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Cleantech Biggest Investment Opportunity Of The Century: Ajit Nazre

21 July, 2009

Cleantech is looked at as one of the most attractive investment opportunities across the world with venture capital and private equity investors pouring billions into the sector. Kleiner Perkins, Caufield & Byers or KPCB, one of the most successful venture capital firms in the world, is leading investments into this sector. The blue chip venture capital firm was the largest investor in the sector globally in April-June quarter, with five deals in the space. Silicon Valley-based KPCB has an India portfolio of eight companies, with its first cleantech investment in Kotak Urja, a maker of solar water heaters and solar photovoltaic modules and systems.

Ajit Nazre, a partner at KPCB, also leads KPCB’s India investment initiative. He joined KPCB in 2003 from SAP, where he played a key role in formulating and executing the company’s internet strategy, and co-founded and led SAPMarkets. Nazre did his undergraduation in Mechanical Engineering from College of Engineering Poona (COEP), in India, after which he went on to to do an MS in Mechanical Engineering from Michigan Tech, a PhD in Biomechanics from the Technical University of Hanover, Germany and an MBA from the Harvard Business School. VCCircle’s Madhav A Chanchani catches up with Nazre on what makes the cleantech space so hot, the investment prospects, and why India should not miss the opportunity. This is the part one of the two part series interview with Nazre.

Q. How has cleantech as an investment concept evolved?

We really believe that cleantech is the single biggest investment opportunity of the 21st century. As far as market size is concerned, if you add up energy and transport sector, that’s $6 trillion worldwide. That is massive; it dwarfs sectors like IT. But that does not mean you will have hundreds of companies with billion dollar market caps immediately. The risks and hurdles are also big. The biggest hurdle is obviously that you need more capital.

There are several factors why I think cleantech is such an interesting investment opportunity. Firstly, there is a consensus in the world that climate change needs to be addressed. The debate may be around what is causing climate change, but everybody agrees that there will be a change, signs are there. Addressing that is a motivating factor which is driving investments into the sector.

The second is global policy. The tailwinds are very strong towards a carbon pricing system globally. If you look at what happened in Kyoto versus what is likely to happen in Copenhagen, there is far more possibility that something globally is going to get passed that will price carbon. This will be a very positive policy change towards cleantech.

The third is volatile fossil fuel prices. The world had seen oil prices jump to $148-150 per barrel last year, and it was $35 three months ago, and now it has doubled to $70 per barrel. That volatility is something that people have realised we cannot deal with, and we need to have some stability.

There are two factors, which are technology driven, which I think are causing a lot of innovation and investment opportunities in the space. There are advances in material sciences which are enabling innovations of magnitude that would not have been possible 10 years ago, definitely not 20-30 years ago.

The reason I bring this up is because in 1970s too there was a cleantech revolution. Oil prices had peaked at that time, and there was a lot of funding for innovation. But as soon as oil prices came back down, every thing went away. I think that is not the case today, because other factors are there, and innovation capability is far superior. 

Simply speaking if you want to have a photovoltaic cell with high efficiency or a better battery, new materials are enabling it. We are not just constrained with a periodic table, we can engineer new materials.

Second, thanks to Moore’s law, the computing capability we have can simulate systems. Giving an example, if you want to build a car or an airplane today, it takes much less time and dollars. You can simulate most of the systems and test them. Earlier you had to build and then test them, which takes a lot more time and money. You can effect changes with much less capital, which also holds true for cleantech innovation.

Q. A lot of venture capital firms have been focusing and investing in cleantech since 2006 and 2007. Since then, how have companies evolved in this sector?

I would say that cleantech investments have been going on since 2004. In 2004, investment in cleantech across research and development, manufacturing and deployment, was $35 billion. In 2008, it reached $155 billion globally.

If you look at successful companies, there are seven solar companies which went public with a market capitalisation of more than $1 billion. There are nine wind companies which have a market cap in the same vicinity. There are cleantech companies which have gone public, are profitable, and which the markets have rewarded.

Cleantech is not a theory, and people have made money. Perfect example is Suzlon which has reported revenues of more than $1 billion. And there are more sectors to come. Energy generation is one, I think transportation is going to come soon, then energy storage, and efficiency will happen.

So there are many sectors, and you can build large companies and make money. And it very much applies to India. We have invested in a company called Kotak Urja, based out of Bangalore, and it’s a large and profitable company. Ever since we got to know them in 2007, they have grown fourfold in two years in revenues. They are the largest deployers of solar water heaters in the country.

Q. Which segments in cleantech do you find attractive for investment in India?

I believe definitely that waste water treatment, water remediation and desalination are going to be very interesting for India because scarcity of water is a big challenge.

Waste is also a big opportunity. The big challenge here is that urbanisation is happening at very large scale. Look at the number of cities in India and when people start living in city what are problems that you have to solve – water, waste and electricity.

Third, I think is energy efficiency. Here of course there is no policy and very few companies. But I think there is a lot of room for policy innovation which can effect changes in this sector.

Q. How do you think Indian government’s policy towards cleantech has been?

I think they have talked a lot, but I wish they have done more. They are not an obstacle, but I think they have not come out and been openly supportive. Taking an example, look at the stimulus dollars which China has. Out of their $580 billion stimulus, $106 billion is targeted towards cleantech, which is huge.

Just like India made IT services industry hugely strategic 10-15 years ago, I think the country has a fantastic chance of making cleantech strategic too. Because there is a huge domestic demand I think entrepreneurs and companies can come up at a fast pace which can make them globally competitive and go onto exporting.

Indian government should look at this as an investment opportunity. The Chinese government is doing this not just because it’s good for the environment, but because they think it’s a competitive advantage they can create. Similarly for the US, out of the $787 billion stimulus, $102 billion is set aside for cleantech. EU is also investing $60 billion. So where is India? I think the government has a unique opportunity do something.

Q. We have also been seeing several Asian economies allocating significant parts of their GDP towards cleantech, and renewable energy…

Definitely. And the biggest problem for the country that I see is infrastructure, which is mainly energy and transport. We have massive scarcity of power. If you can invest in a new type of power, why wouldn’t you? India did a complete quantum leap in telecom. We didn’t make investments in wire line, we went straight to wireless. We skipped a generation of technology. Why won’t you do the same thing in energy? Why would you go to 50-60 year old technology of coal and natural gas, when you can go to something new in energy business.

It’s a huge opportunity. There are some very smart people at the government and they just have to get their act together. The new government has a great chance of making it happen, and I think it’s the best thing that could happen to India. 

Q. A lot of VC-backed cleantech startups headquartered in the US have made India their first market for product implementation. Do you see more of that happening?

That will happen. And you will see more of that happening if access to deployment financing would be available here. We have 3-4 companies in Germany, I would love to bring them to India. The technology is so relevant and so applicable to India, and economically viable. But I need to find financing partners for deployment, not equity.

And if India does it first, it could become the platform to take it to Africa, South America and other regions.

Q. Several electric car companies have raised funding. Do you think scaling will be a challenge?

I think that’s a tough one. There are two challenges. One is that storage technology, especially batteries, have improved, but they have improved (only) by 10-20%. There is no 2x-3x in that. It is at a very incremental evolution. And still extremely expensive.

Reva is a good company, and has a great entrepreneur behind it. But to offer a (viable) car, they need a cheap and long range battery. You can put a lithium-ion battery, but that would put the car out of reach for many. Technology and cost makes it challenging. But 3-5 years down the line, I think it will be a very good opportunity.

Second is the commercial challenge when you are looking to sell an expensive car with a battery. There is a company called Better Place, where they lease batteries. I think such commercial innovation is necessary for electric car companies to take off.

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NucEngineer . 6 years ago

There has been atmospheric cooling the last 8 years, and no new high global annual temperatures in the last 11 years. None of the computer models replicate this fact. Anthropogenic (or man caused) global warming is not proved.

The global warming adherents base their argument of proof on more than 20 different computer models called general circulation models (also known as global climate models or GCMs). Each computer model is composed of dozens of mathematical equations representing known scientific laws, theories, and hypotheses. Each equation has one or more constants. The constants associated with known laws are very well defined. The constants associated with known theories are generally accepted but probably some of them may be off by a factor of 2 or more, maybe even an order of magnitude. The equations representing hypotheses, well, sometimes the hypotheses are just plain wrong. Then each of these equations has to be weighted against each other for use in the computer models, so that adds an additional variable (basically an educated guess) for each law, theory, and hypothesis. This is where the models are tweaked to mimic past climate measurements.

The SCIENTIFIC METHOD is: (1) Following years of academic study of the known physical laws and accepted theories, and after reviewing some data, come up with a hypothesis to explain the data. (2) Develop a plan to obtain and analyze new data. (3) Collect and analyze the data, this may even require new technology not previously available. (4) Determine if the hypothesis is correct, needs refinement, or is wrong. Either way, new data is available for other researchers. (5) Submit results, including data, for peer review and publication.

The output of the computer models run out nearly 90 years forward is considered to be data, but it is not a measurement of a physical phenomenon. Also, there is no way to analyze this so called data to determine if any or which of the hypotheses in the models are correct, need refinement, or are wrong. Also, this method cannot indicate if other new hypotheses need to be generated and incorporated into the models. IT JUST IS NOT THE SCIENTIFIC METHOD.

The worst flaw in the AGW argument is the treatment of GCM computer generated outputs as data. They then use it in follow on hypotheses. For example, if temperature rises by X degrees in 50 years, then Y will be effected in such-and-such a way resulting in Z. Then the next person comes along and says, well, if Z happens, the effect on W will be a catastrophe. “I need (and deserve) more money to study the effects on W.” Hypotheses, stacked on hypotheses, stacked on more hypotheses, all based on computer outputs that are not data, using a process that does not lend to proof using the SCIENTIFIC METHOD. Look at their results, IF, MIGHT, and COULD are used throughout their news making results. And when one of the underlying hypotheses is proven incorrect, well, the public only remembers the doomsday results 2 or three iterations down the hypotheses train. The hypotheses downstream are not automatically thrown out and can even be used for more follow on hypotheses.

Ravi . 6 years ago

Go tell your story to Island country of Tuvalu who have become the first environmental refugees of this century due to global warming.Climate prediction is not an exact science & is extremely complex.So are medical sciences but that doesn’t mean we throw out medical science as a whole.Just as global warming there is of course well known phenomenon of ‘global-dimming’.There also a factor of ‘noise’ that you need to cancel out from the findings which proves that global temperatures are rising & global is an established threat.You quote a time scale of 8 to 11 years to site your proof! are you seriously arguing about climate with this kind of analysis?? These scientists study climate dating back to 100s or even 1000s of years based on not just on pure climate science but also extrapolate from archeological findings,paleontology,geographical sciences,etc. Please do not bring your pseudo-analysis to such forums & create doubt & delay in the layman’s mind.Your line of thinking seems to be influenced by the misleading information war unleashed by section of fundamentalists mainly from emanating from countries such USA & Australia.

Ankur . 6 years ago

One problem with cleantech industry is that most of them don’t have anything new to offer for a long time to come. Many of them are not likely to “change the way we live”.

E.g., solar cells will only generate electricity. I would assume it to fall in the category of “change the way we live” if its cost was half of today’s electricity but that is a little too far off for now. Similarly, electric cars will be nothing but cars only — subject to the same congestion and limitations that today’s cars are subjected to.

However, there are exceptions too. While being revolutionary in terms of environment, they will really improve the way we live.

Cleantech Biggest Investment Opportunity Of The Century: Ajit Nazre

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