Australia & New Zealand Cleantech a strong presence at GoingGreen

It was great to see an Australian company and a New Zealand company win a slot on the GoingGreenTop 100. There were also several Australian and New Zealand led companies attending the associated conference at UC Davis in Sacramento.

Derceto is a NZ company whose software saves energy and water by optimizing the pumping and sourcing of water and waste water. I first met Derceto when I mentored them as part of the ANZA Technology Network Gateway to the US Program (check out the 2007 Program) a few years ago.

At that time they had just secured East Bay MUD as a customer. In the intervening time they have accumulated 15 years of data in multiple installations around the world. Wayne Spittal took part in one of the panel discussions (thanks for Laura Shenkar's support).

Derceto’s selection is timely. The CEC says 19% of California’s electricity usage is for water and waste water related activities. More than a quarter of that is in supply and treatment. That usage must surely be a priority for Governor Arnold Schwarzenegger’s plan to reduce green house gas emissions in California. My back of the envelope calculation is that Derceto could save 2,000 GWh in California.  

Turning from efficiency to generation . . . . Ausra is a solar thermal generation company plucked from obscurity by Khosla Ventures and KPCB. Ausra have a low cost system using flat mirrors and Fresnel lens for utility-scale solar thermal concentrator power plants. They have finally launched their website (link) and announced a 175MW project in the permitting stage. Peter Le Lievre made a great presentation.

Bottom Line: Maybe I am biased, but there is some great technology on the other side of the world.

US based VC rarely venture off-shore?

Dow Jones VentureWire reported excerpts of the latest global venture capital survey sponsored by Deloitte & Touche LLP in conjunction with the National Venture Capital Association.

One of the conclusions was: "Although there's no denying that the venture industry is going global, plenty of U.S.-based VCs are content to stay home."

They took a somewhat “glass half empty” view, so I will try a more positive spin:

• 46%    US-based VC investing globally
• 5%      Portion of capital under management offshore for those VC
• 6-20% Expected portion of capital offshore in next 5 years for 64% of those VC
• 15%    US-based VC not investing globally but will in next 5 years.
• 61%    US-based VC investing globally in 5 years (i.e. 46% + 15%)

There were 528 respondents, 45% of whom were based in the US, therefore 145 firms will be investing offshore in 5 years.Typically these will be the biggest firms. Applying a simple pareto, they probably amount to 80% of US investments, which were $7.4 billion in Q2 (according to Venture Wire).

Assume the new guys invest 5% and 64% of existing guys increase to 6-20% and no growth in total investment, then the off-shore investment could be $7.4 billion x 80% x (5% x (15% + 46% x 46%) + 6-20% x 46% x 64%) x 4 quarters = $0.8 billion to $1.8 billion per year.

Big numbers, but still only a few percent of the total investment.

Before, you get your hopes up abut billions in annual off-shore investment, the main targets will be China, India, Israel and Canada. Many of the larger funds have established local offices so they can be the proverbial 30-40 minutes away from their investment.  (Too bad for Europe, Latin America, South East Asia, Australia, and New Zealand - although some are served better than others by their local venture community).

Bottom Line: Appetite for international deal flow is increasing. However, for the vast majority of start-ups, your chances of getting a US investment will be much higher if you become a Silicon Valley company. However, there is a high comfort level with off-shore development and R&D.

Australasian Cleantech Companies

I went to the 3rd AustralAsian Cleantech Forum in Melbourne, Australia back in April 2007.  Jeff and Peter Castellas and the rest of the team did a great job. There was good representation from start-ups, service providers, venture investors, industry groups, policymakers and even the pension fund industry (Australia has the world's fourth largest pool of pension funds).

Despite a small population (around half that of California), Australia and New Zealand are strong in R&D and  prolific producers of new technology. Clean tech is a particular strength. Unfortunately, there is a gap in early stage investing in Australia.

Here are three of the ten companies profiled at the event (selected purely on the basis of having an interesting story):

• Anzode - A New Zealand company that enables the production of compact, low-cost rechargeable zinc batteries on existing production lines.
• BioPower Systems - Ocean power generators based on a sea plant or tuna tail. Instead of fighting the ocean they work with the flow to generate more energy at a lower capital cost.
• Earth Systems Technologies - Harnessing natural processes to create ground-water barriers.

Bottom Line: Look for some great clean technology coming from Australia.

Perpetual licensing is dead. Long live SaaS!

That was not the official theme of Software 2007, it was actually "powered by innovation".  Nonetheless, there was a lot of talk about on-demand software, software as a service (SaaS) and "Enterprise 2.0".  Perhaps because these are the key drivers of innovation in the software industry, and they are as much about the market and economics as technology.

I thought I should attend the "Venture Capital Panel" breakout session, since everyone has been telling me that VCs don't invest in enterprise software any more. 

The panel was moderated by Dan Dorosin (Fenwick & West) and featured Bob Lisbonne (Matrix Partners), Ravi Mohan (Shasta Ventures), and Ted Schlein (Kleiner Perkins Caufield & Byers).

Some key points:

• Look for "white space" above, below, and to the sides of existing applications, not squeezed between them.
• Look for models borrowed from Web 2.0, where adoption is driven at the user level, rather than dictated from corporate headquarters.
• Bob Lisbonne quoted one of his mentors: " There are only two ways to make money in software: bundling or unbundling."
• The big ERP vendors "own" the CIOs office. Grow virally by selling to buyers who have a highly specific pain points, their own budgets, and minimal control from corporate IT.
• Show investors that your value proposition is so compelling that you are able to sell to big companies without a big sales force.
• Have a great sales partners.
• Consider a mix of software and hardware (e.g. appliances).
• The days of big upfront license fees are gone - make sure you have an on-demand option.
• However these deferred revenues increase the amount of capital required.  This cash flow problem can partially (or totally) offset the trend for lower costs of software, bandwidth, and infrastructure.
• Estimates of the amount of capital required was the subject of some debate. Estimates ranged from $25 million to $100 million. The discussion seemed to settle around $40 million.
• Many SaaS companies are negotiating one to two years of subscriptions up front to help ease cash flow.
• On the other hand, there are examples of companies that have bootstrapped to $6 million to $10 million in revenue.

Bottom Line: The approach to the market is as important as the technology because it is very difficult to compete with the big guys.  Do some smart product marketing and fight the battles you can win. Maybe you'll get some investment.

Why come to Silicon Valley?

The New York Times reports that "When It Comes to Innovation, Geography Is Destiny".  The author, G. Pascal Zachary, also teaches journalism at Stanford. He quotes several authorities and studies.

The thesis is that technology companies from Silicon Valley have a better chance of success than those form anywhere else in the world.  Maybe the the examples given are not the best available, and I am not quite ready to write-off European strength in wireless communications.  However, the conclusions ring true and add some additional ideas.

My simple explanation of the strength of Silicon Valley: a "critical mass" of ideas, networks, people and capital.

Mr Zachary's report suggests these reasons:

• the importance of face-to-face communication in generating ideas,
• increasing returns
• first mover advantage,
• a network of seasoned pros, and
• the ready availability of venture capital.

I am not sure exactly how increasing returns plays into the equation. Any ideas? I can see that the sheer financial strength of some tech behemoths can add additional advantage - either directly or through the ecosystems they create.

Bottom Line: What does this mean for those outside Silicon Valley? Start to network into the Valley, build bridges that tap into the ideas. people and networks. However, to get the Silicon Valley capital, you generally need to be within 50 miles of your investor. So come here!