Black Coral’s Rob Day Talks Cleantech By Way of IT, Why Evergreen Solar’s Bankruptcy Isn’t the End, and Boston’s Energy Future
Two years ago, we took a close look at Boston-based Black Coral Capital, just as Rob Day was joining the newly formed, cleantech-focused private equity firm as partner. Since then, both the Day and Black Coral names have shown up as part of investments in some innovative cleantech plays in Boston—several that go beyond traditional materials and dabble in the services and IT realms.
On a recent visit, Day had a lot to say about how and why traditional, materials-based cleantech firms should innovate, and the sprouting up of new companies using IT to solve cleantech challenges such as energy efficiency. He’s also pretty rosy on Boston’s up-and-coming (and pretty gritty) cleantech incubators, and the city’s potential to become a center for innovations in energy controls.
Read below for an edited transcript of a chat I had with him at Black Coral’s offices last week.
Xconomy: Tell me about some of your existing area investments, in companies like Next Step Living and Digital Lumens.
Rob Day: With Next Step Living, the business model is coming into homes. It has a full set of options. The idea is, “Hey, what do we have to do to get this home to be more energy efficient and get the homeowner to save more money? What makes most financial sense to homeowners?” They’re establishing themselves as a trusted energy advisor to them.
I see them as a channel, solution provider to the home. I keep not being excited about residential energy efficiency technology and products because there aren’t any good channels. That’s where Next Step Living can solve a major problem.
Digital Lumens is much more your classic technology play. They’re putting together what LEDs can do and what controls can do with LEDs. That’s much more of a hardcore tech play.
The similarity is, in all of these markets you need to provide a full solution.
X: What do you see as some of the next big plays in energy efficiency?
RD: There’s a good opportunity to continue to take building energy intelligence downstream. Energy intelligence for buildings has been aimed at homes, like smart thermostats, or it’s been aimed at very large buildings. But there are hundreds of thousands of buildings out there that are too small to use the existing solutions. There is an opportunity there. Ninety-plus percent of commercial buildings don’t have any intelligence out there.
The key is going to be coming up with something that is very flexible [for buildings between 25k – 50k square feet]. They’re going to need to come up with hundreds of thousands of solutions, and they’ll have to be a little bit more cookie cutter-ish. Because the buildings are all different, it has to be highly flexible and easy to configure. Even EnerNOC is starting to get involved in this. I think Boston has a particular opportunity to be an area of expertise of energy controls for buildings.
X: Is the popular notion that cleantech startups are having trouble getting money true?
RD: It’s certainly out of favor right now with investors, at least early stage. It will come back. Investors move one way and then they’ll come back the other way.
I don’t think the industry has taken enough advantage of IT and Web-based tech, though.
X: Why is cleantech IT a more favorable bet than traditional cleantech for investors?
RD: The talent is available. It can be a lot more capital efficient. Particularly since you’re not going to have to reinvent an IT technology to make it work. You can take advantage of existing server technology. Costs are getting lower and lower, so it’s less risky.
It can be a lot faster to get into customers’ hands. Building new solar panels is hard to get to customers to test. If you’re building an IT-based solution, you can go test it somewhere.
The lessons of the consumer Web have decidedly not been applied to energy. At the end of the day they’re selling a commodity—you’re competing against a cost curve. It doesn’t have positive feedback loops, where every single customer that adopts your products makes previous customers happy. When a VC makes returns, it tends to be with those feedback loops.
For a VC to make the outsized returns they like to see, I don’t think its particularly on the back of patents. I don’t care how many different ways you turn your photons into kilowatt hours, there are going to be other ways.
I’m just starting to see companies taking advantage of those Web-based models (e-commerce, community based, market based) and apply them to cleantech. In some ways it feels very niche-y.
X: Why is this just starting to happen?
RD: In order to build communities around people doing building monitoring, first you have to have your monitoring technology. As we built out more intelligent hardware in these markets, now we’re going to see the ability to add software on top of them. We’re starting to get enough critical mass that we can start pulling people together in this way.
We’re still a long way from having such sufficient intelligent hardware out there that the market’s obvious. The better business ideas that will take advantage of it will come out before it’s an obvious opportunity.
X: What do those companies look like? Is it a matter of building Web-based communities surrounding cleantech adoption?
RD: I’m talking about things that form markets right now, in addition to everything I just described—the lack of channels, the need to reinvent existing channels. There’s value to people providing practical tips about energy usage. But it might be best served as being part of a marketplace.
We’ve had some companies that have the potential to incorporate those ideas into their existing product. I’m only seeing now the wave of companies that are being built from day one in pursuit of those kinds of ideas.
What I’d like to see is probably going to look more like business-to-business at first. For example, things that help lighting designers understand and then purchase—specifically in rapidly emerging, LED-based options. Which is tough. What would be good is a website that would make it a lot easer for a lighting designer to make a decision.
See, a lot of these [IT-focused cleantech] companies I’m talking about are going to have to get their hands dirty in the physical world. Information and content are enablers for the more lucrative investment opportunities. They’re not the be-all and end-all by themselves.
X: What do you make of Evergreen Solar and its recent bankruptcy filing?
RD: There were definitely some wrong bets made that aren’t specific to Evergreen Solar. At the end of the day it was buying into a commodity business that looked like the smarter, cheaper approach. Then they got leapfrogged. What really crushed them was the rise of East Asian solar technology, but without that they still would have been hurting.
It’s one on a long list of painful lessons learned by those who are investing. You need to look pretty far out on the cost curve, and make sure you’re not investing in a temporary part of the cost curve. It’s tough to do because you don’t know what other people are working on.
I do think that [the Evergreen Solar story is] overblown at the moment. It’s one of many companies that will have to get consolidated. But it’s not going away. Bankruptcy is a process, not a finality. We will see that asset be useful in other ways. Bankruptcy is part of the process. It’s not like planting a gravestone on the asset and saying it will never be productive again.
There is controversy surrounding the state’s involvement. I sympathize with the decisions they made at the state level. People were looking at the rapid growth of the solar market and saying, ‘Yeah, we want to have technology-oriented manufacturing jobs in our region.’ It’s a long tradition that the economic development groups will try to keep such businesses around.
What I think, though, that it really points to is the idea of [supporting] one manufacturer. And that’s not pointed at Massachusetts, but the U.S. It’s a lot more attractive to try to grow markets and let the market make vendor selections. I’d point to the DOE loan guarantee program. There are very smart people trying to make the best decisions they can and select one vendor over another. Instead they should be creating opportunities that multiple vendors could apply for.
You can favor homegrown manufacturing and assembly, but ultimately you can’t outsource solar installation. [The state] should also foster the end market. If you want green jobs in state, it should be about the non-exportable jobs you’re creating, You can incentivize accordingly.
X: How would these incentives work?
RD: They could provide incentives that would lower the cost of installed solar to the end user. It could lower the cost for them to adopt and install the technology, and then pick the vendor themselves—instead of trying to guess at the state level. Politically it makes more sense, too. You’re still going to end up being wrong one out of 10 times [when choosing specific companies to support]. That one time ends up being political blowup.
Part of it is it’s just the old way of doing things. The economic development office has the budget and makes the decision. I do think it’s shifting, though.
There’s also this political story that people love to tell, around encouraging clusters of innovation—they get encouraged by a lot of the folks that have the incentives.
In Massachusetts, they are encouraging a cluster that already exists, not trying to grow these clusters from scratch. I think the work of the Massachusetts Clean Energy Center is phenomenal. They make this state be an attractive place for companies to locate even if they’re not getting the Evergreen Solar type of deal.
X: Speaking of clusters, what do you think of what is happening in Boston with new incubators like Greentown Labs?
RD: I think its pretty cool. I just absolutely love the fact that these entrepreneurs are getting together and almost guerilla warfare-style getting their startups up and running. They’re obviously sharing a lot of good lessons with each other besides helping each other save money, since a lot of cleantech entrepreneurs are first-time entrepreneurs.
I actually think they’re right in that a lot of these businesses formed around making something don’t have to be capital intensive in their early days. Get dirty, grungy space and just build stuff. You can go a long way doing that. That might be one of the ways we figure out how to make the more physical side of cleantech work. There should be similar efforts focused on the more IT side of it, too.
There’s also the Fraunhofer Center for Sustainable Energy Systems. They’re building out a big facility as a test bed for green building products. That’s the kind of stuff that’s really going to help this cluster evolve—for entrepreneurs to see what’s working and what’s available on the marketplace. So much of winning the game is knowing what the playing field looks like. Having that test bed of products within walking distance—that’s pretty cool.