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The Next Wave of Cleantech VCs

Rob Day: January 30, 2011, 11:21 PM

A couple of years ago, before things went wrong with the economy, there were a fair number of first-time cleantech venture firms out fundraising. Some have persevered in their fundraising efforts. Most have had to stop trying.

It may be healthy overall for the sector over the long run to not have too many funds running around.  But what's a shame is that this weeding out came at a time when the sector was in need of some reinvention, different investment models and different perspectives.  While some of that reinvention will come from more established firms in the sector, some of those newer firms would ostensibly have had a better chance of coming up with that new thinking.

What I find fascinating, however, is that I believe the next wave of cleantech venture firms will come from within.  Across the industry, in a lot of established generalist and cleantech-specialist firms, or having recently left them, there is a cadre of less senior investors who are bumping up against advancement ceilings at their current firms, and are thinking about what they could do in launching their own firm, alone or with others.

Some are cleantech specialists at generalist firms that are shifting away from cleantech. Others are investors with significant experience at specialist firms who don't see an opportunity to advance within those firms, given the likelihood of smaller funds (thanks to the rough fundraising environment) and the current makeup of their firm.  Professionals with five to 10 years of cleantech investing experience, still considered "young" by VC standards, but who've already been through one investment cycle in a sector that itself is young. And sometimes collaborating with these investors are some more senior partners who agree with the need for reinvention and may be looking for new platforms.  

I just got off the phone this morning with yet another such "young" investor who's launching his own new firm, and I've spoken with a number of investors who've already left the firms they had previously been affiliated with and are thinking about putting such efforts together.  I also have a sense there are others out there still at their current firms but quietly thinking about making the jump (if this sounds like you, you're far from alone). The recurring theme of these conversations runs along these lines: "Cleantech venture capital has been done wrong / missed the real opportunity, and we're thinking about some new models or new tactics." Which, of course, is music to my ears.

I think this is an exciting development for the sector, because this means there might be a wave of experienced cleantech investors with a willingness to break with the past, entering the marketplace with new energy and new thinking. The young guns of cleantech venture capital may yet ride to the rescue.

A Litmus Test

Rob Day: January 25, 2011, 12:40 AM

Just finished a very long first day at the Clean Economy Summit in D.C.  Lots of cleantech business leaders in attendance, a great crowd.

I've ended up being in more conversations about the current and future role of natural gas than I expected.  It's clear that the expected continued low cost of natural gas in this country is going to have major impacts on cleantech markets and policies in the U.S. going forward.

Participants were allocated to roundtables on various topics of interest; my group was tasked with thinking about what an effective clean energy standard (the latest rebranding of a national renewable portfolio standard) might look like.  Managers from a wide range of cleantech industries gathered, talking about what would help them out of such a policy.

As per the ground rules of the discussion, I won't talk about what members of the group talked about, but I'll mention some of the points I made:

1. Complexity kills.  

If the cleantech community proposes any new energy policies, they'd better be simple.  Complex policy proposals are hard to message. They're subject to the various cleantech subsectors fighting each other over spoils that matter only to them, eliminating legislative momentum.  And if anything actually gets passed, it creates artificial boundaries, artificial skews to the free market.

2. Rather than ask for more government spending, focus on removing red tape.

Permitting and other approvals require significant effort and create significant obstacles for the implementation of clean energy technologies. And even if such red tape is evenly distributed across all energy projects, the transaction costs end up discriminating against smaller-scale projects, which basically means discriminating mostly against clean energy projects.  Before asking for more handouts, the cleantech community should start by asking for harmonization of local permitting and approvals, and a general reduction of government red tape that is standing in the way of clean energy implementation.

3. Natural gas is my litmus test for any new clean energy standard.

If you start from the perspective that natural gas prices are low and are going to continue to stay low, natural gas becomes the market price standard for any new generation project.  A lot of the discussion today danced around a couple of critical parameters of any clean energy standard: How high a percentage of the energy generation mix should be "clean energy" (with an inclusive definition including natural gas and some other "cleaner" fuels versus the incumbent mix), and what proportion within that clean energy mix should be allocated to specific technologies like renewables, energy efficiency, and natural gas.

To me, the litmus test is simple. An effective clean energy policy results in increased consumption of all three of renewables, energy efficiency and natural gas compared to the status quo, with enough flexibility that states could achieve their targets without increasing costs for utility customers (by offsetting lower-cost techs with higher-cost emerging techs) if they so choose, and with a dominant role for the free market in choosing specific technologies to implement.  If the policy ends up actually reducing the use of natural gas versus business-as-usual, it's skewing the market too much away from the market-making price. If the policy ends up seeing natural gas use expand while renewables and energy efficiency are getting pushed aside, it's not an effective longer-term strategy.

There should be a broad range of fairly simply-designed policies that meet this test -- although the targets may be higher than some politicians are ready to support right now.

Solve a Local Problem

Rob Day: January 22, 2011, 2:03 AM

My hometown was fortunate to be the recipient of a Massachusetts Green Communities award this year.  So I showed up at the town Renewable Energy Committee meeting to see if I could help.  Being the fourth person in the room, it turned out to be a bit more interactive than I'd expected.

On the table were proposals to do major energy retrofits of the town's schools; financing a solar system on one town building's roof; marketing campaigns to get residents to do energy retrofits for their homes; funding a geothermal heat pump for the library; putting up a wind turbine at the athletic fields; purchasing more efficient street lamps; etc.

In other words, a pretty wide range of choices that the town has to deal with, with limited resources.  And it'll be fun to help them think through their options...

But what it also brought home was the major gulf between the pretty high level at which we cleantech investors and entrepreneurs often operate, and the very specific challenges that are faced locally.  

So often, I get approached by cleantech entrepreneurs who have a better mousetrap... but they haven't ever actually caught a mouse.  

It's not unusual for me to see a business plan for a new energy generation or energy efficiency product or service that assumes rational customers with plenty of opportunities to make the correct choice when faced with a wide range of options.  It rarely works out that way in reality.

The devil is very much in the details -- and in the available options and information --  in energy markets.  In my town, they're essentially forced to work with a certain pre-approved ESCO for almost all of the above.  That significantly reduces their technology options, and their vendor options.  They are given a choice of a short list of solar financing options, each of which means they don't have control over the form factor of the solar generation tech to be used.  Concentrated PV systems?  Forget it.  The choices are dictated by the financing partner and ESCO.

Similarly, I could tell by a quick look at the energy efficiency proposals from the ESCO that they were probably incomplete.  At least in regards to the increasingly rich set of technology options available to customers.  LED lighting?  Forget it, not an offered option.  And forget about smart windows or BIPV or new HVAC tech.

Partly, this is just a failure of the ESCO model, which is one reason why the "MUSH" market (municipal, university, school, hospital) may be willing to use ESCOs, but private sector building owners hardly ever use them.

But mostly, this reflects real conditions "on the ground."  Why should my hometown government take any risks on a new tech?  Why should they fight with their local utility, or the state governing agency, or the pre-approved ESCO?

So here's my advice to energy tech entrepreneurs:  Start with solving a very local problem.

If you have a great idea for a new energy tech, that's awesome.  Go talk to your town or local customers about it.  See why they might be interested in it.  See why they might not be able to get the full value out of it.  Get very serious very quickly about what it would take for it to actually be implemented PROFITABLY in your town, or with a local customer.

Does your product not qualify for rebates for some reason?  Does it not fit into existing energy procurement processes the customer may have?  Does it not physically fit in their building and/or grounds?  Can they not actually capture the savings you're creating, because of the way the utility bills them?  Does capturing savings require behavioral changes that are unlikely for the people you're talking to?  Is it simply not interesting given the current energy prices where you live?

Get really in the details, very quickly.  And the best way to do that is to try to work with a customer very close to you, very early on.

In these often complex energy tech markets, it's important to get the lay of the land early on, before starting to build an expensive tech or offering that then needs major adjustments before the real world can actually use it.  And being able to demonstrate a real-world implementation can also help show a level of credibility to investors and follow-on customers that can be important as well.

"Think globally, act locally."

Looking Forward to the Clean Economy Summit Next Week

Rob Day: January 18, 2011, 12:03 PM

Regular readers will recognize the Clean Economy Network from my past mentions of the organization, which has been establishing itself as a nonpartisan voice and community convener for the cleantech industry in Washington, D.C. and in regional chapters across North America.

They're going to be hosting their first annual Clean Economy Summit next week.  An invite-only event to bring together 150 cleantech CEOs, investors and top policymakers for two days of networking and market/policy planning.  I'm looking forward to the event, which promises to be a pretty interesting crowd.

As we look forward to the next wave of U.S. cleantech, what market and policy priorities do you think should emphasized by this group?  Given current economic and political constraints, what are the most important things for this crowd to keep in mind over those two days?  As co-chair of the Clean Economy Network Education Fund's board, I'm going to be handling a few of the emcee duties, and I'd like to insert some of YOUR thoughts and concerns and ideas... So if you'd like to, please share yours in the comments section below this post.  We're all trying to build a robust cleantech community, and while this is a pretty exclusive event, I'd like to help make it inclusive as well...

Also, if you get a chance, check out CEN's new blog, Clean Economy Capitol.  Well worth checking out.

I'll report back from the Summit. Stay tuned.

How to Raise Venture Capital for a Cleantech Startup in 2011

Rob Day: January 10, 2011, 10:21 PM

These are tough times for cleantech startups in need of capital.  In the 2010 cleantech venture tally recently put out by the Cleantech Group, despite their positive spin on it even they had to acknowledge that Q4 was a second straight down quarter -- only Q1 and Q2 made 2010 look good.  Heading into 2011, while I do think there will be a bit of an upward trend, there's little reason to think VCs are going to start pouring significantly more capital into the sector anytime soon.  

So what is a cleantech entrepreneur to do, just fold up shop?  Some will be forced to do so.  Others will turn to alternative sources of funding (grants, NRE from strategic partners, or non-VC funding like angels and family offices).  But for those out there looking at raising venture capital in 2011, I thought I would offer some words of advice.

This is all just one investor's impression of what will work overall, based upon lots of calls and meetings per week with entrepreneurs seeking funding.  This list might be inappropriate for the specific investor you're speaking with.  It might just be flat out wrong.  Take it for what it's worth, food for thought.


1. Be prepared to hold a lot more meetings and take more time than you usually would have to

I've never seen such healthy deal flow as I do in the market right now.  To the point where I just can't keep up with it, which is pretty frustrating. 

From the entrepreneur's perspective this simply means more meetings and more time to get the deal done.  Expect it, and plan for it. Start the fundraising process early.


2. Pre-qualify your prospective investors before spending too much time with them

With so many cleantech investors themselves short of capital, many just simply aren't in the market for new deals.  But they can't say as much.  So I hear a lot of investors say they have room for "one or two more deals" in their current funds.  Some mean it.  Others are just saying it, so that they have the excuse to keep seeing deal flow -- they need to show LPs they're seeing interesting deals.

Ask them if they're out raising a new fund.  Ask them not just if they have dry powder for new deals, but what and when was the last new deal they did out of their fund.  When possible, create a sense of urgency, a sense that the deal is moving somewhat quickly -- not so quick that you drive investors away unnecessarily ("we're expecting term sheets in two weeks!") but enough where you shake out the investors who simply don't have the bandwidth or fund situation to move quickly ("we're looking to bring in term sheets in about a month").  Be proactive about scheduling the follow-on meetings with a good pace to the iterations.  If there's an investor you like and they just can't deal with putting out a term sheet in that kind of time frame, or keep up with once a week meetings, be respectful and understanding about it, but you might need to consider them more as a syndicate partner for the eventual lead.


3. Lead with the team

Many investors are increasingly aware that the innovation cycle in cleantech is often much faster than the market adoption cycle.  This is de-emphasizing the importance of one innovation versus another, because it creates a backlog of innovations. I often describe the current period for many -- but not all -- cleantech sectors as "VHS vs. Beta time".  Furthermore, when times still look a bit rocky investors are needing to feel confidence in the teams they back.  For these and other reasons, with a few exceptions many investors are making Team their single biggest decision-making criterion.

I've certainly talked with some investors who still feel that the innovation is the most important thing.  And that the investor's role is to build the team around the innovation.  That's fine, and may work well for them.  But for me, in an era where I see a backlog of more than 200 venture-backed solar startups (for example), what are the odds that one solar technology truly is so much better than any other solar technology that it can succeed regardless of the caliber of the team?  It seems much more likely that the successful investment might not be the single best technology, but instead will be a pretty good technology but a world class team.

So I and other investors increasingly need to get to know the team as a first order of business.  Therefore put it up front, in your pitch and in your message.  Tell the investors about the team, and specifically why this team has an extremely high chance of succeeding in this particular challenge.  Don't just do the classic 1 page, 3 one-line bullets per team member, very resume-oriented slide, squeezing in a brief mention of advisors.

We're all familiar with the chronologically-structured format of a resume. There's an alternative format to resumes where you organize your accomplishments by key functional areas of relevance to the specific job you're seeking.  Do that, but for your senior team.  One page where the key functional challenges the team faces are juxtaposed with the past accomplishments embodied in the senior management team that address those challenges.  Then another page to give the more basic biographical information.  

It's not just about past successes.  Focus on demonstrated skill sets, not some lucky exit one team member had in another sector some time back.  

And don't try to hide gaps in your team.  Show self-awareness.  A gap in an otherwise strong team isn't a problem for many investors, it's an opportunity to display "value-add"... as long as the rest of the core team is solid, and is 100% in favor of filling those gaps, even when they're at very senior levels (perhaps even CEO) in the management team.

Your goal is to make an investor feel confident that this is a team that will succeed one way or another.  Not hopeful the team can make it work, with help from investors.  Not just impressed with the potential of the team. But confident that this team already knows what they're doing for this specific business and market, and pragmatically understands their strengths and gaps.


4. Paint a vision of what a big win could look like

Don't be afraid to describe a very big vision of how your effort could reinvent a multi-billion dollar industry.  With many investors hoarding their remaining capital, they're not going to be looking for investments that can only provide moderate returns even if they succeed.  These investors want to feel like there's a really big potential story to be told.  Remember, you have to tell a story that's plausible enough that the investor would be able to describe it to prospective LPs with a straight face.  Don't manufacture a big vision just to do so -- but if you believe in one, don't hold back.


5. Don't be afraid of niche early markets

Even while presenting an exciting story of market reinvention (or whatever your "big win" story looks like), be ruthlessly pragmatic about early market entry.  You can't reinvent any cleantech market in year 2.  But you need revenue in year 2.  Often what appears to work (at least to me) is to find an early-adopter niche market for your tech/service/product.  A niche where the economic value proposition is clear, the playing field is less crowded, there's an openness to trying new things, and direct sales is an accepted model.  And hopefully where your team already has made some inroads, in enlisting early trial customers if not actual contracted revenues.

I know some investors who feel these are just distractions, and that want their startups to go after the big market with single-minded purpose from day 1.  I disagree, at least within most cleantech sectors, because these markets can be so hard to penetrate, much less dominate.

The niche market becomes your beachhead.  It reduces the risk of the effort, brings in early cash, accelerates your learning, and in fact helps you gain the legitimacy you'll need when you start going after bigger fish. 

After all, even black swans need to learn to swim before they can learn how to fly.


6. Be flexible about the amount of money you'll take

Increasingly, I see a mismatch between the funding needs of a company, and the size check that investors want to put to work.  And it may surprise you to hear that the problem's often not companies asking for too much money, but the opposite.

A lot of surviving cleantech startups have made it this far in the economic downturn by really running lean.  Especially with such a recent emphasis on "capital efficient" business models.  So they may need only a few million dollars in new outside capital (especially if existing investors are exercising their pro rata rights in a follow-on round).

The problem is again that many investors are looking at doing fewer investments, so they want them to be big ones.  Which means when they find one they think could be a big one, they want to put more dollars at work and own more of a percentage of the company.

There's a valuation component to the decision, of course.  But also, startups need to be open to taking in more capital than they need.

On the other hand, I see many early-stage startups that are at an angel stage but are looking for venture capital dollars.  These entrepreneurs need to think about how to break up their fundraising needs and either raise a smaller angel round to bridge to an eventual venture round, or structure a tranched venture round where the VCs don't have to put too much capital at risk until they see significant progress.

Finally, don't be too dilution-sensitive.  Easy for me to say, I know.  But be realistic, and focus on the bird in the hand more than the birds chirping away in the bushes.


7. Remember your prospective investors are viewing you through an LP lens

Even those VCs who aren't out of capital are keenly aware it's a tough fundraising market for them for their next fund.  And so every investment they make is one they're going to have to justify not only on IRR grounds, but also as an indicator of what kinds of investments they'll make in their next fund.  Especially since so many of their IRRs remain unrealized to date, they need really compelling stories to tell.  

So help them tell your story.  LPs need to understand how an investment fits into key themes the VC is pitching them on.  So figure out what those themes are.  Go ahead and bucket yourself, it's going to happen anyway so you might as well figure out the tagline and category you want to be associated with.  Once you get a pitch meeting you can demonstrate more of the depth of your thinking.  To get the pitch, boil it down to a one-liner that sings.

If you're in an out-of-favor sector, punch that shark in the nose.  Tell investors you agree with the reasons why your sector is out of favor.  But then tell them why your business is the exception, and why.  It may be a more interesting application of a technology that never got market traction in other applications.  It may be a significantly better way of making a product where others failed on cost and performance grounds.  But make it absolutely clear that a) you understand exactly why the investor will be skeptical and for good reason; and b) you can arm them with what they need to be able to tell the story to their LPs, so that they sound smart and contrarian, not clueless.


8.  Be polarizing

No, I didn't say be political.  What I mean is that you need to be very distinctive, as a business.

Labrador Retrievers and Golden Retrievers have been the most popular dogs in the U.S. since 1991.  Did you know that no Lab or Golden has ever won the Westminster Kennel Dog Show?  The winner always seems to be some funny-looking dog, often a variety of dog you've never heard of even if the general category is familiar, and probably a dog that some people roll their eyes at and some people love.  That's what you want your pitch to be.

If you design your pitch to be all things to all people, you'll probably be a solid B-grade investment opportunity in the eyes of most VCs.  And only A-grade investments are getting funded right now.

If you go ahead and be bold in your vision, and take a very different tack on things, and are a bit contrarian, you'll turn off some investors.  But to others, you may really stand out.

No need to be a jerk about it or anything, and remember it's dangerously easy to cross the line from "different" to "not credible".  Don't manufacture some strange point of view just to stand out.  But figure out what makes your business truly different.  And really emphasize that, pretty much no matter what it is.  And when investors push back on that ("no, that's not how you should try to sell this product'), go ahead and respectfully disagree. The dialog will be healthy.  And although you'll turn off some investors who are just convinced you're wrong, you might really turn on some investor who sees something that stands out.

It would probably be best to try this out on some peers, or even better investors who are willing to help but won't be a fit, before you go to investors you care about.  Really easy to hit the wrong tone here.  But it's basically like dating... Be yourself, and emphasize what makes you special, don't just be one of the crowd.


9. Be prepared and thorough

Show that you have a really good depth of understanding of the specific markets you're going into.  And a deep knowledge of your competitor set.  And a healthy respect for the challenges other companies in your sector have encountered before you.  Show that you know this is hard and you're doing your homework and taking a sober approach to your otherwise contrarian and breakthrough vision, in other words.  

I meet with too many entrepreneurs who try to tell me it won't be as hard as I know it will be.  And who haven't heard of the competitors I mention.  And who kind of wave their hands when describing the potential customers they'll sell to, with an air of "well, we'll figure that out when we start talking to them for real."  Uh huh.

Also, make sure you know what's going on in your sector not only in your local region, but across North America if not globally.  These are global markets, and it's very easy for entrepreneurs to get parochial and think they're something special just because they haven't talked to anyone in other innovation regions -- which can be deadly when they find out too late that others elsewhere have been doing the same basic thing.


It will be tough to raise funds from new investors in 2011.  But not impossible.  Even in a down market, there are investors actively out there in the market, looking for great things.  I hope these suggestions, while explicitly to be treated just as food for thought and NOT as direct instructions, help you show investors how great your company really is.

The Good, the Bad, and the “Ugh”: Cleantech and the current web bubble

Rob Day: January 3, 2011, 4:47 PM

I've spoken with a few cleantech investors and startup CEOs lately, who naturally mention and opine about the recent high-valuation fundraisings in the web space, but for the most part without a sense that it really matters to anyone in the cleantech sector.

But far from it being inconsequential or just something to feel a twinge of jealousy about, instead I'm starting to see some real implications -- both good and bad -- for the sector as a result of what's increasingly looking like a new web bubble (or "wubble" as I've been calling it on twitter, because then at least it sounds small and cute and manageable).


The Good:

First and foremost, cleantech VCs are just glad to see any venture capital successes in any sectors right now, what with LPs being so down on the overall asset category.  So any validation of the venture capital model should help with fundraising, particularly for generalist funds with some cleantech activity.  And cleantech CEOs are happy to see any VCs right now with money to invest.

Secondly, the cleantech venture sector is in dire need of a secondary market, or "interim exits", that would allow founders and investors to get some earlier returns, even if not complete exits.  This is true for all venture sectors, btw, but especially true in many of the most popular cleantech sectors where the gestation-and-commercialization cycle has been so long.  So if the "pre-IPO public offering" pathway being opened up by Facebook and Groupon allows some solar and fuel cell startups (for example) to achieve some partial exits by taking the same path, then that can help the sector mature as an investment area.

Third, those of us urging more web-like and other capital-lite models in cleantech now have even more inspiration to go find those.  I'll discuss that more below.


The Bad:

I have to admit I feel more trepidation than eagerness when I see this current "wubble" building up.  

For a while now, in many venture-backed sectors including cleantech, a few smaller banks have been using the special-purpose vehicle route to enable "high-net worth individuals" at increasingly low (or at least unverified) actual net worth levels to invest in privately-held companies, at inflated valuations.  I and many others in the sector have received the pitch of "Now you have the opportunity to invest in a [brand-name VC] backed company before the IPO!" multiple times, for some of the most-hyped companies in the sector.  This pitch builds on carefully-built publicity and hype around a company, plus the brand equity of their venture backers, to bring in a pool of small-check investors who ordinarily would be locked out of investing in such privately-held companies.

Here's one overly-simplified way it works:  The bank in question creates an SPV, which then extends a term sheet for a 'venture round' to a recognized startup.  The term sheet is at a pretty high valuation, higher than a typical VC would be willing to value the company.  Why?  Because the banker actually isn't as motivated around returns.  It's not their money, the SPV is just a pass-through vehicle formed to satisfy SEC restrictions around the number of investors a privately-held company can have without having to report a lot of private information.  And the bank takes in fees from investors who participate in the SPV.  So the SPV is willing to pay a pretty high premium in order to be the lead investor (or at least major participant) in the round, just to gain access to those fees.  Of course, the higher the valuation, the more likely these individual investors won't be interested in participating.  But a) bankers make some pretty compelling pitch books; b) these individual investors aren't very sophisticated about making sense of private equity valuations; c) the bankers don't have to convince ALL investors, just enough of them, and given a deep enough rolodex they can reach a lot of individuals; d) just like in everything else in life, the level of publicity and hype obfuscates a lot of reality; and e) if the SPV falls a bit short, they can reduce the valuation, or just put in a smaller amount of money.

The most important criterion for the bank, therefore, isn't "what's this company worth", but instead "can we sell this story?"  In effect, these are angel-led follow-on rounds... with a term sheet written by a banker... and lots of really small angels in the round... and often some of the proceeds going right out the door to founders and perhaps some existing venture investors.

The existing venture investors get to point LPs to a big write-up, because a big round was raised at this new higher valuation.  And when the valuation is inevitably "leaked" it becomes a PR event in and of itself, lending more of a sense of massive momentum around the company, which leads to even more news coverage, etc etc.  When founder shares are then made available on one of the various secondary markets for privately-held stocks, those sales now of course also are based upon this new, higher valuation plus the additional publicity, so you can start to see implied valuations that are quite high.

This hype and valuation cycle lends itself very well to an eventual high-flying IPO for a deserving company.  Or even without that, to subsequent semi-exits by founders and early investors either through those secondary markets or (more likely right now) via redemptions after subsequent "venture" financings.  

Which is also why bigger-named bankers are now getting in the act.  Because by organizing an SPV-led venture round like this, they not only make fees for that round, if they can also thereby make sure they're the bankers who manage the eventual IPO, they're in line to make huge additional fees at that time.  

None of the above is inherently nefarious, it could be a good answer to a problematic IPO environment.  It certainly opens up good opportunities for founder and early investors to be rewarded in advance of an IPO.  And it gives more high net worth investors an opportunity to make direct investments in venture-backed companies, rather than the other routes of having to either be very early angel investors or indirect investors as LPs in a venture fund.  To be clear, I'm not at all arguing simplistically that "hype is bad."  Hype can be good, too, and either way it's certainly a powerful and legitimate tool for venture capitalists to deploy when seeking out good returns on their investments.  And I'm not at all against the continued democratization of venture capital.  In my opinion, that's a good thing, if done right.  And hey, even investment bubbles can have some good impacts, if their inevitable "pop" doesn't have too many destructive side effects.

But as you can tell, I believe the current hype-fueled process and deal structure also provides strong misincentives for valuation inflation along the way.  And for poor quality control by the bankers.  And while as an investor that doesn't bother me per se, it worries me if there ends up being a backlash when these high valuations don't end up working out well for participants in the SPVs or secondary markets and there's a regulatory/political backlash at some point, meaning that this new exit pathway gets shut down.  Or if these now very-hyped, very highly-valued companies fail to follow-through on blockbuster IPOs and thus end up lending the entire venture capital category yet another black eye among LPs.  Or if, when this bubble pops, it has too many destructive economic side effects, which is why it especially bothers me to see the lax qualifications of "high net worth individuals" I've gotten the impression are sometimes being used -- "click here to agree you're a high net worth individual", etc.

And then there's this, specific to cleantech:  I'm now seeing a fair bit of anecdotal evidence that this type of story in the web sector, in the context of an overall brutal VC fundraising environment, is redirecting VC resources out of cleantech and into web investing.  Venture investors wearing both Web and Cleantech hats now much more obsessed with the former.  And now even a few cleantech colleagues at generalist venture firms who are being told to go find new jobs, because the firm needs to raise a new fund and "faster, bigger" exits in web investing are where the firm needs to pitch prospective LPs, not cleantech.  Which fits with what one LP I spoke with a while back told me, "venture capital only makes sense when there's a bubble."  Well, if there's a bubble in web investing and not in cleantech investing, this will therefore be the reaction of LPs, as reflected by their GPs.

Okay, so what, the money should go where the returns are, right?  Indeed, very selfishly, having fewer cleantech investors out there competing with me for deals is probably a net good thing.  I've never seen more attractive, uncompetitive deals in cleantech venture capital than I'm seeing right now. But if it means having fewer good co-investors and follow-on investors I can turn to, that's not good.  And for cleantech CEOs out there, this is a very bad thing, because it portends even more difficulties in the future in trying to raise the capital necessary to get cleantech startups up and off the ground.


The "Ugh":

The last thing I'll mention is that these stories also very legitimately challenge the cleantech sector overall, because they point to a core difference between the kinds of Groupon and Facebook startups that can command this type of attention, and most cleantech startups.  And that difference is, in short, network externalities.  The "virtuous cycle".  The way these companies build momentum that feeds on itself.

The more customers use Groupon, the more vendors want to use it.  The more vendors use it, the better the deals, the more customers use it.  And so on.  I don't have to buy into the specific inflated valuations being thrown around out there in regards to Groupon, but I do have to admire their business model and understand why it should command a high valuation in general.  Virtuous cycles are what made the venture capital category what it is.  It's not the only kind of business VCs can invest in to make returns, but it's at the core of the VC model, insofar as it's typically applied and talked about among LPs and the popular media.  It leads to really fast growth and high valuations, when it works (easier said than done, of course). 

So far, despite a lot of looking, I haven't seen many examples of virtuous cycles in terms of the business models being deployed in cleantech.  Instead, I've seen lot of emphasis on cost-advantaged manufacturing of products that will then compete against each other on price, which if anything is a vicious cycle.  Not a lot of products or services where the more customers buy them, the more valuable they are.  Some exceptions do exist (I like lighting controls, for example), but if you're looking for truly web-type network externalities in cleantech venture capital, we haven't seen too many of them over the past decade-plus.

I hope the "wubble" doesn't end up having too many negative impacts on the cleantech sector or the venture capital category overall.  But even more so, I hope that cleantech entrepreneurs learn the key lesson from it, which is to go find and launch business models that will benefit from virtuous cycles in the energy, water and materials markets.