If you watched the presentations at the NextWave Greentech Investing conference last month, you saw a lot of talk about how the "next wave" is here, as well as talk of various investment strategies being newly deployed.
But from the entrepreneur's perspective, what does this mean? If you've launched a cleantech startup, or are thinking about doing so, what should you be keeping in mind?
There are a lot of underlying trends to consider in this wide-ranging sector of ours. But three themes particularly stand out for me, and should be top of mind for all entrepreneurs active in the market.
1. The rapid shift away from centralized systems to more distributed assets and intelligence.
Energy, water, chemicals and transportation/fuel markets have for many decades been very centralized industries. Factors such as economies of scale, the high cost of coordinated control, and natural monopolies have dictated "hub and spoke" models for production and distribution of these assets. Even other natural resource markets like food have been trending, until recently, toward more centralized production and distribution models, for many of these same reasons.
And during the last decade, a lot of what got funded were entrepreneurs who were looking to replace centralized production with centralized production of another method.
But many winning clean technologies have been based upon reversing this principle. Distributed generation is the obvious example. But building energy intelligence and "grid edge" technologies in general are also prime illustrations of this. And as an investor I'm seeing a lot of similar action in smaller-scale, modular renewable energy generation (bigger than DG); in localized food production; in modular, distributed water treatment; and even new business models like ride-sharing are examples of this phenomenon.
The emergence of cheap intelligence, sensors and communications is making this possible. How are you taking advantage of them?
And this theme is especially true in emerging economies where centralized infrastructure often doesn't exist. Where can you deploy your distributed solution where there's no entrenched incumbent?
2. The adoption of "capital pragmatism" principles.
Everyone knows that VCs have shifted toward favoring "capital-efficient" business models. But the way this phrase is used, it seems to exclude a lot of opportunities around hardware. I'm not sure the lesson for entrepreneurs should be widespread abandonment of physical innovations.
As such, a couple of VCs have tried to differentiate with a slightly altered phrase: "capital-light". The idea being that in any technology area there are some capital-intensive approaches and some "capital-light" approaches. This, while still wishy-washy, strikes me as an improvement, because it is more inclusive. But still, there's an underlying assumption that the capital for the startup is going to come from venture capital. And therefore that the choice is really one of which business model to choose. That seems very limiting.
So let me throw my own wishy-washy phrase out there: "capital pragmatism." What I mean by this is simple: Use as little venture capital as possible for the business model you are going after.
Be scrappy. As the team at Greentown Labs has shown, for example, even hardware-based businesses can figure out ways to push forward on very little capital by skimping on unnecessary expenses and through collaboration on unavoidable expenses.
Take in non-dilutive financing wherever possible. Grants. Pre-payments and other early cash from customers and strategic partners. This might mean deviating a bit from your vision of the perfect solution for the broader market. It's true that that's not without its own risks. But bear in mind that it also represents the strongest voice of market preferences that you've gotten so far. It doesn't matter what anyone's educated guess is about the preferences of the broader market -- actual cold hard cash being offered to you is the strongest early proof point.
Wherever possible, avoid using venture capital dollars to pay for what project finance should be paying for. It may be unavoidable in the early going, but do your best. This is one reason at my firm we've sometimes found ourselves playing simultaneous roles of venture capital and project finance investors for our portfolio companies: to provide that level of flexibility. Most firms can't do that, but we think it's an important tool for both us and the entrepreneurs with whom we partner.
And finally, don't go too big too early. This is so much easier said than done, because everyone strives for the fastest growth story they think they can manage. But understand the linkage to higher risk: The faster and earlier you want to grow, the sooner you rapidly expand your team. The more you expand your team, the more money you have to raise. The more money you raise, the more pressure on you to meet those loftier expectations and hype, and the more cash you burn -- and the shorter your fuse with your investors when things don't go well. High-cash-burn companies at the point of commercialization with unrealistically high growth expectations are the ones that get crushed the hardest by the market when things don't go as planned.
3. Taking a holistic approach to reinventing markets: you are not an island, you are one link in a very big (and old) value chain.
Over the past decade, there was way too often a myopic approach taken by entrepreneurs and their backers toward reinventing these huge and slow-adopting markets. As we've talked about here a lot, in many cases these industries are outright disincentivized to adopt new technologies. And thus, many innovative solutions that should be adopted simply aren't, at least not quickly enough.
This opens up lots of new opportunities for entrepreneurs who want to reinvent channels, services, or other deployment solutions in these many related markets. Solar rooftop financing is the most obvious example. But there are these types of opportunities in many other cleantech-related markets as well.
But beyond these standalone opportunities, if you are innovating an upstream technology-based segment of one of these value chains, how are you going to market? How are you making the purchasing decision easy for your customers and their customers? How are you finding and working with channel partners who are actually receptive and motivated? How are you selecting early target market niches where you face less entrenched competition?
Don't be a technology innovator. At least not until these antiquated markets get shaken up a bit more, you need to be a solutions provider. If proprietary technology innovation is at the heart of that solution, awesome.
There are other critical success factors to bear in mind, of course, such as talent topgrading and strategic partnerships. But the above three factors, to me, are what differentiate "next-wave" thinking versus the past decade's cleantech entrepreneurship. Innovators who bear these in mind stand a better chance of success.
And hopefully, these suggestions don't come across as any kind of retrenchment, either. Think big, do big, change the world. But it's time we increase the success rate of such big efforts. And these three factors seem to be a commonality among the emerging next wave of successful cleantech entrepreneurs, as far as I've seen.