Now should be a period of happy hunting for angel and other seed-stage investors looking for new deals. Venture capitalists have abandoned the sector, at least temporarily. The Cleantech Group's early Q3 numbers showed a continued decline in early-stage dealflow, with only 55 early-stage deals tracked worldwide in the quarter. If that number holds upon further review, it would be the lowest such quarter for early-stage deal activity over the past five years. Nevertheless, the entrepreneurs have remained active and in my opinion have brought forth even more investable ideas, more pragmatic approaches with more relevancy for existing markets. So it's wide open spaces for angels and other seed-stage investors interested in getting active in the sector.
But it's a lot easier said than done. As we've talked about often in this column, it's time for some rethinking about how investing is done in this sector, but that requires angels to step out of whatever comfort zone they might already have (if any) in terms of how they've done things in the past. I had the opportunity to speak briefly with a group of cleantech angels earlier today, and I encouraged them to step up to this opportunity. I passed along three general suggestions:
1. Hit 'em where they ain't.
A lot of the angel activity I see in the cleantech sector chases the very same type of investments we've seen VCs do as well. Next-great-patent investing, hardware innovations, etc. After my little talk today, someone came up to me and said I disparaged such investing. Not at all! But my message is "AND." It's time to broaden beyond that type of investing, not be limited to just that one approach. And angels are very well positioned to lead the charge.
Why? For one thing, the best new approaches to market reinvention might not be capital intensive, and in fact might require so little capital to get started that the VCs won't be interested -- VCs typically have a minimum check size they'll write, except in rare occasions. Whether it's a new approach to a service offering, or a web-based marketplace, some of these efforts can get to a market proof point before capital requirements get into the millions.
Also, if done correctly, angels can take a longer-term view on some of the slower-developing tech plays like ocean power or advanced materials or water technologies. The big caveat is that these can also be more capital-intensive. But there are strategies to deploy in that regard.
In both of the above scenarios, also think more about alternative corporate structures than the traditional preferred equity approach. LLCs can help provide liquidity out of successful cash-generating service companies, for instance. And an LLC can convert to a C Corp if and when VCs look to invest in a company.
2. Work with friends.
This may seem to be at odds with point #1 above, but it isn't. There are resources out there to help validate ideas during investment selection, to provide support to the companies backed by angels, and to help bring in co-investment dollars.
Universities increasingly have entrepreneurship centers. They can be gateways to getting access to technical knowledge, because I guarantee they would like to meet angel investors and to help them. Corporate technology groups also are increasingly looking to connect with angel investors, since corporates may often see technology ideas they like but are too early for them to engage with. Government labs like NREL are eager to help angels get access to technologies and technology experts, as well. VCs, even if they're not investing (or perhaps, especially because of it) are often happy to meet with and compare notes with angels. There's never enough time, but these kinds of resources for market and technology access, and even for dealflow, are available to investors no matter what kind of investment strategy they're pursuing.
And once an investment is made, there are a lot of organizations ready to help. Just here in the New England region, we have the ACTION network of incubators like Greentown Labs; the Cleantech Open Northeast accelerator / training program; the New England Clean Energy Center; the Massachusetts Clean Energy Center; and others. If you back a relatively inexperienced team, send them to participate in some of these programs. If you back an experienced team, see what resources these groups can bring to the table to help minimize capital burn.
And there are an increasing number of cleantech-focused angel groups and family office groups out there. Go find these kinds of groups and get to know them, even if you decide not to join them. All investors in this sector need to find and collaborate with like-minded co-investors, and just to compare notes.
3. Make those companies run really lean.
Whether you're taking on a "capital-efficient" cleanweb opportunity, or taking on a 10-year technology development effort, it's important to try to keep the cash burn as low as possible. Angels simply cannot count upon even their better-performing seed-stage bets attracting follow-on venture capital, as is the traditional path. It's time to plan these investments as if follow-on capital won't be there.
What does this mean? One of the first things you should help a seed-stage company find is access to grant-identification and grant-writing expertise. State-level grants. DARPA contracts. DOE grants. There are lots of potential opportunities for non-dilutive financing. One key will be keeping these grants from becoming too distracting, but at least right now, it's worth pursuing.
And the other thing is to sacrifice some speed for the sake of cash preservation. Technologist entrepreneurs sometimes think receiving even a small amount of investment means it's off to the races in terms of hiring. That needs to be a very slow-rolled decision, however.
And finally, early revenue is good. Seek it out. Try to charge for early betas. Try to identify an early-adopter niche willing to pay for a specialized product even while you continue to develop the mainstream offering. Get NRE revenue from corporate partners. Do everything you can get make sure limited angel dollars will be sufficient.
Now is a phenomenal time to be a cleantech angel investor. But it's also a confusing and challenging time, in terms of figuring out how to do it. I hope many will feel it's well worth the effort, because it feels like we're on the cusp of a real transformation of the cleantech investing and entrepreneurial scene. And I think angels have an important role to play in bringing it about.