As you pull into the parking lot, the grit of crumbling asphalt crunches under your tires. No shade trees or white curbs in this parking lot, just lines on tarmac, narrow spaces, and an unfiltered summer sun. You get out of your car and look up at the tall, nondescript brick building, and head toward the effectively unmarked entrance, a metal door that makes you remember public schools from years ago. A train rattles by on an elevated track directly behind the building, picking up speed as it carries its daily delivery of bankers and lawyers downtown. A few other people amble into and out of the building, but it's far from busy. This isn't one of the newer generation buildings with retail on the ground floor and offices above, this is an old-school office structure through and through, and you can tell most of the tenants have been here for years. Some random service providers, maybe a social services agency. There's an elevator around the corner from the entryway, but you know it might take longer to wheeze its way to the fourth floor than walking up the stairs. So you walk up and, catching your breath, you walk around a bend in the linoleum-tiled hallway and enter an office lit only from the windows to either side, the lights having been turned off to save electricity except for in the small area occupied by the people you're there to meet.
And you think to yourself, "This is EXACTLY what incubators should look like." Open space, easy to divide up and then redivide up as needed. Inspirational views, past some urban sprawl, of Nahant and the sun's twinkling reflections off Massachusetts Bay. Low rent, but laid out for collaboration and activity. Yes, it's a relatively new space and thus pretty empty, prompting inevitable jokes with the entrepreneurs about wintertime and The Shining. But this space isn't designed for aesthetics. It's designed to be a platform for thinly-capitalized entrepreneurs to get something up and off the ground. Just around the corner from a commuter rail stop and multiple restaurants, places to sit down and have a coffee. Productivity first and foremost, with no frills or wasted cost. A fingertip hold, a small but effective place for a rock climber to latch onto as they scramble up to the next level.
Welcome to the Cleantech InnoVenture Center (CIVC) in Lynn, Massachusetts. A new space launched by North Shore InnoVentures, about 20 minutes north of downtown Boston. Housing, at first, a couple of tenants just getting started. And they're both in the energy efficiency space. Naturally.
Energy efficiency, specifically regarding buildings and homes, is where the bootstrap cleantech entrepreneurs are going these days. Launching an energy efficiency startup doesn't require any breakthrough technology, or MIT-based pedigree. It doesn't require major capital outlays just to ante up, just entrepreneurs willing to work for cheap. And the market opportunity is huge, yet still clearly waiting for that new business model and unique approach that will unlock all the ROI that has been ignored by building owners for decades -- simply making their offices, stores, homes, etc. less wasteful.
As the capital markets have dried up, cleantech VCs have paid more and more attention to energy efficiency. While on a dollar basis it remains behind solar and biofuels et al, energy efficiency now has the highest number of deals as a subsector, according to recent tallies by the Cleantech Group. In part this is because VCs do see the opportunity here, the obvious customer economics, the entry of many more smart entrepreneurs, the ties into IT and internet models that have worked well in the past. But in part this is because the VCs are now all about "capital efficiency", that buzzword du jour. Really, VCs nearing the end of their fund life, and seeing little opportunity to raise a new fund, are looking for those 1 or 2 final deals in the current fund to only use up a small amount of capital. I overgeneralize. But you get the drift of what's going on.
The problem is, the same challenges that kept VCs out of energy efficiency back when solar and biofuels and EVs were hot remain solidly in place. Tough to find truly defensible IP, since even a patentable approach to saving energy will face a multitude of competitors using entirely different IP but going after the same wasted kilowatt-hours. And most energy efficiency startups aren't using patentable approaches to begin with. Plus, customers remain really reticent to adopt even "no-brainer" services and technologies. Payback periods of 2 years or better often aren't enough to convince a factory manager or hospital facility manager to take on the risk that some new energy efficiency system will negatively impact the lights, or comfort, or productivity, or simply will just generate complaints they don't want to have to deal with. And few "network externalities", the positive feedback loops that drive internet users to all want to flock to the same websites and tools. Furthermore, since so much of energy efficiency is in the service offering and implementation, that's just typically a mismatch for VCs unless they see strong existing market momentum they can jump on board with.
So while energy efficiency is on the rise among cleantech VCs, it's still really tough for most energy efficiency entrepreneurs to think about VCs as being their initial funding source. Speaking for myself, I see lots and lots of great entrepreneurs and great ideas in the sector. But BECAUSE of that, and given all of the above challenges, it's tough for me to think about funding one of these efforts until I see proof of execution: Customer traction, repeat business, proof of savings, significant revenue.
But how do the entrepreneurs get from just getting started around a table at the CIVC, to that point? If VCs aren't going to go in so pre-revenue into energy efficiency as they'd done in the past with solar et al, who will help the entrepreneurs get through the first couple of years of operation?
Energy efficiency is where angel investors are really going to shine. Angels, and efforts across the country like the CIVC.
I took a quick look through the most recent Pepperdine Capital Markets survey recently. It's still a work in progress, but it gets better each time. They're still not getting enough participation from the venture community, or from New England investors, and they still need to better segment the answers from VCs so that the interesting answers from the few big-name firms don't get lost in the reported medians of so many pretty small shops.
But the survey illustrates nicely exactly how important angel investors are going to be to energy efficiency. It shows their strong inclination to investing in companies within 30 miles of where they live. Service-oriented energy efficiency startups are going to be very local, at least to get started. The survey shows that angels are really reliant upon formal and informal angel groups, and energy efficiency entrepreneurs come from the same professional networks these angels are coming from -- not just from highly technical research institutions. And it shows that, while VCs may be forced to target what they consider "capital efficiency" right now, angels are ALWAYS having to target it, since a median $25k check can only go so far.
So it's not surprising to see that, out of all the various cleantech segments, angels identified energy efficiency as the top area they're targeting for future investments.
This is great news all around. It's great news for energy efficiency entrepreneurs that cleantech was the fourth most popular sector for angels (out of 18 choices), and that energy efficiency was the top choice among those seeking to do cleantech deals. It's great that so many angels see their role as being Seed and Series A investors. And it's really helpful for VCs that angels and facilities like the CIVC are there to give these companies the boost they need to get to the revenue stage where VCs can finally get themselves comfortable with the other challenging aspects of these startups.
One lesson learned for angels and places like the CIVC is that they really need each other.
CIVC and other local incubators, finding themselves inundated with interest from energy efficiency entrepreneurs just getting started, need to be thinking about angels as being the most likely funders of these companies. Too many, I've found, focus too much on hunting for a VC to bring their capital and notoriety, instead of focusing on the investors who will be the right fit at this stage. These incubators need to reach out to local angel groups and establish relationships with them, hosting angel-only events, providing the market context and data that angels always hunger for, bringing these groups these deals early and often.
And angels need efforts like the CIVC to be able to make sure that their $25k checks, even when matched with other angels, go as far as possible. CIVC is just one illustration of the kind of effort that's happening in similar spaces all over the country, across the midwest, the southeast, etc.: Efforts to promote entrepreneurship as one point of leverage as the U.S. economy tries to lurch into recovery and growth. So angels need to be reaching out to such regional incubators, and directing these companies their way.
As these companies establish themselves in the marketplace, they'll graduate out of the incubators. And they'll eventually raise more money, if necessary, from larger check-writers who see the momentum and now want to jump on board.
But angels, and to a certain extent the CIVCs of the world, are going to play a critical role in launching the energy efficiency innovation sector as it enters a high-growth stage over the next few decades.