1      Sustainable Living Investment Sectors

Within the Physic Ventures Sustainable Living investment practice we look at five sub-sectors:

• Energy
• Materials
• Water
• Food and Agriculture
• Transportation

There are a number of investment themes which span each of these sectors.  The three themes that we are currently tracking are:

• Consumer Engagement: Information, incentives and transparency
• Resource efficiency: Reduce, ReUse, Recycle and Collaborative Consumption
• Enabling Science and Technology

Each of these investment sectors and cross-sector themes are discussed in more depth in the rest of this paper.  The table below shows how the current Physic Ventures Sustainable Living portfolio maps onto these sectors and themes.  More information on each company is available on our website, www.physicventures.com

1.1      Materials

Over the last decade a confluence of factors has led to rapid innovation in the sustainable production of commodity and specialty chemicals and materials.  These factors include:

(i)             A wave of technical innovation in synthetic biology, nanotechnology and catalyst development

(ii)            Increasing prices and increasing price volatility of commodities, and oil, in particular (e.g. see palm oil price chart below)

(iii)           Increased regulatory pressure on carbon emmissions and a drive towards more sustainable business practices

Physic Ventures works closely with two global Consumer Packaged Goods (CPG) companies to connect our sustainable materials investment practice with their long term strategies.  These two companies, Unilever and PepsiCo, have recently released ambitious sustainable sourcing plans for the chemicals and materials used in their products.  The Unilever Sustainable Living plan can be accessed here.  The PepsiCo Performance with a Purpose plan can be accessed here.

These plans are indicative of similar initiatives at most global multinationals that are rapidly switching from petroleum based feedstocks to sustainable alternatives.  Given these trends,  we anticipate that demand for sustainable materials and chemicals will grow rapidly in the next few years creating huge opportunities for producers of these materials.  At Physic Ventures we are particularly interested in sustainable materials and chemicals which can address the following applications:

1.1.1      Packaging

Consumer goods packaging is one of the largest applications of materials.  It is an application undergoing rapid innovation and moves towards sustainability.  In particular, we are tracking:

• The development of biodegradable and compostable packing
• The development of packaging plastics, such as PET produced from bio-based feedstocks, rather than traditional petroleum feedstocks
• Packaging applications that can be used to sequester carbon dioxide

1.1.2      Personal Care and Food Products

We are currently reviewing a number of technologies for sustainably producing the ingredients in personal care and food and beverage applications.  An area of particular interest is the production of oils that can be used in personal care or food applications.  We have recently reviewed a number of algae technologies for these applications.  These algae production technologies can be grouped into 3 categories; growing algae in open ponds, growing algae in Photo Bioreactors, and heterotrophic fermentation.

We are also interested in sustainable approaches to producing flavors and fragrances that can be used in the production of personal care and food/beverage applications.  Synthetic biology approaches are providing routes to producing these specialty chemicals via lower cost routes than synthetic chemistry and from bio-based feedstocks.

1.2      Energy

In the sustainable energy sector, the big story in recent years has been the emergence of demand management and energy efficiency as a growth sector.  Prior to 2008, most venture capital energy investments focused on renewable sources of energy supply, such as solar, wind, and biofuels.  In the last few years, there has been a growing recognition that energy efficiency and demand reduction is the low hanging fruit in the energy sector.  Companies developing DR and EE solutions are typically software based, making them more capital efficient and rapidly scalable. 

The Smart Grid is one of the key enabling technologies for implementing demand reduction in the energy sector.  In addition to our investment in EnergyHub, Physic has reviewed numerous investment opportunities in the consumer facing smart grid sector.  The sector is now somewhat crowded and it’s likely that there will be consolidation over the next two years.  While we believe that the consumer facing end of the Smart Grid remains an attractive market, it is unlikely that Physic will make additional investments in this sector as we believe it will be difficult for new entrants to catch up with the technology and partnerships already developed by existing companies, such as EnergyHub.

1.2.1      Lighting

Another area of energy efficiency that we continue to track closely is energy efficient lighting.  Within the lighting sector we have seen several exciting technology developments at companies such as BridgeLux, as well as promising new lighting control systems at companies such as Adura and Redwood Systems.  These companies are delivering solutions that provide significant cost reductions and/or improvements in performance. 

Currently, most of these companies are targeting the commercial and industrial lighting sector.  While this is a large and attractive market, it falls outside the core Physic investment thesis.  In the future, we predict that some of these low energy lighting technologies and control systems will begin to migrate from the commercial and industrial market to the consumer market.  At this point they may provide attractive investment opportunities for Physic.

1.2.2      Residential Energy Efficiency

Another interesting development in residential energy efficiency sector is the emergence of consumer-facing green auditing, and energy efficiency companies.   We have been impressed by a number of companies including OPower, ReCurve, and MyEnergy.  These companies are all developing solutions to enable homeowners to improve the energy efficiency and air quality of their homes.  These are capital efficient companies with the potential for rapid scalability.  This is an investment sector that Physic believes will remain attractive. 

1.2.3      Energy Storage

Despite recent momentum in the EV sector, the largest technological challenge for electric cars remains the prohibitively high cost, size and weight of batteries.  A lithium ion battery pack, to provide a driving range of 200-300 miles currently costs around $15,000.  Over the 100,000 mile lifetime of the battery, this cost is recouped in fuel savings, but this is a difficult argument to make to consumers who typically don’t consider 10 years of fuel costs when selecting which car to buy. 

Given the significant need for new battery technologies with increased storage capacity and increased power capacity it is no surprise that there are numerous technology startups pursuing these goals.  Most of the technologies which we review represent incremental improvements to the cathode, anode or electrolyte of conventional lithium ion batteries.   We continue to review technologies in this sector and, given the significant unmet need, we see this as an attractive investment sector, capable of generating venture level returns.

We are also interested in low cost, sustainable battery technologies that could be implemented in consumer products ranging from consumer electronics to disposable consumer goods with smart packaging.  These applications require thin-film batteries, with non-toxic components.

1.3      Water

Water is a sector that is likely to continue generating considerable investment activity due to the increasing scarcity of supply for drinking and agriculture.  Our society’s current water consumption pattern is unsustainable in a number of ways.  Firstly, in the developed world we are consuming more water than is sustainable.  In particular, the artificially low, subsidized price of water for irrigation encourages farmers to over water crops or grow water-intensive crops in regions for which they are not suited.  This over irrigation is rapidly draining natural aquifers across the US and driving adoption of new technologies.

In addition to unsustainable agricultural practices, the shortage of water in many developed countries, coupled with an increase in urban living is driving demand for alternative ways of producing potable water, such as desalination.  While desalination does provide a way to increase the amount of water available for human consumption it does so at a very high cost, as it requires large amounts of energy to extract salt from sea water.  Desalination technologies therefore represent an interesting nexus of water and energy. 

1.3.1      Water efficiency

Given the finite supply of water on the planet, as demand continues to increase with increasing population, the only viable way to match supply and demand is to implement more efficient water usage behavior.  Our recent investment in WaterSmart is an example of the promising use of digital engagement tools to provide consumers with information on their water consumption and provide suggestions for how to reduce consumption.

1.3.2      Water Purification

We have reviewed a number of water purification and disinfection technologies in recent years.  This is a sector which has witnessed rapid technological innovation with a number of different technologies promising EPA quality water purification and disinfection at costs significantly below that of boiling water.  In 2010 one of our original investments in this sector, Halosource, had a successful IPO.  We remain interested in making additional investments in this sector.

1.3.3      Desalination

We have reviewed a number of technology solutions for reducing the energy requirements of sea water desalination.  In particular, novel membrane technologies that use advancements in nanotechnology to reduce the pressure (and therefore energy) required to force water through a desalination membrane look particularly attractive.  Several companies have recently been funded in this sector, including NanoH2O, NanOasis, and Porifera.  At Physic, we do not see these technologies for low energy, utility scale desalination as falling within the scope of our emerging consumer market Sustainable Living investment thesis.  However, we are closely tracking developments in this sector as there is a history of water purification technologies, developed at the industrial scale, migrating into consumer markets as the cost of the technology decreases. 

1.4      Sustainable Food and Agriculture

Sustainable Agriculture is an emerging investment sector in which Physic is actively reviewing a number of interesting technologies and business models.

1.4.1      Consumer facing sustainable Ag services

Some of the most interesting sustainable agriculture opportunities that we have reviewed are companies providing services to consumers and businesses that want to purchase sustainable, local, or organic produce.  For example, Local Dirt provides online tools to connect local growers and distributors with farmers markets, restaurants and grocery stores.  Farms Reach also provides an online marketplace for connecting farmers and businesses.  These companies have realized that there is an unmet need for the same level of logistics and operations support in the local and sustainable agriculture sector that has been provided by companies such as Sysco in the traditional produce distribution market for decades.

1.4.2      Food safety and supply chain transparency

There are a number of drivers behind the local food movement.  One is increased consumer awareness of “Food Miles”.  When consumers learn that the produce they are consuming is often transported 1000 miles to reach them, they are typically shocked by the environmental impact of this long range transportation.

Another driver of the local food movement is an increased awareness and concern over food safety.  In recent years there have been a number of high profile safety recalls of produce such as spinach and peanut butter that have become infected with e-coli and listeria.  As food supply chains become increasingly convoluted, there is less traceability and therefore less accountability for food safety.  In 2011 the US passed the FDA Food Safety Modernization Act (FSMA).  This mandates the adoption of technology for tracking produce throughout the food supply chain.

A number of companies, such as PurFresh and Yottamark that are developing sophisticated food informatics systems to track the progress of food through the supply chain and provide consumers with more information on the origin of their food.  Other companies such as FoodLogiQ are incorporating RFID tracking technology into the food supply chain to provide improved tracking capabilities.

1.5      Transportation

In recent years, we’ve seen a dramatic increase in sustainable transportation alternatives.  In particular, the development of electric cars gained momentum in 2008 as oil prices rose and the environmental impact of biofuels, such as ethanol, was challenged. 

At Physic, we are most interested in consumer services for sustainable transportation.  Physic Ventures is a big fan of ZipCar, which we routinely use for renting cars for business travel.  We’re also fans of peer-to-peer or neighbor-to-neighbor transportation services, such as RelayRides and Getaround which enable consumers to rent their cars to each other.  We are also following a number of companies developing ride sharing services such as ZimRide, Goose Networks and GreenRide.  These companies are using an interesting combination of social networking and mobile tools to solve the age-old problems with ride sharing and carpooling services which lacked a critical mass of users and an easy way to verify the identity of the person with whom one is considering sharing a ride. 

Finally, the field of sustainable transportation is not limited to cars.  2011 witnessed an explosion of B2C and P2P bike sharing schemes throughout the world and in 2012 we expect to see other modes of transportation, such as e-bikes also offered through these P2P models.

2        Cross-Sector Investment Themes

2.1      Consumer Engagement: Information, Incentives, and Transparency

One of the leading themes that connects the health and sustainability investment practices at Physic Ventures are the products and services that engage consumers and incentivize consumers to adopt behaviors that produce positive impact. 

In our consumer health practice, many of our investments are focused on products and services that incentivize consumers to adopt healthier lifestyles, for example, diet, exercise, and preventive medicine.  In our Sustainable Living practice, some of the consumer behaviors that we’re attempting to incentivize are the original 3Rs: Reduce, ReUse, and Recycle and new collaborative behaviors, collectively referred to as Collaborative Consumption, or the Share Economy.

Numerous services have been developed to engage consumers, encourage them to participate in creating positive impact, and provide them with transparent information.  Most of these services are built using the so called SoMoLo tools of Social, Mobile and Local.  These new platforms combine the social graph from Facebook, Twitter, or Linked-In with check-in style models, such as Foursquare and mobile apps to provide a seamless way for consumers to share information, compare the performance of products and services and monitor the impact of lifestyle choices.  Within the Physic Ventures portfolio, GoodGuide is an excellent example of a next-generation consumer transparency service and Recyclebank is one of the leading providers of incentives and rewards.

At Physic we are actively investing in both the underlying platform technologies upon which these consumer facing services are being developed and the applications of these tools within different verticals.

2.2      Resource Efficiency

2.2.1      Reduce, Re-Use, Recycle

The advent of digital tools for consumer engagement has opened up numerous opportunities to empower consumers to use resources more efficiently, producing positive environmental impact.  We broadly classify these individual behaviors as Reduce, ReUse, and Recycle:

Our investment in EnergyHub is an example of using information to help consumers reduce their energy consumption.  EnergyHub is using the “Prius Effect” to provide consumers with a dashboard for their home which, for the first time, shows homeowners how much electricity each of their appliances is using throughout the day.  EnergyHub is currently deploying its systems with utility companies to determine the right amount of information to engage its users and incentivize reduction in energy consumption.

RecycleBank implements RFID technology to track the weight of products that consumers place in their recycling bins.  It provides an online rewards system to incentivize consumers to recycle more.  In the cities where they’ve deployed this technology, Recyclebank typically sees a 25% increase in recycling rates.

WaterSmart has a similar model to EnergyHub in the residential water sector.  It provides SaaS tools to water utilities which present water billing data to consumers.  By showing customers how much water they are using and putting this usage in the context of average water usage of their neighbors, consumers can learn whether they need to conserve water and receive advice and incentives on how to do so.

2.2.2      Collaborative Consumption and the Share Economy

Collaborative consumption is a collective term for a number of different business models that extend the individual behaviors embodied in the 3Rs to collective behaviors such swapping and sharing.  Time Magazine named Collaborative Consumption one of the “10 Ideas That Will Change the World” in March 2011.  In their book, “What’s Mine is Yours”, Rachel Botsman and Roo Rogers describe three collaborative consumption models:

Product Service Systems: These are businesses that provide consumers with the benefit of using a product without needing to own the product outright. Current high profile examples of such product service systems are ZipCar, Netflix and RentTheRunway, which allow consumers to drive cars, watch DVDs and wear designer clothes, without needing to own any of them.

Redistribution Markets: These are services that efficiently enable the redistribution of used goods from where they are not needed to where they are. The classic examples of redistribution markets are EBay and Craigslist. Recently, a number of new companies have been established to provide redistribution services for a specific product category, such as ThredUp which is developing a children’s clothes redistribution service, and one of our own portfolio companies, Gazelle, which redistributes used consumer electronics.

Collaborative Lifestyles: These companies help people exchange and utilize underutilized assets such as time, space, skills, and money. The highest profile example of a collaborative lifestyle company is Airbnb, which provides a market for people to rent their spare rooms to travelers looking for an alternative to a hotel room. Another wonderful example is the British company, LandShare which connects people with spare land to people looking for land to farm.

One of Physic Ventures’ advisors, Lisa Gansky, has catalogued over 5000 companies, in over 100 countries and 1000 cities that have adopted these collaborative models in her book, The Mesh, and on her website http://meshing.it/,

We are actively pursuing investments that apply these collaborative models to a number of industry verticals.  We are also investing in the tools and services which enable these new share economy models.  For example, Recyclebank, another of Physic Ventures’ portfolio companies, has developed an Ecosystem model, to use its rewards and incentive points as a common currency for share economy companies.

2.2.3      Big Data meets Sustainability

One of the big trends predicted for 2012 is the growth in opportunities to create value at the intersection of Big Data and Sustainability.  This trend is driven by the growth in ubiquitous connectivity, low cost cloud-based storage and computation, and an industry recognition that data-enabled resource efficiency businesses are both capital efficient and rapidly scalable.  Spring Ventures founder, Sunil Paul, defines this sector as the CleanWeb: “a category of clean technology that leverages the capability of the Internet, social media and mobile technologies to address resource constraints.” 

The initial applications of this model have improved the efficiency of commercial, industrial and residential, lighting and HVAC.  One of Physic Ventures’ portfolio companies, EnergyHub, recently launched its “Mercury” cloud-connected residential HVAC management service that enables homeowners to monitor, control and optimize their HVAC system online, or using a mobile device.  In the commercial space, companies such as Scientific Conservation and Serious Energy have experienced rapid growth in recent years helping building owners reduce their energy bills through better management of existing systems.

We are now seeing the application of cloud-based connectivity and data processing applied in a number of other fields.  For example, in the field of transportation, car-sharing companies Getaround and Zipcar let you find and reserve a car online and then unlock it using a mobile device.  Zimride provides a cloud-based database of journeys available for ride-sharing.  Parking Panda and Parking Carma provide a cloud-based database of parking spaces available for renting.

2.3      Enabling Science and Technology

Enabling science and technology, with intellectual property protected by patents and know-how remains a core investment theme within the Physic Ventures portfolio.  Some of the areas that we are particularly focused on include:

• Materials science: Developments in materials science in the fields of nanotechnology, biomaterials, and sensors/detectors are enabling many of the investment sectors described above.

• Computer science: Computational power continues follows Moore’s law, long after most experts predicted it would saturate.  Additionally, the growth of cloud based services and the ability to analyze “Big Data” is opening up a myriad of business models and investment opportunities.
• Biological science:  We are actively tracking developments in genomics, proteomics, diagnostics and synthetic biology.
• Ag-Tech: The enabling technology for many new sustainable agriculture opportunities is agricultural technology.  Physic is tracking developments in traits and precision agriculture technology.

3        About the Author

Andrew Williamson is a Director at Physic Ventures in San Francisco, CA.

Since joining Physic early in 2007, Andrew has focused on working with companies that are developing technologies, products and services to enable consumers to adopt more sustainable lifestyles.  Among the portfolio company investments managed by Physic Ventures, Andrew is on the boards of Chromatin, EnergyHub, Gazelle, Impinj, Novomer, RecycleBank, and WaterSmart.

Prior to joining Physic Ventures, Andrew spent 10 years leading materials science research and development projects at the Department of Energy's National Renewable Energy Laboratory (NREL) and Lawrence Livermore National Laboratory (LLNL).  At NREL, Andrew developed computational models for predicting the opto-electronic properties of next generation photovoltaic materials.  At LLNL, Andrew was a project leader for computational nanomaterials research.  His group's research activities included nanomaterials, hydrogen storage, thermoelectric materials and battery technologies. 

Andrew has published over 50 peer reviewed academic articles and 2 patents.  He holds a BA and a Ph.D. in Physics from the University of Cambridge and a MBA from the Haas School of Business at the University of California, Berkeley.