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Some quick thoughts on a recent west coast swing

Rob Day: September 29, 2010, 10:40 PM

I clearly need to come visit the bay area more often.  Not only do I simply miss San Francisco, it's also always a super-busy trip as there are just way too many people to visit with in any single trip.  Maybe 14 meetings in 2.5 days doesn't sound like much to some, but when you consider travel time it adds up to some really full days...

  • No offense to Boston, but I got more high-quality deal leads in a couple of days here in SF than in a couple of weeks back east.  Maybe there's some selection bias at work there, not suggesting any hard and fast ratio or anything.  But the level of high-quality entrepreneurial cleantech energy (so to speak) in the bay area really does trump that in Boston, IMHO.  Not that Boston's a slouch, just that the bay area is that active.  When I left SF in 2007 it felt like, in cleantech, there were more interested investors than kick-butt startup management teams.  Now that feels like it's been reversed.  
  • Solar is really on the outs in the bay area, at least among VCs.  In Boston it's similarly out of favor, but not to such an extent, and I do get the sense that in many cases it's as much because the Boston cleantech VCs are out of funds themselves.  In SF, however, in many of my conversations with investors it was clear that simply being OPEN to doing a solar deal made me contrarian.  Maybe that's my signal that it's finally time for me to do one, who knows... 
  • I sort of sensed it along the way, and as one investor confirmed to me, "late-stage cleantech venture is in a funk."  But interestingly, it seems like early stage cleantech remains pretty active out in the bay area.  That's not to say large, late-stage cleantech venture deals aren't happening, but it became clear from talking to investors that it's a lot harder to get an outside lead investor for such rounds than it used to be.  The lack of predictable and lucrative IPOs really seems to be impacting investor interest in the infamous "last money in before the exit" rounds.  But meanwhile, investors see that the winners in these "mediocre" IPOs we've been seeing tend to be the Series A investors, plus it requires less capital to get in (at least for THAT check).  So there's still strong interest in the Series A rounds... but the definition has drifted a bit, to be less seed-y, closer to commercialization.  Entrepreneurs better have a killer tech, plus proof of productization (not just concept), plus proof of market adoption potential, plus a killer team (VCs always WANT all these, but now it's more of a necessity than ever).  Given all that and a sector that VCs remain hot on, such startups are still getting multiple term sheets.  
  • If there's one overheated sector right now that bucks the above trends, it's energy storage.  Every investor I talked to was excited about one new type of battery or another.  In that category, at least, they were all interested in very early concepts, not late-stage companies already shipping product.  And they were lamenting the fact that the companies they were interested in already had multiple VCs crawling all over them, perhaps with multiple competing terms sheets being thrown at them, at surprisingly high valuations.  I'm not sure why so many investors would be shying away from "capital-intensive, overly crowded" solar to pile into what appears on the surface to be a similarly long-path-to-market, big capex, unclear-what-tech-will-"win" battery space.  But it's happening.  Commercial building energy efficiency SaaS, btw, is also going to be overcrowded within 12 months... 
  • Lots of hand-wringing about the challenges of applying "traditional" venture capital models to cleantech.  But not a lot of true breakthrough thinking, much less activity, in any other kind of investment models.  At least not yet.  All it will take is for one brand-name firm to break from the herd and do a very different type of fund.  Not sure when that will happen, but I wouldn't be surprised to see it happen sooner rather than later.  For the most part, tho, despite all necessary rhetoric about "differentiation" most firms seem to be all going after many of the same markets and techs, using many of the same techniques, and using the same deal structures etc.  

The two VCs within cleantech

Rob Day: September 23, 2010, 7:44 AM

It's been pretty fascinating to watch how many strong opinions have been expressed over the past couple of days regarding Fred Wilson's "two VCs" post (and then some others pointed at me after my response to his post). So I thought I would paraphrase some of what I heard (note: mostly NOT from Fred, but from others who've piled on) and give some replies.


Rob, are you saying Fred is wrong?

No. I totally agree with Fred that there's an important divergence of two very different approaches to venture capital right now -- the lean VC (put as little capital as possible to work in each company, grow it quickly and as low-cost as possible, and then sell it as early as possible), and the big VC (find winners, give them even more momentum via advice, capital and brand leverage, and drive to as big an exit as possible).

If anything, I tend to favor the lean VC model Fred is clearly espousing. I do think venture capital is due for a re-invention (or a back to basics, as others view it).

I just don't think it's fair to imply (as Fred and many others have done) that ALL of cleantech venture capital falls into the "big VC" category.

To put my point as simply as possible: Fred is right, there are two separate venture capital industries right now. And you can find BOTH within cleantech.


But statistics show that cleantech is more capital intensive than web investing!

First of all, don't try to apply averages (especially in the form of means and not medians, c'mon Techcrunch you can do better) to "prove" anything about cleantech as an overall sector. As we've discussed ad nauseum on this site, all it takes is a small handful of megadeals to totally skew the sector dollar totals, so means are worse than useless, and even median deal sizes will reveal only that 51% of deals are large ones, right? It doesn't prove that there isn't any capital-efficient investing going on within the sector.

Secondly, it's a little tiresome to see all these web and software journalists and investors castigate cleantech in such simplistic terms (maybe they're all too distracted by AngelGate). Don't get me wrong, I like the web (in fact, I'm using it right now!) and have nothing at all against web and software investors, it seems like a compelling set of markets. I don't paint their entire sector(s) as one single monoculture, so I wish they would do the same.

As Tom Pincince, President and CEO at Digital Lumens (and former Director of Forrester Research’s Network Strategy Service) emailed to a few of us: "Cleantech is such a diverse category ranging from biofuel to consumer power portals. We could just as easily lump software into IT and drag in big networking boxes and telecommunications companies."

Thirdly, while some of the rhetoric around "capital efficient cleantech venture capital" is just empty words, I do think there are a number of investors out there putting serious effort and thought into how to do it. So backward-looking data will only tell us so much about what the sector looks like going forward.


How dare you say cleantech isn't capital intensive! Just look at the high-profile capital intensive deals that have been talked about so much!

Just like how I don't think it's fair to paint cleantech with a broad brush and imply it's all capital intensive, nor am I trying to make the argument that all of it is capital efficient. In fact, if you look at the deals done in cleantech from 2006-2008 (ish), much of them were indeed capital intensive.

But I increasingly see attempts to apply the "lean VC" model within subsectors of this market. And even within some of the sectors of the market that are infamous for being capital intensive (e.g., solar).

But making a significant impact on the energy, etc. industries will require some significant capital to be deployed.


Sure, but why does that have to be venture capital in particular?

Venture capitalists are supposed to be focused on returns, not impact. Often they conflate the two, especially when standing on stage at a conference. But it's increasingly unclear that VCs are supposed to be the ones providing all the capital that will be necessary to put significant amounts of clean power generation out

The two VCs

Rob Day: September 20, 2010, 9:38 PM

Fred Wilson recently wrote that there are now two venture capital industries: One software-based, and one that is capital intensive. He argues that the former has gone capital efficient, and the latter (including "cleantech, biotech and other capital intensive tech businesses") that "operates largely the same way it has operated for the past twenty or thirty years". It's a good post, as with many of his thoughts, well worth reading if you haven't seen it already. He mentions forthcoming data that should be interesting to see.

I think he's right. There really are two divergent strategies in venture capital right now. The one goes for as little cashburn and as quick an exit as possible. The other looks to put money into leading companies, position them as winners, and then put as much capital as possible behind those winners.

I do think Fred misses an important point, however, when he paints cleantech with the broad brush of implying it's all about that capital-intensive strategy. Certainly there are plenty of high profile examples where such an implication is indeed correct! But as Jeff Bussgang then wrote in another good column (not just good because it mentions Digital Lumens, one of my portfolio companies, but because of the basic argument), it's also possible to invest in capital-efficient, non-software startups in cleantech... If management and Board are willing to take it that route.

I think of it more like the divergence in semiconductor investing. At first all semico investments needed to be pretty capital intensive, because they required building out specialized fabs. But as the industry matured, it became possible to invest in "fabless" companies that focused instead on the core innovation, product design and market execution. Such choices are available across sectors.

Perhaps this is why data provided by CBInsights, in response to Fred's column, don't really seem to support the idea that software plays are diverging strongly in their capital intensity versus other categories. While software does show itself to be less capital intensive in general, it's not like that sector's headed one way while the others head the other way.

Fred tweeted me that he's got different data that will look at it in a different way, which could be right. But my strong suspicion is that he's identified a correct pattern -- a divergence of venture capital strategies -- but incorrectly applied it sectorally. I suspect instead that these two investment models can be found WITHIN many of these sectors, including cleantech. I met with a GP the other day who has a strategy of investing in capital-efficient life sciences tools, for example, rather than capital-intensive drug development efforts. I meet cleantech GPs all the time who target capital efficient plays within cleantech (and a few of them actually seem to mean it). So I don't think it's fair to say that software VCs are a new breed and VCs in other sectors are tackling an old model AS A RULE. But to be fair, Fred's right that there really are a lot of VCs in cleantech who (especially up to 2008) were indeed trying to apply that old-school model to the sector. And the results of such efforts are very unclear to date...

But what I think might be interesting to take a look at would be fund size as the causal factor for the schism Fred's identified. I don't know how to prove chicken or egg. But I strongly suspect that the really big funds that have done some cleantech (among multiple other sectors) are the ones most likely to invest in the capital-intensive models. Perhaps it's just out of necessity, but VCs with funds <$200M really do seem to do a better job of staying true to the capital-efficient investment model Fred is espousing, across sectors (including cleantech). And meanwhile I've had a generalist VC with a fund >$500M tell me his fund was explicitly looking for capital intensive opportunities (note: this was in 2008).

I can't say for sure, but I bet fund size is a more important determinant of which of the "two VCs" you are, instead of sector.

It’s time: Cleantech needs more roll-ups

Rob Day: September 20, 2010, 8:24 AM

Rolling up startups is hard to do correctly.  It's easy to say that two companies would work better as a combined entity, but in reality it's quite difficult to do regardless of the scale of the companies involved -- you have cultural shifts to make, personnel who will need to change roles and perhaps leave, a combined set of investors to fit into the same size boardroom, significant operational disruption, not to mention the difficulties involved in pricing and structuring the deal, etc.

So it's not something to be bandied about loosely.  But nevertheless, I think it's time for more cleantech startups to be thinking about how they can team up and carry forward as combined efforts.

First of all, there are just way too many "components" out there.  I use that term in a very general sense.  What I mean is that there are a lot of independently run efforts out there that are trying to build entire standalone businesses on the basis of one innovation within a larger product or service effort.  We've all seen them.  They are the tweak that makes an improvement in solar panel efficiency.  Or the widget that helps connect various pieces of residential equipment.  Or an improvement to a particular part of a biofuel production process.  On the one hand it's great to see all of this emerging innovation that will eventually be part of a more compelling overall offering in these categories -- it is the aggregation of such improved components that will eventually unlock the breakthrough customer value proposition that will take these sectors to the next level of market adoption.  

But it's time for such aggregation to start happening.

Secondly, it's just increasingly hard out there for companies who are out fundraising.  I know the deal tracking data from the Cleantech Group et al suggests that deal counts and dollar amounts of cleantech VC are back to where they were in the 2007-2008 timeframe.  But take it from me, it's really hard out there.  I am seeing so many companies out raising money right now, and many of the deals that are taking place are being done largely as insider rounds.  Certainly down rounds remain the norm.  And in addition, it's impressive and scary how many VCs themselves are out fundraising or gearing up to be fundraising.  This is a bad leading indicator for startups.  So many funds are probably tapped out for their current funds, and then will clearly have trouble raising their new fund, that additional capital won't be there for a while.  So startups are already having to work hard to raise new capital, and it's just going to get worse.

Nevertheless, there definitely is still capital available for really compelling stories.  And as an overall observation, the more comprehensive the story, the more compelling it is to investors.  If you are providing a complete solution to customers, with a strong economic value proposition, driven by multiple innovations across the full tech/product/service offering, and owning as much of their spend in that category as possible, that's much more compelling than being a tweak or a component level innovation.

Thirdly, top notch management remains the single most limited resource in the cleantech sector.  There are lots of good management teams out there with emerging experience and/or pieces of the complete skillset that will be required in order to make a startup a rousing success.  There are, however, very few GREAT management teams with the complete skillset already in place.  This is really tricky, but generally speaking the more you can combine and optimize these teams by bringing them together under the same roof, the better chance you have to aggregate a great management team out of a set of good managers.

Like I said at the top, rolling up startups is not to be taken lightly.  It's really tough to do, and has a high rate of failure.  It will likely require specialized expertise and assistance.  But it's time for a wave of it to take place, because of the economic times we're in, and because cleantech markets are in need of more comprehensive solutions.  Cleantech startups, and their backers, need to be increasingly looking for such opportunities.  

There's been an uptick in M&A activity in cleantech, according to the latest figures.  This likely represents opportunistic purchases for the most part by larger incumbent players.  Startups need to begin playing the same game, or they'll be left behind.

Some brief thoughts from the European Energy Venture Fair

Rob Day: September 9, 2010, 2:25 AM

I am in Zurich this week attending the 2010 European Energy Venture Fair.  It's a good "one stop shop" event for meeting most VCs and investors involved in clean energy in Europe.  It's very heavily geographically focused -- there are not many investors from North America who aren't cross-Atlantic shops, and I haven't found many Asian investors, etc.  And so I assume it makes it a nice cross-section of where European cleantech investing is right now.

So some quick thoughts in no particular order:

1. In going around the room (~200 or so participants), the first thing that strikes you is how many smallish funds there are in this community.  <$200M in size, even for growth-stage focused investors, seems to be the norm.  Often <$100M.  It's unclear to me whether that's reflective of difficulties in fundraising in comparison to North America, where venture capital is more established within the LP community, or whether it's reflective of smaller deals here on average.  I think the two are related.  Smaller funds mean smaller deals mean more conservative growth paths (ie: lower cash burn) at the startups means smaller funds.  And yet these smaller funds still most often have fairly large teams.  I'm not sure how those economics work for GPs... 

2. The other thing that strikes you is how many of these funds are actively fundraising.  There may be a selection bias (GPs tend to go to conferences when they're fundraising), but still it's at a striking level.  Some proof that the dynamic I'm seeing in North America -- that GP fundraising fell behind in 2009, making for a very crowded marketplace in 2010 -- is also true here.

3. Anecdotally seems like a lot of these investors really sat on their cash last year.  But that Q4 is gearing up to be a relatively up quarter in terms of deal count.

4. Taking a 6pm redeye flight to Europe is a bad idea unless you have a 9am meeting the next morning that you absolutely have to make.  A takeoff at that time is guaranteed to make sure that by the time you're finally starting to fall asleep, you're landing.  Makes subsequent lengthy afternoon presentations on the pros and cons of various battery chemistries somewhat deadly...

5. I'm seeing a distinct rise in the number of cleantech-focused family offices being launched and staffed with former institutional VCs.  I think it's indicative of a two things: a) cleantech venture returns have been disappointing to these families as passive LPs to date; and b) there's increasing interest in developing investment models in cleantech that aren't necessarily the pre-established models of traditional private equity asset categories.  It also shows that there continues to be strong buy-in for the long-term cleantech investment thesis.  I'm also already seeing many of these family offices, and more generalist family offices with strong interest in cleantech, teaming up for deal syndicates and diligence/dealflow resource sharing.  In other venture categories there's currently a (pretty useless) debate about angels versus VCs... but in cleantech there's a much less talked about rise of the "large, flexible investor".  True not just in Europe but also in North America. Interesting to see.  Doesn't bode well for those cleantech VCs who've raised their funds from family office LPs, however, since those LPs may be trending toward doing their own direct investments instead... 

6. European markets for cleantech products and services are strong.  And yet the venture capital community seems small by comparison.  It's not like the market is dominated by outside (ie: Sand Hill Road) investors either.  I think there are cultural and institutional reasons why the entrepreneurs in this region might not turn to VCs nearly so often as they do in the U.S.  Plus, the large corporates have more of a tradition of doing their own technology development here, not essentially outsourcing their R&D to startups like large corporates in the U.S. more often do.  And I think much of the investment activity is to be found in project finance and not technology development.  

7. Not only has this been a strong event, it's also been a phenomenally beautiful location.  Well done by the organizers.