Cleantech Venture Capital in 2015

Cleantech Venture Capital In 2015 February, 2011 @cleantechvc

This is a moment of significant reinvention in the cleantech venture capital industry. There is an ongoing shakeout of cleantech VCs, a lot of deep thinking about appropriate investment models, a lot of hype, but also a lot of concerns. This presentation is an attempt to look out to 2015 to project how the industry will have evolved by that time: More diversification of markets and investment strategies; more specialization within investment teams; and a rebounding sector overall. © 2011, @cleantechvc

Looking back, looking ahead In December 2008, I put out a presentation titled “What’s Wrong With Cleantech Venture Capital” http://www.slideshare.net/CleantechVC/whats-wrong-with-cleantech-vc-presentation Unfortunately, despite the industry being badly hurt by the economic downturn, investment practices and patterns haven’t really changed much. This can’t continue. © 2011, @cleantechvc

“What’s wrong with cleantech venture capital” Trends that were identified in 2008: VCs putting more dollars into each deal = capital intensity Piling into only a couple of techs within the broader cleantech sector VCs shifting to later-stage investing An over-focus on California and Massachusetts Too much focus on “black swan” tech breakthroughs A lack of exits and track records © 2011, @cleantechvc

Not much has really changed in terms of deals Trends that were identified in 2008: Capital intensity Sectoral focus Shifting to later-stage investing An over-focus on CA and MA Focus on breakthrough tech A lack of exits and track records Not much more than minor shifts illustrated between 2007 and 2010 © 2011, @cleantechvc Source: Ernst & Young, data for U.S. cleantech venture capital

But things are changing in the VC industry itself Multiple cleantech VCs being forced out of the business Generalist firms shifting out of cleantech, into other sectors Multiple cleantech-specialist groups closing shop or scaling back their teams With LPs backing away from venture capital overall (venture firm fundraising was lower in 2010 than any year since 2003), and cleantech investment models still uncertain, cleantech venture firms are having a harder and harder time raising their next fund. © 2011, @cleantechvc

Some emerging “facts” about cleantech VC It isn’t “cleantech” It isn’t “venture capital” It’s really hard, and so requires specialization New models will thrive (if LPs let them) Not all of the original “cleantech VCs” will survive © 2011, @cleantechvc

“cleantech” The “cleantech” / “greentech” sector isn’t one sector. It’s a collection of various unconnected markets, technologies, scientific and engineering fields, and customers all under one umbrella investment thesis around natural resource scarcity. We lumped them all together when all of this was new to venture capital. But it’s not clear it all has to be lumped together today, from an investor’s perspective. “venture capital” specialization new models shakeout © 2011, @cleantechvc Word cloud of “cleantech” entry in Wikipedia

“cleantech” Cleantech investing isn’t just for venture capitalists ,[object Object]

Smaller and “super” angels have been vital to the early stage and service sectors within cleantech

Control transactions (e.g., buyouts) are poised to rise

A robust renewable energy project finance industry is increasingly making corporate equity bets in tech developers“Cleantech venture capital” often happens without any actual “venture capitalists” being involved “venture capital” specialization new models shakeout In a recent Pepperdine survey of angel investors, >15% planned to invest in cleantech and/or energy over the next 12 months, the second-highest category behind software. © 2011, @cleantechvc

“cleantech” One problem: Non-VCs keep trying to out-VC the VCs in cleantech. “venture capital” specialization From the scant available info and anecdotes, it appears many family offices, angel investors, corporate investors and other private equity investors are mostly looking to invest in opportunities that look very much like venture capital deals… Breakthrough technology with strong IP Engineering-heavy management teams Similar sector preferences – focus on just a couple of areas new models shakeout Angel investors are just as hot on energy generation, energy efficiency and energy storage as VCs are. © 2011, @cleantechvc

“cleantech” But in particular, corporate investors and family offices can bring value to the table that cleantech needs “venture capital” specialization Access to channels Corporate investors, and also family offices (via direct investments in service companies, or via other corporations the families own), can open up access to channels that so far have been difficult for cleantech startups to navigate. Project financing The “first project” challenge is a huge one for capital-intensive cleantech startups – rarely will traditional energy project finance firms provide financing for Fab 1 or Installation 1 (or #s 2, 3, 4, etc). But with their deeper balance sheets and flexibility, corporate investors and family offices can help fill this role. Key insights Thanks to their corporate networks, these players can also help reach into the traditional industries to help hone sales approaches and provide important context that independent cleantech startups might otherwise lack. new models shakeout So far, corporates and family offices haven’t been good at these 3 value-adds, but by 2015 these muscles should develop

“cleantech” Given the wide variety of techs, markets, types of engineers, stages of development, etc. in cleantech VC deals, it’s hard to imagine any one firm can cover all of them effectively. “venture capital” specialization new models shakeout How can you know about all the tech being developed across so many gov’t and academic labs, in garages, in corporate R&D, etc., when you have to cover so many techs? How can you effectively diligence an opportunity when you don’t intimately know the market, the players, the tech options? How do you know what the pain points are? How can you find and recruit the very best managers for risky early-stage companies when you haven’t been walking the halls of the established companies, and serial entrepreneurs don’t exist? How can you get C-level attention for a startup in a crowded market, when you’re on your second or third time engaging the larger company, at best? Dealflow Diligence Hiring Opening doors

“cleantech” And yet so many cleantech investors have invested in an unconnected “checklist” of sectoral bets “venture capital” specialization new models Example: Three cleantech VCs shakeout Do you see a unifying principle? Do you think these investors can bring deep expertise and networks to all these investments? Is it any wonder that so many new cleantech investors look first to solar, with all of the groundwork that has been laid there in terms of analysis, networks, entrepreneur population, etc?

“cleantech” Cleantech VCs have been almost maniacally focused on proprietary IP plays… “venture capital” specialization …SO WHAT? new models With so few exits in cleantech, there’s little evidence to show that the way to play the sector is a very biotech- and nanotech-like model of investing in special intellectual property. Proprietary IP takes longer to bring to market, and makes it harder to use off-the-shelf components. Capital intensive, risky, long timeframes. So many of these “breakthrough techs” are simply yet another way to produce a commodity. No matter how many patents you have, there’s always another way to produce that commodity. These efforts simply chase the cost curve. Does the solar market really need 200+ venture-backed solar startups? Is one of them so special that it will blow the others away on the basis of tech alone? Other venture sectors, like software and web investing, are already very comfortable with the fact that success requires smart business model reinvention, and superior execution, and not patents. shakeout In some cleantech sectors, a focus on proprietary IP as a key investment criterion can make sense. But cleantech VCs will need to learn to embrace execution plays, ones that create defensibility and scale through other means.

“cleantech” In the unrelenting search for “breakthrough technologies” that have the potential to reinvent entire value chains, investors have ignored the fact that these markets are deeply-entrenched and resist change “venture capital” specialization new models Nowhere in cleantech markets is this more obvious than in the channels, where the path to customers is often guarded by 100 year old trolls (ie: old-guard distribution) shakeout Cleantech markets utterly lack the value-added resellers that will be necessary for “black swan” technologies to gain market acceptance in any reasonable investment timeframe And yet cleantech VCs continue to search high up the value chain, seeking to reinvent core technologies, in the unlikely hope that at some point the market will start more rapid adoption “Black Swan” bets aren’t necessarily bad bets, but there are too many of them, and too often they’re being done with a “build it and they will come” myopia. © 2011, @cleantechvc

“cleantech” By 2015, we will see the emergence of four specialized cleantech venture roles “venture capital” specialization Seed stage investors Investing across markets, but specialized in 1-2 science / engineering disciplines Small check sizes, local Patient investors Focused on a couple of markets / themes at a time Multi-stage, global investors, rarely seed Building not only companies, but market ecosystems new models shakeout “The Launcher” “The Builder” Multi-stage investors, including seed Focused on capital-efficient execution plays, internet-type models Investing across sectors, backing talent not tech Big check-writers, looking to be the last round before an exit Bringing brand and access to acquirers/IPO Investing globally across sectors, investing based on momentum, not tech “The Cleantech.VC” “The Last Round” © 2011, @cleantechvc

“cleantech” Launchers: Angels and seed-stage specialists with different structures/ backers “venture capital” specialization “Deep tech” launchers: In tech-type innovations, the seed stage is all about specific technical domain expertise (e.g., ChemE, MechE, biotech, etc.). This lends itself well to seed stage investors with deep knowledge of and networks in specialized disciplines. Here be Dragons (and Black Swans). Long gestation periods must be expected, however. Funds will have to be structured for longer holding periods or “early half-exits”. Since longer holding period = lower IRRs, these funds may sometimes be backed by “social venture” sources (ie: philanthropists, foundations, regional development bodies). With such backers, these funds will have to be small and lean – and thus will have to develop screens and portfolio management approaches that help their engineering-heavy startups also stay small and lean for as long as possible. new models shakeout © 2011, @cleantechvc

“cleantech” Builders: Today’s cleantech VCs, but with more focus “venture capital” specialization “Theme-driven” builders: Venture firms are typically reticent to overly concentrate their efforts – undermines diversification efforts, and easy to get wrong-footed by market shifts affecting entire sectors. However, trying to be “all things cleantech” hasn’t exactly been working either. For reasons mentioned earlier, thematic/ market focus helps build an “unfair advantage” in deeper networks, pattern recognition, etc. in that focus area. Therefore, we will see more and more cleantech venture teams focusing on a particular theme or two at a time. Multiple bets against the same industry-level thesis. In some cases, specialized funds will be raised for that purpose, but in many more cases the firm will simply focus 50-75% of a more general fund on the specialized theme(s), and will staff accordingly. Corporate VCs are also key players. Many will be “growth stage” focused. new models shakeout © 2011, @cleantechvc

“cleantech” Cleantech.VC: Applying the lessons of successful retail and Web investing “venture capital” specialization “Lean cleantech” for VC IRRs in non-tech plays: To most cleantech VCs, to date “capital efficient” has meant spending “only” a few million dollars to launch a product/ tech. Web investors, on the other hand, have been busy pursuing truly “lean startup” approaches, using significantly less capital and racing to market quickly. As cleantech entrepreneurs increasingly pursue web-like business model reinvention opportunities, this also opens up significantly cheaper and faster launch models. …Efforts to reinvent / disintermediate channels… to build cleantech-oriented communities… to accelerate cleantech adoption through smart use of social media and web-based platforms… SaaS… etc… There will be a wave of smaller funds, family offices and super-angels who invest in a new set of cleantech startups that are relatively cheap to launch, leverage increasingly inexpensive IT/web tools to disrupt markets, and build sustainable advantage through branding and network externalities, not patents. Service plays, where these investors can even play “seed investor” roles but with short time to market. new models shakeout © 2011, @cleantechvc

“cleantech” The Last Round investors: “Creating exits” as a core competency in tough markets “venture capital” specialization Branded, late-stage king-makers: As capital markets go through what looks to be a prolonged period of volatility, exit windows are hard to forecast and execute against. Many cleantech investors have already been hurt when their “last round in before the exit” ended up not being the last round… Big-check, late-stage, PR-expert, big-brand players with the ability to open up the right conversations with acquirers and Wall Street, and to drive exits, bringing buyers to the table. “Cleantech mezzanine”, in a sense. Target returns: 2-4x in 1-3 yrs. Such players, if they come in late enough, don’t need to be technical or even market experts – they can already see the dogs eating the dog food. And then anoint the leaders, take them global, take them to exit. To date, such efforts have not done well. But that’s because such players haven’t done a good job of identifying winners (they came in too early), nor of driving exits. In social media, we’re seeing they’re developing the necessary specialized structures and competencies… This will start to be applied in cleantech. new models shakeout © 2011, @cleantechvc

“cleantech” This is not so much about inventing new models as much as it’s about unpacking and adjusting existing ones “venture capital” specialization new models shakeout Check size Cleantech VCs Stage © 2011, @cleantechvc

“cleantech” Toward a more global industry “venture capital” specialization The U.S. federal government is showing few signs of being capable of tackling comprehensive energy strategy. Meanwhile, other markets around the world are becoming more attractive. Cleantech VCs, particularly “Builders” and “Last Round Investors”, will increasingly look to deploy capital outside of the U.S. – particularly for investments in opportunities in downstream portions of value chains. Builders’ increasing level of specialization will also help them attract capital from sovereign funds as co-investors and LPs, when those countries’ strategic goals align with the fund’s sectoral focus. This will further pull cleantech VC dollars outside of North America. International investing is not currently a core competency of most cleantech VCs, however, so this will have to change. new models shakeout

Cleantech Venture Capital in 2015

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Cleantech Venture Capital in 2015