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The Energy Transition’s 3 Winning Themes of 2020

The Energy Transition’s 3 Winning Themes of 2020

I am going to be writing a few 2020 summary notes / awards. Today is “the winning themes!”

Theme 1: Infrastructure Development

Hard assets get a bad reputation in VC. This negative reputation is self-inflicted by the early stage venture community: investing in infrastructure and expecting venture returns. The fact is that there are better financing sources for the infrastructure layer. And in 20200, renewable infrastructure went into overdrive. Here are just a few of the headlines.

Invenergy announced a 1.3 GW utility scale solar project in Texas, the largest utility-scale solar farm in North America.

Orsted and others are building the first sizable, offshore wind farm in the US. The site outside of New Jersey, is targeting 2.4 GW and the winning bidder will build a $250M+ manufacturing facility in the state.

Hawaiian Electric announced 460 MW of solar and 3 GWh of energy storage with a number of winners: AES, Longroad Energy, Onyx, Hanwha Energy…

Theme 2: Hardware

Installed wind, solar and batteries are expected to increase by >10x over the next decade. TLDR: A lot of hardware and components are going to be installed. The last generation of energy had dominant energy brands. This generation’s brands are being established now:

Array Technologies became the first publicly traded solar tracker and received incredible interest with record-breaking follow-on issuances.

Enphase Energy shattered the “inverters are commoditized” notion, gained market share and margin as the #1 systems hardware firm supporting utility scale solar’s undeniable growth.

GE re-establishing dominance in wind and is building a stunningly effective and iterative new Haliade-X turbine platform with recent indications of a 13 MW unit.

NextEra dethroned Exxon in terms of public market value and captured national attention with potential take-overs.

Tesla’s dominance in the electric vehicle and infrastructure market has gained market appreciation.

ChargePoint went public and revealed a path to $150M in revenue through hardware, services and software products. The firm’s trajectory makes it clear they are going to be the pillar of electrification of mobility for the next generation.

Theme 3: Cost Curves

Over the past decade experts made bold claims about how scientific advancements and engineering accomplishments will drive the cost of new energy products to decline. At times we take this stunning progress for granted. It is worth pausing and recognizing just how far we have come…

The cost for utility scale battery packs are in free-fall: lithium-ion battery pack prices, which were above $1,100 per kilowatt-hour in 2010, have fallen 90% to $137/kWh in 2020. BNEF projects the average price will be closer to $100/kWh by 2023.

Utility scale solar costs dropped by another 5-10% since 2019 and have dropped a cumulative 75% since 2010.

Utility scale wind continues to drop by about 5% a year and has dropped 71% since 2010.

Honorable Mention

JOBS: I actually do not believe the jobs topic gained enough coverage in 2020. The reason? No political party can take credit. The jobs created in industry are primarily due to corporate conviction and bottom-line decisions. Climate, renewables and the energy transition are being incorporated into P&L decisions. This is great for the industry but may mean the more easily trackable climate/energy transition jobs are less direct/trackable.

POLICY: We should have more insights into our congressional composition by February. I suspect policy will have a big impact in 2021.

In Summary …

We are still at the stage of market where the infrastructure layer has major runway. The dollars and assets going to the development and hardware space are going to reshape our energy landscape for the next 50 years. VC investors all want to run to software, but there is still tremendous growth and (near-term) margin in the infrastructure and hardware layer.

Industrial Tech M&A: PTC Acquires Arena Solutions

Industrial Tech M&A: PTC Acquires Arena Solutions

An important industrial tech M&A event happened earlier this month: PTC acquired Arena Solutions for $715M… marrying PTC’s CAD software with Arena’s Product Lifecycle Management solutions.

The Acquirer

PTC is a pillar of the industrial technology scene. the company has nearly $1.5 billion in software and related services revenue. The company received a $1 billion strategic investment from Rockwell in 2018. PTC’s core products and solutions can be seen here:

PTC is currently worth approximately $14 billion in the public markets, implying an ~10x revenue multiple. The company’s valuation multiples are depressed relative to the stat-up comps due to the slower growth (sub 5%) for the firm.

But PTC has a very strong brand and strong existing customer relationships. Given PTC’s existing Onshape brand and that Computer Aided Design (CAD) expertise, it was a logical bolt-on as Arena’s Product Lifecycle Management (PLM), naturally works alongside CAD.

The Target

PTC claims that Arena will add $50M of recurring revenue for calendar year-end 2020, and no change in cash flow. This means that PTC acquired the company for 14x 2020 revenues.

Arena Solutions was the first company to develop a cloud product lifecycle management (PLM) application and product-centric quality management system (QMS) solution. Arena has more than 1,300 customers. The firm was founded in 2000 and has had a few pivots along the way.

The Takeaways

This signals three important takeaways for me:

1- There is a “sweetspot” where these larger industrial technology firms want to see a firm hit in revenue and it usually starts at the $40-50M in revenue range. Anything less than that amount and the target’s financial impact is too small to make an impact. And if the company is too small then the acquirer is concerned the existing culture will stall the start-up’s growth. Most industrial tech firms actually want these technology subsidiaries to retain independence.

2- Arena Solutions was probably growing closer to the OSIsoft benchmark of 10% yearly growth versus the 50-100% of most start-ups. PTC acquired Arena for 14x revenue… a healthy multiple but a far cry from other recent start-up valuations. This is an important lessons for the VC and start-up community: the industrial tech firms HATE paying big multiples. They would rather purchase a slower growing firm for a lower multiple than the market leader for an egregiously high multiple.

3- This was a 20 YEAR story. The firm was founded in 2000 and had its’ last venture round in 2014. These businesses take time to grow in the industrial technology space… plan accordingly.

The M&A tracker is now updated. Link here

Kudos to Ty Findley at Ironspring for elevating this one to me and being the co-pilot on this tracker.

Honeywell and Salesforce-built Sparta Systems

Honeywell and Salesforce-built Sparta Systems

The “built on Salesforce” technology stack now has a number of winners.

The original and most epic example is Veeva Systems. Veeva took less than $10M of capital, and is now a $41BN value company. The company was so efficient because it leverages the Salesforce infrastructure to build a vertical-specific solution. In the process, Veeva’s additional application layer gave hospitals and healthcare firms greater value… and charged a boatload more. The company has $1.4 billion of trailing twelve month (TTM) revenue and $340M of operating income. This represents a 30x revenue multiple and a

Since then, many other firms have come forward:

nCino is also built on Salesforce’s platform. nCino used the basic infrastructure and built a banking and finance focused operating system. The company is now a $7.4 billion public company with $170M of LTM. Not a shabby 40x multiple.

Conga and Apptus were some of the earliest platform adopters. These companies, now merged, have nearly $500M in TTM revenue and provide contract lifecycle management.

Today’s announcement by Honeywell brings another “Built on Salesforce” company to the forefront. Honeywell announced the $1.3 billion acquisition of Sparta Systems. The target company’s ore product is a quality management software delivered as a service with artificial intelligence. According to their website, Sparta Systems has “two primary platforms include TrackWise Digital, which is built on Salesforce’s platform, and QualityWise.ai. QualityWise.ai brings natural language processing, signal detection and confidence levels for recommendations to TrackWise Digital.” 

The product will integrate with Forge, and the M&A is consistent with my past analysis of Honeywell’s digital strategy. Perhaps the most important part of the narrative, however, is Honeywell’s continued integration with traditional IT firms as Honeywell is already cozying up with Microsoft and now Salesforce. Given that Salesforce (and Microsoft) are where existing industrial customers go to shop for IT, Honeywell is wisely associating their OT stack.

With the $1.3 billion price tag and the other recent comps listed above I suspect Sparta Systems had somewhere around $40-90M in revenue. As the company has more implementations (non-software) revenue I suspect Honeywell paid a slightly lower multiple and the company had $60-90M of revenue.

sparta-systems-trackwise-stack.png
Pressure is a Privilege

Pressure is a Privilege

Bille Jean King’s autobiography has that title. If you know anything about her, you know that title fits her story arc perfectly.

This phrase is highly relevant for the current sustainable technology environment. Let me break it down:

Pressure (Latin: ‘premere’ -> ‘pressura’ meaning “to push”)

You are pushing yourself. Pressure can be positive: to push for advancement or achievement. Pressure can be negative: fear of letting yourself on others down. Pressure means you are moving away from status quo, or equilibrium. Pressure implies change, and risk.

Privilege (Latin: ‘privus’ + ‘lex’ –> ‘privilegium’ meaning “law affecting one”)

A benefit not equally shared by others. An opportunity. A special right… (whether earned or unearned) Privilege means you have some special position. Select people get complacent with privilege. Others use the benefit as a stepping stone to do more.

My Interpretation of “Pressure is a Privilege”

Being in a position to drive change is a special right

Right now, the climate, sustainability and clean energy industry is under positive pressure. Change is happening. Risks are being taken and entrepreneurs and (yes, I know) investors are driven to be a positive contributor to the industry’s move away from status quo.

It is impossible to work in this space and not feel the momentous changes underway. To be a part of such a high impact arena at such a critical turnover is overwhelming.

We are privileged to be working in this field right NOW – at a point in time when materials, systems and technology advancements provide us an economically viable market for new solutions. We are standing on a century of progress. Now that we are in this favorable position, let’s welcome the pressure and continue to push forward to drive incredible change.

When Ideologists and Capitalists Align

When Ideologists and Capitalists Align

Until recently, sustainability ideology and capitalism were two circles with only minor overlap in a Venn Diagram. Outside of minor fads, the two groups never saw eye::eye and financial returns were (expected) to be sacrificed for an investment in sustainable advancement.

The latest surge of interest in climate solutions, highlighted by:

  • Tesla’s stock surge
  • Array Technology’s record breaking IPO and secondary
  • Record breaking wind, solar and battery deployments
  • SPACs of new electric vehicle platforms, and autonomous solutions
  • Hydrogen interest
  • Additive manufacturing interest
  • Carbon-free flight
  • Financial leaders demanding ESG responsibility

…, is what happens when the circles of ideology and capitalism become concentric. As a result of this convergence, the infrastructure of our world is being reconstructed with sustainability technology, solutions, and products. And for the first time, the financing partners are making these investments with no expected sacrifice to returns. In fact, the opposite where these businesses are now the expected source of growth in our economy.

There is arguably no bigger stage than the infrastructure markets. Therefore, the capital required to effect change – and the potential impact of that change is of an unimaginable scale. As a result, the flow of capital into sustainable technology and solutions has moved from a drip to a firehose. If you think about the scale of our physical infrastructure, then the recent spate of SPACs and investor interest is still relatively low compared to the global interest is these new solutions.

I remain incredibly excited about the change underway and believe that the pace and scale of these new technologies will define the (roaring) 2020s and beyond.

Teardown of C3.AI by Kevin Stevens

Teardown of C3.AI by Kevin Stevens

I worked with Kevin Stevens at Choose Energy. He is now a Partner at Intelis Capital. According to Kevin’s website, Intelis Capital makes long-term investments in the next generation of energy titans accelerating the widespread adoption of novel technologies creating a more resilient and sustainable energy ecosystem.

Kevin recently wrote an excellent post about C3.AI and the company’s recent S-1. C3.ai is a leading enterprise AI software provider for accelerating digital transformation. The proven C3 AI Suite provides comprehensive services to build enterprise-scale AI applications more efficiently and cost-effectively than alternative approaches.

A company issues a S-1 as a lead into an IPO. Instead of doing my own analysis here, I wanted to elevate Kevin’s work.

Here is the link:

https://kevindstevens.com/c3-ai-s1-teardown/

Aurora Solar $50M Series B

Aurora Solar $50M Series B

Aurora Solar co-founders, Chris Hopper and Sam Adeyemo are ALWAYS heads down. They would be the first to tell you that new financings are mostly a nuisance and the fundraising process gets in the way of growing the business. The cofounders are laser-focused and Aurora Solar has a simple statement:

“We are building the operating system for the solar industry”

Aurora is executing masterfully and is now the standard software platform for one of the fastest growing industry’s in North America. As a result of their growth, Aurora is looking to accelerate product development and market expansion through a Series B capital raise led by Doug Pepper at ICONIQ.

Energize led the Aurora Solar Series A in Q1 2019. We were introduced to Aurora by one of our family office LPs… (man now THAT introduction was major value-add). As Tyler writes in our blog post, we had a “prepared mind” on the space as we had seen most of the solar-related and distributed energy software companies. This enabled us (ahem, Tyler) to work heads down over Thanksgiving 2018 and come in the following week with even greater conviction. We have been thankful to be part of the ride with Aurora to-date and are excited for what the next chapter brings for the company.

Here is Energize’s statement on Aurora’s Series B that was announced this morning:

Today, Energize Ventures is thrilled to announce its participation in Aurora Solar’s $50M Series B led by ICONIQ Capital. This funding brings Aurora’s total capital raised to more than $70M. Existing investors Fifth Wall and Pear VC are also participating in the round. Along with this funding, Tyler Lancaster (Principal, Energize Ventures) and Doug Pepper (General Partner, ICONIQ Capital) join Aurora co-founders Christopher Hopper and Samuel Adeyemo alongside existing board member Shvet Jain on Aurora’s board.

Here are the key quotes from the Press Release:

“After weathering the economic challenges this year, there is a tremendous opportunity for the solar industry to serve as a growth engine to spur the development of a global clean energy economy. The outlook for solar has never been more promising, and we are thrilled to continue to support resilient, catalytic digital solutions like Aurora that play a critical role in powering the build-out of sustainable infrastructure and accelerating the clean energy transition.”

Tyler Lancaster, Principal at Energize Ventures

“Solar has emerged as one of the key future energy sources, and Aurora is increasingly the go-to solution for solar installers who are looking to affordably deploy solar at scale. The pandemic has accelerated trends towards remote processes, and we are delighted to have the resources to build all the tools that will help the industry thrive in this new environment.”

Samuel Adeyemo, Co-founder of Aurora Solar

“Aurora has become the preeminent software platform for solar installers, with product functionality and an end-user experience that is far ahead of the competition. We’re looking forward to joining the board and supporting Chris, Sam, and the Aurora team on their exceptional growth trajectory to enable the solar industry to scale for a more sustainable future. Aurora Solar joins ICONIQ’s leading vertical software investments including Procore, ServiceTitan and Relativity.”

Doug Pepper, General Partner at ICONIQ Capital.

“This fundraise is not only a big milestone for Aurora, but for the solar industry. It will allow us to continue to build best-in-class tools for solar professionals in the U.S. and internationally, and help us achieve our mission of creating a future powered by clean solar energy.”

Christopher Hopper, Co-founder and CEO of Aurora Solar.
Product – Budget Fit

Product – Budget Fit

At Energize we are fortunate to see many next-generation technologies. As an investor with a commercial focus, I usually ask the entrepreneur something along the lines of: “what budget or line item at the customer do you think funds this technology purchase?”

Less commercially aware CEOs will answer this question by proclaiming of a new line item or a new approach to the customer’s budget. In my years of venture, this “create a new budget” approach typically leads to sales pain and capital inefficient growth.

The start-up’s technology may be next generation. And the start-up may be using NEW technology to solve an old problem in a NEW way.

However, the most experienced execs will do everything in their power to jerry-rig their technology solution to an existing budget.

Seasoned execs know that if a line item budget exists at a customer, the customer has previously determined they will pay (internal or external resources) for value delivered. By aligning the new technology solution to the outcome-validated budget, a startup backs into budget access and approval.

I call this product-budget fit.

The best start-ups think through product-budget fit from the earliest days of the company. With this awareness, a company fine tunes product development, go to market, and commercialization techniques accordingly. I enjoy seeing this narrative come together at a high growth company and Team Energize thrives in working alongside entrepreneurs at this stage.

Digital Industrial Partnership: Honeywell Forge + Nozomi Networks

Digital Industrial Partnership: Honeywell Forge + Nozomi Networks

About a month ago I wrote about how Honeywell is using their Honeywell Connected Enterprise division to go all-in on software solutions. The core product of HCE is Forge, a domain-specific, low-code cloud operating model built to be system and OEM agnostic. The cloud suite simplifies data extraction from assets, people and process and uses a combination of proprietary AI/ML mechanisms and partner applications to solve business-specific problems.

Honeywell CEO, Darius Adamcyzk, was also recently on CNBC touting Honeywell’s capabilities around control systems and digital technologies that blend hardware and software. At the bottom of this post is my framework for Honeywell’s approach to digital technologies. In their digital goals, Honeywell has stated interest in OT and IoT cybersecurity.

So what is a tangible example of Honeywell leaning into digital industrial solutions? Perfect timing…!

Last week Honeywell announced a partnership with Nozomi Networks to strengthen HCE’s Forge OT cybersecurity offering. Nozomi is a portfolio company of Energize Ventures and is the leader in OT and IoT security and visibility. Through a software platform, Nozomi accelerates digital transformation by unifying cybersecurity visibility for the largest critical infrastructure, energy, manufacturing, mining, transportation, building automation and other OT sites around the world.

I am very excited to see how Nozomi will succeed within Honeywell’s industrial network. Here is a screenshot of the press release.

Digital Tech + Energy Transition: Drones Helping Build The Largest Solar Farm

Digital Tech + Energy Transition: Drones Helping Build The Largest Solar Farm

On Wednesday, Invenergy announced the development of the largest solar farm in America. The solar farm is 1.3 GW, costs $1.6 billion and will employ 600 construction workers. (Invenergy is an anchor Limited Partner in my VC firm, Energize Ventures)

The scale of this project is astounding. The largest existing solar development is 650MW, meaning this site nearly doubles the previous record. I suspect we will be seeing many more in this new scale band over the coming years.

To me, perhaps one of the most enjoyable parts of this transaction is that DroneDeploy enabled this scale. Energize led the Series C in 2018 with a thesis that aerial mapping and analytics will positively impact renewable development. Over the last few years DroneDeploy worked with Invenergy to improve the DD product so that the mapping and analytics solution could go from mapping hundreds of acres to tens of thousands of acres. This is exactly the intersection of digital technologies driving scale that otherwise could not be possible.

Here is a photo of the DroneDeploy team at an Invenergy site in 2018!