The Lessons Veteran Investors Have Learned

Experienced managers, developed business plans and corporate support are a must

How have cleantech investment theses’ changed in the past decade?

At Renewable Energy Finance Forum (REFF) West, veteran investors spoke about what they’ve learned.

“We went into [cleantech] with the notion that we have taken a lot of companies public [and] know what IPO management teams looks like,”  said Stephan Dolezalek, Managing Director of VantagePoint Venture Partners.  “Problem was, we were taking companies public at $90 million valuations that were still relative startups.  Now we are taking companies public at $2-4 billion. You need a completely different management team. We have had to work much, much harder on getting management teams into these companies that can run multi-billion dollar global enterprises.”

Fortunately, the search for executive talent has become easier over the years, even as the skills sought have evolved.

“The most important change we have seen in the sector is the human capital side.  When we started, it was pulling teeth to recruit the best people to our companies,” said Ira Ehrenpreis, General Partner at Technology Partners.  “The last several hires we’ve made [include] the CEO of Vestas China, a guy who was focused on developing PayPal [and] a public company CEO and CFO.  We would have never been able to recruit [them] a while back.”

“The single most important management team number is the title that didn’t really exist when we started, but that we now refer to as the Chief Capital Officer.  If you haven’t gotten one of your most senior people focused every single day on the notion of how you are you going to assemble capital, it gets really hard,” said Dolezalek. 

Investors have also learned to focus on a company’s business plan rather than its technology – and that to executive its plan, a company will need corporate support.

“As an earlier-stage investor, you would think we are really all about technology,” said Tim Woodward, Nth Power’s Managing Director.  “But we learned over 10-15 years of making investments in the industry that the end customer could care less about technology.  The system usually works – the lights work, the car gets you from point A to point B – [but] they want a solution.  You have to focus on the business model and the problem you are solving, not the coolest technology.”

“We have learned that corporate partners are absolutely critical. It is a lesson I learned over 20 years in life sciences. It is even more true [in cleantech]. If you are not doing this with partners, you are out in the desert,” said Dolezalek.

In recent years, corporate partners have been more and more forthcoming with support.

“In the early years, [corporate involvement in cleantech] was greenwashing and nothing more. Now we have Fortune 1000 corporates inside every one of our companies,” said Ehrenpreis. “There is not a week that goes by that there is not some large corporate trying to mine our portfolio [and] figure out partnerships.  That is radically different than most of the years we have been [investing].”

Over time, cleantech investors also figured out how to secure government support for their investments. 

“When I was put in charge of [the energy and power] practice about 10 years ago, I thought I was going to spend a lot of time in Houston, Dallas, and Tulsa,”  said Pat Eilers, Managing Director of Madison Dearborn.  “I [have] spent an equivalent amount of time in Washington, DC trying to work on policy that gives us long-term certainty.”

“We learned is that we had to be as good as the defense contracting firms at understanding the flow of dollars from government,” said Dolezalek.  “If government was going to hand out money, we had to figure out how to get our fair share.”

“When I add up the dollars we have received from non-dilutive government funds in the first decade: less than $5 million. In the last two or three years, we have received almost a $1 billion across almost a dozen portfolio companies,” said Ehrenpreis.  “It is that kind of support that has catalyzed a number of companies to get that next level.”

Finally, investors learned to fly the friendly skies.

“Ten years ago, we didn’t get our passports stamped a lot when we visited portfolio companies. Today, probably three quarters of my portfolio is in some international region, either headquartered, main office, [or] market,” said Ehrenpreis.

Enough about the past.  What about the future?

“We are going to start to see the emergence of an equity formation strategy that give everybody a chance to own a piece of this green energy future,” said Dan Adler, President of the California Clean Energy Fund   “[With] a portion of your 401K or your E*Trade account, [you could] go out and buy a mutual fund or renewable energy assets backed by long-term power purchase agreements.”

“We will see deals fall apart, but that is healthy for the industry,” said Woodward.  “There are a lot of deals that continue to hang out – 25 micro-inverter companies, 20 thin-film players.  We can’t have that.  We are cannibalizing each other’s businesses.”

“First, the Darwinian aspect of our industry is going to take hold. We are going to see the people who don’t have the stomach for it get out.  Second, we are going to continue to see a pipeline of IPOs and later-stage companies begin to flourish.  Third, we are going to see the gap between the US and China widen further,” said Ehrenpreis.

“I would love to be wrong, but I think that what we will see a year from is that an ever increasing percentage of the new cleantech jobs in this country will be paid for by foreign capital,” said Dolezalek.

Yoni Cohen is a JD-MBA student at the Yale Law School and the Wharton School at the University of Pennsylvania.  Born in Israel, he is a former college basketball writer for Fox Sports. Follow Yoni on Twitter @cohen_yoni.