Tarrant Partners Review

1
The Cleantech Sector Opportunity for Innovators
and Entrepreneurs
Evan Lovell
April 11, 2008
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Agenda

• Virgin Green Fund Background
• Sector Comments
• Valuation
• Future Landscape
• What Really Matters

3
Virgin Green Fund Investing growth and
expansion capital in renewable energy and
resource efficiency companies in North America
and Europe
VGF
Investments to Date
www.virgingreenfund.com
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Agenda

• Virgin Green Fund Background
• Sector Comments
• Valuation
• Future Landscape
• What Really Matters

5

Do you recognize these Founders CEOs?
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Do you recognize these CEOs?
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How about these?
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You should.
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You should.

• Combined market cap of over 100 Billion
• Consistent top line growth of over 30
• The next 50 years will be determined
• by these and similar companies

Zhengrong Shi
Alf Bjørseth
Patricia A. Woertz
Don Enders
Anton Milner
Dick Swanson
LeRoy Nosebaum
Michael Ahearn
Nabeel Gareeb
Randall Hogan
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Macro Sector Overview

• Sustainable demand side pull vs. supply side
  push.
• .leads to traditional resources responding with
  unprecedented price increases
• coupled with a Chinese menu of legislative
  acronyms (RPS, PTC, ITC, CAFÉ, AB32, Kyoto, Kyoto
  II, EU Directive)

Oil (/bbl)
Natural Gas (/mm Btu)
Corn (/bushel)
4th Industrial revolution?
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Macro Sector Overview
in billions
Source New Energy Finance
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Macro Sector Overview
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Macro Sector Overview
LTM Indexed Price Performance of Cleantech Stocks
Source Citigroup
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Macro Sector Overview
According to the US Department of Energy,
Cleantech accounts for about 3.5 of the energy
currently consumed, with tremendous growth
expected
Global Electricity Generation
U.S. Electricity Generation
Source Wall Street Research
Global Energy Consumption Forecast by Fuel
Quadrillion BTU
Source EIA, 2007
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Macro Sector Overview
Population (billions)
Source United Nations, 2007
Source EIA, 2007
Units (millions)
19.5 CAGR
Source EIA, 2006
Source Oliver Wyman analysis, 2007
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Macro Sector Overview
Billion metric tons of C02
Carbon Dioxide EmissionsForecast
Source EIA, 2006
U.S. Mid-Range Abatement Curve
Source McKinsey, 2007
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Macro Sector Overview
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Mapping of Sectors
Renewable Energy
Resource Efficiency

• Biofuels
• Biomass
• Solar energy
• Wind energy

• Hydro energy
• Geothermal energy
• Fuel cells

• Energy efficiency Energy Storage
• Monitoring management systems
• Water / Waste management
• Emissions reduction

Growing demand for technologies, services,
products that provide cleaner or more efficient
use of existing resources resulting in
environmental benefits and/or reduced reliance on
fossil fuels
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Sector Comments - Solar
PE / VC Investment in Solar
( in millions)
Source New Energy Finance. 2008 represents YTD

• 2006 1.7 GW, 6.2B market, 42 growth
• 2007 3.9 GW, 12.6B market, 88 grid connected
• By 2010 7.7 GW installed, 66 Germany, 25 in the
  US
• Germany created the rebirth of renewables with
  Euro50c/kWh subsidy and real feed in tariff
  programs
• 15B sales in total industry
• Solar companies fully contracted out 3-4 years
• Strong margins (30-40)
• Implied valuations (assuming growth are
  reasonable). Lowest growth estimate is 35 5 year
  CAGR. 20 P/E1, PEGlt1 but Spot silicon 25/kg now
  350/kg

Source Factset
Capital markets supporting strong secular growth
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Sector Comments - Solar
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Sector Comments - Wind
( in billions)

• Historically largest investment area, largest MA
  area, lowest cost renewable (ex-hydro)
• Challenges Wind blows off peak- reserve margin
  issues, no ability to get capacity payments,
  transmission lines used only 1/3 of the time
• Inefficient due to lack of storage and dispatch

Most developed of the renewables markets due to
price point of wind power leading to strong growth
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Sector Comments - Biofuels

• Too little midstream distribution and too much
  production
• ETOH pricing 77 BTU content 23 energy
  content tax benefit refiners taking their
  margin
• Macro data seems more positive than choppy
  capital markets imply

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Sector Comments - Water

• Aging infrastructure Assets depreciating faster
  than rate of investment (city sewers are 100
  years old, suburbs 60 years), all reaching well
  past useful life
• Large spend EPA estimates 25B/yr over next
  10-15 year, or 300B total. Right now spend rate
  is 2.5B annually
• Fundamentally betting on the failure of
  governments to tackle the problem.
• Convergence Water and Power (delivery and
  treatment of water is the 4th largest consumer of
  power)
• Price inelastic demand Whether economy is up or
  down, people flush toilets
• Role for technology Drip Irrigation, Advanced
  Metrology, Blue Star Program
• The colors work Yellow and Blue make Green

Water is behind the walls, under ground. Its not
sexy but is the largest, most fragmented of
renewables
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Sector Comments - Water
Crisis
Danger
Caution

• Ben Franklin Well know the worth of water when
  the wells run dry
• Over 250 Billion annual spend worldwide to reach
  UN safe water standards (25-50 billion annually
  required in the US), but will it be enough?

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Sector Comments - Water
Million Cubic Meters per Day
RO Capacity 1,000 m3/day
Cost of Water (/m3)
Global
1985 - 2005E CAGR 14
Middle East
Unit Cost (/m3)
Technology helping to drive down costs
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Agenda

• Virgin Green Fund Background
• Sector Comments
• Valuation
• Future Landscape
• What Really Matters

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Investment Environment
Factors Driving New Deals
More than 75 of all deals are now require larger
dollars is this expansion or valuation driven?
Investments cut across all sectors there is no
one bullet
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Agenda

• Virgin Green Fund Background
• Sector Comments
• Valuation
• Future Landscape
• What Really Matters

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Future Landscape

Project/ Infrastructure Finance
Expansion/ Growth Capital
Early Stage/Venture Capital

• Long-established VCs, historically focused on the
  information technology and biotech sectors, have
  expanded into this sector, which is now generally
  referred to as cleantech.
• Focus on high-quality entrepreneurs and mgmt
  teams, disruptive tech, and deep market knowledge
  as they move from company formation to product
  development to commercialisation.
• These funds typically invest from 5-20 million
  in a single company over its lifetime.
• Examples Nth Power, Chrysalix, Emerald Tech,
  CMEA, DFJ, Khosla, KPCB, MDV, Norsk Hydro,
  SCATEC.

• Specialized funds as well as larger investment
  buyout funds with a special allocation into the
  sector.
• Focus on proven business models and products or
  services that have been validated by the
  marketplace. As companies reach their growth
  inflection point, these opportunities usually
  require significant equity investments beyond the
  scope of traditional early-stage venture capital,
  however, they entail market, execution, and/or
  team risks.
• These funds typically invest from 20-50 million
  in a single company.
• Examples Mission Point, Demeter, 3i, Masdar,
  Climate Change Capital, Perseus.

• Funds investing in energy assets and development
  projects.
• Focus on asset base intensity for downside
  protection and asset aggregation to achieve
  equity-like returns.
• These funds typically invest more than 50
  million in a single company.
• Examples Riverstone, USRG HG Capital, Arclight,
  Hudson Capital, Citibank, Goldman, GEF.

• 2-5 billion allocated over 100 funds

• 10-15 billion allocated over 25 funds

• gt5 billion allocated over 20 funds

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Future Landscape

• Renewables can learn from Biotech and Pharma
  industries
• Utilize incumbent channels to market and
  distribute new products
• Existing companies realize additional revenue
  opportunities and increase ROIs while
  diversifying risks of dependence on traditionals
• Bridge gap between innovation and market
  distribution
• Examples transformation of the lighting
  industry, roofing companies installing solar
• CEOs and Boards asking how to become more green
• Leverage economic/political/social momentum now
  to make investments that at other times would not
  have been done
• Focus not only on bottom line (how do companies
  reduce their costs), but now on the top line (how
  do I sell more green products to meet customer
  demands)
• Financial Markets evolving
• Valuation concerns Solar the new Ethanol? Whats
  next?
• Valuations in todays markets Multiple lifts,
  higher leverage, take more risk (management,
  technology, non-US, non-correlated industries,
  earlier stage)
• -Technology drives down costs dramatically sets
  up efficient frontiers but government subsidies
  create disequilibrium between demand and supply
  (e.g. what is the true cost of water?)

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Future Landscape

• History has some lessons to teach us
• Seen the renewables stories a decade ago fuel
  cells/fly wheels/microturbines/thermal coupling
• Projections then were we would have 1 teraWatt of
  power from new sources by 2005
• Industry has burned investors- 95 of projections
  failed over-promised under delivered
• Whats different now?
• Weve seen oil at these levels before (inflation
  adjusted in 78/79)
• Then is was a supply shock (ME) vs demand shock
  (China/India)
• Real climate issues (global warming debate moving
  from speculation to hard science)
• Energy security/independence has a special
  meaning post 9/11
• Unbelievably strong management teams
• Changing Role of Oil
• 24.73 avg cost/barrel in 2006
• 43.62 avg revenue/barrel
• 45 increase in 2005 to 2006 and again in 2007 of
  spending to buy/find/develop more oil and gas
• These efforts yielded a 2 increase in reserves
  this is a huge negative arbitrage

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Agenda

• Virgin Green Fund Background
• Sector Comments
• Valuation
• Future Landscape
• What Really Matters

33
What Really Matters

• Insight only gets you so far
• Id put my money on solar energyI hope we dont
  have to wait till coal and oil run out before we
  tackle that.-Thomas Edison 1931
• Conservation may be a sign of personal virtue
  but it is not a sufficient basis for a sound
  comprehensive energy policy. Dick Cheney 2001

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What Really Matters

• Make products people want to buy
• Cost matters
• This is the energy industry and its capital
  intensive Google built with 25mm of VC capital
  (GOOG Market Cap 145B. First Solar built for
  250mm of private Capital FSLR Market Cap 21B.
• There are no silver bullets to the energy
  problem/global warming. Multiple
  problems/multiple solutions.
• Dont rely on government incentivesif you dont
  believe this look at the wind industry and what
  happened when the PTC was not renewed.

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Conclusions

• Growth by any metric invested, valuations,
  deal size, number of companies
• Silicon Valley or Green Valley DNA Serial
  entrepreneurship, focus on end markets, easy
  access to capital, VC culture
• Multiple ways to play this sector supply and
  demand solutions. Opportunity to think outside
  the box solutions to reduce cost often are
  hidden under rocks.

• Increasingly competitive Number of funds, assets
  under management, number of companies attacking
  similar problems. Large strategics are coming.
• Be prepared to raise significant capital and be
  in this for the long haul.
• Cost curve is still difficult. Government
  incentives still matter in many areas. The easy
  problems are often the most difficult markets to
  penetrate.

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Conclusions
Time to Get to Work!
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Conclusions
Questions?
evan.lovell_at_virgingreenfund.com www.virgingreenfu
nd.com
Thank You