by the movement of ocean waves he very very compelling very promising but extremely early days so that’s a place where huge risk reward kind of ratio for people that are in the venture community if somebody gets it right they’ll have a big win allah you know some of the big winners and solar yep a lot of people are going to get it wrong and i’m going to spend a lot of money on prototypes that ultimately won’t be successful okay so i think i’m hearing that that’s that’s currently for the enthusiast at the moment but maybe not for the serious investor so one thing the wind farms the wave generators have got going for them is they can operate in the dark and we’ll solar cell systems continue to be limited particularly in the developed world until better batteries or better ways of energy storage can be developed well so I think that I think certainly batteries and storage technologies are an extremely attractive area for investment right now we’ve looked at a number of those technologies most of our brethren who are doing cleantech investing have looked very closely not too many investments made yet around that because there’s still significant challenges but tremendous area of opportunity to be able to take solar power generated in the day stored at night and reuse it I will say however I think the solution is actually much closer at hand than people realize and that’s in the form of automobiles as we go forward over time what we’re going to begin to see is something that is going to be completely revolutionary and almost entirely positive for for humankind as it were if you look at California with the rules around ab32 which is something that most of the people in a clean tech world are quite familiar with by the year twenty twenty in California if you’re going to build a new residence that residence has to be energy independent has to create enough of its own energy to be able to run its own energy source basically and that’s largely going to be solar but it can be other sources too if you’re in a wind area that could be wind if you by 2030 commercial buildings are going to be required to be energy independent and that’s a complete sea change from where we are today when that begins to happen you’re going to see some really interesting phenomena occur and and I’m pumping this a little bit because I’m headed down that pass in my personal life with what we’re doing with our home but you’re going to find people are going to essentially create the equivalent of energy factories with their homes and with their businesses and they’re going to use those to power their cars and power other parts of their life that are currently run by fossil fuels today in short you’re going to see people put enough solar power on their roofs or on the skins of buildings that can power cars during the day and then they can be used as backup power generation and batteries at night ok let’s talk them about that because you are doing something on that and it’s not actually that far away it’s now 12 years down the road now that’s right in the building industry which is renowned for being a slow in adopting new technologies this is being mandated now you’re ahead of the game we talked about this a bit earlier you’re doing this with you home can you tell us a little bit about that sure well there’s a few different angles to this first let me answer the part about the just the building industry it’s that itself again there is a whole new generation of companies coming out today we have funded a couple of them ourselves one is called calstar and the others called serious materials they’re recreating the building industry product by product they’re creating new forms of products serious materials is a great example they have a product called eco rock it will replace drywall as we know it today drywall today is a very energy intensive product it’s a very intensive product from a carbon off-gassing perspective for a variety of reasons in the way it’s made this new product eco rock is going to have very very low carbon off gassing an extremely low amount of energy used in its production so it’s going to be a complete sea change from what we’re seeing today you can take that and apply it to windows which was serious is doing you can take it apply it to cement and bricks which is what calstar is doing and you just simply go down the line and all the traditional building material products will be reinvented over the next five or ten years in more green formats and that’s an area that’s very interesting to us low embodied energy lower carbon off-gassing or great are great outcomes but let’s speak about the house a little bit so we began the process of designing a new home because we live in a very old home that that’s kind of falling down so we began this process about four and a half years ago about halfway through the design process we got introduced to a woman named and Edmund Edmund sir and an is one of the co-authors of the lead for home standard in California lead is leadership and energy and environmental design it’s a point system and you get a certain number of points and you’re either certified or your silver or your gold or your platinum so my wife and I are both type-a personalities got interested in the whole point thing wanted to get all the points and so we started designing our house with that goal in mind and really with the notion of how green could we make this custom home and long story short we now have on paper the greenest home in the system it’ll be north of 20 points more green than the highest standard 89 points get you to platinum and we’re pushing about 120 points with this house so this is an example of the type of thing that the average buyer could be looking at in 20 years time and what type of the site they’ve been taught him to 12 years time type of theme

you what type of systems are you putting in there sure so there are a whole different things and I’ll try to like boil it down into the essence of it there are handful of categories that are important when you’re thinking about this type of thing energy waste water materials and habitats those are the five areas that we focused on the most okay so start with habitat we’ve taken down all of our fences and we’ve taken all the non native fauna off of our property flora rather off of our properties we want to come and go Guiseley mission so we’ve taken all the non native trees and bushes and so forth and we’ve taken them out with taking over 50 trees off of our property because they’re birches and beaches and maples and things like that that just don’t belong in California they soak up too much water they attract the wrong kind of pests and so forth taking all those out and we’re repopulating the land with native trees here horse chestnuts live oaks and so forth and that will have a positive impact on the on the land from a materials perspective we have only four materials that we’re working with with the house we’re doing wood steel glass and stone some of those are for materials we have no composite materials we have no petroleum based materials going into the house from a waste perspective we’re recycling all of the water that comes into the home in whatever form it goes out and it goes through two forms of filtration one is a regular septic tank and the other is what’s called a submerged wetland which essentially filters the water to where it’s in theory it’s potable at the end of that process we’re never going to test it because it just stays underground and goes out and it’s distributed subterranean into an irrigation field so that’s another area that we’re doing some work around around water and waste management and finally an energy we’re very aggressive with this we’re putting 23 kilowatts of solar power on the roof of the house and that power is more than enough to make us energy independent in fact net energy positive will create more energy and we use over the course of the year but we have three children who are young today but they’ll be older at some point we hope and and we intend to convert our cars to electric cars and over time we think that that’s what they’re likely to drive so our notion is a family is it within two years we want to be completely off of fossil fuels who want to completely out of our lives we want to stop going to gas stations well this is really quite something that not only are you living it through the work you’re doing in investments you do but you’re really living it on a personal level provide something unfortunately while there’s several more things I’d like to ask you about we have run out of time sure okay so thank you again Paul for coming along got it up and goodnight from the Silicon Valley entrepreneur this is chris girl with silicon valley association startup entrepreneurs signing off for this evening thank you you