“For successful cleantech companies -- and there have been 23, if success is defined as having gone public on a major U.S. [stock] exchange  the average time to go public was nine years,” said Matt Trevithick of Venrock at a recent TiE (formerly The Indus Entrepreneurs) Energy event. “Entrepreneurs in cleantech have to have extraordinary patience. This is a 10-year journey just to get started.”
“Maybe the notion of four-year option packages is obsolete [for cleantech]. That is from the IT space,” continued Trevithick.
The TiE event brought together venture capitalists and entrepreneurs with roots in the Indus region (India, Pakistan, Bangladesh, Sri Lanka, and Nepal) for a frank discussion on opportunities -- and pitfalls -- in greentech.
“We are used to companies that are powered by Moore’s Law that sell into an entrepreneurial environment,” said Bob Walker of Sierra Ventures. “Intel, Google, Samsung, and LG [all] have an entrepreneurial core. They’ve got to come up with the next cell phone or display technology. These are industries where if you miss a product cycle or two, you are dead.”
“A lot of the industries that we consider cleantech don’t operate that way,” continued Walker. “No [employee] at a municipal water plant is going to lose their job because they didn’t buy the latest technology. These people have one goal in mind: to retire, get their pension, and not make a mistake that gets them fired. If there is a new technology, [they think] ‘Let somebody else buy it; we’ll wait five years and maybe we’ll buy it then.’”
To succeed, greentech startups -- and particularly energy efficiency companies -- must have business models that facilitate market adoption.
“I worked as a facilities engineer for a couple of years,” said Rachel Sheinbein of CMEA. “We would see a lot of things that would reduce water use or energy use. [But] it was very hard. There is a principal-agent [problem]. You need cap-ex spending to see op-ex savings and those are different budgets and different motivations. […] The business model becomes [even] more important if you are going after sustainability or efficiency.”
“Solar is an example of an industry that has innovated incredibly rapidly to figure how out to deploy, going from direct sales to leases and community solar,” said Nety Krishna of Redpoint Ventures.
In addition to financing innovation, participants suggested that greentech companies should consider developing aspirational products. For example, a Tesla Roadster or Model S electric car.
“Hybrid vehicles are a compromise and that may be dominated by Toyota and General Motors. But an all-electric vehicle is aspirational and is the basis of a disruptive business. That is Tesla,” said Trevithick. “Tesla received about the same size loan guarantee, as did Solyndra. Tesla is a three-billion-dollar company today. Tesla is a success story. Make aspirational products. That is how you make margins.”
The relative importance of margins, however, is a source of debate.
“Cleantech entrepreneurs have forgotten … that most of the money in venture capital has been made on products that have 50 percent to 70 percent margins,” said Trevithick. “The challenge in cleantech is that you are shipping hardware, an industrial category. How do you get beyond a 20 percent to 30 percent gross margin business [that] does not have very high multiples on sales or earnings?”
“I am not going to put the bar at 50 percent gross margins. That is high,” said Sheinbein. “If [cleantech] companies are going to exit through acquisition, they need to be accretive. They are more likely to be accretive through EBITDA. I am looking for [companies] being accretive, more than a certain percentage gross margin.”
Across the board, venture capitalists agreed about the paramount importance of a startup’s team.
“After seven and a half years as a venture investor and 10 years as an entrepreneur, I have come to a Zen-like appreciation of the importance of the team. It is really the CEO. Each cleantech success has had a gravity-bending CEO that could cause improbable things to happen and almost will them into existence,” said Trevithick.
“For most of the successful cleantech companies -- defined again by an IPO on a U.S. exchange -- the team that was present at the Series A played critical roles at the post-IPO company,” continued Trevithick. “In Venrock’s experience across all sectors ... in 70 percent to 80 percent of cases, the team that was present and gave the pitch when the first check was written was the team that rang the bell at NASDAQ.”
After building their team, founders should be very careful not to overcapitalize. Don’t take every dollar VCs offer, panel members cautioned.
“Companies that are capital-efficient, disciplined, and bootstrapped are going to be able to get favorable returns,” said John Robison, of NGEN Partners. “We have seen that from companies that were acquired three or four years ago in the smart building space, Gridlogix and Richards-Zeta, where the founders were very shrewd with when they chose to sell their business before they took on too much capital.”
“[In recent years,] there are companies in the data center space that have been very capital-efficient and have been able to virtually hold off on taking on additional VC money,” added Robison. “Some of their competitors perhaps -- only time will tell -- overcapitalized, [which] will make it harder for the investors and the founding team to realize their financial dreams.”
Similarly, participants indicated that venture capitalists should not monopolize even their most promising deals. Instead, they should share deals with colleagues at other firms.
“I would syndicate a lot more than I did [if I could redo the past few years]. VCs are motivated by two things: fear and greed. One of them is ascendant at any time. I think it is very important to balance,” said Krishna. “When you come across a company that you think is fantastic and you have a change to take a big share, you do, not thinking that down the road, it is better have more people at the table to manage risk.”
Increasingly, VCs are able to share risk with large corporations.
“We are seeing a lot of companies across very different sectors [become] interested in building relationships with venture firms and their portfolio companies,” said Sheinbein. Large companies “will continue to come in, everyone from General Mills to Delta Electronics to all the large chemical companies and consumer products companies. […] These companies have money on their balance sheet, are interested in getting into [the cleantech sector], and have very different timelines than the venture community.”
Indeed, when thinking about environmental innovation, it is important to consider not only venture-backed companies, but also corporate initiatives.
“Five years ago, very few companies were interested in biodegradable or bio-compostable goods,” said Krishna. “But look at what Coke and Pepsi are doing today. They have completely bought in to the concept, partly because it is green and partly because it is cheaper. Those things are happening, but they did not make a venture company a billion dollars, so you do not hear about them.”
But not every greentech opportunity will be attractive to either venture or corporate investors.
“We looked at residential energy efficiency plays. We hired a business school student to count them for us,” said Venrock’s Trevithick. “He got to 108 companies in residential energy management, which led me to believe that it is easy to start a company there, but most of those companies will not make any money. We didn’t make an investment because most of those businesses will not make any money.”
The profitable web startups you do hear about, the Facebooks of the world, are making raising capital for greentech startups more challenging.
“The Groupons, the Facebooks and the LinkedIns -- and all the stuff going on with cloud computing -- are incredibly capital-efficient companies. With a small amount of capital, [investors] get to see if the company is going to succeed. That is who your competitors are if you are [a cleantech entrepreneur] trying to raise money,” said Walker. “Even those of us who are pushing cleantech deals have to compete with our [venture capital] partners for resources in our funds.”
Yoni Cohen has worked for greentech venture capital firms in San Francisco and Israel and reported about environmental innovation for numerous publications. In May, he will graduate from Yale Law School. Follow Yoni on twitter @Cohen_Yoni.