B-22 ORANGE COUNTY BUSINESS JOURNAL

CLEAN TECHNOLOGY Advertising Supplement

SEPTEMBER 3, 2012

Cleantech Capital Update

How are cleantech companies getting funded? And who is investing?

nterviewer Samantha McDermott spoke with some industry insiders including Taylor Honrath of CleanTech OC; Peter Polydor of Sail Capital Partners; Tim OBrien, co-chair of Stradlings Clean Technology Practice; and Greg Hanson, managing director of First Cornerstone about the above, as well as the opportunities and challenges that cleantech companies are facing today. companies continue to receive the bulk of the money. Early stage companies are receiving the least money showing that cleantech is experiencing the same phenomenon seen in many technology sectors in recent years, where venture capital has focused on funding later-stage companies. In addition, the amount of capital required for cleantech companies involved in major infrastructure projects (building solar farms or production scale biofuels plants) greatly limits the number of these companies that can be funded in their later stages by available venture capital sources. Significant strategic investments by large companies are essential to many of these companies. Peter Polydor/Sail Capital: The biggest hurdle for a company today is flexibility. In the market right now the quantity and quality of deal flow seems higher than ever. From the investor perspective its frustrating as great companies with innovative technologies have to be passed on. What this means for entrepreneurs is they need to be flexible on the time it takes to raise money, the amounts they are looking for and the price they are asking for. Taylor Honrath/CleanTechOC: The reputation of the cleantech industry in the VC world has suffered a bit, partly as a result of unrealistic expectations of VCs and their LPs. A number of early stage investors thought cleantech would be similar to the IT boom we have all since learned that the runway for cleantech is longer, and the time it takes to achieve ROI is more significant as well. At a fundamental level, investors want to see some evidence that a company can commercialize and achieve profitability as they claim to in their investor decks. Investor confidence is everything at a time when the capital markets are increasingly risk-averse.

McDermott: Who do you see cleantech and renewable energy companies turning to for funding? Greg Hanson/First Cornerstone: I see cleantech and renewable energy companies in the early stages turning to potential investors who can also be partners in the project that can provide potentially valuable services for the project. For example, good partners are ones who can make an investment in capital and can also contribute to the success of the company. The benefit is that the active investor is able to help the company achieve success through participation rather than as a passive investor. The active investor lowers their own risk and likely the companys too. Investor contributions can be of many forms other than just capital, including being able to make key introductions to potential buyers of your product or service, providing engineering and construction services, access to economic development incentive programs, or even site development, to help the company be successful. Tim OBrien/Stradling: In Stradlings practice, the primary sources of funding are venture capital and private equity funds. Equity financing from the public markets is generally not available for emerging companies in the cleantech space. This is a similar issue for many companies in the technology and life science sectors. The lack of significant assets or revenues makes these companies poor candidates for bank loans or other types of debt financing.

Peter Polydor/Sail Capital: Cleantech companies are facing an even more competitive market for fundraising today than ever before. The number of venture firms in the space is shrinking whereas the number of companies seems to keep increasing putting downward pressure on new deal valuations. Still, according to the Cleantech Group Q2 report $1.6B was invested so companies looking for funding should continue to pursue the venture capital and corporate ventures. Alternatively entrepreneurs should add to the list family offices, angel investors and any kind of government funding they can find.

Tim OBrien

McDermott: To Gregs point, we know investors will back a company that can demonstrate its assumptions can be achieved on a commercial level. Which of these companies are getting funded? Peter Polydor/Sail Capital: Looking at the numbers no one subsector of cleantech is now the majority of funding with capital flowing into everything from transportation and energy efficiency to water and wastewater technologies. The short answer is companies who have Tim OBrien Tim OBrien is a shareholder at Stradling Yocca Carlson & Rauth and is co-chair of the firms Cleantech practice. He represents companies in their formation and organization, initial and follow-on public offerings, venture capital financings and private equity investments, mergers and acquisitions, antitrust compliance, and other general corporate and securities law matters. In addition to his cleantech clients, he works with life science and technology companies in transactions involving the nations leading banks, investors and other professionals. continued on page B-71

Greg Hanson/First Cornerstone: The biggest hurdle I see is if the company does not have a commercial-scale demonstration facility. Its one thing to have a research model, or lab bench model, or small pilot model, but the risk that exists in proving the ability to demonstrate that the company can achieve commercialization at the level needed for profitability is a fear that investors have. Investors will ask, Are you able to demonstrate that the assumptions in your financial model can be achieved at a commercial scale?

Taylor Honrath

First Cornerstone
Taylor Honrath/CleanTechOC: First, its important to make the delineation between cleantech companies raising a Series C round, and cleantech companies that are attempting to raise their first round. Those in the former category are still able to successfully approach VCs (and in some instances private equity) to continue funding their efforts at scaling up and commercializing their product. Startup cleantech companies raising their first round, on the other hand, arent having quite as much luck with VCs at the present time, due to the diminished appetite for risk in the VC world. The consequences of this trend are considerable new innovations are being underfunded, and entrepreneurs are relying much more heavily upon friends and family, foundations and angel investors. Unfortunately, this funding strategy is not sustainable for most companies, highlighting the critical importance of appropriate government support during times when the private investment market scales back.
Gregory Hanson

Taylor Honrath Taylor Honrath is the director of CleanTechOC, a regional nonprofit trade association serving the cleantech cluster in the Orange County area. CleanTechOC serves as the connective tissue between the public sector, private sector and academia and seeks to promote economic growth and job creation in Southern Californias cleantech industry. Prior to joining CleanTechOC, Taylor was the legislative aide for Mayor Bob Foster in the City of Long Beach, and has also worked in Sacramento and Washington, D.C. He is a graduate of California State University, Long Beach, and resides in Seal Beach.

McDermott: What are some of the biggest hurdles these companies face when trying to raise capital? Tim OBrien/Stradling: Venture capital financing has fallen significantly over the last year with the decline being most obvious in the solar energy sector. Solar, transportation and biofuel

Peter Polydor

Gregory Hanson Greg Hanson is managing director of First Cornerstone with over 30 years of working in public and private companies, including 20 years as CFO or head of finance operations. He focuses on financing strategies and business plans for commercialization of renewable fuels, renewable feed and other co-products from cellulosic waste, biosensor devices, biotechnology, alternative energy products, project development and finance, and investment banking. During his career he has listed two public companies on National Stock exchanges and completed approximately $1 billion in financing transactions, licensing and partnering arrangements, M&A activity and cost avoidance measures to fund operations.

Peter Polydor Peter joined SAIL in early 2009 and has been an active entrepreneur, market analyst and policy advisor. Currently, he focuses on global cleantech networks, portfolio company acceleration, operations and new investment opportunities. Peter also played a major role in founding and is the lead for SAILs Toronto office.

SEPTEMBER 3, 2012

CLEAN TECHNOLOGY Advertising Supplement

ORANGE COUNTY BUSINESS JOURNAL B-71

CleanTech OC 2012 Company of the Year Award Finalists

CLEANTECH CAPITAL UPDATE

managed to build a customer base (no matter how big or small that base is) are attracting investment. That means companies with revenues who are past the proof concept phase, and have a customer that validates a companys product or service. Taylor Honrath/CleanTechOC: The companies that appear to be attracting the most interest and investment in the past year are those with technologies related to efficiency; energy, in particular. Renewables will remain a big part of the cleantech landscape, but if consumers managed their energy use more efficiently we wouldnt need to bring nearly as many renewables online. California is an excellent example of a state that has essentially halted energy demand in its tracks by focusing on efficiency (even at a time when energy consumption is on the rise), thanks almost entirely to Title 24 legislation. Looking at the bigger picture by and large the cleantech companies getting funded today are companies that were funded previously. Its hard to walk away from a company that youve invested in and know has the potential to perform profitably if the stars align. Tim OBrien/Stradling: We continue to see investments in a variety of technologies such as innovative battery technologies, including those with high energy/volume ratios to power consumer and military electronic technologies, power management systems, low-cost and energy-efficient electric motors, systems that convert waste streams to useful energy and clean water and reduce the volume of material going into landfills, and a variety of algal biofuels, cellulosic ethanol and biodiesel fuel companies that seek to produce cost-competitive liquid fuels for various transportation applications. If we see any theme that is consistent across different industries, it is that companies with an identifiable market for their products and management teams with operational, sales and technology experience (as opposed to just technology experience) have an edge in securing funding. Greg Hanson/First Cornerstone: To my earlier point, many of the ones that got funded were early in the game, and were able to demonstrate disruptive technology, at least at a lab scale. However, the money invested was before many of the unknown risks of achieving commercial scale became evident. Now you can expect that the newness of the disruptive technology sales pitch has worn off some of these projects; and the projects that will be funded in the future will be the ones that have demonstrated they can achieve their assumptions at least on a small commercial scale. When asking for money, be ready to answer the question as to whether the funds you are asking for will get you to the milestone that will increase your companys market value. Investors are more likely to invest knowing their investment will last significantly long enough for you to achieve the important milestone you are driving for without having to come back for additional money. Remember to think of your investment needs in stages too: Build it, measure it and learn, as taught by Peter Ries in his book, Lean Start Up. continued from page B-22

he CleanTech OC Company of the Year Award will be presented at the Third Annual CleanTech OC Conference and Expo on September 18 at the Irvine Hyatt. This award will be given to one of the following three finalists in recognition of their impressive leadership in representing the regional cleantech hub and its growth potential. To be eligible to receive the CleanTech OC 2012 Company of the Year Award, a company must be classified as a pure-play cleantech company, and be either based or have substantial operations in Orange County. An independent panel of judges will review all applications and determine this years honoree. The 2012 finalist are:

Verengo Solar Combining relentless drive, fundamentally sound strategic thinking and the flexibility needed to hurdle formidable obstacles along the way, Verengo CEO Randy Bishop and Verengo President Ken Button transformed a near-bankrupt home-improvement company into Southern Californias leading residential solar installer within two years despite the worst economic environment in 80 years. Relying on industry-defining innovation and the ability to navigate a rapidly growing and changing industry, Bishop and Button directed the companys expansion throughout California, and into New Jersey. Under their leadership Verengo has now become the #1 solar integrator in California, overtaking Solar City as the states sales leader. Over the past three and a half years, Verengo revenues have skyrocketed from nothing to $15.8M in 2009, $27.3M in 2010 and $62.5M in 2011. The company is on track for over $100MM in revenue for 2012.

McDermott: It sounds like there is money available for companies that are either past the proof-of-concept phase or are able to demonstrate viability at a commercial level. Gentlemen, thank you very much for sharing your insights with us. For more information, please feel free to visit Stradlings website at www.sycr.com or call 949.725.4000.

Phoenix Energy Technologies With commercial buildings accounting for up to 75 percent of energy consumption and 20 percent of greenhouse gas emissions, coupled with imminently rising fossil fuel costs and depleting supplies, the need to reduce energy consumption and costs has reached critical mass. Compounded by economic uncertainty, businesses must be able to do so without a substantial, time-intensive capital investment. Phoenix Energy Technologies has risen to this challenge, providing a full-enterprise energy management suite, which combines software and services to reduce energy costs by six to 10 percent for national retailers. With no new hardware and no on-site installation required (we use software gateways in lieu of traditional hardware solutions), Phoenix provides maximized speed and minimized cost to entry into the enterprise energy management space.

Earth Friendly Products Earth Friendly Products is a leader in manufacturing award-winning, eco-friendly cleaning products. The company has succeeded in using 100 percent renewable energy during their entire manufacturing process in 2011-2012. The energy success is the latest in a wave of ongoing responsibility initiatives the company has mandated to continue to lead the green cleaning product industry ahead of the curve. Earth Friendly Products, whose own solar energy panels keep their facilities 60 percent self-sufficient, negotiated to purchase the final 40 percent of energy needs from green energy, making the entire manufacturing power process 100 percent green. The company is proud to have served the Orange County community for over 34 years in both the Huntington Beach and Garden Grove facilities that it has occupied. The fact that Orange County customers create jobs for their community by purchasing Earth Friendly products in their local stores is what the Green Movement is all about.