I was speaking with a member of the limited partner community today, and I mentioned an analogy I’d come up with to try to explain what’s going on in the cleantech market right now.
“There are four ways to try to make money at the race track,” I explained. “The first way no investor will admit to, but sometimes does happen—it’s showing up and just walking up to the betting window and picking a horse because you like its name or that they’re the favorite or the owner is your friend.”
“The second way is what a lot of bigger venture funds aim to do—showing up, walking into the stables, checking out the horses with an experienced eye, talking with the jockeys, and making some informed bets. But betting on a lot of different horses, and not expecting to spend a lot of time with any individual one, in order to maximize the chances of betting on an eventual winner. It only works if you know your way around horses already, however.”
“The third way, and the one I happen to like personally, is to be the horse trainer, picking a few horses with good potential and helping them become champions. It’s more hands-on and takes more specific expertise, but again hopes to maximize the chances that the horse you’ve backed is an eventual winner. It’s a tough strategy for a newcomer to jump into, however.”
“The fourth and final way is a bit of a stretch, but the idea would be an investor watching and waiting until the race enters the final turn and then trying to bet on the leader then. You’d have to pay a high price at that point, but at least you have a better chance of backing a winner.”
“It’s this last approach that’s been driving much of the money pouring into the cleantech sector recently, since it doesn’t require being an expert at horseracing to be able to pick likely winners, and so it’s become a crowded approach right now. That may be one reason why some later-stage deals have been at such high valuations.”
The investor I was talking to listened patiently to my (admittedly pretty lame) analogy and then simply pointed out that there is a fifth way to make money: Own the racetrack.
Touche.
Rob Day is a Boston-based cleantech venture capital investor and entrepreneur, and is also the President of the Renewable Energy Business Network (REBN). The views expressed on this blog are those of Rob and his friends and colleagues, not necessarily the views of REBN or Greentech Media or any other group. Contact Rob Day at: (JavaScript must be enabled to view this email address)
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