NewNet Investor Profile, Scott MacDonald, Emerald Technology Ventures

30 September 2008

Scott MacDonald

Emerald Technology Ventures was founded in 2000. The firm focuses exclusively on innovative technologies in energy, advanced materials and water. Emerald has 19 team members in offices in Zurich, Switzerland and Montreal, Canada, The firm manages three venture capital funds and two venture capital portfolio mandates totaling over €300m.

Scott MacDonald is a partner, based in the firm’s Montreal office. He focuses on green IT investments within the cleantech sector. He previously served as chairman of RuggedCom and currently serves on the boards of the Pressure Pipe Inspection Company, Soft Switching Technologies, Solicore and SynapSense. Prior to Emerald, he was a managing director in the venture capital subsidiary of Ontario Power Generation. Previously, he worked for a Toronto-based corporate finance and investment banking firm.

When did you first look at cleantech?

‘We raised our original fund in 2000, we called it Sustainability, as the term “cleantech” had not been created at that point. We started as a venture capital division within a larger asset management firm called SAM, which stood for sustainable asset management.

With the original fund, the majority of our team was Zurich based. Our first fund, Emerald Fund I, was €90m in size and focused on North America and Europe.

In 2005 we won two venture capital mandates within the cleantech space. One was on behalf of pension fund Caisse de dépôt et placement du Québec, where we took over some of their portfolio companies in the energy space. A short time later we took over management from Ontario Power Generation, an electric utility who had direct venture capital activity, and we started to manage their portfolio companies also. We continue to manage these, as well as our own.

At the same time we established a North American office in Montreal. We currently comprise 19 team members between Montreal and Zurich and over the years have emerged as a leading global venture capital manager focused exclusively on the growing cleantech sector.

In 2007 we closed our second fund on €150m and around the same time we spun out of SAM and renamed ourselves Emerald Technology Ventures.’

What is your geographic focus?

‘We invest globally. Our main geographical focus is obviously Europe and North America, given our offices. We have made investments in Australia, and we continue to look at Israel. We have a strategy to address emerging markets like China and India, though we have not invested there yet.’

What is your focus within cleantech?

‘Emerald invests exclusively in the cleantech sector. Within this, we have three core areas: energy, advanced materials and water. We certainly have a more granular investment focus. We think solar is very interesting and have invested historically in companies such as Evergreen Solar and Xunlight.

Most people think of renewables when they think of cleantech, but cleantech covers a wide range of areas. In particular we are looking at the emergence of the smart grid which is comprised of technologies such as automatic meter reading, grid infrastructure and electricity transmission.

We are also very excited about green building products. We think there is a large movement towards more efficient building materials, and it all comes back to energy efficiency in general.’

Why cleantech?

‘Now it seems obvious, but even when we closed our second fund back in 2007, people would ask why we were looking at cleantech, as there had been no success stories. It was obvious to us though, that when you started to research energy demands, and if you looked at the changes that were happening with emerging countries and their resources, with the scarcity of water, energy dependence and climate change, it was clear that people were going to demand more cleantech solutions. The price of oil also began to move up and it no longer became fine for Arnold Schwarzenegger to drive around in a big Hummer any more, as these things began to take hold.

In 2000 cleantech was not mainstream, and that has certainly changed. The investors in our latest fund differed a great deal compared to previous funds. We have some big investors like CDP, GIMV, Rabo, Volvo, John Deere, Unilever, Dow Chemical and Bosch. This is because they realise that there are fundamental changes going on and they are all cutting edge organizations that realize the need to adapt their business model to ensure a clean future.

Going back to 2000, it was a view that there were some trends and dynamics that were pushing opportunities for nimble start-ups, much as we saw in Silicon Valley in the IT space in the 1990s. It is a totally different market though. Energy is a trillion-dollar market, and you cannot underestimate the size and the magnitude of the opportunity. All the drivers, be them political, social or technological, are starting to line up in a particularly favourable way.

Our investment thesis was shaped in 2000 and has now panned out. We have seen that some of the biggest venture capital returns over the past five years have been in cleantech companies; there have been incredible returns for investors whether they be the early venture backers, or as they move from small to mid cap. All of the mainstream Silicon Valley funds are now focused on the sector, including big names like Sequoia Capital.

There is a lot more interest in the space, and when you look at the numbers you see that cleantech is a real investment sector. Going back 12 months, it was still seen as a niche and not getting recognised as an investment sector, it was seen as a trend. Cleantech is not just a trend, and there are good returns to be made. Things have evolved faster than even we at Emerald expected.’

So do you feel this is where the best opportunities are to be found in venture capital now?

‘We really do. Some of the cleantech markets are trillion-dollar markets so it’s not surprising to see the veterans of the venture capital arena like Vinod Khosla of Kleiner, Perkins, Caufield & Byers spinning out and focusing solely on cleantech.

It offers the opportunity to make significant changes, and to create huge amounts of wealth, while doing good for the environment, and hopefully feeling good about the money you are making.’

Which areas are of particular interest at the moment?

‘For us the exciting areas are smart grid, and while it is still early days, it is an area that is really accelerating. Today the electricity grid is archaic and there are lots of technologies that can improve that. We are definitely going to see an accelerating build-out over the next 5 years.

In North America in 2007, 1.5 per cent of all electricity went to power data centres and servers. The more information we store electronically, the more power they need to power their equipment. This is a huge market if we can more effectively manage these systems. There is a huge opportunity for green IT.

Solar obviously continues to interest us, and the costs are really coming down.

Wind is still experiencing significant growth but it is becoming a harder area to find venture-grade early stage companies, though there are clearly later stage opportunities to be found in wind.

Finally, I would probably say water technology. We think it is a harder venture capital investment space, primarily because of the types of deals, but also the number of deals we see. Only ten per cent of our total deal flow is water, and while it remains a major sector for us, it is still less than energy and advanced materials. We think there are great opportunities for water, but they are a little scarcer, and you really need to have the knowledge. We have compiled a team that contains in-house sector expertise, so unlike traditional venture funds which may outsource on a deal-by-deal basis, we have in-house expertise in a number of areas including water.’

How important is it to have a good knowledge of the sectors in which you operate?

‘Incredibly important. This is the difference between a generalist fund and one that is focused. The diversification of the knowledge base required to assess a water technology deal next to a solar technology deal is very different; it is almost like a different industry. Within the cleantech space as a whole there is a vast array of technologies, market drivers and regulations.

Our approach is that we are going to invest globally in certain areas where we have this expertise, and where we believe there is the potential to create growth. We do not care where they are, from a geographic point of view, but we still need to understand that specific space. We feel it is important to have these specialists as part of our team.

I am sure there are teams that do not have specialists, and maybe that works for them. Our view is that if we have them in-house, they not only add value when we are making the investment, but, more importantly, they are there to help us grow and create value.’

How do you find out about potential investment opportunities?

‘When we started, we saw 350 business plans in the first year. In 2008, we will have seen over 1,000. There has been huge growth, so our deal flow is very heavy and comes from a range of places. It may come from entrepreneurs who have heard about us. It also comes from our network, from conferences and from just being out in the space. We also get a significant number from the academic and research world, through the links and networks our technology specialists are plugged into.’

How many investments would you look to make in a year?

‘I think that is a function of our capital under management and the opportunities we see. There is no set amount, but around six investments per year is the pace we have been on. Our average investment amount is somewhere between €5m and €8m. Obviously, it comes back to the stage of investment, we can go early in a classic venture investment, but we have also made expansion stage investments. Because we are focused on the sector, we like to take a balanced approach to the stage of the deal, and will consider all stages.’

What is the biggest issue facing the cleantech space at the moment?

“Besides the troubling financial environment that faces all industries, I think the industry suffers from the false notion that cleantech is just another “bubble”. I do not feel that we need to continue to consider these questions. It’s true that not all the venture-backed companies will survive but the importance and magnitude of the climate change challenge is clear in our minds.

I think that there is a danger that as more money floods into a space that some of the money may not be as particular as the early investors in the sector. Therefore there is an opportunity for companies to get funded that should not be, and will eventually fail and leave a black spot in the sector. This is just part of the evolution of the sector, though, and I feel confident that good deals will continue to be made.

It is a challenge we have to face like IT did with the dotcom boom. The difference is I do not think we are in a similar bubble, and I do not feel there are significant parallels. The amount of capital is nowhere near, as are the amount of funds in the space. There is a healthy number of funds, and at the moment we have an ecosystem that works. Our biggest problem 12 months ago was that in Europe we could not find other funds to invest in deals alongside us. This is thankfully no longer the case.’

How can you see the space evolving?

‘I think we are going to continue to see some of these sectors mature. Policy is going to continue to develop, with political pressures and consumer pressures increasing. There is a debate about whether oil is going to eventually hit $200 a barrel or go back to $70, and how this is going to affect demand for alternative fuel resources. I think we are in an upward trajectory though, in spite of the volatile markets. I still think that at the moment the sector is still emerging. It is a very exciting time and there are significant investment returns to me made by smart investors.’

For more information on Emerald Technology Ventures please visit www.emerald-ventures.com

Copyright © 2008 newnet

Tags: cleantech, gp, investor profile, materials, smart grid, water

This story was published on Tuesday, September 30th, 2008 at 1:46 pm and is filed under profiles. You can follow any responses to article entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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