The Caller from Canada

My new car has Sirius satellite radio which comes with around 140 channels of niche channels, including one channel called POTUS which is mostly politics talk.

There's a show on POTUS called "Standup with Pete Dominick", where a former comedian talks politics with random callers from all over. When I was driving back to SF from Google on Thursday around 10 pm he couldn't fill his hour-long slot, so he offered any caller 30 seconds to talk about whatever they wanted to say. (Note that there is a 7-second delay to the show to bleep out coarse language.)

One of the callers was from Canada and his advice for Americans was to have more confidence in investing in the future of their nation. Dominick put him on the spot, and asked what specifically Americans should invest in. The caller fumbled a little bit - "there's really a bunch of stuff" - and before his time was up, the only example he could come up with was "running shoes".

Running shoes are clearly not the prime example of what America needs to invest in[*], but as the clock hit 10 pm, I found myself turning off the radio and thinking about what the right answer should be.

It's clear that the US needs better infrastructure - fix the roads, improve road safety, and build faster, better trains. We need more solar panels on roofs so we can burn less coal, and more wind farms that feed into the grid. We need better education and better educators so that kids no longer drop out of high school, but prepares them for the jobs of the century ahead. Better and cheaper health care, better medical records, the list of big-ticket items goes on and on ...

One problem is that the US is a country that's in love with the quick fix, and the things we need to do are long-term investments that need years and decades. And that requires confidence. The caller from Canada, while wrong on the running shoes, was right.

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[*] To the caller's credit, he got cut off before he could launch into an argument. Maybe he was going to propose a scheme to give everyone running shoes to decrease obesity and thus long-term health care costs.

VC Investment Returns: Europe vs US

Roughly paraphrased, the takeaway from this deck is that in Europe, startups compete for fewer investment dollars, which leads to better startups getting financed, and exits that are bigger. Thus venture investors get larger returns from investing in Europe than in the US.

You should flip through this, if only for the awesome graphics.

Earlybird Europe Venture Capital Report

-- as seen in David Cowan's post on TechCrunch

Solar Energy - Where's the Platform Play?

After my last blog post on investing in solar energy, a friend introduced me to Kerim Baran, cofounder of CivicSolar, an online distributor of solar equipment. Kerim gave me a little more data to chew on. Thus, here are some more thoughts on the space.

What does Solar on Your Roof Cost?
Installation costs right now are $5/Watt, which breaks down as follows: $2 for panels, $0.5 for inverters, $1.50 for balance of system (racks, wires, connectors, etc.), and $1 for installation. The average US residential solar installation costs around $20k.

Service companies like Solar City that plan and install solar panels on your roof typically make 30% margin on the installation of the job, and will provide financing costing an additional 10-15% which is backed by banks. So if you don't pay cash, and don't arrange the installation yourself, you're looking at $7 per installed Watt of solar capacity.

The price breakdown above also illustrates how the industry of getting photovoltaic (PV) cells on your roof is structured:

PV equipment manufacturers like Mayer and Burger, and GT Solar make equipment for a huge field of commodity PV manufacturers. Racking, cabling, and inverters are made by a different set of companies. Offline and online distributors like Kerim's CivicSolar get the wares to installers, which are often local contractors (although SolarCity also does its own installations). The local contractors often are electricians or construction companies that need third-party services like software to plan out the installation on your roof, and training on how to install the cells in the first place. These contractors are also hired by full-service firms like SunRun and Sungevity that present packaged deals of installation and financing to consumers who want solar on their roof.

Falling Costs
Don't mind the $7/Watt cost though - the US Department of Energy wants solar installations to go down to $1/Watt by 2020.

Right now, just installing the panels costs that much. Panel prices will fall, racking might become easier (think solar cells that you drape over your house like a carpet), and inverters could become cheaper (inverterless panels seem possible) or unnecessary (most devices in the average household require DC, not AC, so the extra conversion could be avoided).

The goal of $1/Watt is far away, but it illustrates just how far prices could drop.

Temporary Low
At the moment, PV manufacturers valuations are depressed because government solar subsidies are ending - Germany is one example of a country that's phasing them out. Some of the PV manufacturers' stocks are trading at 5 P/E, despite 10% profit margins and solid growth. Yet demand has declined and panel manufacturers are sitting on extra manufacturing capacity and stockpiled solar panels.

Despite this, betting against solar right now is like betting against Microchips in the late 70's: yes, demand temporarily fell, but given how much dormant demand there is, it would be stupid to bet that the solar industry will shrink long-term. Just think about all those big mansions in the Sun Belt of the US that want to reduce their $400 air conditioning bills.

Platform Plays
In the computer industry, platform plays always pay best: Build your own proprietary system that's an significantly better than the status quo and allow others to build on top of it. Think Android, Chrome, Windows, iOS, Macs, and so on - all of these are highly successful platform plays. I think it's reasonable to assume that the most powerful solar investment strategy would be in a platform play.

Where to Invest?
But what's the platform play in solar energy? All the hardware - PV cells, inverters, racking - is commodified as far as the eye can see. Photovoltaic technology is actually pretty simple, low tech stuff. What's improving is the PV manufacturing process. Yet betting on the PV equipment manufacturers feels wrong - you're betting on the second derivative here, because in order for these companies to grow, the PV manufacturers need to increase their rate of growth, not maintain it.

It's the installers like Solar City, SunRun and Sungevity that might end up becoming the platform. Homeowners can call them up and have them take care of installation, just like consumers can build their own computer out of individual parts, but prefer to buy one from Dell. If you will, these installers are building a service platform on commoditized hardware.

The problem is that it's hard to invest in these companies as an individual investor. None of them are public, and even when Google[*] put $200 million into Solar City, my understanding is that Google didn't get equity. The Sequoia Capitals of the world that invested in the early stages will reap the benefits.

[*] Yes, I work at Google but I don't do investments, nor am I speaking here on Google's behalf.

Thoughts on Investing in Solar Power

I've been thinking about investing in photovoltaic solar energy. Here's why:

Energy consumption is growing world wide, and we need to build more capacity. As a country, your options are: Build nuclear plants, build coal plants, build wind parks, build solar parks, or encourage people to add solar to their roofs. Post-Fukushima, it's going to be hard to build nuclear plants. Coal and gas are heavy carbon emitters. Wind isn't suitable for everywhere. Solar is a great, emission-free option, especially for sunny climates.

Demand for photovoltaic will continue to grow. Solar stocks are depressed right now as some countries like Germany and Spain are ending their subsidies to install solar panels. This doesn't mean the end of solar installations though.

One crucial advantage of solar power is that the decision to install solar on your roof can be made and financed by individuals, and the electricity can be consumed where it's produced.

For example, in the US, demand will grow as people realize that they can knock down their air conditioning bill by installing solar panels on their roofs. In sunny states, air conditioning makes up 60 to 70 percent of the summer electricity bill. Solar power provides electricity precisely when air conditioning consumes it - in the middle of the day - no batteries or storage needed. From a recent visit in Arizona, it seems like few people have solar on their roofs, and there will be a lot of cells as consumers get more informed.

There have also been developments in financing solar installations. SolarCity, a company founded by Elon Musk and backed by Google, will finance your solar panels and lease them out to you. This allows people to realize savings without the upfront cost - more and more people are likely to use it.

Germany is a small, rainy country and had 7400 MW of photovoltaic (PV) solar power installed in 2010. The US, sunnier and bigger, meanwhile has 878 MW installed. There's plenty of room to go.

How to invest? It seems like there are three ways to bet on PV solar power.

It seems like the best bet would be to invest in financing companies like SolarCity. They will have reliable cashflows, high profits, and there's little competition in the space right now. Unfortunately, I couldn't find a single public company that does this. Google has made this bet by investing in SolarCity, but it's still a private company, so this isn't something an individual investor can do.

You could invest in the companies that make the equipment to manufacture PV cells. These are primarily German and Swiss companies - one example is Meyer and Burger. They have high profit margins, but by betting on the equipment manufacturers, you're betting on the second derivative: The growth in manufacturing capacity, not on growth in solar power.

Lastly, you could bet on the companies that manufacture the actual PV cells. This is essentially a commodity market, with many companies in the US (e.g. FirstSolar, GT Solar), China (e.g. Suntech, JA Solar), and Germany (e.g. Q-Cells, Solarworld). Some of these companies are trading very cheaply right now because of concerns of overcapacity. Just like there used to be 500 car companies in Detroit at the beginning of the 20th century, I expect a lot of this industry to eventually consolidate. Thus, it's crucial to pick the winners. I've ran the numbers on some of these companies. I'll share those in a second post.

"You just need to find the people who don't give up"

I was having dinner with Immad yesterday. He said:

"Angel investing is easy. There are plenty of smaller exits, and anyone who's smart can achieve a decent outcome. You just need to find the people who won't give up."

Of course, picking those people is the hard part. A portfolio of companies that don't give up will probably outperform the stockmarket over any time period.