transforming a sector: m&a in cleantech - agrion · 2011-01-31 · michael c. dorsey (the...

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Transforming a Sector: M&A in Cleantech

Tuesday, January 11th, 2011, 8:30am - 11:30am PT

Speakers:

Battery Ventures, Mike Dauber, Partner

Reed Smith, Armando Castro, Partner

SiVal Advisors, Dr. Naveen Bewtra, VP Cleantech

The Westly Group, Michael C. Dorsey, Managing Partner

Moderator:

Deloitte & Touche LLP, Garrett Herbert, Partner, M&A Transaction Services

INTRODUCTION 2

Garrett Herbert (Deloitte & Touche LLP) 2

Dr. Naveen Bewtra (SiVal Advisors) 2

Mike Dauber (Battery Ventures) 3

Armando Castro (Reed Smith) 3

Michael C. Dorsey (The Westly Group) 3

TRACKING THE TRENDS: 2011 EXPECTATIONS 4

What to Expect from Investment in 2011 4

Sectors with M&A Upticks in 2011 from a Global Perspective 6

Maturing Businesses as a Necessity for M&A 7

Employed Strategies for Positioning 8

Focus on Sustainable Business Models 9

DOMESTIC VERSUS INTERNATIONAL ACTIVITY 11

Finance Buyers versus Corporate Buyers 11

Corporates and International Investments 11

The Role of International Buyers 12

FOR PERSPECTIVE TARGETS AND ACQUIRERS 13

Preparing for M&A 13

Unanticipated Issues 15

The Attorney’s Role 17

Examples of Failed Deals and Why 17

From M&A to Licensing Agreements 18

Structures of M&A Transactions and Trends 20

Escrows and Other Trends 22

Q&A SESSION 24



M&A Example Not Involving IP 24

Acquirer Motivations 25

Size and Scale 26

Licensing as a Dominant Feature of a Business 27

M&A in Solar for 2011 28

Federal Funding 29

INTRODUCTION

Garrett Herbert (Deloitte & Touche LLP)

Good morning and thank you for joining us today for the Agrion panel discussion Transforming a Sector: M&A in

Cleantech. My name is Garrett Herbert. I am a partner at Deloitte & Touche, where I work in our M&A transactions

group. I actually lead our Silicon Valley transaction services group. On a national basis I also work with technology

companies broadly. I spend a lot of time within cleantech specifically, primarily helping buyers and sellers execute M&A

transactions. We also do a lot of work around venture capital by helping people evaluate deals, get funding, and things

of that sort.

I am very excited to be here. Cleantech is an area that if you asked me four years ago if I would have been spending a

lot of time doing cleantech, I would have told you no. Over the last two years a lot of the M&A that I have seen is in

cleantech. It is an area that I am very passionate about. I think it is a very exciting area and we have a phenomenal

panel that I am very excited to introduce to you.

What I would like to do is have each of the panelists introduce themselves, give a little bit about their organization, and

then we can get into the agenda. First I will hand this off to Naveen.

Dr. Naveen Bewtra (SiVal Advisors)

First and foremost I would like to thank Agrion for the opportunity today to be a panelist. We have great attendance, so

thank you very much for taking the time out of your schedules.

My background is pretty straight forward. I have a Ph.D. in electrical engineering from the University of Toronto. I found

out that I was a terrible Ph.D. and I decided that I had to figure out something else to do for a living. So I moved into

more of the business development and marketing roles. I have founded my own startup and sold it successfully shortly

after 9/11, which was quite an experience. Subsequent to that I ran corporate M&A for a $20 billion Japanese company

out of Tokyo. I started out running their investment group and then their M&A group. I ran corporate development at

JDS Uniphase and I am now at SiVal Advisors. We are a boutique investment bank and I am focusing on cleantech.

We are helping companies with strategy on both the buy side and sell side. So thanks again for having us.

Mike Dauber (Battery Ventures): I did not need a Ph.D. to figure out that I was not very good at engineering. I

figured it out much, much faster.

Dr. Naveen Bewtra (SiVal Advisors): And saved a lot of money. I can tell you that.



Mike Dauber (Battery Ventures)

A lot of heartache, actually. I have a lot of friends who got PhDs. My name is Mike Dauber and I am with Battery

Ventures. I started off in engineering, as well, doing networking at Telco back in the last boom, if you guys can

remember that. I did sales and marketing for a couple of companies, again on the Telco side. I joined Battery

Ventures almost exactly three years ago. I found out pretty quickly that there were not a whole lot of networking

companies that were still making big, 100 gig. Ethernet switches that were not called Cisco. I also started finding that a

lot of the technologies that I knew pretty well had transferred over into cleantech. So, I do not spend a lot of time on

things that require chemistry or material science, but I do spend a lot of time on things that involve traditional IT

technologies.

I have spent a lot of the last three years looking at companies in and around that space. Redwood Systems, which is a

solid state lighting controls company is one of my investments. SolarBridge, which is a highly reliable micro-inverter

company down in Austin, Texas, has another seed deal. I do not think that we have announced it, but since they have

posted it on their website, I can talk about it. Ideal Power Converters made a big showing at NREL late last year, and

has real innovation for large central inverters. This is a recent investment of mine. I guess you could also count Calxeda,

the arm based server company formerly known as Smooth-Stone until they got sued, as an investment of mine. Those

are sort of the relevant areas that I have invested in. I have not been lucky enough to get into M&A yet with any of

those guys, but I am looking forward to talking about it today.

Armando Castro (Reed Smith)

Hi, my name is Armando Castro. I am a partner at Reed Smith, which is a law firm here with an office in Palo Alto. It is

one of the 15 largest law firms in the world. We have 24 offices, which are primarily in the United States, but we also

have a large presence in Asia, Europe, and the Middle East. I have been an attorney in Silicon Valley since 1992. Before

I was an attorney I was not an engineer, as you can guess, but I was an accountant for four years at Ernest and

Whinney. I was an auditor in the Los Angeles office before I decided to go to law school. When I got out I did not go to

New York. I always wanted to work with technology companies, and did, so I have been in the Valley for a number of

booms and busts.

I started working on cleantech before it was called cleantech, mostly through semi-conductor companies and synthetic

biology companies. In about 2005 - 2006 everyone started to categorize themselves as a cleantech company, so I kept

working with my clients and the firm made me the co-chair of their cleantech group. I have been doing the same thing

for a long time. It changes names, but what I do is about the same. I work with companies, often from formation stage,

and do a number of venture capital financings. I work with those companies through their exits, so I have done a lot of

public offering work and mergers and acquisitions. As a firm we have a very large energy practice and in the valley we

have a number of cleantech clients that we try to work with within the context of the larger energy practice overall.

Michael C. Dorsey (The Westly Group)

I am Mike Dorsey from The Westly Group, where I am a managing partner. We invest mostly in cleantech companies,

but a more accurate description would be government-impacted industries and e-commerce software companies. This is

my second fund. Before this I co-founded something called the Bay Area Equity Fund, where we invested in several

cleantech companies. One of them was Powerlight, which was sold to SunPower. So that was an M&A event I would talk

about, if you want. I have also invested in Bright Source, Solar City, eMeter, and many other less well known companies.



I have been investing in mostly cleantech for nine years and prior to that I was an investment banker for 20 years,

working with a wide variety of technology companies.

TRACKING THE TRENDS: 2011 EXPECTATIONS

What to Expect from Investment in 2011

Garrett Herbert (Deloitte & Touche LLP): Great. The first thing that I would like to do with the group is talk a little

bit about trends and what to expect in 2011. What we have seen is that in the environment over the last year, there has

been a lot of talk about how it is really difficult to finance things, there is no money out there, and on and on... You have

heard a lot of people talk about doom and gloom. Now, one of the things that is interesting about cleantech is that

investment has been up. Cleantech Group released their Q4 report, which covered 2010, on Friday. It showed some

interesting results. Venture deals were up 28% in 2010 over 2009, IPOs were up from 33% in 2009 to 93 in 2010, and

M&A was up to $36 billion dollars from about $32.8 billion dollars in 2009. So, you have the three most important areas

to look at from an investment perspective all showing up for Cleantech.

What I would like to do is ask an open ended question. I will start with Mike Dorsey. What is your expectation, as far as

what we will see with cleantech investment in 2011?

Michael C. Dorsey (The Westly Group): I expect it to be terrific. I think we are just scratching the surface of

opportunities in cleantech. I expect it will have more IPOs. You did note that there were many last year, which is true.

Most of them were in China, though. There were fewer in the US than there have been. We would expect more this year

in the US. Not more than in China, but more than we have had recently. I would expect many sales of venture backed

cleantech companies. I hope that some of them are producing very attractive returns.

I will just tell one story that illustrates the magnitude of the opportunity as I see it. One of our companies is Recycle

Bank, which has rewards programs for people who recycle more and increase energy efficiency. It is a demand side

product that they are now introducing. The new CEO of that company joined from a company called WPP Group, a

London based marketing and communications firm, so he has many former clients. He recently brought 15 of his clients -

- British Gas, British Telecom, Colgate, Palm Olive, and others of that nature -- to a meeting that we had with a bunch of

greentech portfolio companies because WPP is being incentivized by those very clients to become more knowledgeable

and active in sustainability and greentech very broadly defined. I think that is indicative of the fact that all of the big

corporate powers around the world, not to mention government powers, which I think is more obvious, are getting more

and more committed to this sector all the time.

Mike Dauber (Battery Ventures): I was looking up on my phone, just now, an M&A activity because I knew that one

of my partners emailed me about it yesterday. Two of the things that I think are interesting about this space are 1) we

talk about cleantech as if it is one homogenous market when it is not. To me it is sort of talking about the DOW where

you have automotive companies, fuel companies, GE, and you have lots of different market segments. Cleantech is very

similar. It is not like Web 2.0, which is a much more consistent and homogenous market.

2) The other thing about cleantech is because there are big sections of it that are industrial, that stuff does not get picked

up as much. There was a massive cleantech M&A event that happened yesterday which I have not seen anyone write

about. It was that DuPont bought Danisco for $5.8 billion dollars. I did not know who they were because I do not spend

much time in this space. But, that is a pretty material event. I mean, Groupon sneezes and 50 reporters write about it.



DuPont buys someone for $5.6 billion and you do not see anything written about it anywhere. I guess one thing I would

say on that is that it is already happening, you just have to dig a bit to find out.

I think at least from what we are seeing on the cleantech side, at least the stuff that I spend time on, is that a lot of it is

still early. I think that there is going to continue to be a lot of M&A in cleantech, but I think if you look at something like

Solar, the M&A we have seen on the solar side has been distressed assets. It is someone who has poured a ton of

money into one of these CIGS technologies and gets acquired for pennies on the dollar because it is interesting

technology, but that startup could not get to the point of being operational. That is obviously not what we are here to

talk about, but I think we are going to see a lot more asset sales in the near term among all of this early technology.

Armando Castro (Reed Smith): I would like to echo the comments that Mike made because with Reed Smith being

a large firm, we have a lot of traditional industries that we represent, like shipping, which is not something that you look

at in the cleantech sector. Last year we represented Daewoo, a large ship building company, and they made a large

investment in cleantech. They bought a manufacturer of wind energy. It was a huge investment for them of $700

million dollars. Again, these are the types of transactions that are appearing frequently, but they are not really sexy or

appealing to a lot of people. But that is what is happening. When we say that M&A is going up, it is in these traditional

industries.

Dr. Naveen Bewtra (SiVal Advisors): I always laugh when I hear about these trends in cleantech. We are at its

infancy and, even in its infancy the last two years have been points off of the line. So you cannot include those. I am

not really sure where you draw a line off of anything before that. I would like to say that looking forward is where the

focus should be. I do not think that the last two years are representative of any industry, and especially an industry that

is just starting to grow.

Mike Dauber (Battery Ventures): I would say that there is one other thing, when I think about it, which impacts

M&A right now. In 2006 - 2007, when cleantech was new and sexy, there were a lot of people that poured money into

deals and they were not worried about follow and financing risks because in that time period who was worried about

liquidity? Then Bear Sterns falls apart, then Lehman, and in late 2008 all of those companies that were never worried

about getting funded could not get money from anybody. Those companies were either boosted up from the inside by

syndicates that were lucky enough to have the strength to do so, or they had to disappear.

I think you had this sort of unnatural one-two punch over the last couple of years that we are still sort of sorting through.

When you talk to a lot of VCs who are investing, they are very interested in "capital efficient" cleantech. I think this is

specifically because of that dynamic. A lot of these guys went really long in giant solar companies, for example the guys

up in Fremont, and they were asking, "Where are we going to get another $500 million from?" It is just not hanging

around anymore.

Dr. Naveen Bewtra (SiVal Advisors): I think that is part of a bigger piece, which is as we looked at these transactions

as investments, there was a real lack of understanding of the total capital expenditure required. Whether there was this

downturn or not, there still was this requirement for a substantially higher amount of equity capital than was originally

predicted. I think that is something that we have learned from and it is only going to help this industry moving forward.

There are much smarter decisions being made today than there were pre-market meltdown.

Mike Dauber (Battery Ventures): Do you think that created a disruption in M&A activity?



Dr. Naveen Bewtra (SiVal Advisors): Yes. I think that M&A activity always lags the investment. I always have the

benefit, right? The two of you are on the forefront of the line where the battle is. I always get to see this three years

later when all of the carnage has already happened. From my perspective, we will only see the results of that this year

because there is that time lag from when Mike and you make that investment and I get a call about an exit.

Sectors with M&A Upticks in 2011 from a Global Perspective

Garrett Herbert (Deloitte & Touche LLP): Let us focus purely on M&A exits. I think we saw a lot of volume in 2008

- 2009, a lot of solar and wind, some of which was distressed. In particular I think solar was an area with a lot of

distress. If we look forward into 2011, where would you expect to see investment? Let us focus outside of solar and

wind. What kinds of sectors? I think the comment has been made a number of times that cleantech is not an industry.

At one conference I went to, someone called it a concept, which I think is pretty good. Cleantech is not an industry, it is

a concept. There are probably a dozen different sectors within it. What sectors would you expect to see, especially from

an M&A perspective, an uptick in during 2011 and the next two years?

Dr. Naveen Bewtra (SiVal Advisors): I am going to change directions a little bit here. It is not only about what

segments are going to have an uptick. It is about what international segments because we seem to focus on the

segments that are closest to home. I think that if you look at this internationally, and I am working with a number of

investment banks offshore in India, China, and Japan, the feelings that are portrayed to me are around things that are

easiest to implement and have a low barrier of penetration. These are things like lighting and lighting controls. Redwood

Systems is a great company and has found a tremendous niche there.

Mike Dauber (Battery Ventures): Should I write the check to you afterwards?

Dr. Naveen Bewtra (SiVal Advisors): Yes, it is N. Bewtra... There are companies like that which have done

tremendous jobs penetrating domestically and have a huge opportunity internationally as well. I think that is what I

would caution the group to do, which is to talk about this from an international perspective.

Mike Dauber (Battery Ventures): I think that is a really interesting point. We spend a lot of time looking at, when

you look at smart grid, you look at how that is going to roll out when every customer that you sell to also has a state

regulated body called a Public Utility Commission, which regulates them and dictates to them what they can and cannot

do. You can get very fixed on, ‘If I sell to Duke Energy, they have five different PUCs that they have to deal with.’ Then

you go to Europe, where this constraint does not exist, and realize this is much easier. You can sell to entire countries

unlike selling to States.

Dr. Naveen Bewtra (SiVal Advisors): Let me interrupt to say that this is a great opportunity to get the bugs out of

the system and then go through the regulatory process here in the States.

Mike Dauber (Battery Ventures): I agree with that for sure. I would say that the Smart Grid area is certainly a

market where we are going to see M&A. I do not know if it is going to be in 2011 specifically, but when you look at your

classic business school 2 x 2 matrices, you do not want to sell new products to new customers. You are either going to

sell existing products to new customers or the other. I do not need to fill it in because you guys all know what I mean. I

think that a lot the big guys out there have struggled with the new product piece.



I am going to paint a really wide brush and know that I am generalizing, but if you look at big industrial technology

companies - ITRON, Johnson Controls -- these guys do not tend to be innovators, but they are very good at acquiring

companies. Schneider Electric is another. Big industrial conglomerates like these are not looking to have an R&D team

develop Redwood Systems or Solar Bridge or Scientific Conservation, right? They are looking to see which of these guys

will pop and then they will buy them.

I think that the M&A problem that we will have here in the Valley is that VCs are used to investing, like in the late 1990s,

in a company like a Crescendo or a Grand Junction that Cisco goes out and acquires for a boat load of money. Schneider

does not do that. They have this foolish idea that you go back and discount cash flows, figure out what a company is

really worth and then pay something reasonable for it. These guys do not have insane amounts of money, I am joking of

course. But Cisco could afford to pay $7 billion for Cerent back in 1999 because their stock, at the time, was one of the

most valuable in the world. When your currency is that valuable, why not pay Cerent $7 billion?

Schneider does not have that. I think that one of the things we are going to see, and we are seeing this in the Web 2.0

space right now, but I think you will absolutely see this in cleantech because there will be a lot of M&A opportunities

turned down. You are going to have VCs who are going to say that they have shot the gap, have this really successful

cleantech company now, and they want to get paid for it. Schneider is going to say that they are going to pay 3x - 4x

revenue because that is already double what Wall Street values me at. The VCs are going to say that their growth is a lot

better than that and that they should be valued at some greater trajectory than that and for them to get their payout

they need to do something bigger. So I think that there are people who are going to hold out.

Maturing Businesses as a Necessity for M&A

Garrett Herbert (Deloitte & Touche LLP): Actually just to follow on that question, and I will pose this to Mike

Dorsey, in order to see this continuation of this trend within M&A do we need to see a maturing of these businesses,

where it is about cash flows and not about the pie in the sky, and it is really about the fundamentals that drive valuations

of businesses?

Michael C. Dorsey (The Westly Group): I would say that we do not know if we need to see that or not because the

phenomena that Mike described was a consequence of the fact that one could take companies public at high valuations

with almost no history. So, if we return to those sorts of capital markets, then we will not need to see a business model

proven out. That is why Cisco had to essentially overpay, because otherwise that company could have gone public at a

high price.

If we want to assume that we do not return to those market conditions, then I think we will surely need to see more

before corporate acquirers are willing to make acquisitions. But whether or not venture capitalists want to sell is really a

function of where they are in the lifecycle of their fund because they do not determine the prices any more than anyone

else determines the prices. What I think will support the prices is that it will not only be Johnson Controls, or whomever,

who will be bidding for that, but also maybe Oracle, SAP, Siemens, HP, and others who want to get active in the space.

So while I think valuations are currently much lower than they were 11 years ago, I do not know where they will be this

year or next. But I do think that there will be much more competition for these kinds of companies.

Mike Dauber (Battery Ventures): I would like to pose a question to the panel. Certainly Mike you might be in the

best position to answer this, but I am interested in what you guys are seeing in terms of companies that are being built.

There is a difference in what we at Battery Ventures used to call the hotbox. When you would build a company with

no intent to actually ever make it into a company, we used to call it a hotbox. My first startup, I realized looking back



now, was a hotbox strategy because we had been doing research for three years and never had an operations guy in the

firm. It was clear that no one had ever thought that we were ever going to have to sell these things to anyone. We

figured that if we built the product that Broadcom would buy us.

Dr. Naveen Bewtra (SiVal Advisors): Yeah. If you build it, they will buy it.

Mike Dauber (Battery Ventures): That is right! I will make a side note, which is they did come and offer us the

money. We rejected it, insanely. I mean we had a hot box strategy, it worked, and then we rejected it.

But are you seeing with your companies and the companies you represent that they are really being set up and built for

the long haul, and not knowing if that market is going to be there, and therefore they really have to build this company

so that they can be a standalone public entity?

Michael C. Dorsey (The Westly Group): Yes. That is actually all that we do. That is not to say that we do not think

about who the likely acquirers are of a company when we initially make an investment. If we do not think that there are

good acquirers we will not make the investment. But I think that Armando has a broader perspective on that.

Armando Castro (Reed Smith): Actually, I will tell you that for the companies that are formed and are being

financed, because we do not always finance the companies we form, and are moving forward, they are very targeted

strategies. They are really going out to do actual market research, talking to buyers, and are trying to solve real

problems. There is a transaction that I would give as an example where, while we are putting the financing together for

them right now, they already have an acquisition strategy for two companies. They are going to retrofit diesel engines for

natural gas, and they are also going to take out some of the components in the engine and convert them to digital

components.

It does not sound like a really attractive deal to a lot of people, but the things that make it attractive are a couple of the

potential investors would be oil and gas companies that want to distribute more natural gas. They have gone out to a lot

of the truck fleets that they are going to be selling to and they are saying that they are dying for this product because it

will reduce our fuel costs over the next five years by a factor of something like 40%. These reductions are something

that these companies really want. When you look at it, they are not numbers that are consistent with technology

startups. But in terms of dollar value, it looks more like an oil and gas play, so the oil and gas companies are interested,

and so are the fleets.

Employed Strategies for Positioning

Garrett Herbert (Deloitte & Touche LLP): Something that I am curious about, to Mike's point, Armando, what are

the companies doing in order to position themselves? Are they doing things differently to position themselves as a

business versus as a product?

Armando Castro (Reed Smith): I would say that they are positioning themselves more as a business. What they are

doing differently is really coming back with targeted strategies. They come back and say that this is the product they are

developing because here is the need that we have identified, here are the buyers that we have found, and what would be

the follow-ons into the market. You cannot say that it is a return to basic fundamentals. An investor is not going to put

money in unless there is a big market opportunity. The initial applications, or the initial things that they do, may be a

little bit smaller, but if that does not have the potential to scale up quickly, it is not going to be attractive to investors and

it will not be attractive to buyers.



Dr. Naveen Bewtra (SiVal Advisors): Let us be clear. None of this is limited to cleantech. Fundamentally, if you

build a company based on the assumption that you are going to flip it, hotbox it, or whatever you want to call it, then you

are prone to the bubbles that we saw in the telecom industry, the dot com industry, and you are going to be a part of

that. I think that the growth of a fundamental business, where you have a roadmap and mundane things like customers

and product lines, I think that we have grown away from that in these bubble times because they do not need that. They

will get funded and then they will end up finding out two years later that they did not need that.

Mike Dauber (Battery Ventures): The reason why I think this is important, though, is if you look at the Web 2.0

space or the cloud space right now and the companies that are being formed and the business models that they have,

there is no way that half of these companies can say that they have a standalone business model. And that is okay.

I will give you an example of a very good company that was acquired last year for a lot of money, SpringSource. It got

acquired by VMware for $450 million. Spring was an open framework. The company was making money on services.

VMware thought this was strategic to them and they paid a lot of money for it. I am not criticizing SpringSource in any

way, shape or form, but these guys had a couple of million bucks in revenue. I mean that they were not a stand alone,

sustainable business. They were burning a lot of cash. But it was a strategic asset and someone was willing to pay for it.

If you are building a company like that, you know you have to exit, and you know you have a window in which you can

exit.

Dr. Naveen Bewtra (SiVal Advisors): But if you did not get acquired, what would happen?

Mike Dauber (Battery Ventures): My point is, when we are looking at cleantech the reason that I think that this

conversation is germane to this audience is that the types of companies that you are seeing are not stand alone. When I

talk to other investors, and certainly on the boards that I sit on, we are myopically focused on how to make this business

a business. How do we make sure that we make more money than we lose? I am not trying to poke fun at the other

guys. Those are very, very successful markets right now from an investment standpoint, but that is one of the reasons

you see so much M&A. It is a vicious cycle, right? People see that you can have a lot of M&A so they do not necessarily

focus on building a business. I think that a lot of people in cleantech are hunkering down and saying that they cannot

assume that there will be an exit, or that there will be an exit that they really like. So they need to be able to weather

any storm, which may or may not be there, and pick and choose when to take an exit.

Focus on Sustainable Business Models

Garrett Herbert (Deloitte & Touche LLP): You actually bring up a good point as far as we do not know if there is

going to be an exit and where there is going to be an exit. Is cleantech different than say cloud computing in that, again

it is not one sector, but generally you have the potential for a much longer investment cycle? Should cleantech

companies, or at least the ones that have a longer cycle, be focusing on a more sustainable business than focusing more

on product?

Dr. Naveen Bewtra (SiVal Advisors): Let me put it this way, I meet with a lot of companies as a part of my business,

both on the sell side, buy side, and strategy. I have always said that M&A occurs at the intersection of greed and fear.

Okay? There is plenty of greed, but what you have got to do as CEOs of your companies, or investors in companies, is

you have got to build that fear into the ecosystem. Now, whether that takes one hotbox and you can induce fear, or you

build an entire platform an induce fear, it is your responsibility to get that fear to intersect with greed. I think that is my



guidance to you, whether you are in cleantech or one of these other areas. It is not going to happen until those two lines

intersect.

Mike Dauber (Battery Ventures): I think that there is something unique about the cleantech concept and the

markets that cleantech touches versus the traditional high tech that many of you are used to in the valley, which is

traditionally in an M&A situation we see make versus buy. We could make this, but if we bought it we would have it now,

and these guys already have existing customer relationships. I believe that VMware, given enough time, could replicate

what SpringSource already had and that was a lot of people who were using them and found them valuable.

I think that the companies in cleantech are different in that I think that there is a lot of stuff that is being worked on right

now that these guys cannot go off and do. You mentioned Redwood before Naveen, so I will mention Redwood because

I know a lot about them. I have been working with the company for months, since before they started as a firm. When

we go out and talk about the lighting ecosystem at Redwood Systems, there is not a single lighting ecosystem guy out

there that can replicate what those guys are doing.

Those guys came out of Cisco. They are very strong in networking software architecture. They are talking to guys who

know how to make lighting fixtures. They do now know how to do a power over ethernet switch. They do not know how

to do self discovery. They do not know how to do the software that sits on top of it. So, it is much, much different than

a team of software guys buying another team of software guys.

I think that dynamic in cleantech is consistent across the broader "market" versus what you see in traditional tech.

Google would not have bought Groupon allegedly, at least from what I have seen in the Journal, because they did not

know how to write the software. They were buying those customers. It was not like they did not know how to do that

specific thing; it is just that they did not have it. Cleantech is a lot different. A lot of these guys, like Schneider who buys

a company for that specific expertise, they want to add that product line.

For me, a lot of this goes back to day one and being focused on building a sustainable business and then you have more

control over picking that exit point, rather than your investors saying that this business was never really conceived as a

money making business. It was conceived of as a strategic market that we were going to go after and eventually

someone will buy us. Well, if that does not happen, you have to sell because it is going to keep burning money.

Armando Castro (Reed Smith): It is a different angle about what was just said, some of the acquisitions that we are

starting to see are based on intellectual property. I used to joke a couple of years ago that cleantech is just old tech re-

visited, so when you’re building a technology you have to make sure that you can actually get the patents you are talking

about.

We have not seen this play out in the form of a licensing strategies or patent controls, but we are seeing the trolls

starting to buy up some of the patents that have been issued because they have realized that we may see something on

a methane gas deal and realize that there are a couple of companies that own a substantial block of patents in this area.

How can you get past that block of patents and practice this new invention? So, we are seeing these types of

acquisitions being done. I do not know if it is a technology acquisition, but they are really after the intellectual property,

and that is a little bit unique to cleantech. I did not see a lot of that in technology. You saw a little bit of that in the life

sciences area, but I think that we are going to see more of that in the coming years.

Mike Dauber (Battery Ventures): I think that is true. I think the reason for it is that traditionally, in most corporate

high tech areas technology moves so quickly that if try to buy a blocking IP it is obsolete fast enough that it doesn't



matter. But with power conversion technology, no one is going to invent a new inductor. You are sort of stuck with what

you got. If you own a blocking IP around an idea, you are going to have that until the patent expires. There is not going

to be a lot of innovation around that either.

Dr. Naveen Bewtra (SiVal Advisors): At a higher level, there is also a trend that we should look at. As I started off

this discussion, over the last two years have been data points that you can forget about. We are starting to see the entry

point of corporates that are sitting on a tremendous amount of cash now realizing that there is not going to be a double

dip and there is an opportunity to come in and acquire tremendously valuable assets, whether they are IP or product and

companies, and there is a lot of cash sitting on the sidelines. I do see 2011 - 2012 as the entry of a lot more cash into

the marketplace by these corporates, not necessarily increasing headcount, but rather in acquiring tangible assets.

DOMESTIC VERSUS INTERNATIONAL ACTIVITY

Finance Buyers versus Corporate Buyers

Garrett Herbert (Deloitte & Touche LLP): Naveen I think that is going to be a very important trend. I think we are

already beginning to see that with the corporations coming in. It is going to vary by sector within cleantech. Where are

you particularly expecting to see it?

Dr. Naveen Bewtra (SiVal Advisors): You are absolutely right. I would expect to see this happen internationally first.

I think, for example, in the countries that have come out of the recession earlier (APAC, China, Japan) you are going to

see the corporates there look at opportunities in the US for strategic assets. I work with a number of Indian firms, Tata

Motors and Reliance Global Call, that are actively looking at what the right opportunity for investment is within the US for

investment or M&A.

Garrett Herbert (Deloitte & Touche LLP): Armando, are you seeing finance buyers versus corporates being more

active within cleantech?

Armando Castro (Reed Smith): Yes, our international clients are looking at markets now. In 2009, we did a couple

of deals where they said the valuations in the US looked attractive and they came in and did deals. We had seen this for

awhile. We represent a number of sovereign wealth funds, some of them are in China and the Middle East. Frankly, they

are coming in and investing but it is almost an acquisition strategy because their goal is to invest in companies where

they can make sure they do not get transferred to their countries, but that they can also be used there. We have had

them approach some very large clients, like DuPont, on investment strategies where they are willing to put in a billion

dollars of investment because they want to partner with them on some type of particular project.

Corporates and International Investments

Garrett Herbert (Deloitte & Touche LLP): Mike Dorsey, what have you been seeing as far as the mix of corporates

and their kinds of interests? I think both corporates are going to move toward a trend with the international investments.

Michael C. Dorsey (The Westly Group): I think there is extremely broad interest in most of our portfolio companies,

with the exception of the ones that do not have that much to offer. By and large, other venture capitalists are very

interested in our companies. Larger investors and corporate acquirers are, in most cases, sniffing around as well.



Dr. Naveen Bewtra (SiVal Advisors): Mike will not talk about this, but I will. He has got a company that has

tremendous applicability into the trucking industry. That is not limited to the US. In fact the largest trucking

manufacturer happens to be Tata Motors and their strategic relationship with Marudi. So Mike's company, Glacier Bay, is

absolutely an international company, whether they intended it to be or not. It has the realm of possibility for

international acquisition.

Michael C. Dorsey (The Westly Group): Let me just comment on that. I agree. Thank you, Naveen. In addition to

that, we try very hard to invest in companies that have international opportunities and avoid those that only have a

domestic opportunity. Beyond that, we try to seek out companies that may have international capital markets

opportunities.

As we mentioned, most of the IPOs in cleantech have been in China. I do not know if that will continue or not, but

certainly many will be in China. In addition, another company of ours that went public this year, Amyris, had it been

unable to go public here could have done so in Brazil, where most of its business is anyway. Similarly, when we look at

energy companies in Canada, we are aware that the Toronto Stock Exchange is very receptive to such companies. So,

one of the things that we try to do is diversify our capital markets opportunities, as well as think internationally. It would

be foolish to think only domestically.

The Role of International Buyers

Garrett Herbert (Deloitte & Touche LLP): One of the things that I have been seeing is that I think the increase has

been primarily in North America. A lot of the early stage dollars have been driven by North America. What I have seen,

as far as my client base, is concerning exits, whether it is an IPO or M&A, very often there is either a foreign buyer or an

important international aspect to that exit. Are you seeing similar things?

Michael C. Dorsey (The Westly Group): Yes.

Armando Castro (Reed Smith): Absolutely. The analysis for the potential market for the companies is viewed in a

global manner. You might look at the US domestic market as the initial applications, and then they want to see how it is

going to expand, and what level of interest there is for that. That is what is driving a lot of these deals.

Garrett Herbert (Deloitte & Touche LLP): Here is a question for the group. If you looked forward five years from

now, would you expect the majority of the dollars coming into cleantech to be foreign, as far as where the capital is going

to come from? We are seeing a lot still from North America, but if we look forward five years in cleantech are we going

to see a shift to where a lot of it is, say, Asian money?

Mike Dauber (Battery Ventures): This is where I think the specific segments in cleantech matter. I think for really

big capital intensive types of things, like if someone wants to put more money into solar for example, or biofuels, I think

you are going to see more international investment. I would throw the Middle East into that. I have seen an enormous

interest, from Abu Dhabi in particular, in terms of putting money into companies. They have a surprisingly large amount

of money they are willing to invest.

For example, at Calxeda one of our investors is Abu Dhabi Technology Investment Corp. They own

GLOBALFOUNDARIES. They invested $13 billion. Battery Ventures cannot throw around that kind of money into a

single investment and neither can any other firm in the United States. Large private equity groups like TBG (The

Beekman Group), BlackRock, and Silver Lake can do stuff like that, but there is a clear M.O. out of the middle east, which



is they need to diversify out of oil right now. So I would throw those guys into that bucket. I think for really large deals

like that you are going to see a lot more international money.

I have got to tell you that for the stuff that I focus on, if there is another person invested in solar balances systems or

commercial energy efficiency, which is all going to come from the United States, for the most part because it is easily

venture-backable. There are a lot of VC who are looking for things like this. Those deals are reasonably capital efficient.

I would throw lighting in there as well. I just do not think you are going to see international investment be necessarily

relevant there.

Armando Castro (Reed Smith): In the specific markets that we are seeing the larger investments on the international

side, I guess you could consider them cleantech, but I look at them more as infrastructure transactions. It is water and

alternative energy -- large wind, large solar developments, any kind of distributed power supplies, and the mining

industry. These are large infrastructure types of financings. They are not cleantech deals. They are a little different.

Dr. Naveen Bewtra (SiVal Advisors): I would say that as the US starts to come out of this recovery and, again, as

there is optimism that is arising back into the capital markets, you are going to see infusions of more capital in US based

companies as well. I would not write off the US capital markets in lieu of international markets. This is a very resilient

economy and we will continue to inject capital into these technologies.

FOR PERSPECTIVE TARGETS AND ACQUIRERS

Preparing for M&A

Garrett Herbert (Deloitte & Touche LLP): That is great. One of the things that I would like to do is shift the

discussion a little bit in terms of where we are headed. I would like to direct the questions to be focused on a different

area. I think that a lot of the folks in our audience here are with private cleantech companies and may be thinking about

where they are going to get funding, what is the ultimate exit, and things of that sort. I would like to focus the next

round of questions to the group on things that private companies should be thinking about in terms of preparing for M&A,

when they should start thinking about it, what are the actions and steps to do it, and what are the common hurdles and

mistakes that companies make. Really, the first question is, and I will direct this to Mike Dorsey, when should a company

start thinking about M&A?

Michael C. Dorsey (The Westly Group): In my opinion at the time that it is founded. Certainly, assuming that you

want an exit, instead of running the company for 50 years or so. If you want an exit, one of the alternatives, and one of

the likely alternatives, is to be sold to a corporate acquirer. The way that I think of it is that there are a few things that

you have to be sure to avoid.

You do not want to enter into any transactions that would make you unattractive to an acquirer and the most obvious

one would be if you have a minority interest with certain preferential rights which you have sold to a corporation. That

could make you unattractive to foreign acquisition compared to one of their competitors. So you have to be very careful

about that. Of course if it is cancelable at the option of the smaller company in certain circumstances, or if it could be

repurchased for a certain amount, then that would provide you protection in that case.



But, in general, if you build a company that has a great value proposition, and it solves a problem that the world and the

economy wants to have solved, there should be people who will want to pay a lot for your company. I think that it is

more that you have to avoid a few things and otherwise build a good business.

Garrett Herbert (Deloitte & Touche LLP): Mike Dauber, are you thinking about selling a business before you decide

to invest in it?

Mike Dauber (Battery Ventures): Yes, in the sense that we think about what this business could be worth. We are

certainly doing what the other Mike here was saying, but we need to make sure that you are not doing something bad

like give Cisco some right of first refusal in a deal, which happened in one of our portfolio companies years ago and it

killed the sale. You need to be wary of strategic investors and strategic investments that could de-value the company,

but other than that...

Especially in cleantech, we get very focused early on. In the back of our minds we know who the acquirers could be, but

let us keep our heads down and build a good business. If you build a good business and get the company to break even

on cash flow, I have to say at least at Battery Ventures when we are looking at companies in the cleantech space, we

are completely focused, initially in the company's lifecycle, on getting to that magical cash flow/break even moment.

The belief is that once you get that cash flow to break even, you are sort of playing with the houses money. You have a

profitable business, which means that an acquirer is not going to lose ongoing money to own this business. Now it is a

question of how do you grow it to be making the most possible money. At some point we say, ‘Wait a minute. We have

been really focusing recently on getting cash flow to break even. We have an opportunity to go after the market more

aggressively, do we want to increase our burn to grab a bigger share of this market and not focus on cash flow right

now?’ But that is a decision we make later on, specifically from an exit perspective. If you think you can pour gas on the

fire at a certain time, you will want to do that.

Otherwise, what we have found, and I do not know if everyone else feels this way also, when you start spending a lot of

time talking about M&A activity with a company all you do is distract them.

Dr. Naveen Bewtra (SiVal Advisors): Yeah, I think that is a good point. Let me put it in a slightly different light

here. Having run corporate M&A for billion dollar institutions, I can tell you that I have never bought a company that was

in my lobby. I always bought companies where I was in their lobby. So if you are finding yourself in a situation where

you have to be in my lobby talking to me about being acquired, there is something wrong. I should be in your lobby as

an acquirer asking you about what kind of transaction you are looking for.

I think that the second thing is it comes back to where you fit into the ecosystem and how much pain you have

penetrated. That will give you a substantial idea of how acquirable, if that is even a word, you are. If you have not

penetrated that ecosystem, there is very likely a low probably for you to force someone to have to acquire you. I think

that is the way to look at these things.

Armando Castro (Reed Smith): The one thing that I caution about the whole thing, is that there is one thing that we

do talk to all of our clients about, at whatever stage they are at, if they are thinking about going into an M&A transaction,

and that is the title to their intellectual property.



Most of our clients are cleantech companies, or IP companies in cleantech. If you do not have clean title, and that starts

from the beginning, it is going to be a problem that could kill your deal instantly. It can kill investment and it can kill an

exit. So that would be the one area to focus on, and then as the company goes forward, not limiting their rights in

regards to their intellectual property. It may be very tempting to enter into a strategic deal where you are licensing out

some of those rights, and you do that for non-dilutive capital. You really have to think about those transactions if you

think you are going to do those and close an exit, because a buyer will often will want the broadest possible set of rights,

if possible.

Dr. Naveen Bewtra (SiVal Advisors): From my perspective in helping you sell your company, you have to understand

where the legal and the formation due diligence, and the IP due diligence, occur. They occur after we have spent a lot of

time with the acquirer to build up momentum. And not, as we are getting into the nitty-gritty of them investigating this

and looking into the IP, if there is a hiccup you do a tremendous disservice to your company during that process because

that momentum has stopped and it is very hard to revisit and regain that momentum. I would encourage you, as CEOs

of privately held companies, to make sure that those ducks are lined up prior to bringing in a discussion -- even an initial

discussion -- around the M&A process.

Mike Dauber (Battery Ventures): I can fit all of this advice into one sentence: Hire a good lawyer. I am pretty

cheap and the companies that I work with know that I am pretty cheap, and I am not a particularly extravagant person,

but this is one place where you want to spend real money. I told the same thing to my wife when we were getting an

estate attorney. I said, ‘Saving $500 bucks on a putting together an estate plan is not worth anything. The whole point

of estate planning is piece of mind. Saving $500 bucks does not make you feel any better. This is not a place to save

money. Hire a good lawyer.' Then I do not have to think about this stuff because the good lawyer takes care of all of it.

Unanticipated Issues

Garrett Herbert (Deloitte & Touche LLP): Let me ask the question: Everyone is going to have a different

perspective on this, or maybe this will be uniform because from a process perspective they are not ready to be sold, but

when you work with a company that signs a letter of intent to sell, what are the things that come up that you find

companies were not ready for and were not anticipating at the time that they signed a letter of intent?

Michael C. Dorsey (The Westly Group): Do you mean hires a banker, or enters an agreement to merge?

Garrett Herbert (Deloitte & Touche LLP): Let us start with hires a banker. So they have hired a banker and made

the decision that it is time to sell, first of all what percentage do you think are ready to be sold and what are the reasons

that they are not ready to be sold?

Michael C. Dorsey (The Westly Group): I find that very hard to answer because when you say 'ready to be sold,' the

way I think about it is it will be reflected in price and the terms. Because, assuming that the company has something to

offer, if its accounting is a mess, if its contracts are invalid, if its customer relationships are overstated, etc., they are still

worth something, but not what was originally perceived. So, I guess the company that I just described would not be

ready to sell.

Of course, in my opinion it is always a function of what are its alternatives. It is better than bankruptcy if that is its real

alternative, of course. So if you mean ready to sell in an optimal sense, I would say that very few are because at least

most of the companies that I have been involved with have been running as fast as they can to develop a product, to



approach the market, to develop strategic relationships, while trying to raise money in a difficult environment. So, many

of things that I have mentioned have not been done well, so they are usually penalized for that somehow.

Dr. Naveen Bewtra (SiVal Advisors): Right, and that penalty always appears while we are running an M&A process.

Again, I cannot stress this enough, once that momentum stops because they find an issue in the IP, but also not just on

one sentence but in terms of the books, in terms of the financial projections...

Mike Dauber (Battery Ventures): Hire a good lawyer and hire a good accountant. Sorry.

Dr. Naveen Bewtra (SiVal Advisors): There you go. And hire a good investment banker. So, you pay a penalty once

that momentum stops. There is a push/pull that always occurs between my side of the fence and the investment side of

the fence, which is once you start using the word 'acquisition,' I think that is a time where you want to sort of line up

these ducks. When we are in the heat of an M&A process, that is not the time to find out there is an issue. The key

point is that I can even help subdue that issue if I know about it ahead of time. It is the surprises that cause these things

to go bust.

Mike Dauber (Battery Ventures): Naveen, you made a comment earlier that I keep thinking about, which is that

there are two kinds of M&A. There is M&A where you are out shopping and there is M&A where they are out courting

you. The processes are very different. Not every situation where you are trying to sell means that things are bad. We

had a company that was doing fine. It was a profitable company that had gotten to a steady state of revenue. It was

what it was going to be and they decided that it would be better off being a part of a public company. We knew that

they were worth something, so we said let us get ourselves ready to go into that process.

When you are losing money, that is very unlikely to be the case. You have this sort of 'Oh Crap, how do I box this up as

best I can because every day that I am around reduces my ability to sell myself’ moment, because if my potential

acquirer strings me along my value is just going to be that much less. Those two scenarios are completely different form

the 'I am moving along nicely and someone calls me up and says would I like $500 million for this business, and you reply

that you actually would.' You had no plan for that yesterday, but now that you mention it that sum of money is

interesting and you will go off, work for a year, and then take some time off in Hawaii.

I just think that what you do as a company to prepare for one versus the other is very different. You hope to never be in

the situation where you are losing money and you have to sell. I do not know if you want to spend a lot of time planning

for it above and beyond the legal, accounting, and IP things that you need to take care of. If the business is running in a

steady state and you choose to sell, then you have to take time out, get a banker, and look at what you have to do. But

at least in that case you have time. At least the business is not going anywhere.

I think that in the last case, those are ones where I as an investor do not want to distract my company, but we do want

to have a contingency plan. Let us tell ourselves in the back of our minds what we think this business is worth. It is sort

of when you are interviewing for a job. Before they make you an offer, you want to know in your mind what you are

willing to say yes to, because as soon as the offer gets made, now there is a number on the table and you get into this

emotional thing. Sometimes you are willing to argue over $10,000, but maybe that much matters and maybe it does not.

You want to make an intelligent decision. It is hard to make a non-emotional decision if you have not thought about it

beforehand. I think every once in awhile, if you are thinking about that third scenario you should think about, if you are

a founding team, what would you sell this business for if I get to this level and I am not going to get greedy? What am I



going to sell this business for? That is fine, if you know that is what you want to do. But, then if someone comes to you,

you know you can make a good offer and be happy about it.

The Attorney’s Role

Garrett Herbert (Deloitte & Touche LLP): Armando, as an attorney, how do you help companies, in order to

maximize value, as they prepare for a process like this?

Armando Castro (Reed Smith): Really, a lot of it is making sure that they have done the things that I said earlier.

They have clean title to intellectual property. Their stock records are in order. Their contracts have been looked at by

accountants. If your auditors are not residing in Northern California, chances are that you are going to have a problem

with your revenue. So you are going to see a purchase price adjustment. We always recommend that they get very

experienced auditors to help them on those things.

Then it goes away from the legal process and it is talking more about financial planning, and one of the last things that

we want to see is a company entering an M&A process and they do not have 18 months of cash in the bank. If the M&A

process extends for any reason at all, you are going to be in a tough spot in the negotiations. That is one of the things

that we talk to them about. When I say 'we talk to them about' we are typically talking to the officers and then there is a

board level discussion about this, and really working with their larger investors to make sure that the financing that the

company has in place is sufficient to last through that process. I would say that those are the most important points to

mention.

Dr. Naveen Bewtra (SiVal Advisors): In terms of the cash position, anything less than a certain amount is not just

material to the M&A, it is material to the operation of the company as well. If you have got enough capital to continue to

run the company, then we have enough capital to see it through an acquisition.

Armando Castro (Reed Smith): I would say that the number that we are looking at is about 18 months, depending

on the company.

Dr. Naveen Bewtra (SiVal Advisors): It depends on the burn rate for the company.

Examples of Failed Deals and Why

Garrett Herbert (Deloitte & Touche LLP): This just kind of follows that. Naveen had a comment up front as far as

enemies to getting a deal done and that surprises are going to the big ones. What I always talk about with clients are

two enemies: Time and Surprises. I would like to ask the group, to put it in a more practical phrase, just to think about

an anecdote of a deal that went sideways because of a surprise, specific to cleantech. I will share one.

There were a lot of solar deals that I was seeing in 2008 - 2009, and in deal after deal, and probably every deal I worked

on basically died. Why all of those deal died rested in an area to commitment to contingencies. It was the things that

were not on balance sheets and were not in your cash flows. Those are the things that actually kill deals. With the one

deal in particular that I am thinking of, the company was a solar integrator and they had a buyer coming in who was

excited about it because they wanted to push products through this integrator.

As the deal went on, they found out that there was an increasing commitment over five years to buy panels from

someone else. So the deal was going on and on, this popped up in the last week of the deal and killed the deal because



the whole value driver for the buyer rested on this strategy that was discussed up front. The seller did not talk about it

up front and that is what caused it to crash. I see frequently, in cleantech in particular, that the commitments to

contingencies, the things that are not on the balance sheet, are the surprises that most often kill deals.

I am curious to hear from each of our panelists if they could comment on other deals.

Michael C. Dorsey (The Westly Group): I agree with you 100%, but I would say that another problem that I have

seen is when there are products in the field that are not performing as they have been promised to perform, and

therefore customers are unhappy. That is another form of liability, for certain. In some cases that would be a warranty

liability, but whether there is or not, that product is not performing to spec. is a big issue.

Armando Castro (Reed Smith): An M&A deal that specifically fell apart. In this case it is a solar company. The

buyers had looked at it and saw that the company had signed some potential power purchase agreements. The terms on

those power purchase agreements were so unfavorable to the company that the buyer backed out of the deal because

they could not see how they could run the business profitably. This is not for M&A, but I keep talking about IP because I

think that it is so important.

We worked with a company, or we were thinking of working with a company that was in the methane gas space. The

team was out of Carnegie Mellon University, it looked like a really promising technology, and one of our patent attorneys

had done some patent work on some larger methane gas transactions. When we looked at the block of patents that was

out there, we determined that the company was un-fundable. Again, I would say poor planning on the intellectual

property in that instance. That was not M&A, but M&A was the revenue spot.

Mike Dauber (Battery Ventures): You guys have said a lot of good stuff already. On specific IP issues that I see, a

lot of the time in cleantech we will see entrepreneurs license IP from a University and that is sort of the seed IP that

starts the company to go off and build on top of it. Some universities are very good at licensing IP because they do it a

lot, but some universities really are not.

We have seen some issues around that. They were not so much around an M&A transaction where it was going to be a

killer, but as a VC when you get in and look at this IP and you ask, 'Do you guys understand what is committed here? It

does not hurt you, but in the future it could be a killer.' We had to go back and re-negotiate it to avoid that, but we have

seen some royalty requirements in perpetuity. This is not Gatorade. No one is going to be paying you royalties for the

next 60 years. You have to have caps on it. Some entrepreneurial teams do not think about that up front, and the

universities sneak it in there. If we knew that was going to be a problem we would not have touched it.

Dr. Naveen Bewtra (SiVal Advisors): In my experience the largest source of failure in an M&A process is directly

contributed to missing your numbers. That could be a warranty issue. That could be your over zealousness to sell the

capabilities of the product. My guidance to any CEO, any management team, or any board member is that it is better to

put in a number that you can hit and is achievable, rather than one you would hope to hit. This is because, having been

on the buy side, there is nothing until much later in the process that prevents me from walking away penalty free. So,

make sure you hit your numbers.

From M&A to Licensing Agreements

Garrett Herbert (Deloitte & Touche LLP): Looking forward to potential exits, one of the things that I have seen and I

am looking forward to hearing the panels’ view on this, is I have seen a lot of M&A transactions in cleantech flip from



straight M&A and investment to maybe more of a licensing arrangement. I think a lot of this rests on the IP. I think this

was a big trend that we saw here in the valley. Semi-conductors are a great example of where we have seen that over

time as well, where the strategic objective of the buyer could be achieved through access to the IP. Have you seen

arrangements where it was intended to be M&A and it morphed into more of a licensing arrangement?

Dr. Naveen Bewtra (SiVal Advisors): I have actually seen it the other way. I have seen it with strategic relationships

that we had built up, when I was at HOYA.. We were licensing something and decided that we wanted to make sure that

it was the delta between what we were going to pay for an exclusive license worldwide and what we would have to

acquire the company for. We just decided that we would take it off the table, so there are two flavors to that.

Armando Castro (Reed Smith): I have had a couple of transactions in the last four years where we started off an

M&A process and the buyer switches because they have an impasse on the valuation, and the buyer says why do we not

just license the technology? But when you look at the terms, they may as well have acquired the company. They want

exclusive rights to it or something, so we typically have to advise these companies 'Why would you sell your company for

this price, because that is what would end up happening?' I would say that it is really tricky.

You have to look at what those licensing terms are and look at what the implications are because typically the buyer is

going to somehow limit the rights of your intellectual property. They are going to ask for some limited type of exclusivity,

whether it is a sector or some type of application. You really have to be in a position to decide whether that is going to

negatively impact your company so much that it is going to eliminate your ability to enter into a similar transaction with

another party or move forward with an M&A exit with someone else or some type of offer.

Mike Dauber (Battery Ventures): I would say that when we sit on boards, we typically do not like our investments to

license their IP, unless it is in an adjacent market, because you are a startup. The whole value that you create is around

your IP. If you license your IP, what else can you sell? It is not like you have a giant existing channel that you can

monetize somehow.

The example that I will give you is I told you I was in this central inverter company, Ideal Power Converters. This is an

interesting story of this guy who invented this technology for his master’s thesis work 30 years ago, got married, had four

kids, and needed a job to support his family. He worked for BA systems, down in Texas, for a long time. When his

youngest finally got into college he said finally I can go off and pursue this technology that I have been interested in.

He played around with it for a couple of years, got a granted patent on his IP, did some work with Texas A&M, and said,

'I am not a fundable guy. No one is going to give me money.' He was able to get Lockheed Martin to give him the

exclusive license to the IP for military applications. His thinking was, ‘There is no way that I can build something and sel l

it to the military anyway. It is a very slow moving market. You have to be one of the key suppliers, which Lockheed

Martin is.’ He would rather take a licensing deal from them and that allows him to focus on solar because he is not going

to license that market. He licensed the adjacent market instead.

Now, I have been critical to him before because I think that he did not get enough money for his IP, but when you go

back and look at the state of the company, which was a guy, he is going up against Lockheed and he did not have a lot

of counter leverage against them, I am pretty impressed with what he was able to do. I think that he made the right

decision. But that is one of the only instances that I have seen where a startup is licensing IP where I thought it made a

lot of sense because it allowed him to get the company to a point where it was fundable.



For example, if Redwood Systems came to us ever and said they wanted to license the IP, we would ask why they did not

want to sell the company as a reply. If you license the IP, what else is there? We tend to be very cautious around it and

I am sure, as lawyers, you guys are pretty good at advising against that most of the time.

Armando Castro (Reed Smith): When they start talking about it, your first inclination is to say 'NO!'

Mike Dauber (Battery Ventures): Yes, just say 'NO!'

Armando Castro (Reed Smith): Or, 'Probably not, but let us look at it.'

Mike Dauber (Battery Ventures): I saw one situation that we did not do, but I had never heard of it before. At one

of my companies we had a Taiwanese OEM, which was very, very strong in their market. They did not want to license

the technology, they wanted exclusive rights to a particular end market, which happened to be a very large end market

and they wanted to sign a distribution agreement.

At first they just came to us and said that they just wanted a distribution agreement with us. We replied that they were

great in that market and that we would like to talk about distribution. We asked what they wanted. They wanted

exclusive rights to sell our product into this market. Well, that market was 95% of our business. So they basically

wanted exclusive rights to us making a part and handing it to them and having them tell us what we can sell it for. So

they wanted to acquire us without acquiring us is what they were telling me.

They replied that they did not want acquire us. They respected us as a separate company, but that they just wanted

exclusive rights to this small market. We will call it China. So it was a 'NO!' But it was interesting because we had never

seen it before. We were used to saying no to IP licensing deals, but in this particular company, they sell so much to

China that if you had exclusive rights to a company’s product in China, I do not know where else you could sell it.

Armando Castro (Reed Smith): I will tell you that it is actually a fairly common ask.

Mike Dauber (Battery Ventures): Really?

Armando Castro (Reed Smith): It is not uncommon. I will say that.

Mike Dauber (Battery Ventures): The amount of chutzpah about it surprised me, because they swore up and down

that they did not want to acquire the company and we were sure that this was just a play at acquisition.

Armando Castro (Reed Smith): Exclusive rights in perpetuity.

Mike Dauber (Battery Ventures): Yes, exclusive rights in perpetuity, without acquiring the company. It was a nice

try.

Structures of M&A Transactions and Trends

Garrett Herbert (Deloitte & Touche LLP): While we are broadly talking about structures, M&A versus licensing, one

of the things that I would like to talk about, because there have been some emerging trends we were talking about

before the panel started, are the structures of M&A transactions as far as what kinds of trends are we seeing. One

example that we talked about is we have seen resurgence, in terms of the number of earn-outs we are seeing in



transactions. Armando, can you comment on what you have been seeing as far as earn-outs and some of your thoughts

on them?

Armando Castro (Reed Smith): Earn-outs are still being used for the same reasons that they have always been used,

which is to bridge a valuation gap. The buyers do not want to over pay. The sellers would obviously like to get more.

We are increasingly seeing those terms on deals.

One of the things that we caution our clients about is that coming up with the terms of the earn-out, if there is any kind

of a requirement for continued employment, you need to recognize that this earn-out payment is going to be ordinary

income to the recipients. It is not going to be capital gains. So that makes it far less attractive in terms of payment.

The other thing is that with earn-outs, as Naveen said before the panel, and we have had several clients say, if you are

on the buy side, the attitude is it is a lawsuit waiting to happen. This is because if you do not pay it out, the sellers are

typically going to allege that there is some sort of breach by the buyer and that they did not supply enough resources for

them to achieve their earn-out target. So be very careful as you word those earn-outs. They should be as objective as

possible. I do not think that long-term earn-outs are a good idea.

Dr. Naveen Bewtra (SiVal Advisors): It is very hard to keep track of those from the accounting standpoint inside of a

big public company.

Armando Castro (Reed Smith): The other thing from a buyer’s perspective is that they are a disincentive to

integration and typically you want to have integration happen as quickly as possible for it to more or less be a successful

acquisition. That would be a business reason that we would caution against the use of the earn-out, but they are very

commonly used. I would say that in over half of the deals that we have done in the last three years, as least in Northern

California or in the San Francisco and Palo Alto offices, I have seen earn-outs in them.

Dr. Naveen Bewtra (SiVal Advisors): As you run though this, M&A is not a two day process. It is a deliberate, time

consuming process where you are going through a number of steps.

Typically what happens at the end of this when you are talking about the nitty-gritty on price, there is always some

disagreement and it is always easiest to say 'We will capture that as an earn-out. You think this, I think this. It is close

enough. We will do it as an earn-out. Let us get the deal done. I have got the board on the phone and I want to

convey this to them.' The problem is that every time I have done it on the buy side, I have always ended up either being

sued, or threatened to be sued, and the reason is the following:

You take this small startup company, albeit very well funded and very impressive in their technology, and that is why we

bought it. They have got a 'VP of Sales,' who has now been integrated into the sales organization of a $20 billion dollar

company and still wants to be the 'VP of Sales.' The minute you move him into a more appropriate level, the first thing

that comes up is, 'I was not given adequate resources to make the earn-out number.'

There is just no easy way to keep track of the earn-out and what that group was delivering because you are consolidating

all of your revenue, or to ensure that they would have the same amount of resources that they would have had as an

independent entity. So, I will just caution you that it is an easy way out now, and the investors do not care, but it really

does end up as a transaction.



Mike Dauber (Battery Ventures): Well, we do care because we want to know the likelihood of the earn-out hitting

and we have investors that we report back to as well. You want to position it appropriately.

I was going to say anecdotally that I have had one earn-out that has gone well and that was a situation where you had a

product that was easy to self-identify, it was an additional product to the acquiring company, and they had a sales

channel that was not commission based. It was one of the few companies that I have seen that was a straight salary

sales force, so there is no way that you could argue that they were not properly incentivized because they have no

incentive directly to sell their current product, so why would they have a direct incentive to sell a new product. So it was

really easy to say, 'Well look, you guys are saying that your sales forecast is "X" for next year. If you hit that, we will give

you a kicker on top of that and we make more money if we paid the earn-out.'

Dr. Naveen Bewtra (SiVal Advisors): Right, but that is a non-commission sales channel.

Mike Dauber (Battery Ventures): Yes, but it was two things that I thought made it unusual. The first one is that it is

super unique -- a standalone product that is easy to identify and is not contingent on a second product being sold. The

second was that it was a non-commissioned sales channel. I will say that we end up having earn-outs a lot in our

negative deals and not in our positive deals. So if you think about it as the psychology of a partner who has just invested

in a company that he got 0.3x on in capital, the last thing he wants to do is spend the next year working to get that 0.3

or 0.35. Right? It is not a good ROI for the investor.

Dr. Naveen Bewtra (SiVal Advisors): It is most likely 0.325, but you are right.

Mike Dauber (Battery Ventures): You want to move on to the next thing so that you can get you personal IRR up at

your firm again. So, you just want to be done with it and move on, frankly. Earn-outs just prevent that too, both

tactically and emotionally. If there is real money on the table it is one thing, but that is not what we are shooting for.

Michael C. Dorsey (The Westly Group): I feel the same way Mike. I would say that it is worth taking a moment to

talk about the ideal situation. I think that the ideal situation is that you have two companies. One could be public, which

would provide liquidity, but not necessarily, which could merge and have great synergies by doing so. I think that within

the cleantech sector we see some of those today. Certainly in IT you see those very frequently.

In that case it is a great aid to integration if most of the consideration is stock, so that people are incentivized to work

closely together like they were one company. Of course it is one company after the merger. So I have seen a couple of

great examples of that and it is a very happy outcome. Moreover, I think that more of us should spend more time

thinking about that because there are many such transactions to be done and those are the ones we should be pursuing.

Escrows and Other Trends

Garrett Herbert (Deloitte & Touche LLP): Are you seeing any other trends in terms of added structure deals,

whether it is related to escrows, or any other sorts of areas, and I am thinking specifically related to cleantech?

Armando Castro (Reed Smith): I can go through a couple of legal points on some of the structures we are seeing.

One of the things that we are seeing because the exits are taking longer is that we are seeing shifts in the management

team over the course of the history of the company. So as a result, we are seeing management carve-outs that are

being used on each end. There are exits that I think are very good values, $150 - $200 million dollar deals, and they still

had to use the management carve out.



Why? It is because the company is 8 - 9 years old and there was a change in management. You need management to

stay with the company and to do the deal. There is not a lot of incentive on the table for them because maybe the

company had to raise some rounds at the end where there are very large liquidation preferences in front, or they simply

do not own a large enough percentage of the common stock, so you are seeing on a lot of what I would call successful

exits management carve-outs, which are usually associated with negative deals.

Mike Dauber (Battery Ventures): Yes, that is a good point.

Armando Castro (Reed Smith): The other thing that we are seeing and I think this is pretty useful for companies,

whether they be public targets or private targets, is the use of insurance on Reps. and Warranties. Brokers are selling

insurance to cover breaches of Reps. and Warranties and, interestingly enough, it is into very open ended areas like

intellectual property breaches.

We will take a simple example. Say it is a 10% escrow, the cost of the insurance, depending on the broker, is about

15%, so you are talking about 1.5% of the total deal to buy the insurance. The insurance company likes to see that

there is some risk on the part of the shareholders of the company, so they are going to want to see an equal amount of

cash that you are willing to take. So now you are looking at about 3% of the total value of the deal, or 30% of the

escrow, and you are guaranteed that you are going to get the other 7%. That is good for sellers because you have

greatly reduced your risk that you are not going to get your payout.

For buyers, if you are not looking at a technology where there is not a lot backing any of the Reps or Warranties besides

the escrow, it takes a lot of the risk off of the play for you. It is not perfect for every situation, but I would suggest that

you might talk to your broker about it. A number of the brokers are offering this now.

The other thing, and this is not very specific, but if you have not been engaged in a mergers and acquisition transaction

in the last seven years, is it is going to be a little different for you in terms of the level of diligence and preparation that

you are going to see. We used to see on $100 million transactions and above, for example, full financial diligence, where

they would go out and hire an M&A team from one of the big four to come in and do the diligence.

Then we saw that number drop to $50 million. I would say that starting at around $25 million it is not uncommon for us

to see, for example, full financial diligence being done by buyers. If, when you sell the company, you are presenting

projections, one of the things that I have seen in the last two years, and it seems to be increasing, is that even if it is a

private target the buyer often expects that there has been a valuation done. And they will look at those projections.

That makes us very uncomfortable because you are talking about the projections for a private company that were not

intended to be used for any kind of a public market setting. My point is that the level of diligence has increased so much

that we are even seeing that type of activity by the buyers.

If your product uses any type of open source, there will be a separate open source audit by a company like Black Duck,

or somebody like that. In general, the level of scrutiny that is given to these transactions has greatly increased. Part of

that has been because of the discipline that has been instilled in the buyers.

It used to be that you would have a large public buyer and if there was an internal champion at the company, they could

push that deal through, and that was enough. I will tell you now that it is not enough. That buyer has to go though and



get buy-in from a number of the business units. They will have to answer to finance, to the engineering teams, the

business development teams, and you need buy-in from a number of people. One champion is not enough. That is one

of the things that is driving this increased level of scrutiny by the buyers.

Dr. Naveen Bewtra (SiVal Advisors): I think that at a higher point, just to pick up on Armando's point, it is an entire

process. It takes dedicated resources to work with the potential acquirers. You never want to be in a situation where

there is one potential acquirer in the process. And I have a rule of three. You want to have three people in the process

because one always falls out, speaking from experience, and you want two entities bidding for this. So you are managing

three independent processes, all of which are going through developing synergy models and relationships with their

potential business units, etc.

One of the gotchas, coming back to what Garrett had asked, is that thinking that a CEO is going to be able to do this in

parallel to running the company. That is one of the real gotchas that we have got in this industry: 'Well, we will let the

CEO do it. He knows the company best. What is the harm? We will see what pans out.' It is a very deliberate process

and if you are going to burden the CEO with that, you are incurring the likelihood that they are going to take their eye off

the ball. The minute that happens, you have wasted a critical opportunity for few bucks.

Garrett Herbert (Deloitte & Touche LLP): We are drawing to the close of the time for the panel discussion, but we

did want to provide some time for Q&A. I would like to take this point and pose it to the group here. I am sure that we

have a lot of interesting questions out there.

Q&A SESSION

M&A Example Not Involving IP

Question from Kurt Hurley (CleanShare): Good Morning. I am Kurt Hurley from CleanShare. I had a question for

the panel. I am interested in an example of a merger and acquisition play that did not involve IP. Say it was a purchase

because they wanted to increase their market share or they were very interested in that.

Michael C. Dorsey (The Westly Group): The acquisition of PowerLight by SunPower. While it did involve IP, that

was not the driver. The driver was that it essentially was a vertical integration in which SunPower believed that it would

have greater access to the market by being able to offer the integration and installation services of PowerLight, which at

the time was the largest commercial solar system installer in the US. There was IP, but that was not the driver.

Mike Dauber (Battery Ventures): CREE and LLF (LED Lighting Fixtures) was a similar example. There was IP but

that is not why CREE bought them. CREE, as I am sure you guys all know, is an LED chip maker, and they needed the

capability to build the fixtures and LLF was making fixtures. They had actually spun LLF out and then they pulled them

back in. But they wanted the fixture making capability.

Dr. Naveen Bewtra (SiVal Advisors): Sharp's recent acquisition was solely focused on getting channel penetration

into the US. It was not about clean technology. They were looking at a number of companies that had acquired rights to

development for solar installations.



Armando Castro (Reed Smith): We have done a number of M&A transactions in the wind space, and they view it

more of as an investment. They are not looking at it from an intellectual property point of view. They are really looking

at it from an ROI type of investment.

Mike Dauber (Battery Ventures): I guess I would caution to the broader audience, and Mike can speak for himself,

when I look at a cleantech deal I am pretty fixated because it is pretty early. I am pretty fixated on the IP. If it is a later

stage deal, you already have traction, and there is already revenue, then IP becomes less important. But, it is sort of

hard to get your arms around what you are investing in unless there is some sort of IP you can hang your hat on. In the

past, where we have looked at a deal that we have liked, it was earlier. Invariably, at some point, if we did not do the

deal or it broke down, it was something about the IP or the market it was going into. IP is pretty darn important.

Dr. Naveen Bewtra (SiVal Advisors): It is funny that you ask that question because, having worked on some of

these deals where the synergies for the acquisition are around a new channel, geography, or customer base, they still

want to do the IP due diligence. It does not give you a free pass for that.

Acquirer Motivations

Question from Bill Soby (Green Vision Fund): That question gets to the broader issues of buyer motivation in

acquiring a company. What are they looking for? So Naveen identifies this power point between greed and fear, but

clearly there are other motivations. Maybe you could address that, as they deal with green washing, with sincerely

wanting to help the bottom line, a diversifications strategy, or just entering an entire growth market that is currently in.

Could you address any of those or the motivations with a broader scope of what motivates the acquirer?

Mike Dauber (Battery Ventures): Obviously it is a very good, but very broad question. So it is hard to be specific

without going into singular examples. But I think when you look at a lot of the spaces we are talking about today, I think

it is a combination of new markets and new technologies. I think that is what a lot of the big industrial buyers that you

are seeing are looking for, and you can throw Cisco into that too. I do not know if you guys know Richard-Zeta. It is sort

of the counter balance to Honeywell's Tridium. It is a box that allows you to connect up in the building for commercial

energy management controls. Cisco wanted that commercial energy networking box. It was a technical capability that

they thought they needed because they did not have it and Richard-Zeta did. They thought it would ultimately help their

bottom line. It was a specific technology that they felt they needed to acquire.

We see that in cleantech more than anywhere else. Once again, if you look at other markets, a lot of times you will see a

customer acquisition play. I do not think that we have seen a lot of that in cleantech. I think it is a lot more specific.

You have more mature technology companies and more mature industrial companies that are looking to add a specific

technology vertical to their portfolio. Again, this is broadly generalizing, but that is what I see more often than not.

Dr. Naveen Bewtra (SiVal Advisors): I think that encompassing some of the different aspects that we have talked

about, improving their bottom line, entering into new markets, etc., there is still a fear around that because if you do not

execute around that and your competitor pulls the trigger on that transaction, guess what, that is suddenly not your

strategic partner anymore. This ecosystem is very dynamic and if they are not playing for you, they are playing for

someone else. That is going to affect your bottom line. That is going to affect your ability to penetrate new customer

bases and new geographies, so I would think of it more in that aspect.

Mike Dauber (Battery Ventures): To contradict my last statement, I will give you an example of the other side. If

someone was to buy SolarCity, that would be a customer acquisition play, or a channel acquisition play. I am not trying



to offend SolarCity, but I cannot think of discernable IP there. It is a great company, but you are buying customers if you

are buying SolarCity. So it could go either way, but more often in cleantech it is going to be technology IP and access to

a new market.

Garrett Herbert (Deloitte & Touche LLP): The question you asked is the right question to ask. When I sit down

with clients, in prepping to help them with due diligence, the first question I ask is what are the value drivers and why are

you buying this business? Sometimes clients will say we want you to go out and do the accounting, due diligence, and

the standard of what you do. Based on what the buyer is doing, that is really what they should design the diligence on.

You want to focus on what the important items are.

I think the question you asked is really the key question. I think that in cleantech there are going to be a host of

different reasons. A lot of it is going to rest in the IP, but the value drivers behind the deal could be a whole host of

different areas. It could be the management team, the markets they are in, the geography -- there is a whole host. But

think it is key, as a buyer, to define what those are and really execute a diligence plan against that. As a seller, you really

want to be focused on why the buyer is buying you and make sure to craft your story accordingly.

Armando Castro (Reed Smith): I can say that in the transactions that I can think of at our office, a majority of the

larger transactions are international buyers and they are were making financial investments for the most part. They were

buying the companies because they were going to get a return that they wanted. But they were existing, profitable

entities. In the instances when that was not the case, the buyer wanted access to the technology because it was going

to provide them a cost reduction in the way that they operate their business. They needed access to that technology.

They wanted it for themselves and they were going to use it in their existing business to reduce their costs.

Size and Scale

Question from Prabhu Soundarrajan (LumaSense): The question I have for cleantech is about size and scale.

Cleantech, unlike computer software, is highly capital intensive, so what is your recommendation about size and scale

that is appropriate from an entrepreneur's perspective as well as from an investor's perspective?

Mike Dauber (Battery Ventures): I mentioned this before. I think most investors right now are explicitly staying

away from anything that is capital intensive, for exactly that reason, because if you do not know with high confidence

that the next round can get funded, there is a real problem with this business idea. It is sort of dead on arrival.

When we step back and look at a lot of businesses today, if you really need massive scale to be successful, then it is not

a business that we want to be in. There are certainly businesses where you need some degree of scale. But if you can

get to that in a reasonable amount of investment dollars, even $50 - $60 million, we like it to not take that much, but VCs

can figure out how to get to $60. We cannot figure out how to fund another Solyndra. We are not going to go out and

fund a billion dollars. You just cannot get a return on that money.

So, scale is a little bit in the eye of the beholder. I have to take shots at Solyndra; I am sorry. It is just a lot of money

and the tax payers put up a lot of it also. In, general, I just avoid things that need that level of scale or anything close to

it because how do you make the money back on it in the end?

Michael C. Dorsey (The Westly Group): Our most successful investments have been capital intensive ones. Tesla

Motors, for example, and Amyris needed a lot of money and we are very successful. Similarly, I expect BrightSource,



which just got a $1.4 billion dollar loan guarantee and has several corporate investors, to be successful. I agree that it is

an added risk because you have to have high confidence that the money can be raised somewhere.

You asked about other models. Certainly in the biotech business, that is how companies have been financed, by and

large, through getting large pharmaceutical companies to fund clinical trials and generally by giving a geographic market

segment to them, some product exclusivity for a period of time, or something like that. Thus, I think that model makes a

lot of sense and that the model can continue to be employed. Also, a lot of cleantech is not capital intensive. Many are

vertical market software companies that are not really capital intensive. So, I think we have both kinds of companies in

cleantech.

Mike Dauber (Battery Ventures): I would like to retort real quickly. I do not think that you could fund those

companies today if you were just starting. Maybe you could, but it would be very hard. I will never say never, as it is too

hyperbolic for me, but I do think it would be very hard to do it.

Dr. Naveen Bewtra (SiVal Advisors): Mike was going to give each of the panelists a Tesla, and now you blew it.

Mike Dauber (Battery Ventures): No, he will give you guys one. He just will not give me one. They are both good

companies, I just think that it is very, very hard to fund a company like that today from ground zero.

Michael C. Dorsey (The Westly Group): I think that there is more money available in China than there was five years

ago, for example. I think we ought to avoid being myopic and I think there will be more money available from big

corporations to fund these sorts of ventures that we are investing in.

Mike Dauber (Battery Ventures): Fair enough.

Dr. Naveen Bewtra (SiVal Advisors): I will tell you from the M&A perspective, you should not assume that your

acquirer is going to take on that liability. So if you have that capital requirement, you are going to want to have that set

up otherwise they are not going to take that.

Licensing as a Dominant Feature of a Business

Question from Emily Liggett (Nova Torque): I heard concerns about a licensing strategy, but despite those

concerns have you seen much M&A with a company that has a licensing strategy as either all or part of their business?

And if so, how does it value?

Mike Dauber (Battery Ventures): The best example that I can think of here is in the semi-conductor industry, where

you actually have a few well known licensing companies. They are ARM and Rambus. ARM and Rambus have very

different strategies, but they are both licensing companies. ARM licenses IP and people pay for it. Rambus sues people.

They are very different business models. In one of them you hire engineers and in one of them you hire lawyers. It is

true.

I had an uncle who was on the board at Tessera, which was an IP packaging company. He said it is sort of depressing

when you are sitting at a board meeting and you realize that the best thing that you can do with your money is to higher

more lawyers to sue people. There is nothing wrong with lawyers, but that is how they were making money. That is a

very hard investment for a VC.



The ARM model was a complete shoot the gap type of situation, but it is an incredibly successful company. If you are

going to do an IP licensing strategy, I think that ARM has done a better job licensing their IP than maybe Qualcomm, but

Qualcomm also makes products as well. I cannot think of many people who have build a better model of licensing IP

than ARM has, and the ubiquity with which they have done it. It is not impossible, but it is a tough model.

Armando Castro (Reed Smith): There is one thing that I want to say about that, because it is difficult. Even if you

are going to go with licensing, I think that you should have some operations and some products because if you do not

have the ability to send out an engineer to the company you are licensing to, and explain to them and help them, say you

make some type of electronic component, you are going to be sitting there for a long time even after they have licensed

it.

Mike Dauber (Battery Ventures): Even if you have done that, if the sales guy who is selling the product that you were

licensed into does not know what they are doing, then you are screwed at the second hop. So it takes a long time.

Dr. Naveen Bewtra (SiVal Advisors): In terms of how do you value it, whether you should invest in it or not, and

once that is done how do you value it in an acquisition. You really want to develop a model around what kinds of

revenues the acquirer is going to see as a result of the incremental revenue.This is not what your projects are for; the

license would be as an independent entity.

That brings up a larger issue of what is the right price? When you look at the M&A process, what you want to be

determining is, what is your company's value to the acquirer and base the acquisition price on that. You certainly do not

want to start off as multiples of your revenue, if you even considered any multiple. That really does not exist in tech

anymore, but I thought I would mention it. You really want to focus on, as part of the acquire’rs company, what does

your company bring to them incrementally, and use the multiples off of that. Okay? I see a significantly larger value

proposition off of that than what we would do independently.

M&A in Solar for 2011

Question from Abe Ghanbari (Folium Technologies): A lot of pundits are saying that this is really the reckoning

year for the solar industry, so we are going to see a lot of startups go out of business and a lot of M&A taking place in

solar. Can any of you share any good information about what is going on?

Dr. Naveen Bewtra (SiVal Advisors): Solyndra needs more money.

Armando Castro (Reed Smith): I was told they may go public. I would like to think so.

Mike Dauber (Battery Ventures): Honestly, there is a lot of money thrown into CIGS. A couple of those companies

are still doing reasonably well and there are rumors that some of those guys are going to IPO later this year or early next

year.

I have really focused on balance of systems in solar, so this is the power conversion piece that goes into solar. I think

that there is a lot of money you can make there. Enphase, which we are not in, is doing spectacularly well. I do not

know anything specifically, which is why I am willing to talk. If I knew something I would not tell you, because I would

get into trouble. It is not that I do not like you guys.



I think there is going to be M&A in the balance of systems phase because it goes back to what we were talking about

before. If you are a solar panel manufacturer and you are looking for a way to differentiate yourself, you could have

more efficient panels or cheaper panels. But, guys like Suntech Power are already going to be super, super cheap.

It is tough to differentiate yourself on that, so I think a lot of the big existing guys, or I would not be surprised if a First

Solar went out and bought on the cheap some CIGS technology that they thought folded into what they were doing

nicely. But they are not going to pay a lot for it. They are going to try and get it a bargain basement prices.

As a side note, Battery Ventures unfortunately has some experience with this. We invested in a company, Advent

Solar, which did back contact of crystalline. When we invested in it, everything looked like it was ready to go into

production. We invested in it and they were not. We invested in 2007. In 2008 we could not get funding for the

company and we ended up selling to Applied Materials. I was meeting with Applied Materials on something completely

different, and we were right about the technology. Applied Materials is going to make a lot of money on it, but we will

not see a dime. A dime is more than they gave us, which were pennies on the dollar.

I would expect more transactions like that, but I think on the solar side you are going to see the guys who are successful

are going to be largely IPO on the thin film side. And if they are M&A, I would assume that the M&A is negative. It does

not have to be that way, but that would be my guess. As another side note, if you look at the valuation of most of these

guys -- SunPower is at $1.5 billion, or whatever -- it would be hard for them to pay a multiple of what the dollars are that

went into a lot of these companies. I think that First Solar is maybe a $3 - $4 billion market cap, or something like that.

It is just hard to see how you could have an M&A in this space without it being a sort of negative M&A.

Dr. Naveen Bewtra (SiVal Advisors): I think that is absolutely right. I think that you are absolutely going to see,

and this is no secret, that there is going to be a lot of carnage in the solar space. I think it is healthy for that space, to

tell you the truth. There are way too many incremental providers of technology and the industry cannot move forward

until there is a real cleansing, it is clear who the real incumbents are and what holes really exist.

I think that the VC community does not know what to invest in right now in that space because it is so oversubscribed

and incrementally differentiated. I would say that there seems to be an emergence of interest in CPV. So, that could be

one of the areas that does come out of this. But, I think that every industry boom has seen this carnage of companies

and each boom has benefitted from that.

Federal Funding

Question from Al Spiers (20/20 Environmental Group): I have heard mixed messages about what the next two

years are going to be like in federal funding for cleantech. How might that affect by either speeding up or slowing down

M&A activity?

Mike Dauber (Battery Ventures): Well, I would say logically that if there is less federal funding, there is likely to be

more distressed M&A because there are companies that were counting on it. I will say that for every company that we

work with, we assume there will be none, so we are pleasantly surprised if money does come through.. But, I think it is

also very hard to predict with a new congress coming in, as it has been awhile since we have had a split congress..

If you look in general at all of the risks that as a VC you are trying to balance, political risk in the United States is one that

you do not want to touch if you can help it. So I think that you really have to build your business plans assuming that



you get no money and if there are companies that are counting on it, they are certainly going to have to find another

avenue, which is likely to be M&A.

Michael C. Dorsey (The Westly Group): I would not be that negative. I still think that there is some money

available.

Mike Dauber (Battery Ventures): I am not saying that there will be no money available. I am just assuming that

there will be no money available.

Michael C. Dorsey (The Westly Group): I do not do that either. Our perspective is that if you are going to invest in

sectors of the economy that are dependent on public policy and where the government is a big customer, as well as a

potential funding source, that it is important to try to make reasonable estimates of what they are going to do. So we are

happy to do that and we do that all the time. I think it is a key part of our business. I think that there is probably less

money available, but that there is still money that has been allocated that has not been invested. I wish that I could give

you a good estimate of what that is but I don’t know.

I also think, as you said Mike, that it has been awhile since the two houses in congress have been split, but I think there

is a new impetus to compromise on measures so I think that we are going to have some progress. It is probably with

less dollars in the aggregate available, but maybe more laws being passed that enforce energy efficiency and do not

require a lot of federal funding. For example, things that would be deficit reduction friendly, as well as environmentally

beneficial.

Mike Dauber (Battery Ventures): I will make one political prediction, which is 2011 is when things will happen and in

2012 nothing will. Having grown up and lived in DC for over 20 years, and having lots of rings with parents in that

system, when you have a presidential election like we are going to have in 2012, no one wants to pass any bills because

they want to screw the other guy. It does not matter who is in office. I just expect there to be a lot of foot dragging in

2012 as we run up to November.

Garrett Herbert (Deloitte & Touche LLP): Great. With that I would like to thank everyone for their attention and

participation. I think this section of Q&A has been phenomenal. Thank you to our panelists for their thoughts and views.

Thank you again to Agrion for putting this panel together and to you for your participation.

End.

transforming a sector: m&a in cleantech - agrion · 2011-01-31 · michael c. dorsey (the...

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