It’s not easy being a cleantech startup.
Venture capitalists have pulled back from the cleantech sector, burned by unimpressive returns and the bad reputation that previous investments have earned. According to cleantech investor Rob Day, “Few cleantech-specific venture firms of any stage preference can raise new funds from LPs, so they're not writing checks themselves. And generalist VCs won't touch the sector with a 10-foot pole.”
The decline in VC funding for smart grid technologies and companies last year reflects this downward trend. Smart grid communications and smart metering, for instance, a sector that once saw strong VC investment, raised only $15 million in 2013, compared to $102 million in 2012.
The 44 early-stage companies at the Boston-based incubator Greentown Labs are on the front lines of the funding challenge and finding different ways to overcome it. For many, the answer is to find a corporate partner.
“Companies are finding funds through competitions, through accelerator programs, through angel investment, seed investment and government resources, and get enough funding to...build an initial prototype,” said Emily Reichert, executive director of Greentown Labs. “But they really need funding [for] getting that prototype tested in a real-world environment."
“That’s why they want to bring a real strategic partner in, because they have the resources, knowledge and expertise, and an understanding of the market that’s very important for these startups moving to the next phase beyond prototyping,” she said.
Strategics generally have longer investment timeframes than VCs. They also understand supply chains, pricing and manufacturing. If anyone knows how to bring a product to market, it's them.
“Strategics are very helpful not only with assisting with research and technical development, but also with the whole chain of the business, which means distributing your product, understanding the market, and ancillary services they can provide to your project," said Ryan Holy, business development manager at Altaeros Energies, which makes a novel airborne wind turbine.
The startup has funded four prototypes over the past four years with government grants, competitive awards and a small group of angel investors. Next year, Altaeros will launch a $1.3 million commercial demonstration project with the Alaska Energy Authority. But despite this, Altaeros has yet to attract funding from a strategic.
Corporate interest in cleantech is growing, but it’s still hard for a startup to navigate a corporate partner, said Reichert. Getting their technology in front of the right people is the first challenge. To facilitate the introduction, Greentown Labs holds “office hours” during which strategics will meet with several startups at a time.
The GE Ventures team recently met with startups at Greentown Labs and walked away with several promising connections, said Colleen Calhoun, senior executive director of GE Energy Ventures, in an interview.
“They’re pretty early-stage investments, but it really gives us insight into what people are thinking about and innovating around today, that’s probably not going to be commercial for five or six years,” she said.
GE has already put money behind several cleantech startups, including Sungevity and Stem. According to Calhoun, the company is now actively looking to invest in new companies working on grid optimization, on-site generation and data analytics around energy efficiency.
Partnerships are not a panacea
Not all startups are sold on the corporate partnership route, however.
Jason Hanna, entrepreneur and co-founder of Greentown Labs, has had mixed experiences working with strategics. “What I find with strategics is they can work very fast or they can be frustratingly slow, depending on the size of the strategic, the kind of ownership and how big of an internal advocate you have,” he said.
Hanna has raised more than $1 million to launch his company Embue through grants and awards. The company is now trying to raise the necessary capital to manufacture and deliver the first 250 of its distributed wireless sensors and relay control modules for efficient HVAC management, which retail for a little over $100 each. One of Embue's backers is a strategic.
Paul Laskow, CEO of Save Energy Systems, which makes intelligent controls for HVAC systems, is avoiding the strategic route altogether. “If I had to dilute equity, I’d just as soon hang on to it,” he said.
Having survived the valley of death on personal capital and $150,000 in grant money, to the point where his company is now making enough sales to become profitable, Laskow said he’s no longer seeking outside funding.
“We’ve gone through the hard part,” he said. “Why bring money in now at the easy part when we don’t really need it?”
Save Energy Systems makes networked thermostat sensors and control units that automatically manage HVAC energy use at commercial and retail facilities. The units sell for between $7,000 and $20,000 depending on the size of the system.
For most companies, though, going it alone is not an option.
Avalanche Energy, for instance, has succeeded in building and testing prototypes of its high-concentration solar-powered water heater solely with money from friends and family. But the startup is now looking to raise capital in order to start manufacturing the product at larger scale.
Going through friends and family is tough, because the company can only get small chunks of money at a time, said CEO and founder Alex Pina. “We’re always watching the bank.”
Unlike other solar water heaters, Avalanche’s technology uses a double deflector that heats up water quickly without the need for a working fluid. The reflector is mounted on a dual-axis tracking system to maximize the amount of thermal energy captured. The design has allowed the company to cut out glass and other materials that add weight and cost to the system.
Avalanche is currently collecting operational data on the technology from a pilot in San Jose, California with the hope that it can attract enough venture capital investment to begin manufacturing next summer.
Venture capital is coming back
It’s a misconception that venture capital has dried up, Tim Healy, CEO of EnerNOC, told Greentech Media at a recent Greentown Labs event. There are still massive amounts of capital being deployed into cleantech, but that capital is just being dispensed by fewer players and in more specific areas, he said.
“What you’re seeing is a little bit more specialization, a little bit more concentration of that capital, rather than an overall shrinking of that capital base,” said Healy.
“What hasn’t changed is that this is still a massive market, a massive market opportunity in [a sector] that’s going to see a transformation in the next five to ten years,” he added. “So there’s still this incredible appeal to leading venture capitalists.”
According to GTM Research, venture capital and private equity spending on “grid edge” technologies slowed in 2012 and 2013. But year-to-date investments are way up and on track to beat investment numbers for earlier this decade, with a projected 89 deals worth a total of more than $1.2 billion.
“While the past two years saw decreased investment in grid-edge markets, we're seeing signs of a rebound in 2014 due to several large investments in energy storage,” said Andrew Mulherkar, associate analyst at GTM Research. “The number of grid-edge investments also rose, buoyed by investor interest in energy management for homes and buildings. Seven financings for companies targeting commercial energy use took place in the last several months alone.”
FIGURE 1: Venture Capital and Private Equity Investment in Grid-Edge Markets
Ryan Wright, founder and CEO of Sol Power, which makes solar-powered electronics charging stations, echoed the notion that traditional venture capital is still strong, but it’s just coming from new places.
Sol Power, which has grown to date on founder investment and government grants, is specifically working with new, smaller private firms. According to Wright, these companies are led by people who’ve worked in the sector for big investors, like GE, that have created a spinoff with their own private assets in order to fund smaller projects.
“They’re not as well publicized as VC or angel groups, but they’re out there,” he said. “It just takes a little bit more digging.”