http://www.greentechmedia.com/cleantech-investing/post/defenestrate-your-assumptions/
Defenestrate your assumptions
If one is to go by what cleantech VCs are saying these days, it seems like we're at a time where some of the core assumptions and current patterns in cleantech venture capital might be about to see some changes.
This is all within the context of VCs generally agreeing that cleantech is going to see continued interest and investments going forward (note: pdf), of course. But the colleagues I speak with will often refer to some key challenges facing the sector's status quo:
1. The venture model is (kinda) broken, across all sectors. Lots of people say this phrase, but they all tend to mean different things by it. In general, however, there's a growing recognition that in the overall venture capital industry the big funds are getting too big, the returns have been too low, the valuations have risen as too much money floods in, and true company-building skills have fallen away in favor of attempts to simply harvest already well-established opportunities.
2. We're still waiting on the big exits in cleantech. To be clear, there have definitely been some big cleantech success stories and there has been an increasing pattern of exits overall, but we have yet to see the big "make the fund" type of exit that would justify the kind of dollars that have been thrown at certain opportunities (ahem, solar, ahem). There are plenty of good excuses for this, including the lack of an IPO window, the overall economy, and the fact that the major investment activity has only taken place over the last few years. But lacking success stories, VCs lack good examples of what works in the sector. And so many of the most ardently-felt and -stated opinions about investment models (ones that become conventional wisdom and accepted at face value by journalists and others) remain very untested.
3. There are too many VC firms in general, and too many inexperienced teams throwing themselves at cleantech in particular. That sounds more disparaging than I mean it to be -- I've met with many first-time teams that have very smart ideas and good backgrounds outside of cleantech venture capital. Some will end up being the engines of the new creative thinking that we might be about to see in the sector. But the fact remains that there are well over 100 venture capital firms that are focused only on cleantech venture capital, and then another couple of hundred that want to put money into the sector along with other venture sectors. They can't all thrive, and in fact many won't survive their initial fundraising efforts. But the number of these firms running around meeting with companies, with LPs, etc. is dizzying. And yet at the same time, actual experience (much less track records) in cleantech venture capital remains tough to find.
4. It's become conventional wisdom that the sector should focus on "growth stage" investments (although different investors have different ideas about what exactly that means). On paper, at least, it appears to be the stage where the risk/rewards and the timeframe to exit fit best with the returns hopes of these investors. However, as per point #2 above, it's completely uncertain that the exit multiples in industries like energy and water (where the market prices are often affected by the availability of multiple alternative solutions to what is essentially the production of basic commodities like kwh and drinking water) will be as healthy as these investors expect, since we haven't seen many such exits yet. And the sheer volumes of capital being directed into this stage means that, in order to win these deals, many of these investors will likely end up overpaying for the opportunity. It may seem less risky on paper, but the capital supply and demand dynamics in growth stage cleantech venture capital means that the efficacy of that kind of a stage focus is very much an open question. Yet in general, according to the NVCA survey linked above, many more VCs expect to be shifting later rather than earlier over time.
5. There remain some pretty major underserved "gaps" in the marketplace. A) There's a gap at the seed stage, in subsectors within cleantech where the gestation period of an innovation is going to take longer to bring to market than typically meets the timeframes of even "early stage" cleantech investors. B) There's a gap in "first of a kind" and "second of a kind", etc., project finance -- financing the build-out of a CIGS solar manufacturing facility, for instance. VCs have done some of this, but it costs a lot and they're reticent to keep paying for steel in the ground. Government dollars are helping to address this, but it remains (as always) a slow and uncertain source of such capital. C) There's a gap in all of the non-proprietary-technology parts of clean energy and water markets. Much of the business opportunity from any "clean energy revolution" (as some have termed it) will actually be captured by service players like specialized installers, consultants, outsourced service providers, etc. But these types of businesses really don't fit the typical venture model, because it's tough to see huge exit multiples and tough to see how they scale quickly enough to provide 10x returns for VCs. Yet they will make money as businesses, even if they won't do it in the specific model that VCs will look for.
What's the answer to all of the above? To be determined, stay tuned. But these are the kinds of challenges that I hear about from my fellow investors in the space, and these investors are often talking about this being a time to be innovative about investment models, investment structures, and the like.
Of course, VCs are infamous for not really putting their money where their mouths are when it comes to changing the traditional VC model. So we'll have to see if anything actually happens. But if there's ever to be innovative new approaches that could change the way our industry does things, now would be the time.
Saturday, July 11, 2009
Rules of Cleantech
http://www.cleantechblog.com/2009/07/rules-in-cleantech.html
Here is our version of the Rules:
1. Energy is slow and big - Energy technology R&D and commercialization time frames are longer and costs higher
2. Technology is “cheap”, the scale up is where all the risk is
3. There is no disruptive technology in energy, only disruptive policies and resource shocks that make certain technologies look disruptive after the fact - aka, "it's the policies (and subsidies), stupid"
4. At scale, there is no capital efficient investing in energy
5. Commodity prices and policy tend to be more important variables than technology and management
6. Energy is at heart a resource play, the price you pay matters more than what you do with the resource
As a result we've worked out a strategic playbook:
1. Look for mature technologies - if it's not 10 year old technology, don't touch it.
Limit scale up risk and look for technology with few dependencies for scale
2. Embrace policy - solid policy frameworks are much better bets than great technologies. In fact, most of the serious money in cleantech has been made by being in the right place when the policies or subsidies hit critical mass, not by developing technologies after the fact.
3. Expect lower exit multiples, and target lower burn rates over a longer commercialization time as a result
4. Discipline wins. Think Stage Gate and SPC instead of venture style “massively parallel” R&D commercialization strategies
5. Don’t be afraid to play a diversified investment strategy
6. Don’t ignore Acquisition & Development as a viable growth strategy
7. Don’t be afraid of good low tech deals, that's where many the cleantech hits have been (if we haven't heard "that's not a venture bet" 3 times, we tend to stay away.)
8. “Powder dry approach” - deploy limited capital early on for larger stakes and focus on returning capital quickly, not rapidly deploying capital
9. Secure vastly superior market intelligence before moving - stealth is pretty much a worthless strategy, you're too likely to miss key things that way.
And I thought I'd share a few paraphrased quotes told to me over the years that have helped bring these thoughts home:
A former boss, now an executive at a major utility - "the only thing that matters to the bottom line of the company are the rate cases in front of us. Nothing else we can do with customers, finance, or technology will make a difference if those don't go well."
A former head of oil company venture fund on why it takes so long to get technology into the energy sector - "we figure we are taking enough risk just letting a vendor touch our $1 billion platform."
My father in law, a long time refinery engineer and manager on what small scale means in energy - "let me take you on a refinery tour during a turnaround sometime and show you what half a billion looks like lying on the ground." Corollary, "you can't do anything serious at a refinery for less than $100 mm."
Electrochemist and long time fuel cell researcher on the challenges of making a FC last - "if you could perfectly control humidity and temperature, a PEMFC will run forever." He was pointing out that it's much easier said than done.
Here is our version of the Rules:
1. Energy is slow and big - Energy technology R&D and commercialization time frames are longer and costs higher
2. Technology is “cheap”, the scale up is where all the risk is
3. There is no disruptive technology in energy, only disruptive policies and resource shocks that make certain technologies look disruptive after the fact - aka, "it's the policies (and subsidies), stupid"
4. At scale, there is no capital efficient investing in energy
5. Commodity prices and policy tend to be more important variables than technology and management
6. Energy is at heart a resource play, the price you pay matters more than what you do with the resource
As a result we've worked out a strategic playbook:
1. Look for mature technologies - if it's not 10 year old technology, don't touch it.
Limit scale up risk and look for technology with few dependencies for scale
2. Embrace policy - solid policy frameworks are much better bets than great technologies. In fact, most of the serious money in cleantech has been made by being in the right place when the policies or subsidies hit critical mass, not by developing technologies after the fact.
3. Expect lower exit multiples, and target lower burn rates over a longer commercialization time as a result
4. Discipline wins. Think Stage Gate and SPC instead of venture style “massively parallel” R&D commercialization strategies
5. Don’t be afraid to play a diversified investment strategy
6. Don’t ignore Acquisition & Development as a viable growth strategy
7. Don’t be afraid of good low tech deals, that's where many the cleantech hits have been (if we haven't heard "that's not a venture bet" 3 times, we tend to stay away.)
8. “Powder dry approach” - deploy limited capital early on for larger stakes and focus on returning capital quickly, not rapidly deploying capital
9. Secure vastly superior market intelligence before moving - stealth is pretty much a worthless strategy, you're too likely to miss key things that way.
And I thought I'd share a few paraphrased quotes told to me over the years that have helped bring these thoughts home:
A former boss, now an executive at a major utility - "the only thing that matters to the bottom line of the company are the rate cases in front of us. Nothing else we can do with customers, finance, or technology will make a difference if those don't go well."
A former head of oil company venture fund on why it takes so long to get technology into the energy sector - "we figure we are taking enough risk just letting a vendor touch our $1 billion platform."
My father in law, a long time refinery engineer and manager on what small scale means in energy - "let me take you on a refinery tour during a turnaround sometime and show you what half a billion looks like lying on the ground." Corollary, "you can't do anything serious at a refinery for less than $100 mm."
Electrochemist and long time fuel cell researcher on the challenges of making a FC last - "if you could perfectly control humidity and temperature, a PEMFC will run forever." He was pointing out that it's much easier said than done.
Taken from http://www.venturecompany.com/opinions/files/stung_by_subprime.html
Here is how entrepreneurs can recognize a sting from subprime VC:
Step 1: We like the idea, but before we invest please finish the product some more, then come back
Step 2: 6 Months later, you finished the product. Great, now prove it works by getting 100,000 daily users, then come back
Step 3: Fantastic, now we'll take 60% of your company for $1M
Ouch, that hurts.
Here is why sub-prime tactics hurt our innovative ecosystem, just like sub-prime lendings have a negative effect on the housing market as a whole.
ad 1/ Technology development is the investment risk we understand quite well, timely applicability to a market is the real issue. So, proving that the entrepreneur can build a product can easily be derived from the entrepreneur's vision, knowledge and credentials in that space, juiced up with some kitchen-sink prototyping. On top of that a 6-month self-funded development timeframe with 2-3 developers can hardly yield a sustainable competitive advantage anyway, so R&D development proves nothing.
ad 2/ In many cases it is impossible to land 100,000 users before you have a critical mass of product capabilities. That critical mass comes from an R&D investment that generates substantial differentiation, and rarely from tip-toeing into the marketplace. Marketplaces, for example, only grow when a critical mass of both supply and demand are lured in and participate, which often requires a bolstering of technology to support all constituents, rather than minimizing it. Already, too many technology products enter the market unfinished as a result of underfunding and yield false negatives.
ad 3/ Control and valuation of the company are a direct indication of the future success of an early-stage company. The vast majority of technology success stories are derived from retained majority control by its founders and CEO (Facebook, Google, Twitter, eBay etc). Investors are terrible operators (no surprise given their background and experience) and should not want to own a majority stake in their companies, simply out of self-preservation.
The only early-stage investors who may be able to turn sub-prime deals into prime are the investors who:
- have proven to be successful operators themselves
- support the vision before the product is there
- have great syndicates to support the full runway of a disruptive market entry going forward.
Here is how entrepreneurs can recognize a sting from subprime VC:
Step 1: We like the idea, but before we invest please finish the product some more, then come back
Step 2: 6 Months later, you finished the product. Great, now prove it works by getting 100,000 daily users, then come back
Step 3: Fantastic, now we'll take 60% of your company for $1M
Ouch, that hurts.
Here is why sub-prime tactics hurt our innovative ecosystem, just like sub-prime lendings have a negative effect on the housing market as a whole.
ad 1/ Technology development is the investment risk we understand quite well, timely applicability to a market is the real issue. So, proving that the entrepreneur can build a product can easily be derived from the entrepreneur's vision, knowledge and credentials in that space, juiced up with some kitchen-sink prototyping. On top of that a 6-month self-funded development timeframe with 2-3 developers can hardly yield a sustainable competitive advantage anyway, so R&D development proves nothing.
ad 2/ In many cases it is impossible to land 100,000 users before you have a critical mass of product capabilities. That critical mass comes from an R&D investment that generates substantial differentiation, and rarely from tip-toeing into the marketplace. Marketplaces, for example, only grow when a critical mass of both supply and demand are lured in and participate, which often requires a bolstering of technology to support all constituents, rather than minimizing it. Already, too many technology products enter the market unfinished as a result of underfunding and yield false negatives.
ad 3/ Control and valuation of the company are a direct indication of the future success of an early-stage company. The vast majority of technology success stories are derived from retained majority control by its founders and CEO (Facebook, Google, Twitter, eBay etc). Investors are terrible operators (no surprise given their background and experience) and should not want to own a majority stake in their companies, simply out of self-preservation.
The only early-stage investors who may be able to turn sub-prime deals into prime are the investors who:
- have proven to be successful operators themselves
- support the vision before the product is there
- have great syndicates to support the full runway of a disruptive market entry going forward.
I once attended a full day conference by Amory Lovins where I listened to his jokes 4 times in a row.
Anyway, this guy is really something else and is probably the greatest advocator for energy efficiency in the US. Here's some interesting career advice, and coincidentally, quite similar the advice of taking up psychology my father always tells me to do:
"Students who are interested in CleanTech should have some scientific or engineering knowledge and some economic acumen, but they should also study social sciences, like culture and anthropology.
If you continue to pursue learning , Lovins said, “you’ll learn early that you can learn more in 6 months than most people know about just about anything,” and this holds particularly true in this very dynamic moment in history.
Once you are in the field, you just need to take advantage of individual people’s knowledge and - tap it."
Anyway, this guy is really something else and is probably the greatest advocator for energy efficiency in the US. Here's some interesting career advice, and coincidentally, quite similar the advice of taking up psychology my father always tells me to do:
"Students who are interested in CleanTech should have some scientific or engineering knowledge and some economic acumen, but they should also study social sciences, like culture and anthropology.
If you continue to pursue learning , Lovins said, “you’ll learn early that you can learn more in 6 months than most people know about just about anything,” and this holds particularly true in this very dynamic moment in history.
Once you are in the field, you just need to take advantage of individual people’s knowledge and - tap it."
Presentation Tips
Less is more.
You have lots to tell - you are brimming with enthusiasm - you want to pack all your information into a very short period of time. The problem is that too much information can be a real turn off. Simplify your message and your audience will be able to understand it.
Every picture tells a story.
Most corporate presentations are packed with bullet points. The problem is that bullet points are a very inefficient way of telling a story. In a presentation 55% of the way that we take in information is visual compared with only 7% for text (bullet points). If you use images to tell your story then you will have an immediate competitive advantage. And if you are wondering about the other 38% this is for vocal delivery.
Don't go it alone.
Resist the urge to do it all yourself. We can all use PowerPoint for putting together an ad-hoc presentation, but a corporate presentation deserves better. Best to bite the bullet (if you'll excuse the pun) and bring in a professional presentation design agency.
Dress for success.
You wouldn't present wearing a shell suit - so make sure that you are dressed correctly. Generally speaking it is better to dress on the smart side. You could also read our article about What to wear.
"Life is a stage and we are just players on it".
When we go up to present we put ourselves on display. The audience will be looking at us - often in intense detail. Ensure that you have covered off the finer points - hair brushed, shoes cleaned, clothes ironed, nails cleaned and clipped.
Winging it.
It is so easy not to prepare. There are never enough hours in the day - and besides all the best speakers can just stand up and give a great speech. The problem is that they have had years of preparation. The sad truth is that as with most things in life you take short cuts at your peril. Rehearse & you will get better.
You have lots to tell - you are brimming with enthusiasm - you want to pack all your information into a very short period of time. The problem is that too much information can be a real turn off. Simplify your message and your audience will be able to understand it.
Every picture tells a story.
Most corporate presentations are packed with bullet points. The problem is that bullet points are a very inefficient way of telling a story. In a presentation 55% of the way that we take in information is visual compared with only 7% for text (bullet points). If you use images to tell your story then you will have an immediate competitive advantage. And if you are wondering about the other 38% this is for vocal delivery.
Don't go it alone.
Resist the urge to do it all yourself. We can all use PowerPoint for putting together an ad-hoc presentation, but a corporate presentation deserves better. Best to bite the bullet (if you'll excuse the pun) and bring in a professional presentation design agency.
Dress for success.
You wouldn't present wearing a shell suit - so make sure that you are dressed correctly. Generally speaking it is better to dress on the smart side. You could also read our article about What to wear.
"Life is a stage and we are just players on it".
When we go up to present we put ourselves on display. The audience will be looking at us - often in intense detail. Ensure that you have covered off the finer points - hair brushed, shoes cleaned, clothes ironed, nails cleaned and clipped.
Winging it.
It is so easy not to prepare. There are never enough hours in the day - and besides all the best speakers can just stand up and give a great speech. The problem is that they have had years of preparation. The sad truth is that as with most things in life you take short cuts at your peril. Rehearse & you will get better.
Portfolio Update 07/11/09
Investing Period June 1st to July 11th
Portfolio Performance to Date = 4.25%
XIRR = 20% (for a period of 2 months)
Lessons Learn
Portfolio management
1. This marks 2 months of Investing (started on May 12)
2. Etrade Now upgraded to 9.99 per trade. Differences between Absolute Profit lose and with commission getting lesser.
3. 3 stocks instead of 4 stocks seems to be doing better.
Buying
4. Buying only on breakout and on strong reversal seems to be a good strategy.
5. Have to stop buying stocks when it has increased too fast up.
6. Buy stocks on the "bullish accumulation trend", where there is a previous period of strong accumulation. (Riding the wave!)
7. Dont pay a premium for stocks that are too illiquid.
Selling
8. Still do not know the best time to sell stocks. For now, just stick to +20%, or when -8%.
9. Sell stocks on strong weakness and/or distribution
Portfolio Performance to Date = 4.25%
XIRR = 20% (for a period of 2 months)
Lessons Learn
Portfolio management
1. This marks 2 months of Investing (started on May 12)
2. Etrade Now upgraded to 9.99 per trade. Differences between Absolute Profit lose and with commission getting lesser.
3. 3 stocks instead of 4 stocks seems to be doing better.
Buying
4. Buying only on breakout and on strong reversal seems to be a good strategy.
5. Have to stop buying stocks when it has increased too fast up.
6. Buy stocks on the "bullish accumulation trend", where there is a previous period of strong accumulation. (Riding the wave!)
7. Dont pay a premium for stocks that are too illiquid.
Selling
8. Still do not know the best time to sell stocks. For now, just stick to +20%, or when -8%.
9. Sell stocks on strong weakness and/or distribution
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