The State of Cleantech Venture Capital, Part 4: Parting Thoughts

(A version of this post also appeared at GigaOM.)

tl;dr: We’re in the early innings of a long ball game.

This week we’ve analyzed the state of cleantech venture capital and used data to discern myth from reality. In summary, we’ve found that:

  • There will be sufficient late-stage capital in the next few years to feed the ’06-’08 “baby boom” of cleantech start-ups, but there may be a corresponding dearth of Seed/Series A money.
  • Contrary to conventional wisdom, cleantech VC is not sucking wind compared with VC overall. The two are performing about the same on an interim basis and cleantech investment has actually overdelivered on IPOs.
  • Half of successful cleantech start-ups stumble on the way to the finish line, enduring a down round that disproportionately hurts founders and employees. Entrepreneurs should approach fundraising with a long-term orientation and be wary of sky-high valuations.

A few parting thoughts as I muse on these points:

  • It’s still really early. Cleantech venture capital investment only became substantial in 2006, and the average VC-backed start-up takes eight years from founding to exit. That means the real fruits of this labor are yet to come. If there is ever to be a cleantech IPO boom, one would expect it to start in the middle of this decade.
  • Limited partners should reassess early-stage cleantech. More and more cleantech venture capital is earmarked for late-stage growth equity deals. As a result, these investment rounds are likely to engender price competition that depresses returns. In contrast, Seed/Series A cleantech financing looks to be cyclically underserved, and the enhanced return profile that accompanies scarcer capital could help offset early-stage technology risk. If I were at an LP institution right now, I’d be looking for the sharpest early-stage cleantech investment team that can zig while most investors zag.
  • New company founders should weigh alternatives to VC. While CEOs at late-stage firms will have adequate financing options in the next few years, new cleantech founders will find themselves fiercely competing for capital. Think of it this way: Since 2009, about 50 cleantech ventures per year receive Seed/Series A funding. Do you want to place all your bets on being one of the fifty? There are plenty of other underexploited options for cleantech entrepreneurs – including grants from agencies like ARPA-E during initial technology development (case study: FastCAP Systems), funding from a large corporation in exchange for a preferred license or other IP rights (case study: Liquid Metal Battery Corporation with Total), and early sale to a corporation with an executive job in the bargain (case study: Zensi with Belkin).
  • The optimal investment vehicle remains to be figured out. I pointed out in the second post that VC firms have, so far, mostly restricted their funding to companies that fit in the venture “box” – i.e., $10-30 million invested over the life of a technology company, all in equity, for an outcome in five to 10 years. By definition, this excludes big-payoff categories with mondo capital requirements (like nuclear fusion), fields that have acceptable capital needs but stretch the timeframe (like advanced materials), adjacent investment opportunities in cleantech value chains (like land deals for biofuel feedstocks), and financing the deployments of technologies versus the technologies themselves (an odd one, since more value tends to get created downstream). All of these omissions leave money on the table. A number of VC firms – mine included – are blazing a trail by shaving these square pegs for the venture model’s round hole, and flexible alternative investors like family offices, superangels, and corporations have a window of opportunity exploit. Despite this, I can’t shake the suspicion that a truly purpose-built cleantech investment vehicle lies in the future, not the present.

Thus ends our whirlwind tour of cleantech venture capital. Studying a fuzzy topic like this keeps a person humble, because most of the predictions you make are likely to be wrong! Please don’t hesitate to contact me with your own, especially if they differ.

This entry was posted in Numbers, The State of Cleantech VC 2011, Venture capital. Bookmark the permalink.

2 Responses to The State of Cleantech Venture Capital, Part 4: Parting Thoughts

  1. Meir Ukeles says:

    Matt – Terrific work on the whole 4-part series – well-researched, well-reasoned and generally very well-done. Meir

  2. Andrew Dougherty says:

    Great series Matthew. Thanks for pulling this together.

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