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Insight: How cleantech tarnished Kleiner and VC star John Doerr

Venture capitalist John Doerr shows a flexible solar panel during a panel discussion at the 2006 TechNet Innovation Summit at the Stanford U
Venture capitalist John Doerr shows a flexible solar panel during a panel discussion at the 2006 TechNet Innovation Summit at the Stanford U

By Sarah McBride and Nichola Groom

SAN FRANCISCO/LOS ANGELES (Reuters) - In the spring of last year, John Doerr received some bad news: Miasole, the solar-panel maker backed by his famed venture capital firm, Kleiner Perkins Caufield & Byers, was on the verge of bankruptcy.

If Miasole went under, it would be a dramatic collapse for a once-promising startup that in its heyday had been valued at $1 billion. It would also be a failure for Doerr, who for years had argued passionately that clean technology could be the biggest business opportunity of this century.

So Doerr, best known for making billions from backing the likes of Google , Netscape and Amazon in their infancy, dipped into his own pocket for the roughly $2.5 million that Miasole needed to make payroll, according to two people familiar with the situation. The highly unusual personal loan allowed Miasole to stay afloat long enough to be sold to a Chinese renewable energy company for $30 million.

The quiet fix shows the lengths to which Doerr was willing to go to avoid the embarrassment that would have come with a collapse. It also underscores U.S. cleantech's dramatic turn for the worse after the financial crisis, due in part to competition from China and a surge in the production of abundant and cheap natural gas at home.

The market changes have left Kleiner, the most active venture capital firm in cleantech, with dozens of investments that may never pay off, threatening its image as the gold standard of venture capital.

Doerr, 61, remains bullish on cleantech and in an email to Reuters called Miasole a well-run company that "was caught in a perfect storm." He did not respond to questions about his personal investment.

"Certainly the cleantech sector has challenges, but it would be a mistake to underestimate the size of the opportunity," Doerr said in the email, adding revenues in Kleiner's cleantech portfolio rose 70 percent over 2011, to $2.4 billion in 2012.

Kleiner's financial performance, measured by the returns its funds have delivered to investors, is not known. VCs, though, are often judged by their ability to successfully exit startup investments through initial public offerings or through sales to other companies.

Of the 38 "greentech" investments listed on Kleiner's website, only Miasole has been sold. Three others have gone public - biofuels maker Amyris Inc , microinverter maker Enphase Energy Inc and Chinese inverter maker Sungrow Power Supply Co Ltd <300274.SZ> - but all are trading far below their IPO prices.

Some Silicon Valley entrepreneurs say Kleiner, while well-regarded, is no longer at the very top of the VC heap. Such impressions matter when VC firms compete to fund the most promising startups, and getting in on the best deals is in turn key to future success.

At the annual AlwaysOn Venture Summit in December, Kleiner Perkins did not make the list of top 10 venture capital firms. Conference organizer Tony Perkins said he worked with Morgan Stanley and the 451 Group, a research firm, to draw up the list based on successful venture "exits."

Kleiner partners "are not in the top of founders' minds when they think about VCs," said Paul Graham, founder of the prestigious Y Combinator technology incubator.

Reuters spoke to more than a dozen entrepreneurs and venture capitalists about the top VC firms, and they more commonly cited Sequoia Capital, Accel Partners, Greylock Partners and Andreessen Horowitz than Kleiner. Kleiner's last knockout success was Google's IPO in 2004.

"Every firm has cycles," Amanda Duckworth, a spokeswoman for Kleiner, said in an email when asked to comment on the perceived decline in the firm's reputation. She said that Kleiner has made many high-profile investments outside cleantech and beefed up its Internet team in recent years, and that its partners and portfolio companies regularly win awards and remain highly regarded.

Indeed, several Kleiner investors and entrepreneurs told Reuters they were pleased with the firm, which successfully raised a new $525 million fund last year.

"The firm remains very vibrant and very energized and very engaged," said Amy Falls, chief investment officer at Rockefeller University. "We are very happy to be invested with them." Over the decades, Kleiner has made Rockefeller many millions, she said.

Some believe Kleiner could yet have the last laugh, and applaud Doerr for jumping into the sector early and smoothing the path for others.

"Five years from now, mark my words, a cleantech revival," said Scott Sandell, a partner at NEA, a large venture firm that co-invests with Kleiner in many companies.

GREEN EVANGELIST

The alternative energy business looked highly promising in the mid-2000s. Gasoline prices were rising, and then-President George W. Bush signed into law a renewable-energy loan-guarantee program that would funnel billions of dollars to alternative energy programs.

Former Vice President Al Gore's effort to educate the public about climate change was also making a mark: His movie "An Inconvenient Truth" won two Oscars in 2007. Gore joined Kleiner as an adviser later that year.

Doerr emerged as cleantech's biggest cheerleader, with a commitment that was personal and political as well as financial.

"Green is the new red, white and blue," he told a gathering at Silicon Valley business forum the Churchill Club in early 2006, tying green investing to U.S. energy independence.

Influenced by Gore's work on climate change, Doerr said his teenage daughter, Mary, had spurred him to tackle the issue.

In a 2007 talk, Doerr quoted his daughter as saying: "Dad, your generation created this problem. You had better fix it."

With an estimated net worth of $2.5 billion, Doerr is an active philanthropist. But he has repeatedly stressed that cleantech is good business, not a charitable endeavor. "Going green is bigger than the Internet. It could be the biggest economic opportunity of the 21st century," he said in 2007.

Kleiner announced in 2006 that it would dedicate $100 million of its latest fund to greentech — and then doubled that commitment to $200 million. Two years later, it launched the $500 million Green Growth Fund. Kleiner poured the cash into dozens of solar, wind, geothermal, energy efficiency and renewable fuels startups.

Further greening seemed inevitable with the 2008 election of President Barack Obama, who at the time was a strong proponent of a national market to limit and trade carbon emissions. The outlook brightened further with passage of the American Recovery and Reinvestment Act in 2009, which provided $27.2 billion for energy efficiency and renewable energy projects.

But things changed fast. The financial crisis stifled investment in solar and wind projects, while efforts to pass cap-and-trade legislation collapsed in Congress. The explosion in natural gas development made possible by "fracking" undermined the economics of many renewable energy projects.

Then came the bankruptcy of solar-panel maker Solyndra, which had received more than half a billion dollars of federal support. That unleashed a storm of criticism, which made it even harder for green companies to secure financing to grow.

The sudden shift in market conditions and investor sentiment hit some of the Kleiner-backed firms hard.

Amonix Inc, a solar company, was forced to close a Nevada factory last year. Luca Technologies Inc, which uses biotechnology to produce natural gas, canceled IPO plans at the eleventh hour last April due to difficult market conditions.

Silver Spring Networks Inc, a smart-grid company, and biofuels maker Mascoma Corp have yet to follow through on mid-2011 plans to go public. AltaRock Energy Inc, a geothermal energy startup, was forced to abandon its first project in 2009 due to drilling problems. Another project to demonstrate its technology is underway in Oregon.

Fisker Automotive Inc, an electric car maker, has been plagued by production delays and hasn't built a car in more than six months. It is currently seeking a partner.

The companies did not respond to requests for comment on their relationships with Kleiner or their current situation.

REMEMBER THE INTERNET

While Kleiner focused on cleantech, which has accounted for more than a quarter of all its investment dollars since 2007, its competitors were lavishing money and attention on the consumer Internet. Accel Partners bet on social networking site Facebook Inc in 2005 when it was worth about $100 million. Firms like Charles River Ventures and Spark Capital first jumped into microblogging service Twitter Inc in 2007, when it was worth around $25 million.

When Kleiner tried belatedly to catch the social media wave, prices had exploded. In early 2011, Kleiner invested in Twitter at a $3.7 billion valuation, Facebook at a $52 billion valuation, and Groupon Inc at a $5 billion valuation, according to published reports of valuations from the time.

Kleiner said it did not agree with the reported valuations. Based on its cost, the firm said, its investment in Facebook is up 39 percent; Twitter, up 111 percent; and Groupon down 38 percent.(VCs generally aim to earn at least three times their investment.)

Meanwhile, Kleiner's other earlier-stage consumer Internet investments, including the social network Path Inc and reputation-measurement service Klout Inc, have yet to make a splash. One that did, social games developer Zynga Inc , was less of a victory than it might have been because Kleiner held on to all its shares post-IPO, only to see the stock plunge from an initial offering price of $12 to trade below $3, where it is trading these days.

Kleiner faces other questions, too, including who might replace Doerr as de facto leader of the firm should he retire. Doerr said in the email that the firm has developed many leaders, including technology-focused partners Ted Schlein and Randy Komisar, and healthcare partner Beth Seidenberg.

And it's wrestling with the bad publicity - and possible financial liability - from a much-discussed sexual harassment and retaliation suit filed by Ellen Pao, a former partner. Kleiner has said the allegations are without merit.

The firm has made a concerted effort over the past several years to burnish its credentials as an Internet VC, hiring Mary Meeker, the highly regarded former Internet analyst at Morgan Stanley, along with up-and-coming stars such as Twitter's former engineering vice president Mike Abbott and Square's former products director Megan Quinn.

At the same time Kleiner has scaled back its cleantech activity, though even last year it was the most active VC firm in the cleantech sector, according to research firm the Cleantech Group, participating in more than 20 funding rounds.

On the sidelines of a Kleiner party in November, Doerr said that the firm has more profitable cleantech portfolio companies than any other venture firm. When asked if he regretted pushing so hard into cleantech so early, Doerr gave a qualified no. "I wish," he said, "we'd known then what we know now."

(Reporting By Sarah McBride and Nichola Groom; Editing by Jonathan Weber, Tiffany Wu and Ciro Scotti)

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