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How This Cleantech Investment Firm Is Tackling the Next Wave

Rob Day: February 26, 2013, 7:10 PM

Just stepped out of a great RFK Compass event, where I took the opportunity to deliver some of my current message to the limited partner community in person. And it occurred to me that, while I've put bits and pieces of the thesis into past columns here on this site, I've never really explained how we at Black Coral Capital are ourselves tackling the next great cleantech investment opportunity -- and you might want to know whether we practice what I preach. I've been reticent to turn out a column that's a blatant self-advertisement, but if you'll forgive me this once, I'll lay out what we're aiming to do and then you can all judge our performance over time... 

As background, we started Black Coral around 4 years ago as a blank sheet of paper, trying to answer the question "if you actually wanted to make money in the cleantech sector, what would it look like?" We had a conviction that there was a huge macro-opportunity here, but also a recognition that none of the GPs in the sector (myself included) had yet proven that they knew how to reliably make money investing into these opportunities. We also were fortunate enough to have secure capital in place and didn't need to go out to the limited partner community as a first-time fund.

So we embarked on a period of some experimentation and network-building, to accelerate our learning directly and via others. I come away strongly believing that there will be multiple "correct" answers here, several different strategies that will make money over time (and you can see some of my earlier thinking on this here, which surprisingly has not yet grown stale).

Important additional context for our team in particular, then, is that we have from Day 1 believed very strongly in finding and backing only the very best management teams, using a very rigorous methodology borrowed from elsewhere in the private equity world. And also that we wanted to take advantage of our flexibility, rather than to try to "out Sand Hill Rd." the various Sand Hill Rd. denizens. They're smarter than we could ever be, so we should try to do what they can't or won't.

Over time, this has led us to really focus on tech-enabled and non-tech execution plays, and to avoid commoditization cycles wherever possible (but in fact, where possible to take advantage of them). Our view is that venture capital investments into clean technologies have been very successful over the past few years, in terms of bringing to the market new technologies that are capable, reliable and cost-effective. But that the market hasn't been ready to rapidly adopt those technologies. Thus the adoption cycle remains too slow for capital-intensive, high cash-burn commodity producers to get down their cost curve before they run out of runway, in far too many instances. (And thus, the lack of compelling investor returns in the sector)

So from our perspective, the opportunity now lies in market reinvention. Figuring out how to accelerate how people buy, sell and deploy these new technologies, in scalable ways.

This requires a new type of investment thinking, at least as applied to the cleantech sector (although it's really old-hat in some other venture investment sectors).

It means focusing on new business models, not solely on breakthrough technology innovations.

It means finding strong executing teams as a first-cut investment criteria, not as a secondary consideration after sectoral thesis and proprietary IP ownership.

It means being perfectly okay with "stealing" good ideas that are already well-understood from other sectors (e.g., web-based marketplaces) where they are applicable and adaptable to these change-resistant markets.

It means finding world-class teams who are tackling difficult market adoption challenges, with technology or non-tech solutions; and those solutions cannot be "but we can make it cheaper than anyone else" as the major point of differentiation.

In many cases it means finding teams that have developed advantaged innovations, but who then seek to control their own destiny;  so they themselves deploy those innovations downstream (i.e., embedded controls vs. standalone) rather than trust that a market will emerge downstream smart enough to value and reward them for their efforts, at least in the near term. Bundling their innovations into a full market-ready solution, in other words.

It means being open to growing, and then using that scale to drive new innovation into the marketplace; not the other way around.

And it means sometimes being a "VC," sometimes being a project finance investor, and sometimes investing in entirely different business models and investment structures than either of those two approaches would typically back.

It also (along with the make-up of our team) steers us away from opportunities with major science risk, because what's the point of going through all the trouble of vetting a high-execution team if execution isn't really in their control anyway ("sorry, but the bugs died in the test tube").

A lot of the market is shifting in this direction over time, and certainly various parts of this approach are already being deployed by various firms out there. Everything I describe above is in fact where VCs have made a ton of returns over the years, in other sectors (think about how the dot-com revolution was really market reinvention surfing the wake of a prior wave of IT/telecom hardware commoditization).

But in cleantech, I don't see this approach being deployed comprehensively, consistently, and in practice the same way we do, so we don't yet see any existing investors for us to simply dovetail behind. So we'll continue to focus most of our efforts on our direct investments versus our LP activities, at least for the time being.

And while it remains early days, our early results have been quite positive. While I of course can't divulge many details of our portfolio performance to date, I can tell you that across our entire portfolio last year we saw revenues grow 84% year over year. We don't have the ultimate evidence yet in terms of a lot of realized exit activity, but we feel we are at least helping great entrepreneurs build solid businesses and we are hoping that helps lead to strong results.

But we shall see. Apologies for the self-advertisement post here, but rather than simply describe parts of our thesis I wanted to lay it all out one time. Because now it's time for us and others tackling the reinvention of cleantech investing to start not only showing some results, but showing our work along the way, so that everyone out there has a framework for understanding the results over time.

And to be clear, I think there are other really interesting and potentially valuable (and completely different) approaches being attempted out there in the marketplace. I've seen some really smart approaches to backing "black swan" proprietary technology R&D efforts; to project finance; to subsector-specific efforts; etc. I would encourage these other investors to also lay out their theses (here's one!).

Because I think we're going to start seeing some compelling but early data points about the validity of these new approaches to cleantech investing, and we all need to understand the frameworks underlying them or it's going to simply appear as some randomly-generated success stories in a sector otherwise still dominated by v1.0 type thinking (amidst a lot of continued v1.0 shakeout).

Let the cleantech investing revolution begin. And let it be televised blogged. 

The Cleantech Investing Summit I Would Like to See

Rob Day: February 8, 2013, 4:53 PM

Stopped by the Cleantech Investor Summit out in Palm Springs this week -- meant to stay through for the entire event, but Nemo forced me to scurry back to Boston on an earlier flight.

Ira and his team always do a terrific job of running that event, it's always a good networking opportunity and they get big names to come speak. And Tesla test drives, of course.

But it seemed to me like yet another missed opportunity. With so many cleantech investors and their ecosystem partners under one roof, it would have been great to see more exploration of the emerging "next wave" of cleantech investing strategies. Instead, most of what was presented was what I call "old Cleantech VC": capital-intensive upstream technology bets. 

Until recently, such investments really defined "cleantech venture capital," in the eyes of GPs, LPs, the media, and entrepreneurs. But over the past couple of years we've seen the emergence of a few different takes on the sector, and it's time we had a major industry event really explore these kinds of strategies.

I would love to see a full-day event where a few innovative investors were given the platform to present their strategies and analyses in short plenary talks. Matthew Nordan to present some of his quantitative research into cleantech venture returns and key success factors. Sunil Paul to present his Cleanweb thesis. Whitney and Scott at McRock Capital to present their intelligent infrastructure focus. Sarah Wood to discuss her efforts working with family foundations to promote program-related investments (PRIs). US Renewables Group to present their more project-finance oriented approaches. And yes, one of my colleagues at Black Coral Capital to present our market-innovation (vs. tech-innovation) approach and our collaborations with other family offices. As just some examples among others.

In between these presentations, there could be presentations by some of the startups and established companies that are touchstones and early examples of these approaches. From bigger companies like Tesla and EnerNOC and SolarCity to earlier stage companies like Noesis and Sidecar and Propel. They could present their businesses, but especially their capital strategies and how they look to interact with cleantech investors in the new era.

We're all working hard to reinvent cleantech venture capital, with an eye toward returns-producing investment strategies. And there won't be one right answer, there will be several, it seems to me. But at just about every industry conference I go to these days, most of what's discussed is the old paradigm, with companies that were funded that way but couldn't get funded that way today.

That's not looking forward, that's looking backward. And I think our industry would be well-served at this point to have a real forward-looking event, so we can kick-start more of the necessary conversations about what's next. Those conversations, plus some good results starting this year from these new approaches, would be what would unlock LP interest in the sector. And that's necessary, because it's the LP community's utter disinterest in cleantech right now that's the limiting factor. 

I've never seen better entrepreneurial teams in cleantech. I've never seen more interesting, pragmatic business plans. The underlying markets are growing strongly and seem poised to continue to do so. The large corporates seem more serious than ever about getting into cleantech with strategic intent. The one missing, and yet vital piece is the venture capital dollars, and if the LPs aren't giving any capital to the VCs, the VCs can't put any money into this next wave of startups. 

We're not going to fix that by fixating on the old paradigms of cleantech investing. So it would be great to see one day that gets a lot of attention focused on potential next paradigms for cleantech investing.