Light Me Up

Four years ago, Elton Sherwin, senior managing director at Ridgewood Capital Management, purchased four LED bulbs that he installed in his home.

Soon after, he unscrewed them and banished them to a closet.

“The quality of the lighting was annoying,” he says.

Recently, Sherwin thought he’d give it another go and purchased three new LED bulbs.

“They have gotten significantly better,” says Sherwin, who expects to replace all of his incandescent and fluorescent bulbs in his home with LEDs within a year or so.

He’s been so enthused about the topic of energy efficiency, he published a book last year that covered LEDs and other cleantech topics titled “Addicted to Energy.” However, Sherwin—who previously was with Motorola Ventures and has eight patents from his time at IBM and Motorola—has not yet invested in any LED technology.

“We continue to look,” Sherwin says. “We haven’t found an investment we like.”

Sherwin had better act soon, or his Palo Alto, Calif.-based firm might lose out.

High-quality LED bulbs and fixtures, which typically burn 85% less electricity and which match incandescent and fluorescent lights in color and intensity, are arriving on store shelves at much lower prices.

That could pay off for VCs who have been placing bets on the technology in the past decade. The potential market is huge for those investing. Research firm Strategies Unlimited says the retrofit market will grow from $3.9 billion in 2010 to $9.3 billion in 2014.

The overall global market for lighting now stands at $40 billion.

One factor in the expected explosive growth is that LEDs have been decreasing in price 20% to 25% annually as vendors bring more competitive products to market.

The cost of lights is down to about $20, and will drop lower, for bulbs that are billed to burn brightly for years.

Alan Salzman, CEO at VantagePoint Capital Partners, notes that $2.7 billion in replacement bulbs were sold in 2010 in the United States.

“And there are 43 billion sockets worldwide requiring screw-in bulbs,” he says. “That gets people’s attention.”

San Bruno, Calif.-based VantagePoint has invested more than $100 million in seven LED-related startups over the past few years, making it the most active investor in the sector. Salzman says his firm could invest another $100 million over the next few years as LEDs gain traction in the market.

The firm’s investments include San Francisco-based LED lighting controls business Adura Technologies Inc.; Livermore, Calif.-based LED packaging business Bridgelux Inc.; LED advanced technologies company Swedish-based glo AB; Taiwan chip maker Huga Optotech Inc., which recently filed to go public on the local stock market; Los Gatos, Calif.-based lighting controls company iWatt Inc.; Vancouver, British Columbia-based LED controls company Light-Based Technologies; and San Jose, Calif.-based bulb maker Switch Bulb Co.

VantagePoint participated in a $60 million Series E round in Bridgelux in early August, which was led by Craton Equity Partners in Los Angeles. Existing investors DCM, El Dorado Ventures, Novus Energy Partners, Invus Group, VTS Investments, Harris & Harris Group and Passport Capital among others also participated. Bridgelux has now reportedly raised more than $300 million since starting up in 2005.

Salzman says LED lighting is on the “cusp of change,” as prices tumble, especially for emitters, the semiconductors that provide the actual light source.

“Before this decade is out, 100% of the lighting is going to be LED,” he says.

We think that a $150 billion industry globally is going to go through a transformation in a relatively short period of time.”

Alan SalzmanCEOVantagePoint Capital Partners

Switch Bulb has already announced that it is releasing 100 watt replacement bulb that compares favorably to the old reliable incandescent, which is good news for consumers. Meanwhile, the U.S. Congress, in what has turned out to be controversial legislation, has outlawed the sale of incandescent 100 watt bulbs, starting in 2012.

Gary Dillabough, managing partner at The Westly Group in Menlo Park, Calif., says the switch to digital lighting from analog will not only disrupt, but transform the general illumination market.

“It’s kind of like what happened when HDTV overtook analog TV,” he said. “It was a big difference, and LED lighting will have a similar impact.”

The Westly Group, with participation from Kohlberg Ventures, Navitas Capital and RCG Ventures, has invested more than $10 million in 4-year-old Lunera Lighting Inc., in Redwood City, Calif., which is focused on replacing those much-despised fluorescent tubes in office buildings.

Lunera CEO Karen Owyeung—like so many of her cohorts and competitors involved in the LED sector—traces her early years to Hewlett Packard Co.’s optoelectronics division, which pioneered LEDs for handheld calculators in the 1960s and 1970s. Dillabough sees LED technology overtaking incandescent and fluorescent sales in 12 to 18 months.

“I believe its time has come,” Dillabough says.

Since it began shipping replacement lamps in 2009, Lunera has installed 3 million square feet of lighting (enough to light up the insides of three Transamerica Pyramid skyscrapers), he notes, and counts eBay Inc., Facebook Inc. and Google Inc. as among its satisfied customers.

“The industry is finally starting to open up,” he says. “The big issue is still cost, but prices are starting to come down in an aggressive way.”

In 1999, Don Caldwell, chairman and CEO of Cross Atlantic Capital Partners in Radnor, Penn., invested in Rubicon Technology Inc., an Illinois supplier of monocrystalline sapphire emitters used to make LED lamps.

“We thought that LEDs were going to be a bigger and bigger, part of our lives,” Caldwell says. “And making the necessary first product in the supply chain made a lot of sense.”

After raising four rounds of funding totaling $18 million, Rubicon went public in 2007 in a $94 million IPO.

“Right now, the market is most advanced where lighting is difficult to access, and the cost of the bulb is nothing compared to the cost of replacing it, such as street lights, beacons and other hard to reach places,” he Caldwell says. “The Holy Grail is when we get to replacing all of the light bulbs in our office buildings and our homes.”

To be sure, not everyone agrees that lighting is the place to be if the long-awaited LED market takes off as predicted.

Danny Yu, CEO at wireless controls startup Daintree Networks Inc. in Mountain View, Calif., says 24% of VC dollars in LED is flowing into controls, because the technology can help save power and costs with existing fixtures—as well as LEDs—in commercial structures.

The “arms race” to develop LED lighting has become too crowded, Yu says.

“Many have an interesting twist, but if they can’t scale it, they’ll never compete,” he says. “It’s what you see in solar. People talk about product or cost advantages, but if they can’t scale those advantages, they can never make a go of it.”

Yu points out that a recent U.S. Energy Departments survey found that 2.2 million out of 2.7 million commercial buildings 30 years and older still have their original control systems. Yu says this makes for a potential market for his company’s controls.

Australian VC firm Jolimont Capital and the investment arm of Lend Lease have invested $18 million in two rounds of funding for Daintree.

Yu says there is a good reason why a huge chunk of the money flow is going into controls rather than lighting, given the threat from established bulb makers, such as General Electric Co. and Dutch-based Philips Electronics.

“It has become in so many ways a big company game than a venture stage game,” Yu says. “You have to be extremely well capitalized and have established distribution to be successful or you’re going to have a tough time.”

Many have an interesting twist, but if they can’t scale it, they’ll never compete.”

Danny YuCEODaintree Networks Inc.

To be sure, not all agree that established bulb makers pose a threat to VCs.

“It’s not a threat, it’s an opportunity,” says Nat Goldhaber, managing partner of Claremont Creek Ventures in Oakland, Calif., which has invested $17 million in two rounds of funding in Adura. “It’s often forgotten that venture capital has to have liquidity to be successful.”

Goldhaber says he decided to invest in Adura after the company’s founders, who were then students at the UC Berkeley’s Haas School of Business, rewired one of the campus’s large libraries, “where the lights hadn’t been turned off in 50 years.”

“They made it so that the lights could be controlled by a computer,” Goldhaber says. “Suddenly, you had an old building with a very difficult retrofit problem modernized with more modern controls than new buildings, and that’s pretty cool.”

Meanwhile, some wonder what impact China, Japan, Korea and Taiwan will have in the emerging LED sector, given that the Asian countries have become competitive in other cleantech industries, such as solar panel production.

“I suspect that China’s LED market will grow very rapidly—their use of LEDs is very high, and they are motivated to help their own companies,” says Yu of Daintree. “They now have most of the LED reactors anywhere in the world,”

However, DCM General Partner Pete Moran, whose firm has invested in Bridgelux, disagrees.

Moran added that making an emitter “practically requires technicians with Ph.D.’s who have to carefully monitor the mixes of chemicals used.”

“It’s very exotic,” says Moran, who adds that China has not been able to churn out the highly trained graduates required to make the high-performance products that can compete with established chip foundries in the United State and Japan, Korea and Taiwan.

As a result, China’s LED industry will be relegated selling to low-quality, low profit products.

“The Chinese got a little ahead of themselves, so customers are not happy with the lighting quality,” he said.

Quality control and related issues will open opportunity for competitors, he added.

“This is going to be a good place for U.S. startups for years to come,” said Moran. “There’s room to get in there.”

He said the worldwide replacement market for lighting consists of thousands of different fixtures, or SKUs (stock-keeping units).

VCs who’ve invested in the sector are optimistic that the massive change-out of bulbs and lamps will start in 2012 and 2013.

“We think that a $150 billion industry globally is going to go through a transformation in a relatively short period of time,” says Salzman at VantagePoint.

Meanwhile, Ridgewood Capital’s Sherwin says 70 U.S. coal-fired general power plants could be shuttered if the U.S. replaced all incandescents with LEDs.

The cost of providing power too a halogen lamp can run as high as $5,000 over the 50-year life of a home, compared to $750 for an equivalent LED bulb, says Sherwin, who adds that new homes feature dozens of halogen bulbs, 100 in a single home.

“It’s a huge opportunity for LEDs,” he says. “A huge opportunity.”

Tom York is a San Diego-based contributor. He can be reached at tom.york@gmail.com.