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Solar investor Nancy Pfund sees shift to positive cash flow as reconciling of growth culture

Nancy Pfund is founder andmanaging partner of DBL PartnersLLC,  where she leads theventure capital firm's investments in renewable energy and smart grid technologycompanies. She sits on SolarCityCorp.'s board of directors and is the chair of the corporategovernance committee. S&P Global Market Intelligence sat down with Pfund onthe sidelines of New York City's Climate Week to discuss financial trends inthe solar industry, the fallout of SunEdison Inc.'s bankruptcy and some pointers on howsmaller developers can stand out in an increasingly crowded sector.

The following is an editedtranscript of that conversation.

Nancy Pfund, founder, managing

Partner of DBL Partners

Source: DBL Partners

How can solar industry meetits capital needs over the next year?

Theindustry goes through cycles, and with what happened in Nevada, which was wayoverblown and is now beingcorrected, along with SunEdison's failure, it did not help investorconfidence. So we have had a double whammy this year, which did slow thingsdown, but you also saw SolarCity raise a new fund with George Soros, and did another big funda few weeks ago. The finance people are engaged and I think you will see withsome of this positive development, around Nevada getting settled and the adventof new loans, so that there will be good bit of financing activity in 2017.

How has SunEdison's demiseimpacted the solar industry?

WhatSunEdison taught us is it is important to focus and have a growth strategy, butone that fits into a cost reduction strategy and moves to cash-flow positive.It doesn't have to be today but it has to be a part of the way you construct agrowth strategy, and that is hard to do when a firm is involved in a lot ofdifferent business activities all at the same time, which is what SunEdisondid. It is kind of a cliché to say "stick to your knitting." Youdon't have to stick to your knitting exclusively, but you do not have to go allover the world either. You can go from solar to storage, which, like [SolarCityChairman Elon Musk] said, go together like peanut butter and jelly. Things thatare additive and complementary to your existing business are the ways to moveforward, without getting into the all things all people situation thatSunEdison fell prey to.

How long can incumbents gobefore they demonstrate they can be cash flow positive?

Itis a matter of which levers you pull. Maybe you don't have 100% growth, or even20% growth, but you can still have growth, but just do not need to spend asmuch, so you can become cash flow positive sooner. There is no fundamentalreason these companies cannot be cash flow positive in the near future, it justmeans they have to tweak something and give up something in order to do that.Amazon, for example, when it went public warned investors they would not beprofitable for a while, and all revenue would be spent on new business, and thatis the story of a lot of tech companies, and it is important to do that butalso you need to invest in the future.

How is competition helpfulfor the solar industry, even if it at times appears to drive some cannibalismin the sector?

Whatneeds to happen to unlock larger markets is that companies have to helputilities figure out a way to act more competitively, and not fall back on theguaranteed rate of return. Consolidated Edison Inc., Pacific Gas and Electric Co., , forexample, are beginning to do this, and are therefore developing bridgestrategies that incorporate distributed generation, and allow net entrants andbattery people to do what they do well. That is so unlike the past forutilities and it is not easy. A lot of generational change has to happen beforethis becomes the norm. You will have all the benefits of the entrepreneurialcrowd, with the aspirational side, together with the utilities, so you havethat backbone where you will start seeing scale and transformation.

What's your advice tobusinesses looking to scale up?

InCalifornia, for example, we see so many bright technology entrepreneurs makingthe move to energy because they want to make a difference. One can only buildso many apps for dog walkers before realizing they are fiddling on the roofwhile Rome is burning. There is a lot of opportunity to take the technicalsavvy and expertise and understanding consumer behavior and markets, that thetech side does so well, and bringing that to the energy field, and I alwayslove seeing that and that is a way to differentiate. But you also cannot havehubris around policy, and that is one thing tech executives often do. Sometimesyou have to pull them by their collar, or by their hoodie, and tell them to payattention to policy.

What is the role of policy inguiding your investments, and which markets do you find appealing?

Itis trifecta: technology, capital and policy. At your own risk, you ignoreeither one of any of those. It is something I use when I judge a pitch. I donot expect everyone to understand how important policy is, but if people resistand say they are never going to Washington, and hate everything to do withgovernment, it is going to be difficult. But the solar industry, in terms ofhow many government affairs people they have relative to any other industry Ihave invested in, it is like a heyday of sorts for government folks, and I donot mean that in a dismissive way, but you have so many policies and each statethinks it is the leader with its own unique spin.

Butyou also want to be where people actually live, like Texas, New York andFlorida. Florida is fascinating and I have been obsessed with Florida foryears. We are just seeing the beginning of that market, with that down there. It is ourthird-largest state and there are a lot of homes in Florida, so there is nothingnot to like about that market except the lock the utility has on that state.