We've been talking about the need for new investment models in cleantech venture capital for some time now. A couple of years ago, I put out a presentation calling out some of the more unsustainable trends in cleantech VC in evidence at that time. By now, many of those trends and practices are even more upfront in the minds of many investors and LPs. In the meantime, the cleantech venture industry has entered a period of significant stress. . . and potential reinvention.
Over the past few weeks, based upon lots of conversations with fellow cleantech investors, LPs, and entrepreneurs, I've been working on an effort to look forward to what's next for the sector. It's been an evolving perspective, informed along the way by the helpful comments of these colleagues, and below is a presentation which covers much of what we expect to see develop in terms of new models and emerging trends in cleantech venture capital.
What's really guided me in thinking about this perspective has been my own experiences as a cleantech investor over the past seven years -- where I've made bad investment choices, and where I've made ones that I still feel good about, and why. Where I've been able to add value to my portfolio companies, and where I've been frustrated at my relative inability to do so. I've raised money from LPs, and I've been an LP. I've had good exits, and I've had write-offs. I've tried to capture a lot of these lessons here.
On the whole, what I believe we need to see is more specialization -- more specialized roles; more sectoral specialization. What we've learned over the past few years is that this is hard, that cleantech markets don't necessarily lend themselves easily to venture capital models. However, I reject the thinking that says venture capital models can't be applied to cleantech sectors at all. First of all, which venture capital model -- the biotech one? The social media one? And secondly, which parts of cleantech? We know quite clearly now that cleantech is really not a sector -- it's an umbrella investment thesis developed around natural resource shortages, tying together several different sectors, industries, markets, geographies, business models, technical disciplines, etc., etc. So rather than trying to apply a one-size-fits-all approach to venture investing in the sector, it's only logical that there be a variety of different "correct" ways to invest in these diverse sectors.
Furthermore, I think it's time for cleantech VCs to stop being so overwhelmingly focused on breakthrough, proprietary technology. It's still unclear whether there are huge investment returns to be made from such approaches. And there are plenty of other places where VCs invest without looking to proprietary tech as a critical factor at all. But in the years I've been a cleantech investor, I've rarely heard any cleantech VC describe their investment approach as being about execution plays and smart business model reinvention -- "What's your IP?" has remained one of the first three questions VCs ask prospective investments. That's not a categorically incorrect approach to investing in the sector, but it's also not a categorically correct way to invest in the sector -- yet that's how it's largely been done to date, with all the resultant capital intensity and long development cycles that that approach entails. But if you look at the (smallish) population of successful venture-backed exits in cleantech to date, quite often, proprietary IP has not been a critical underpinning of the company's success.
A lot of cleantech VCs out there are seeing many of these same trends. But what will they do with this knowledge? That's really what this next phase is all about -- and it will be fascinating to watch as "Cleantech 2.0" emerges out there in the venture community.
A few things to note about this thought piece:
- I'm hoping this helps prompt some good public discussion of important issues for the sector. While several colleagues have provided very helpful input along the way, this is far from a consensus perspective -- instead, this is one investor's opinion. Many other investors will disagree with what I'm saying here. And that's good. Hopefully, it will serve as fodder for a broader discussion.
- Much of what I critique here are trends and practices that I myself have been as "guilty" of as anyone else -- for example, on the slide where I lay out three funds' portfolios by category, one is from one of my own former funds. We're all learning and thinking through this shift as it happens, with no one investor having all the right answers. This uncertainty, of course, is what continues to worry LPs looking at the sector, but the way to start moving forward is to bring out many of these issues for public debate.
- Why 2015? Well, I do expect things to contract significantly before the next wave of cleantech venture capital. During that contraction, the emergence of new models and new thinking will be masked. My expectation is that this next wave will begin before 2015, possibly much earlier -- but certainly by 2015.
- I've used several different data sources for this presentation -- that's on purpose. The data reporting efforts of the Cleantech Group, Bloomberg New Energy Finance, Ernst & Young, and others are all pretty valuable, and I didn't want to distract by focusing too much on one single data source (because each has its own methodological strengths and flaws). I use them all, and have tried to give due credit here.