Technology

Canada in 2020 – Energy: Mr. Clean

Canadian Nicholas Parker is at the forefront of a low-carbon, high-profit tech movement.

“I thought we’d go with the race car driver,” says Nicholas Parker. “People need a dose of fun.”

Parker is referring to NASCAR racer Leilani Münter, tonight’s final speaker at Cleantech Forum XVIII, a gathering of investors, entrepreneurs, fund managers and others interested in the business of clean technology. It’s Sept. 16, the day after Lehman Bros. declared bankruptcy after 158 years in finance. Wall Street is in the throes of its mid-September meltdown.

Regardless, the forum, organized by Parker’s company, Cleantech Group LLC of Ann Arbor, Mich., and San Francisco, has attracted more than 500 movers and shakers to a Washington, D.C., hotel. The guests include U.S. Treasury undersecretary for international affairs David H. McCormick, whose unenviable job it had been earlier that day to announce the government’s decision to take control of 79.9% of the assets of failed insurance giant American International Group Inc. (NYSE: AIG).

The reason Parker’s event remains hot while markets freeze is simple. Though liquidity has drained away from many sectors through 2008, so-called cleantech has, on balance, remained an investor magnet. Private equity and venture capital deals in clean-energy companies globally notched a record US$5.8 billion in the second quarter of 2008 alone, according to New Energy Finance Ltd., a London-based consultancy.

The forum’s speaker on Sept. 16, Leilani Münter, is a race car driver who doubles as a green activist; she adopts an acre of rainforest for each race to offset the carbon cost of her sport. Münter outlines why it makes sense for someone who drives race cars to be a poster child for the environmental movement. “In the United States, more people tune in to watch NASCAR than baseball, basketball and hockey combined,” she explains. “Just imagine, 75 million NASCAR fans, recycling.” The well-heeled crowd roars its approval.

Picking Münter to speak at his forum’s dinner is classic Parker. During a three-day conference laden with serious sessions such as “The Importance of Project Finance in Cleantech” and “The Cleantech Town Hall,” he likes to balance things off with a light tone. Earlier in the day, he’d introduced his opening presentation — hastily rewritten as “Toxic Assets in a Toxic World” — with a cartoon about the business plan for inventing the wheel.

But the magnitude of what Parker has achieved in the brave new world of the low-carbon economy is no joke. After all, it was Parker who coined the term “cleantech” and helped invent the asset class that accompanies it. Now a global industry, cleantech represented 10% of all VC investments made last year by U.S. firms, including US$2.6 billion in the first three quarters of 2007 alone, according to statistics from Thomson Financial and the U.S. National Venture Capital Association. And that’s just for new ventures. A Goldman Sachs report published in fall 2007 puts total worldwide investment in renewable energy technologies at US$70.9 billion in 2006, up from US$45 billion in 2005. So far this year, according to Cleantech Group, VCs invested US$6.6 billion in the sector, including a record US$2.6 billion in the last quarter.

Nicholas Parker’s role in catalyzing the growth of this sector cannot be overstated. Generating serious green off going clean has become his life’s work. Together with Michigan entrepreneur Keith Raab, Parker co-founded the Cleantech Venture Network in 2002. Conceived as an industry data and networking organization for venture capitalists interested in cleantech, it’s since grown into the Cleantech Group, a network of entrepreneurs, VCs and private equity investors who together represent more than US$3 trillion in assets.

The Cleantech Group maintains offices in Silicon Valley, Ann Arbor, Beijing, Delhi and London. It counts among its fee-paying membership famed venture capitalists Sequoia Capital — the VCs that seeded Google and Apple — and Vinod Khosla, a co-founder of Sun Microsystems. In February, Cleantech Group launched what it calls the Cleantech Accelerator — a program to connect companies looking to source more energy-efficient fuels and alternatives to hedge their energy costs. Its first client: Wal-Mart Stores Inc.

Cleantech Group — and the asset class it defines — has grown so quickly at such a rate for a very simple reason. While the price of oil will fluctuate as global economies slow, many economists, led by CIBC’s Jeff Rubin, believe higher energy prices are here to stay. In recent years, the smart money, including Texas oil baron T. Boone Pickens, has decided the future belongs to those businesses that can contain their exposure to higher energy costs. Those businesses that achieve this will dominate their markets. Those that cannot will not survive.

And those who figure out how to supply the most competitive energy-efficient alternatives at low cost — in other words, cleantech startups — stand to make stupendous profits. In its 2006 World Energy Outlook, the International Energy Agency projects a sector outlay of US$20 trillion over the next 25 years. That’s one hell of a market opportunity.

But let’s back up a second. What exactly is cleantech? Is it wind power, smart grids or scrubbers for smokestacks? At the Washington forum last month, representatives from tiny greywater-filtration startups stood side-by-side with delegations from giant oil companies like Royal Dutch Shell. It all seemed a tad imprecise — as though any company could add some green to its brand, put out a press release touting one tiny initiative as energy-efficient, and call itself “cleantech.” Canadian environmental economist Mark Jaccard heaps scorn on the term for precisely this reason. “It’s difficult or impossible to define,” he says. “Every technology involves varying degrees of throughputs of energy and materials. Thinking we can have some kind of a dichotomous relationship — that something is green or not green — is really misleading.”

Parker acknowledges that his definition of cleantech is sprawling. But in his view, a broad definition is what’s required, given that the transition from high-carbon to low-carbon economy is something that affects every business person and consumer on the planet. He defines cleantech as new technologies, and related business models, that provide superior performance at lower costs. The point is to reduce or eliminate those processes’ negative ecological impact, while improving the productive and responsible use of natural resources. In short, it’s technologies that deliver more bang for the buck — at less cost to the planet.

Parker called the burgeoning global market in alternative fuels and energy-efficient technologies decades before price signals emerged to do it for him. Back in the late 1980s, he sat in on a meeting with British Prime Minister Margaret Thatcher’s energy advisers at 10 Downing St., when policy-makers first started to talk about carbon trading, or cap and trade.

This year, energy prices caught up dramatically. Oil spiked above US$147 a barrel in July, and North American consumers stopped buying gas-guzzling light trucks and SUVs in large numbers. General Motors cut shifts and announced plans to close plants producing transmissions and trucks in Windsor and Oshawa. Meanwhile, Toyota surpassed GM to become the No. 1 seller of automobiles globally in the first half of the year. Many automotive analysts agree that Toyota’s success is due in no small part to red-hot sales of its energy-efficient hybrids and small cars. David Whiston of Morningstar commented in a July report that Toyota recognized the need for fuel efficiency far sooner than Detroit carmakers, with the first hybrid Prius sold in Japan in 1997. GM is now putting pedal to the metal on a plug-in hybrid electric vehicle, the Chevrolet Volt. However, that product won’t hit the streets until at least 2010.

Small wonder that investors are piling into cleantech. Another Cleantech Group creation, the Cleantech Index, or CTIUS, tracks equity investments in 76 cleantech companies now listed on global exchanges. In 2007, CTIUS outperformed the S&P 500 by 37%. As the markets have slowed in 2008, CTIUS has also slowed, but it has continued to outperform the S&P over the past 12 months up to Sept. 30 by 4.4%.

The volume of money pouring into the space represents a large increase from 2002. Back then, investors were recovering from the dot-com bubble. The total amount invested in cleantech all year remained less than US$1 billion globally. Parker and Raab weren’t sure if what they were trying to do would succeed.

One of Parker’s first moves after high school in Ottawa was to go see the world; he hitchhiked across Africa in 1979. Back in Canada, he took a bachelor’s degree in technology studies from Carleton University, graduating in 1984. He spent 1985 travelling in Asia, then moved to the United Kingdom to do an MBA at the University of London.

“Many of my peers at university thought business was destroying the world,” Parker says. He didn’t agree. “I’m a capitalist. … During the ’90s, I reached the conclusion that the most powerful lever of change is actually through business.” Though Parker cares deeply about making the world a better place, he also cares a lot about making money. “Most of my career has been about trying to pull these two things together,” he says. The ultimate manifestation of that impulse is cleantech, where, in Parker’s view at least, there is no trade-off between doing well and doing good.

After Parker got his MBA, in 1989, he started a company in London, the Delphi Group — a corporate finance vehicle dedicated to sustainable investing. That introduced him to the world of venture capital. Within five years, he was managing money for several high-net-worth individuals, including Canada’s Maurice Strong and Stephan Schmidheiny, one of Switzerland’s wealthiest men. He participated in one of the first-ever initial public offerings of a solar company, Evergreen Solar Inc. (Nasdaq: ESLR), then split his attention between a bunch of different venture capital and investment firms, including Zurich-based Sustainable Asset Management, which manages the Sustainability Index, a list of public companies that report data on their environmental impact as part of their company filings.

About 10 years ago, Parker took on an advisory role for the Environmental Capital Network, a non-profit based in Ann Arbor. It aimed to create networks of entrepreneurs and promote “green” business initiatives. He was impressed by the energy and commitment of the guy running the organization, Keith Raab. “The thing had no resources, no money behind it — he was almost single-handedly keeping it going,” Parker recalls. “I thought, boy, back this guy properly, with the right resources, messaging, networks and my credibility as a venture capitalist — and we could do something.”

Both Raab and Parker realized that the old notion of environmental investing wasn’t going to cut it. “That form of ‘green’ business was very much driven by compliance with regulation and end-of-pipe technologies — in other words, clean up after you’ve made the mess,” says Parker. “Essentially, it was low-tech, low-growth markets with a save-the-world mentality.” And it wasn’t likely to interest anyone who was serious about making money.

In November 2001, Parker headed north to Ontario to hang out at a cottage near the Kawarthas. On a canoe ride, he came up with the term for the asset class: “cleantech.” Why clean, not green? Parker says it was to draw a clear distinction between the old way of thinking about green business and the new: funding technologies that prevented pollution, used resources more productively and efficiently, and added economic value for those who adopted them.

In typical Parker fashion, when an idea pops, action isn’t far behind. After he and Raab had brainstormed the concept of cleantech, Parker challenged his partner to write a business plan that would take the networking that Raab had been trying to do via his non-profit and turn it into a serious money-making proposition — one that would create an investing community around the new term. The result was the Cleantech Venture Network.

They set up shop in Raab’s hometown, Ann Arbor. But the early days were tough. “We had no data,” says Parker. (Becoming a source of information on who is doing what in cleantech, at what volume and value, has become a subsequent driver of much of the company’s revenue.) “When we called people and said we were Cleantech, they said, ‘Well, the janitor is out to lunch,’” he says. “We bought our domain name, cleantech.com, off a dry cleaner in Iowa.”

Raab continues the thread. “We were basically trying to invent an industry,” he says. “We started with seven investors. Each put in US$25,000; one put in US$50,000.” The group included Mark Donohue, of Massachusetts-based Expansion Capital Partners LLC, a US$100-million venture fund; and Bob Epstein, co-founder of Sybase Inc., one of the first providers of client-server computing, and now a prominent banker and environmental entrepreneur in Silicon Valley. The first Cleantech Forum was held in Toronto back in November 2002. “There were maybe 80 investors there,” Raab remembers.

As Donohue recalls, “People were very cautious — and we were far from clear ourselves. Even those of us who believed 100% had to doubt we would pull this off.” Donohue says his investment in the company has since appreciated forty times.

Epstein is similarly pleased with the progress. “Of the seven organizations I have helped found, this was one of the smallest capital requirements in terms of upfront investment,” he says. “It’s enabled me to access a set of data I believe in, and there was a significant upside financially.” Having Parker involved helped earn Epstein’s confidence. “He’s driven to accomplish things, so he is a natural entrepreneur,” says Epstein. “Someone saying no — that just makes him more excited.”

Weighing options after that first Toronto conference, Parker decided the Canadian investment community was too risk-averse to jump into the opportunity he saw in the space. So he took the Cleantech road show global — organizing networking forums and picking up valuable members in San Francisco, Mumbai, Shanghai, Frankfurt and, most recently, the Middle East. As Cleantech’s activities expanded, so, too, did the size of investments in the asset class. “Whether it is natural pesticides, solar energy or sensors to monitor toxicity, the markets for alternative energy are growing at 30% compound annual growth rates,” says Parker.

By and large, sector statistics back this up. The speed and scale of the build-out in wind alone has been astonishing. In 2007, the United States hit its third straight year as the largest wind growth market in the world, according to a study by Emerging Energy Research, a cleantech advisory firm in Cambridge, Mass. The U.S. installed more than 27% of newly added global capacity in 2007. There were 5,329 megawatts of wind installed last year in the U.S.; 2008 is set to be another record year, with more than 8.6 gigawatts of projects currently under construction.

Parker clearly relishes the chance to explain why he’s jumped full bore into what many in the Canadian investment community continue to regard as an overly risky sector. Critics charge, for example, that the industry is too dependent on exposure to policy shifts and tax credits. In many sectors — notably corn ethanol — there’s a lot of truth to that. “But,” argues Parker, “the current cleantech industry has emerged at a time of the weakest support from environmental legislation that we have seen since the Second World War.”

Michael Goguen, general partner at Sequoia Capital, concurs. “We stay away from areas where there is too much dependence on government structures [in the business model],” he explains. “And we only fund mature companies whose revenues and markets are proven.” That includes companies such as A123 Systems, based in Maryland, whose lithium-ion battery technology might be used in the Chevy Volt.

Wal van Lierop, the founding partner of Vancouver-based VC firm Chrysalix Energy Venture Capital, echoes Parker’s belief that much of the Canadian investing community, on balance, has been blind to the cleantech opportunity. “Ninety percent of my investors come from elsewhere,” says van Lierop. He acknowledges that investing in cleantech is not for the faint-hearted. “Over time, it is capital intensive, and it is not the norm to exit in 18 months,” van Lierop says. “But the opportunities are real.”

Consider the story of Burnaby, B.C.–based Xantrex Technology Inc., a company that traded on the TSX until the end of September. Funded in the early stages by Canadian VCs, its products efficiently convert raw electrical power from any source, including wind and solar, into the high-quality power required by electronic and electrical equipment. In late July, Xantrex reported Q2 2008 revenues of US$84.4 million, up 43% from US$59.2 million year over year. At the same time, it also announced it was being bought out by France-based Schneider Electric SA in an all-cash transaction that valued the company at $15 a share — for a total value of $500 million. In other words — mature cleantech ventures equal real markets, real revenues and real profits.

Xantrex was Canadian. And if you look across the cleantech space, it’s clear Canada isn’t falling short when it comes to supplying energy-efficient technologies. Of the 2,000 companies that have received cleantech funds since 2001, approximately 10% have been Canadian, says Parker. “For biotech, that figure was more like 5%,” he says. “So we’re punching above our weight when it comes to developing the technologies in the sector. It’s in the job and wealth creation around the cleantech opportunity where we are falling flat on our faces.”

Take the Canadian pension funds, he says. “Not one of them in any way, shape or form has engaged in this space in a significant way.” Meanwhile, other pension funds such as California-based CalPERS and CalSTRS, and equity funds like New York–based Blackstone Group and Zurich-based Credit Suisse Group have all jumped into the space.

Why such Canadian investor aversion to such a red-hot sector? Well, for one, the risks of losing your shirt are as real as Xantrex’s revenues. What’s more, there’s the issue of whether speculative venture capital is even the right way to go about financing the build-out of a green economy, considering the scale required. Parker acknowledges the point. “It’s going to cost US$700 billion to US$800 billion to convert the electricity grid to a smart grid,” he says — “about the cost of a financial market bailout, come to think of it. But that’s why we need to get private equity involved.”

Given the ongoing global market meltdown, much of the costs of scaling up alternative sources of power may end up being borne by the state. It isn’t hard to see some of the policy pronouncements in Democratic presidential candidate Barack Obama’s energy plan, which calls for a US$150-billion fund for clean energy, morphing into a green economy version of the Roosevelt-era New Deal.

Regardless of the source of financing, an era of higher energy costs means both public and private sector will be sinking large amounts of money into energy-efficient alternatives. That spells major opportunity for those in the business of supplying them.

Parker estimates that over the next five-year period, at least 1.4 million high-quality jobs will result from venture investment that’s going into this space, globally. “Who’s going to get those jobs? Shanghai? Stockholm? Silicon Valley? Or Toronto?” he asks. Considering the Canadian manufacturing sector has shed 88,000 jobs in the last 12 months — with likely more to come next year when those GM plants close — it’s a pertinent question.

It’s the last day of the Cleantech Forum in Washington. After entrepreneurs make a series of presentations to the VCs on everything from new forms of smart grid technology to a method of generating energy from recycling plastic polymers, the forum closes out with a panel featuring Treasury Undersecretary McCormick. The day before, he’d had to announce his government’s plans to bail out AIG at a cost of US$85 billion to taxpayers. “You may be thinking, ‘Gee, why’s he here? He’s probably got other things he should be doing,’” McCormick says to the crowd. “Well, I can tell you this: I’m very happy to be here.” That’s because in an era when bears rule the global marketplace, he’s talking to one of the last oases of liquidity that hasn’t yet dried up.

BIO

Nicholas Parker • Born April 13, 1960, in London • Chairman and managing partner, Cleantech Group

1987 Reads The Green Capitalists: Industry’s Search for Environmental Excellence by John Elkington; realizes he’s not crazy.

1992 Attends the Earth Summit in Rio de Janeiro, a major U.N. conference that led to the Kyoto Protocol on climate change.

1999 Launches Sustainable Asset Management’s private equity group, the first international cleantech VC.

2001 Participates in Evergreen Solar’s IPO, the second solar company to go public.

2002 Co-founds Cleantech Venture Network, precursor of Cleantech Group, with Michigan entrepreneur Keith Raab.