cleantech venture capital in 2015

Cleantech

Venture Capital

February, 2011

In 2015

@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

http://www.slideshare.net/CleantechVC/whats-wrong-with-cleantech-vc-presentation

http://www.slideshare.net/CleantechVC/whats-wrong-with-cleantech-vc-presentation

“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


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

Source: Ernst & Young, data for U.S. cleantech venture capital© 2011, @cleantechvc

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.


Lots of capital deployed, few returns


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


“cleantech”

“venture capital”

specialization

new models

shakeout

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.

Word cloud of “cleantech” entry in Wikipedia© 2011, @cleantechvc

“cleantech”


specialization

new models

shakeout

Cleantech investing isn’t just for venture capitalists

• Family offices are playing an increasingly important role

• 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

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.


“cleantech”


specialization

new models

shakeout

One problem:Non-VCs keep trying to out-VC the VCs in cleantech.

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

Angel investors are just as hot on energy generation, energy efficiency and energy storage

as VCs are.


“cleantech”


specialization

new models

shakeout

But in particular, corporate investors and family offices can bring value to the table that cleantech needs

•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.

So far, corporates and family offices haven’t been good at these 3 value-adds, but by 2015 these muscles should develop

“cleantech”


specialization

new models

shakeout

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.

Dealflow Diligence Hiring Opening doors

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?

“cleantech”


specialization

new models

shakeout

And yet so many cleantech investors have invested in an unconnected “checklist” of sectoral bets

Solar Alt fuels

Energy storage

Energy effic.

Trans-port.

Water Other

Cleantech firm A 5 0 5 8 3 1 17

Cleantech firm B 1 2 1 1 0 1 1

Generalist firm C 4 2 3 4 1 0 9

Example: Three cleantech VCs

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”


specialization

new models

shakeout

Cleantech VCs have been almost maniacally focused on proprietary IP plays…

• 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.

…SO WHAT?

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”


specialization

new models

shakeout


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

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)

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.

“cleantech”


specialization

new models

shakeout

By 2015, we will see the emergence of four specialized cleantech venture roles

• 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

• 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 Launcher”

“The Cleantech.VC”

“The Builder”

“The Last Round”© 2011, @cleantechvc

“cleantech”


specialization

new models

shakeout

Launchers: Angels and seed-stage specialists with different structures/ backers

“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.


“cleantech”


specialization

new models

shakeout

Builders: Today’s cleantech VCs, but with more focus

“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.


“cleantech”


specialization

new models

shakeout

Cleantech.VC: Applying the lessons of successful retail and Web investing

“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.


“cleantech”


specialization

new models

shakeout

The Last Round investors: “Creating exits” as a core competency in tough markets

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.


“cleantech”


specialization

new models

shakeout

This is not so much about inventing new models as much as it’s about unpacking and adjusting existing ones

Check size

Stage

Cleantech VCs


“cleantech”


specialization

new models

shakeout

Toward a more global industry

• 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.

“cleantech”


specialization

new models

shakeout

Cleantech venture capital: Heading toward a “reboot”

• Even the continued slow rate of exits will slowly build a better track record for the sector, help LPs get comfort.

-Right now, LPs’ advisors are often telling them to back away from VC and cleantech

• Until then, cleantech venture firm fundraising will be difficult. Even established funds are having a hard time raising their next fund.

• Some firms will go away. Others, faced with raising smaller funds, will see attrition even at the senior partner level… Cleantech teams at generalist funds are often shrinking, or being dismissed. Brand new funds are having an especially hard time attracting LPs.

• To overcome LP reticence, both existing and new GPs will ask for less management fees, more carry. And hone their pitches to better demonstrate how they can be differentiated and additive.

• More specialization will help LPs who ARE interested in cleantech venture capital to make multiple commitments, across more theses.

• There will be a wave of “Cleantech 2.0” funds, often staffed by experienced investors breaking away from their current funds.

In the end, the cleantech market opportunity (w/ markets ~4x bigger than IT markets) is too big for LPs to ignore.

“cleantech”


specialization

new models

shakeout

Between now and 2015, cleantech venture dollars will decline, but then recover quickly

The next wave?

The first waveInsider-led

follow-ons

The withdrawal of LPs from cleantech probably will dry up venture dealflow in the near term, esp. for new deals.

We can’t know when it will recover, but given the latent interest of family offices, corporations, GPs and LPs in the sector, it will probably happen quickly when it does.


This is a moment of contraction and reinvention for the cleantech venture industry.

It’s going to get worse before it gets better.

Cleantech startups need to think lean, and think about alternative sources of funding, in

the meantime.

But after this “reboot”:Cleantech venture capital 2.0 will come back

stronger and more focused than ever.


cleantech venture capital in 2015

Economy & Finance