Peter Grubstein, a managing director at NGEN Partners who has avoided the wind-power sector so far, said he sees huge opportunities to develop technology for wind-power generators that could be deployed by homeowners and other small users as opposed to the giant wind farms that have sprouted across the country. Speaking at the Dow Jones Alternative Energy Innovations conference in Redwood City, Calif., Wednesday, Grubstein said he’s seeing very interesting small-wind concepts about once a week.

“There’s a huge push, and I think it will be a successful push, for decentralized power,” he said. “Wind plays very well into that, particularly if they can work out the mechanics of light wind.” Furthermore, he said, “I think what you’re starting to see, too, is a change in consumer behavior” where having a windmill in the backyard will become acceptable.

Victor Westerlind, a general partner at RockPort Capital Partners, said there have been a lot of questions about the viability of small wind but “it’s just now starting to show the kind of education in the marketplace that would suggest there is a market.”

Wind-turbine components are also attractive to venture investors given the rapid growth of wind energy. Wind-turbine blades alone represent a $6 billion market, said David Dreessen, a partner at Battery Ventures. Battery has invested in a company that is taking a different approach to making blades. Technologies such as wind-assessment also look promising now, Dreessen said. “As the markets evolve, these small niches actually can become large enough” to produce venture returns, he said.

Dreessen also said wind and solar power are key to reducing reliance on imported oil as the use of electric cars grows. He called these renewable sources of power and electric cars “a marriage made in heaven.”

But Alexander Wong, a managing director at D.E. Shaw Venture Capital, cautioned that selling into the wind market is challenging. “I think there’s a tension with these market companies really wanting to drive innovation and work with start-ups but also being conservative in this market with very difficult project-finance challenges,” he said.

According to the golden rule, he who has the gold makes the rule. In the land of venture capital, however, the question is: Who actually has the gold?

Advertised as a celebration of entrepreneurs, last week’s Ernst & Young Strategic Growth Forum mostly served as a networking junket for venture capital managers to meet the small businesses of their investing future. Between the glad-handing there were business proposal swaps and face-to-face meetings that could serve as the first step in a multi-year process.

At this early stage, everyone seemed to be in agreement on just above everything - except, that is, the idea of control once the dotted line is signed on a term sheet.

On the one hand, nearly every venture fund manager interviewed said one of his biggest criteria in any deal is gaining some level of control over how a company is run. If they’re writing the check, they want some insight and leeway.

But the idea behind a great new business model is also worth its weight in gold, entrepreneurs said. The thought of ceding some control over to an outside investor is tough for some entrepreneurs to stomach.

“We certainly understand there is collateral value associated with equity. But in this case, no one understands how to run this business better than us. When we decided to fuel our expansion with outside equity, what we are really most interested in is the check,” said Jim Fredrickson, founder and chief operating officer of Innovative Process Administration LLC, a Brecksville, Ohio-based provider of hosted software used by businesses to manage enrollment, benefit administration and billing.

For Fredrickson, 63, clients including industry bellwethers Principal Financial Group Inc. and Mercer Insurance Group Inc. have helped him amass roughly $2.5 million of free cash. Still, given his growth plans for the business, he says “it’s time for some dry powder.”

Fredrickson may be in for a rude awakening if he raises money from a venture investor. Over time, it is the fund managers that will often win the battle for control, says Maria Pinelli, Americas Director of strategic growth markets with E&Y. She notes that especially when it comes to venture capital funding, business owners are in need of help to scale their business and build a more stable corporate culture, something where the VC firm can provide clear direction. Typically venture capitalists sit on the boards of companies they invest in, and while their job is to advise the entrepreneurs, some assert more control over management than others.

She noted Twitter Inc. as an example of a start-up that has brought in more business acumen to help it craft a business model. Indeed, Twitter co-founder founder Biz Stone said at the conference that the inclusion of more business-minded people was an essential factor in the acceptance of $135 million from investors this year. Twitter’s investors have been careful not to intervene too much, but with that big investment there is now more pressure for the executives to deliver a working business model.

For Jeff Glass, a managing director with Bain Capital Ventures, the debate over power has defined much of his career as he was a business founder and entrepreneur long before joining Bain. And, in wrestling between needing money and wanting control, he said the steps being taken at first meeting shouldn’t be taken lightly.

“A huge part on both ends is just personal chemistry between management and board; board and CEO; investor and management,” said Glass. “But being on this end now, I would advise to spend more time diligencing the VC or PE firm. Everyone’s cash is green until you have a problem.”

Art by Mike Lucas

QuinStreet Journal - You might remember our blog post in August about a online marketing company called QuinStreet Inc. which suddenly released its financial numbers in a press release. The figures were indeed worth boasting about - $260.5 million in revenue for the fiscal year, up 35%, and growing profits - but it was an unusual move for a private company.  We suspected 10-year-old QuinStreet was testing its chances for an IPO before actually filing for one. But Chief Financial Officer Ken Hahn told us of an IPO bid: “We certainly will look at it and will be considering that over the next year or two, but that’s not the primary focus of the company…We don’t really need to go public to run the company.” Well, yesterday QuinStreet filed for the IPO. So that was either executive-speak or somebody changed his mind (the work of QuinStreet’s longstanding VC shareholders, perhaps?)

Squared Away - Predicting the next big thing in the start-up world isn’t easy. Most companies are way over-hyped, and sometimes a technology strikes like lightning before we barely know of it. But I might have to agree with Mashable CEO Peter Cashmore’s pick for next year’s Twitter: Foursquare. Here in New York, where Foursquare is based, I constantly hear the company’s name mentioned at networking events. The mobile virtual game is just plain addictive, everyone says, and it’s a location-based service, the hot technology of tomorrow. Of course, to generate real buzz, Foursquare will have to come up with a verb to describe what its users do, like tweet. I just squared you?

Gambling Your Money - Here’s a questionable angel-fund model that Jason Calacanis would likely have a problem with: According to TheStreet.com, Cambridge, Mass.-based Revolutionary Angels asks as many as 100 start-ups to pay $5,000 to compete for a “maximum” $250,000 prize. The runner-up gets $50,000. The rest of that $200,000 or so? That’s for Revolutionary Angels, which gives the rest of the start-ups “feedback.”

Don’t Catch Start-Up Disease - Have any of these symptoms? Then your start-up may be on the path to failure, says David Aronoff of Flybridge Capital Partners. ”While every situation differs,” Aronoff writes, “I think there are some key diseases that plague startups and while some of them manage to recover, most, unfortunately, are doomed to at least mediocrity, if not complete failure when they contract the symptoms.”

It’s Complex - Fred Destin of Atlas Ventures shares the thoughts of a portfolio company founder about how he deals with “the ongoing complexity and varied demands” of being an entrepreneur. One of his points: “I have 0 emails in my in box when I leave the office each day.” (I’ve tried and continued to fail at this.)

That was the task set by the National Venture Capital Association and job board StartUpHire, which asked for Twitter-esque submissions from start-up employees in celebration of Global Entrepreneurship Week.

You can find more than 100 of them here, and submit your own. Many of them aim to be funny, some inspire, though quite a few are simply advertising their start-ups or didn’t seem to understand the objective. Here are a few of our favorites. (Post yours at the aforementioned link, and if it’s interesting enough, we’ll add it below.)

“There once were VCs
Extremely hard to please,
Moving at breakneck speed
Was their only creed,
But we exceeded all milestones with ease.”
-Bill Nelson, PhD. - Vice President Product Development, Limerick BioPharma

“A bad thing about working for a startup is everyone sees what you do. A good thing about working for a startup is everyone sees what you do.”
-Chris Farber, Albridge Solutions

“The word “no” is only the beginning to any negotiation and “change” is the only constant in the world. Accepting these allows us to succeed.”
-Plinio J Garcia - President, J Green Foods

“Being somewhat annoyed because the day is nearly over, and thinking: “whoever invented 24 hours in a day, really got that wrong”!”
-Ed Richards - CEO, LiquidPiston Inc.

“If you haven’t seen the sunrise at least once while working you are not really in a startup”
-Ed Loessi - CMO, RapidInfluence

“Our CEO is wearing gym shorts and a T-shirt right now. At bulbstorm.com, we’re too busy innovating to iron!”
-Bart Steiner, CEO, Bulbstorm

To the relief of parents everywhere, shelling out $182 for Principles of Biochemistry may become a thing of the past. Several recently funded start-ups make it cheaper, or in some cases free, for students to obtain books.

Akademos Inc. raised $2.5 million in August to support an online marketplace for students to sell books to each other, saving buyers an average of 61% off list prices. Flat World Knowledge LLC, funded earlier this year with $8 million in Series A money, provides digital versions of textbooks online for free, earning revenue and paying authors by giving students options to purchase soft-cover textbooks, audio books and self-print individual chapters.

The latest - and most heavily financed - is Chegg Inc., which just closed a jumbo-sized $57 million funding round to add to a $25 million capital infusion in December. It’s aiming to become the Netflix of textbooks, a model it says now reaches more than 6,400 colleges and saved students $16 million in 2008.

Chegg said its rental service is as much as 75% cheaper than buying textbooks. In 2009, students have rented more than 1.5 million books through Chegg, which makes money by charging a fee for renting over a certain period. Principles of Biochemistry, for instance, is available for $12.49 for the semester

“This is a problem that everybody who has been to college understands - the tyranny of textbook pricing,” said Deven Parekh, managing director at Insight Venture Partners, which led the round alongside investors Foundation Capital, Gabriel Venture Partners, Kleiner Perkins Caufield & Byers and Primera Capital. ”Consumers are buying into the model. It’s growing extremely fast because they’re solving a fundamental problem. We see a company that can really revolutionize the industry.”

Chegg also emphasizes customers service and fast shipping. Currently it has one warehouse to ship books because it wants to ship books together, rather than from separate locations, for better service. Still, the company could add one or two more warehouses in the future to cover the country better, Rashid said.

The company, which has now raised more than $160 million in equity and debt since its founding in 2005, raised the latest round and $25 million more in credit mainly to invest in expanding its book inventory in order to have a more complete selection. Chegg will also look to expand its staff and improve its logistics and customer service.

-With reporting by Tomio Geron

Addrenex, formed in 2006, recently agreed to be acquired by partner Sciele Pharma Inc. for $29 million, excluding shares Sciele already owned. Addrenex’s early angel investors will make 10 times their money, said Stephen E. Butts, vice president of commercial operations.

But the exit could have been bigger had Addrenex been able to raise venture capital to advance its pipeline further, co-founder and Chief Executive Moise A. Khayrallah contends. The Durham, N.C., company launched with seed and angel funds to conduct early clinical work on an extended-release version of the hypertension medicine clonidine. This reformulated drug, Clonicel, is designed to cause less drowsiness and fatigue than the original.

In late 2006 Addrenex tried to raise venture capital to advance Clonicel, but VCs balked at a one-drug company. That led it to pursue other options. In July 2007 it licensed Clonicel to Sciele, which agreed to market the drug for hypertension and another condition, attention deficit and hyperactivity disorder. The deal netted Addrenex $6 million in equity and upfront cash, and enabled it to acquire a portfolio of compounds for hypertension, ADHD, pain and other conditions from University of Nebraska Medical Center in December of that year.

Khayrallah tried to interest VCs again in 2008. With $12 million to $15 million, he figured that he could significantly advance the pipeline acquired from the University of Nebraska. But venture investors moved too slowly, and Addrenex instead struck a second partnership with Sciele, this one to develop a new hypertension drug, ADX415, in July of last year.

It was becoming clear that Addrenex could get by without venture firms’ money. Nonetheless, early this year it set out on a dual-track effort to raise more equity or sell the business. Leerink Swann LLC, a health care investment bank, shopped Addrenex to potential buyers. That led to the merger agreement with Sciele, announced Monday.

Sciele, an Atlanta-based unit of Japanese drugmaker Shionogi & Co., proved more nimble than the venture firms following Addrenex, according to Khayrallah. Because of their lengthy due-diligence, it would have taken six to eight months to close a financing, he said.

“We would have been attractive to VCs, but they were too slow or too distracted, or we didn’t fit the box they were operating in,” Khayrallah said. Sciele, by contrast, conducted its analysis swiftly. “We had an asset they wanted, and they wanted to make sure they got it before anybody else did.”

Khayrallah and his team remain with Addrenex for now, but eventually they aim to start a new company with a similar strategy of reformulating or re-branding existing drugs. Whether they will approach venture capitalists the next time around remains to be seen.

Art by Mike Lucas

The Venture-Backed Nine - Venture capitalists have another IPO to cheer about as computer-network security company Fortinet Inc. saw its shares rise 33% in its first day of trading. Redpoint Ventures and Meritech Capital are among the company’s backers. This could be the last venture-backed IPO of the year as the market usually quiets down during the holidays and none of the other five IPOs expected this week have venture backers. If that’s the case, we’ll have seen nine IPOs of venture-backed companies this year, according to VentureSource, all of them since May. That’s better than the seven recorded last year - but that was also the worse showing on record. In 2007, there were 76 such offerings. It’s a good sign that the market is receptive to new offerings, but the IPO window certainly isn’t open very high.

District of Capital - On the regulatory front, a couple of things are happening today in Washington worth keeping an eye on - if you can keep them open. First, the Senate is meeting to mark up a sweeping financial regulatory bill introduced by Sen. Chris Dodd (D., Conn.), the committee’s chairman, that includes a measure to omit private equity and venture funds from the requirement to register as investment advisers with the Securities and Exchange Commission. The bill, which would require only hedge funds to register, leaves defining what exactly venture and private equity funds are up to the SEC. This proposal is only a tiny piece of the 1,139-page discussion draft of the bill, which is expected to mark the starting point in negotiations with the House and the Obama administration over how to overhaul financial rules in the wake of recent economic turmoil. Also, the SEC is hosting an annual forum for small businesses to highlight “perceived unnecessary impediments to the capital-raising process.” Last year’s forum recommended several changes to facilitate the exchange of private-company stock, including a proposed regulation to allow limited advertising. With the change of administrations, that proposed rule is still pending, but this meeting will take a fresh look at the situation.

Let’s Get Social - Microsoft and Salesforce.com are jumping into the business social-networking game, an area already crowded with start-ups. In Microsoft’s case, it said yesterday the next version of Microsoft Outlook will automatically display information from social-networking sites to better connect people. Salesforce.com is going a more ambtious route, unveiling a new product called Salesforce Chatter, billed as the “Facebook for enterprises.” But don’t call it a social network, says CEO Marc Benioff - it’s more about “collaboration.” Semantics, of course.

The Boise, Idaho-based company, founded in 2006, is focused on a narrow set of consumers it calls the “formerly banked,” those that used to have credit cards or checking accounts, but no longer qualify. The company’s initial product, the READYdebit Visa prepaid debit card and online check-writing service, provides consumers with a lower-cost alternative to high-fee checking accounts.

For a monthly fee of $8.95, users are given a card that gives them the same features of a checking account with a bank, such as direct deposit, online bill pay and e-commerce transactions. The only difference is that customers are not issued paper checks - though they can arrange for Ready to send payment via a paper check for free.

Ready is not extending the overdraft line, so users are not at risk for overdraft fees.

“With all the turmoil in the banking industry, new credit card regulations and the additional scrutiny on credit, the un-banked are grossly underserved,” said Jeff Bussgang, a partner at Flybridge Capital Partners, which invested in the Series B round alongside Rockbridge Growth Equity, a middle-market private equity firm started by Quicken Loans Inc. founder and Chairman Dan Gilbert. “There are a lot of people excited about this market, and we think these guys have the right product and team.”

Banking committee Chairman Chris Dodd, D-Conn., has introduced legislation that would enable consumers to opt-in for overdraft protection on ATM and debit card transactions when they open an account. It would also limit the number of overdraft fees a bank can charge per month and year, require that fees be proportional to the cost of processing the overdraft and require that customers be notified when they overdraw their account so they don’t make further uncovered transactions. Rep. Carolyn Maloney, D-N.Y., has proposed similar legislation in the House.

“I don’t expect [banks] to move out of it altogether, but the new rules by the Fed can’t help but lower the number of overdraft fees they can charge,” Ready Founder and Chief Executive Will Tumulty said.

The Federal Reserve last week also announced a rule, to take effect July 1, under which banks would need customers’ consent before charging large overdraft fees on ATM and debit card transactions. The rule also requires banks to offer opt-in options. If a customer chooses not to participate, any debit or ATM transaction that overdraws their account would be denied.

Tumulty said he expects opt-ins for overdraft fees to be among several tactics by banks to keep profit margins high on checking accounts.

“We expect one response from banks will be to try to make up that revenue in the form of other non-overdraft fees,” Tumulty said. “We’ve recently seen moves indicating this from large depository institutions. For instance, [Bank of America] recently raised the monthly fee on their basic checking from $5.95 to $8.95. This leaves the customer with two largely equivalent options with the same monthly cost - only one charges overdraft fees and ours doesn’t. We feel well very well-positioned to win with consumers in that marketing contest.”

With project financing hard to come by, “The thing that’s changed is the strategy around how you get to plant number one or plant number two,” Trae Vassallo, a partner at Kleiner Perkins Caufield & Byers, said at Dow Jones Alternative Energy Innovations on Tuesday in Redwood City, Calif. Portfolio companies are looking for strategic partners and even acquisitions to bridge the gap.

Instead of standalone projects, Vassallo said, geothermal energy company AltaRock Energy Inc. is looking at how it can add capacity to conventional power plans. “It forced us to focus on a strategy that we could execute with the capital markets closing down some,” she said.

And while “you never invest in a company that’s got to get government money in their investment plan,” she said, venture-backed companies need to develop relationships with government. AltaRock has received $26.5 million in grants this year alone that Kleiner Perkins wasn’t counting on, Vassallo said.

What’s changed since the 1970s energy crisis, said Thomas Baruch, a managing director at CMEA Capital, is that the technology now exists to provide alternatives to fossil fuels. “The things we back have to be in fact truly innovative and timely because one of the things that hasn’t changed is the whole issue of scalability,” he said. “The platform has to have sufficient depth to enable lots of options in terms of moving in and out of the capital markets.”

Braemar Energy Ventures if anything has gotten a little more aggressive because company valuations have fallen, said managing director Dennis Costello. The firm is seeing “later-stage opportunities that maybe have some momentum but need some more cash (where) we didn’t have the opportunity to get in before.” But he said there still remains a gap between venture financing and low-risk project finance that the private sector needs to fill.

Public financing can help companies grow, and panelists said they were encouraged by battery company A123 System Inc.’s IPO, which indicates that the public markets are ready to take a chance on cleantech. But others need to join A123 as public companies because there is a danger to the cleantech industry in having so much riding on the success of A123, said Jennifer Fonstad, a managing director at Draper Fisher Jurvetson. “It’s very much of a high-stakes game for the rest of us,” she said, and it’s important for other companies “that have good profitability and invest in underlying growth stories to get out there in the public markets.”

“Our view is that there’s going to be a lot of winners and losers here in this next 12 months,” said Anup Jacob, a partner with Virgin Green Fund. “I think if the public markets are open and are willing to take on traditional riskier investments, I think that’s great because the downside of that is if they don’t, we then put in our capital, which will be expensive.”

According to Dow Jones VentureSource, the median valuation of U.S. companies raising money in the third quarter was $18 million, the same price as in the second quarter, after falling from $24 million in the first quarter. For the first nine months of the year, the median price sat at $19 million, a bit below the 2008 level of $20 million, which was a decade high.

For first rounds, the median valuation was cut in half to $4 million after rising to $8 million in the second quarter. Although it’s just a three-month slice, this could signal that venture capital firms are putting less money to work in younger companies.

The median second-round valuation in the third quarter rose to $18.8 million, up from $15.5 million in the second quarter and more than twice as high as the first quarter. Deals that are third rounds or higher commanded a median valuation of $36.3 million, slightly higher than the $35.8 million in the second quarter and $34 million in the first.

For the nine months, first-round valuations were $5.75 million, versus $6 million in 2008; second-round prices reached $15.3 million, less than the $18 million last year; and later-stage deals were valued at a median $35.7 million, which is significantly down from $50.3 million in 2008.

By sector, the business and financial services category is tracking at $12.5 million for the year, versus $16 million a year ago. Median valuations of energy and utilities companies were $26.2 million, up from $20 million last year and on track to be the highest this decade. Health care valuations sat at $21.6 million so far for the year, slightly below the $23.1 million from 2008. And the largest sector, information technology, recorded an $18 million median valuation, off pace from the $21.9 million recorded last year.