Strategy

Venture capital: A modern Midas

Always the innovator, Alan Salzman is now betting big on green.

It’s a sun-drenched afternoon in San Bruno, a verdant town in Silicon Valley, and Alan Salzman is gunning the engine of his Tesla electric sports car. We are barrelling toward an overpass bearing a sign emblazoned Police Radar Zone — at 180 kilometres an hour. At the last minute, Salzman eases the power.

“Not bad, eh?” he says, betraying the hint of a Canadian accent. “And listen to the engine. Because it’s electric, you can’t hear a thing.”

A compact man with greying blonde hair and a piercing gaze, Salzman exudes coiled energy. Back at his office headquarters, he leaps out of the car and flips the hood, revealing a battery and some wiring. “And check this out,” he says enthusiastically, opening a flap on the side. There’s a plug-in socket where the gas cap should be.

The Tesla is one of a long list of technological breakthroughs Salzman has helped finance. With about US$4.5 billion raised since its founding in 1996, his venture fund, VantagePoint Venture Partners, has seeded everything from the MySpace social networking site to BrightSource Energy, builders of utility-scale solar-power plants, to Pure Digital’s Flip Video camcorder — which earned an estimated US$150 million in revenue last year.

Few tech companies tap equity markets these days, but Salzman isn’t fazed. This year, his fund is betting a billion on clean technologies. Its most audacious new investment is Shai Agassi’s Better Place, a Palo Alto, Calif.–based startup that aims to supply infrastructure to power the electric car around the world.

Salzman, a former Torontonian, wants nothing less than to transform what we drive — and where we get the energy to drive it. In decidedly un-venture-like fashion, he’s partnering with blue chips, utilities, even governments, in order to do so. He breezes past naysayers with the simple argument that fossil fuels are finite, so finding alternatives isn’t a dream — it’s an inevitability. But venture capitalists aren’t known for their love of government — or Corporate America. In transforming transport and energy, Salzman will also be transforming himself.

Alan Salzman grew up in Toronto. He dreamed of becoming an international lawyer, but no such program existed in Canada. So after a year at the University of Toronto, he crafted his own program at schools in London and Brussels, as well as Stanford University in Palo Alto, Calif. He graduated in 1978.

After stints in Europe and New York, in 1982 Salzman took a job with one of San Francisco’s most respected lawyers, John Larson of Brobeck Phleger and Harrison. Sensing the wealth-creating potential of Silicon Valley, Larson asked him to set up a division in Palo Alto, catering to high-tech. Salzman ended up representing the likes of General Electric’s venture arm.

In 1987, then GE chief executive Jack Welch cut the division. So Salzman and a few partners bought it for US$40 million. They raised another US$100 million of fresh capital, then started to fund health-care and IT plays — Matrix Pharmaceuticals, a cancer drug company, was his first investment. Salzman co-founded VantagePoint in 1996.

By October 2003, VantagePoint had picked up what’s estimated to be a 22% stake in MySpace for US$15 million; the company was later sold to NewsCorp for about US$600 million. Today, VantagePoint is one of Silicon Valley’s largest funds.

The investment ethos Salzman lives by is simple. “We are looking for products or projects that are seeking to transform their industries or their markets,” he says. Failure is inevitable, Salzman acknowledges. “But as long as, every now and then, we create a new industry or innovation that everybody adopts, it works out.”

Like most VC firms in Silicon Valley, VantagePoint went through tough times in 2002, in the aftermath of the tech boom. That’s when clean technologies first piqued Salzman’s interest. Together with managing director Stephan Dolezalek, he started thinking: What industries hadn’t yet gone through a major transformation? “We came up with energy, water, transportation and materials,” Salzman says.

Salzman and Dolezalek adopted the term “clean tech” to describe their new focus. But they quickly discovered tackling these sectors meant playing in a whole new league. “The submarkets are enormous,” Salzman says with more than a hint of marvel. “Transportation is a multi-trillion-dollar industry — and that’s just a subset of energy. We realized we couldn’t do it on our own.”

So, again in most un-venture-like fashion, Dolezalek, Salzman and others went trekking around the world in search of blue-chip partners. The team found what they were looking for at BP, DuPont and Procter & Gamble, among others. “BP see themselves as an energy company, not just an oil company,” Salzman recalls. “So they joined us on projects like BrightSource.”

BrightSource Energy was founded as Luz II in 2004, with seed financing from VantagePoint, BP, Google.org and several others. It’s currently building a solar power plant in the Mojave Desert. On Feb. 11, the company announced a deal with Southern California Edison on contracts to supply 1,300 megawatts of clean solar thermal power — priced at an estimated 12.5¢ a kilowatt-hour.

When fully operational, BrightSource’s solar plants could potentially offer a clean source of the electricity required for another of Salzman’s ambitious investments: Better Place. That venture came to VantagePoint through an invitation-only conference the fund sponsors each year, called Resource Point. Shai Agassi, future founder of Better Place, attended in October 2007.

“I commented that the U.S. basically doesn’t have an energy policy,” recalls Agassi, “and talked about my plan to electrify transport.” Stephan Dolezalek was in the room, and nabbed Agassi afterward for a two-hour conversation. “At the end of it,” Agassi says, “we pitched Alan.”

Agassi believes businesses can’t plan ahead when they don’t know whether their transportation costs are going to be US$47 a barrel or US$147 a barrel. His solution: a network of smart charge spots and battery-replacement stations. Drivers of electric cars would subscribe to a plan that would allow them to charge, or swap out, their car’s batteries. The vehicles would come from partnerships with automobile companies, the electricity from utilities and the profits from the sale of electricity. “It’s the AT&T to Nokia’s cellphone,” Agassi says.

At first, Salzman thought Better Place was not feasible. “All Shai had was a white paper,” he recalls. But Salzman and Agassi kept talking. Six months later, Salzman committed millions to the company. Agassi asked Salzman to join the Better Place board. Eventually, Salzman upped his stake.

Better Place was founded in October 2007. At press time, Agassi had signed up Renault-Nissan, a utility in Israel, and the governments of Israel, Denmark, Hawaii, the San Francisco Bay Area, Australia and, most recently, Ontario. “We raised capital of US$200 million at the beginning of 2008,” Agassi says. Better Place has recently partnered with Australia’s Macquarie Bank to raise an additional $1 billion Australian dollars. According to Wired magazine, Better Place is one of the fifth-largest startups of all time.

Of course, Better Place needs more than infrastructure partners to fly. An affordable electric car is also a requirement, and the current edition of the Tesla, at US$109,000 for a roadster, doesn’t apply.

Critics say the battery technology needed to produce such an electric car isn’t yet available at the cost required. The Holy Grail, according to Massachusetts Institute of Technology professor Donald Sadoway in an article in the Christian Science Monitor in January, is a battery that can power a car 250 miles (just over 400 km) without a charge. That would make the electric car competitive with the internal combustion engine. In Sadoway’s opinion, battery technology isn’t there yet.

Salzman, however, claims the Tesla has demonstrated a range of 230 miles (370 km) between charges. Its cost, he argues, will be brought down through economies of scale. The Better Place team has partnered with Renault-Nissan on a battery-powered electric car that, Salzman says, will be priced at US$20,000 without a battery.

It’s a claim that independent automotive consultant Dennis Profitt substantiates. Add in the current cost of an all-electric battery — US$20,000 — and he estimates an all-electric Tesla-style battery-powered vehicle priced at US$40,000 is feasible within two or three years.

Carlos Ghosn, chairman of the Renault-Nissan Alliance board, is convinced. Others aren’t — yet. General Motors, for example, is betting on plug-in hybrids. “I am not naive,” says Salzman. “These things play out over a 20-year period of adoption. But adopt they will. The naysayers are fighting the inevitable.”

What’s also true, however, is that investors tend to take plays like Better Place seriously only when the price of energy is high enough to make alternatives cost-competitive with fossil fuels. Today, oil is hovering below US$40 a barrel. That means trouble for clean-tech plays seeking capital in 2009 — unless, of course, they also qualify as infrastructure plays eligible for financing from governments.

That explains the clean-tech advocacy effort currently underway on Capitol Hill in Washington. Salzman’s firm is involved, and so are groups including Cleantech and Green Business for Obama. The goal is to secure government financing for critical infrastructure, such as a nationwide smart grid that stores or transmits solar-powered electricity over long distances.

Estimates peg the cost of this grid at between US$750 million and US$1 trillion. Sure enough, the stimulus bill that President Barack Obama signed into law on Feb. 17 sets aside US$11 billion for such a grid, as well as about US$30 billion in grants and incentives for renewable energy and energy-efficient projects.

Whether these investments will come to pass in the time frame Salzman needs to see a return on his clean-tech investments is unclear. In the meantime, he is busy with another transformation: his own.

A traditional venture capitalist is a kingmaker in his own domain. His success hinges on funding cutting-edge projects and technologies with the potential to upend their markets — think Google’s search algorithms or the Flip camcorder.

To date, Salzman has been this kind of VC. The public constraints on governments and publicly traded companies have not been his problem. Nor, frankly, has he had to lobby governments in order to ensure his companies’ business models are feasible. “I prefer to stay away from business models that hinge on government involvement,” Salzman says.

But because of its scale, clean tech is different. And VantagePoint’s companies have already experienced complications with government partnerships. Tesla Motors, for example, signed on with New Mexico in February 2007 to manufacture a lower-priced version of the car. The deal gave Tesla Motors access to a US$7-million incentive package. By 2008, California had offered a sweeter deal. In June, Tesla dropped New Mexico for the Golden State.

On his blog, Tesla’s president and chief executive, Ze’ev Drori, cited proximity to Tesla headquarters in San Carlos, Calif. and California’s commitment to addressing climate concerns as reasons for the switch. Salzman’s public relations firm did not respond to requests for comment. Some might argue Tesla Motors is simply doing what automobile companies have always done: playing governments off to get the best deal possible. Fair enough.

But Adeo Ressi of TheFunded.Com, a website that allows entrepreneurs seeking Silicon Valley funding to compare notes on VCs, says that based on posted comments, Salzman’s firm is perceived by entrepreneurs as being very difficult to deal with. “Mr. Salzman may be doing great from a returns standpoint, but he should also take into consideration how he’s doing among entrepreneurs. The best deals might pass him by.” Salzman dismisses such criticism as sour grapes from CEOs who didn’t get funding.

Salzman’s immediate challenge this year will be to successfully transform himself from market-maker to Establishment mover-and-shaker. He’s certainly giving it his best shot. He’s recruited heavy hitters from Terry Tamminen (the inventor of California’s low-carbon fuel standard) to Bobby Kennedy Jr. to former CIA director James Woolsey to his advisory board; his firm is actively promoting the value of clean tech in D.C., and he made a presentation at the World Economic Forum in Davos to get the green-from-green message across.

Asked why he was prepared to do all this, Salzman shakes his head. “When [President John F.] Kennedy said he was going to put a man on the moon, he didn’t say he was going to send a man halfway to the moon. He said he was going to put a man on the moon. What we’re doing has the potential to help solve global warming. Why go half-measures on that?”