Nancy Floyd was early to the greentech investing game. A prominent venture capitalist, she founded and remains the managing director of Nth Power, an early-stage venture capital fund based in San Francisco. Nth Power, a $180 million fund, has seen a number of successful exits, including companies specialized in biofuels and "smart" meters.
More than a quarter century ago, Floyd founded NFC Energy, one of the country's first wind development companies. She has also been active in non-profit energy projects, such as home audits, and sat on the Vermont Public Uitlities Commision. These days, she makes bets on the future of greentech. I sat down to talk with her in San Francisco. Here's an edited transcript of our conversation:DailyFinance: Give me a 10,000 foot overview of what you are seeing in terms of investments in greentech.
Nancy Floyd: Investors are seeing the macro drivers all falling into place. It's something of a perfect storm. They are seeing climate issues, security issues, price volatility issues and societal pressures all coalescing around processes using traditional hydrocarbons.
And most recently, they have seen an administration come into office that's very supportive of new energy technologies. They feel this is going to be the new economy and I agree with that. The opportunity is so large. We have not seen something like this in my lifetime. So, you have a lot of competition for good investments and a lot of good technology competing in the same niches, but there is a lot of opportunity for both startups and venture capitalists due to the breadth of greentech.
But we don't have a national level policy. Isn't that bad?
No, we don't have a specific national-level new energy legislation or climate legislation. Those types of bills are going to be difficult to pass. But we have legislation at the state level. There are enough states that have renewable portfolio portfolio standards to almost enforce a national mandate. When you have two dozen states with renewal portfolio standards, that's really significant and hard for the energy industry to ignore.
I'm talking about the U.S. market here, but in reality, the rest of the world is probably a better market than the U.S. Those economies will grow faster. This is a unique challenge for our companies. From the moment you fund them, you have to encourage them to think globally because the better markets are outside the U.S. in markets inside the U.S.
Where do you see the money going next?
A lot of people have focused on the supply side with next-generation solar, wind, and even geothermal. That's only a part of the equation. The supply side comes with huge challenges. It's extraordinarily capital intensive. We've seen that with next-generation solar technologies, where getting up to full-scale production requires hundreds of millions of dollars.
We have about a $170 million fund, so with that type of size, you have to look for capital-efficient business plans. There are a lot of people who argue that cleantech is by default capital intensive. I would strongly argue against that view point. There are many companies that are capital efficient, even within the solar value chain or with the wind sector. You can find companies that add to the productivity of these core technologies and scale up well without a huge capital investment.
For example, we have an investment in a company that has a proprietary anti-reflective coating for photovoltaic cells used in solar power equipment. You can apply this coating just about every type of photovoltaics. The coating means less light is reflected back off the solar cells and more solar energy stays in the cell. It's a terrific value proposition that can add 4% to 5% to the efficiency of a solar array. In thin film solar panels, where solar arrays are running at lower efficiency points, that's a tremendous gain.
So what are the specific areas you are looking at for investments?
We define the universe through six categories: renewables, smart grid, clean transportation, carbon tracking and mitigation, resource optimization and green building materials. And we are looking in areas that do include enhancing conventional energy supplies, as well. We are looking at companies that can increase the productivity of the oil and natural gas infrastructure.
We have an investment in a company that makes a catalyst that can increase the gasoline and diesel output of a refinery by 2%. That's a very solid number, but they say they see a pathway to 4%. If they co that, it's a fund maker. The refinery companies we have talked to have said even a 1% improvement is significant because the margins in refining can be so tight. We actually think that there will be more attention paid to optimizing legacy natural energy resource infrastructures.
So you are trying to land ahead of those trends?
We do try to be ahead of the trends, but not too far ahead. If you are too far ahead and get there too early for the market window, it doesn't work. Definitely we don't have any pure "science projects" (companies that have yet to develop marketable technologies). And we try not to have marginal plays. We feel that a startup has to address a critical pain point. It can't be incremental. It has to be a very critical pain point where customers will take action.
And you also have to have immediate markets to sell into. As a result, a lot of this is around market timing and not around technology. Those are two guiding principles. We invested in solar in 2002 before it go to be a hot area. We had invested in carbon-related companies well before that became a major trend. We were investing in energy efficiency eight years ago. For us, it's all about looking out five to seven years and investing to address what we think the world will be like then.
One thing that has surprised me is how the venture community was so gung ho for solar, wind and other energy supply companies, but they really ignored energy efficiency, which would have been a much cheaper and easier way to tackle the problem.
My theory is venture investors like technology that is defensible IP [intellectual property] and that they are wowed by technology. There is not a lot of sexy technology in energy efficiency. It's a boring area. But small measures make a very big difference when spread across wide geographies and millions of people. Compact fluorescent light bulbs and refrigerator efficiency standards are critical to the end goal of reducing growth of power consumption.
But venture capitalists like the big ideas where one investment can return all the capital in a fund and, realistically, in energy efficiency, the progress has mostly been incremental. Now, I think the venture community is turning their attention to energy efficiency. Policy makers have recognized that energy efficiency should be the first step before you turn to the supply side.
Can you talk about some of your specific investment themes?
I can't really discuss the themes in depth because those are our secret sauce. We do have very well-developed themes on how we think cleantech is going to play out. But I'll give you a few ideas. In solar we are taking the contrarian view that maybe the time is right to again invest in solar power equipment companies. A lot of people are tying to exit the market because module prices have come down so much. There has been a glut of capital thrown at the space. We think that the market for new varieties of solar tech will be very solid down the road several years out.
We also have a contrarian view on green buildings. There has been a meltdown in commercial real estate and construction is way down. No one thinks there is any money fro green building materials. But we are also seeing that in new construction projects. LEED standard buildings do not have to be any more expensive to put up than energy hog buildings. More energy efficient heating and cooling equipment, for example, can mean you can have a smaller HVAC system than you would before and a correspondingly lower cost.
A lot of venture capitalists see problems without solutions, which means market opportunities for startups. What do you see out there that is unfilled?
That's also a little bit of our secret sauce. But I'll give you one. I have not seen a security company in the smart meter space. By that, I mean a company that can prevent bad guys from hacking into smart meters or into utility networks that are carrying huge amounts of critical information. Those networks are totally unprotected. They have no encryption. To date, they have been physically separated from the Internet. But that will probably be changing as we build out the smart grid. So we'll need to protect those assets.
Alex Salkever is Senior Writer at AOL Daily Finance covering technology and greentech. Follow him on twitter @alexsalkever, read his articles, or email him at email@example.com.
Greentech VC Nancy Floyd: U.S. cleantech firms must go global to thrive