Inventive technologies from more than 230 companies and universities were on display last month at the 4th annual ARPA-e Energy Innovation Summit in Washington, DC.
Funding this technology and giving it a chance to succeed remains one of the greater challenges in advanced energy and cleantech science.
Among the technologies at The Summit was a company showing early samples of a solid-state Ultra-Violet-LED (UV-LED) device. The technology might enable an inexpensive, reliable water sterilization system using UV-C light, today’s gold-standard disinfectant technique, produced by long-life, low-power and tiny form-factor LEDs.
The goal is to make clean water accessible to all, not just the privilege of a few.
Commercializing the innovation will take substantial capital. But the odds of raising sufficient funds don’t favor this tiny hardware start-up. Why? Because the lion’s share of VC dollars is going to software start-ups where swift exits and lucrative returns dwarf what’s occurring in the hardware sector. Think Instagram, LinkedIn, and WorkDay.
Look at the numbers: In 2012, $26.5 billion of venture capital was invested in 3,698 deals. (PriceWaterHouse Moneytree Report). The software sector claimed the most dollars – 31 percent of total investments - the highest level of investment in the software sector since 2001. And while VC investments declined by 10 percent overall in 2012, dollars applied to software actually grew by 10 percent last year.
The year was less rosy for hardware. In 2012, investments in the cleantech sector declined by 28 percent, semiconductors by 32 percent, and electronics and instrumentation by 46 percent. Prestigious venture firms with little difficulty attracting capital will continue to look for the next big hardware homerun. But the bar for investment criteria will be set very high.
So where does this leave a UV-LED start-up that needs time as well as money to develop the technology? Not in a good place. Disruptive potential aside, the concept is still a science experiment with an uncertain future. To thrive, it needs a different class of capital than what’s giving life to software companies. It needs “Patient Capital”. This means money from a source with a deep understanding of complex technologies, high tolerance for risk, expertise in managing the “innovation through commercialization” cycle, and a great deal of patience.
A source like the VCs of yesterday. The type that took a chance on nascent companies like Intel, Apple and Cisco. Long-haul investors - winning with some, losing with many others, but routinely delivering outsized returns to Limited Partners over a seven-to-10-year period. A funding source that’s now virtually extinct.
And that void could devastate innovation.
Unless a new kind of investment model emerges -- one that taps into the vast reservoirs of capital lying in corporate war chests, then uses proven venture capital processes to find, fund and commercialize promising hardware technologies.
It makes sense. Corporations have the infrastructure, money and the urgent need to innovate. Institutional VCs know how to take innovation from concept to commercialization. This includes navigating the challenges of writing term sheets and establishing valuations for future fund-raises. Pairing the capital with the expertise creates a unique investment engine – strategic and highly disciplined - to empower internal innovation. It’s a collaboration of experts with a focused eye on advancing the strategic goals of a corporation or group of corporations through enterprising investments in hardware start-ups.
Along the way, a new source of capital becomes available to high-potential hardware newcomers like that UV-LED company.
Alain S. Harrus, PhD. is a Venture Partner at Crosslink Capital.