The ones that get away

A quick side-note, because I’ve been remiss in mentioning it until now:  GTM’s Green Light blog has become a must-read for me every day.  I don’t mention their stuff as much as I should because I’ve assumed readers of one GTM-hosted blog are probably already aware of the other main GTM blog, but in case you haven’t checked it out yet… Do so.

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I try not to let this blog go too much into navel-gazing territory, since that’s not why people read these writings, and I’m also quite aware of how little I bring to the table when it comes to “deep thoughts”...  However, I thought it might be useful to entrepreneurs out there, thinking about VC funding, to get a bit of a concrete sense as to how VCs commonly miss doing great deals… and are okay with that fact.

A personal example may help set the table (note: necessary self-promotion alert)...  The first time I was introduced to a small startup now called M2E Power, I dismissed it fairly quickly.  Because the person who mentioned it to me described it as being too early for my firm’s investment approach, and also described it simply as a “vibration-harvesting” (ie: generating power from everyday motion, etc.) company.  Too early is too early, and I’d seen several vibration-harvesting plays before and been unimpressed, so two strikes was enough for me to move on.  Fortunately the opportunity came up again a couple of months later, the company had made some significant progress, and I dug into it enough to realize that I really hadn’t understood the importance of the company’s innovations.

As it turned out, M2E Power’s innovations are applicable in vibration harvesting, but that’s not really the core of what they’re all about.  The company’s innovators had developed some fundamental breakthroughs in electromagnetic induction:  the way permanent magnets and wire coils are used to generate electricity.  The technology, developed at the Idaho National Laboratory, held the potential for significant performance gains across a wide range of scales… In other words, not just for portable power (“wouldn’t it be great to charge up your cell phone while you jog?”) applications, but also potentially for improving the efficiency of a wide range of larger-format permanent magnet motors and generators (wind turbines, for example).  The company didn’t fit easily into a single investment category, but represented a set of pretty fundamental and exciting breakthroughs.  In fact, we now consider M2E Power to be as much about “Big Power” and transportation applications as portable power, although all three are compelling markets imho (not that we’re biased or anything!).

I’m not claiming that M2E Power is a success story yet (so far so good, but it’s still early days for sure).  I just thought it was a good example I could share of how I had passed on a company that, upon a second look and now getting to know very well, I actually like a lot.  Every experienced VC has a favorite story of the deal they passed on, that ended up being a big winner (to their credit, Bessemer Venture Partners even highlights theirs on their website).

Our team reviews hundreds of potential investment opportunities every year and we aim to do about one new deal per quarter, so you can get a sense of the filter.  Does that mean 99% of businesses we see are bad ideas?  Not at all.  It just means that we’re looking for companies that fit our specific investment profile, where we feel we can add value, and where the deal dynamics are right.  It also means we have to make a lot of quick judgments.  Pattern recognition and heuristics play a big role, and that’s why cleantech specialization and experience really helps us make better decisions.  But as the M2E Power example shows, we’re far from infallible (some of us even more than others…).

VCs have to reconcile themselves to the fact that they’re going to miss out on some great deals.  That’s okay.  But the key is making sure that the financial returns are great on the deals that they DO select.  It sets up a predisposition for saying “no” quickly and moving on to the next one.

So entrepreneurs out there should expect this.  When a VC does reject your idea quickly, the most important thing is to get honest, brief feedback from them about why they didn’t see a fit.  Was it just simply not a fit with the VC model at all?  Or was this just not the right VC or the right time in their investment cycle? A good VC will help you understand their decision at least to this level.

You don’t want to waste time going after VC financing if your great business idea and the overall VC investment model are just never going to match up well with each other (there are many other sources of financing than VC, after all).  But you also can’t let one VC’s particular investment filter discourage you too much, if that’s all it is…

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The next Boston-area Renewable Energy Business Network event:

REBN-East / Young Professionals in Energy Networking Event

October 7th, 6:30pm start time

Flat Top Johnny’s
One Kendall Square,  Building 200
Cambridge, MA