SV Forum’s Annual Cleantech Conference, Part 2: Cleantech investment opportunities

Read part 1 from SV Forum’s Annual Cleantech Conference here

Reflecting on the money rush of 2006-2009 and some refreshing realism from the investor panel

Jason Matloff, Battery Ventures, Rachel Sheinbein, CMEA Capital and Dylan Steeg, Intel Capital started the investor panel by outlining their views on the evolving role of venture capital in the cleantech space and by pointing out some of the limitations of the VC asset class.

The sweet spot for venture capital is about $50-75 million in total funding needed in order to reach exit. What happened in 2006-2009 was a unique period of time when money came from other asset classes (hedge funds, private equity etc.). In addition, industrial multiples are much lower than for tech companies so valuations were inflated. None of the panelists expect there ever to be another batch of companies like the current class that is now coming to maturity and have raised hundreds of millions in venture capital (think Tesla, Fisker, Solyndra, Miasole, Bloom, A123 and many others). Venture capital is not seen as a vehicle to fund science projects and should not be exposed to novel manufacturing practices, high degrees of science risk or massive scale manufacturing projects with a high cost to prove either the technology or the economics (utility scale renewable energy, car manufacturing).

There is a new realization among investors that it is very difficult for startups to compete against mature global companies in markets where the end products are not differentiated and margins are thin. Therefore in the viewpoint of several of the panelists, that VC investment in companies that plan to compete in the commodity manufacturing space will continue to fall.

In addition investors are discounting any company that depends on government support which is fading throughout the world given a variety of dynamics in the public sector (politics, lack of good will, budget constraints).

Newfound realism leads to better investors and sharper entrepreneurs

While there is not a 100% overlap between cleantech market opportunities and the types of companies that VCs will fund, VCs remain very active in the space with a new focus on capital efficient companies potentially using a fabless operational model. Entrepreneurs should be selling a premium product with healthy margins not competing on the commodity energy and water markets because of the scale required and the maturity of industries they are up against.  Software, ICT, power electronics, systems solutions, analytics and automation were consensus areas of interest among the panel.

Companies need to be very sharp in understanding what it will take to scale the company and reach a sizable market. Who are the intermediaries that will be key to the success of the company?  In many cases the success depend less on the technology than on the business model and the ability to execute of the team. In the cleantech space many companies are dealing with an entrenched value chain so partnership is very important.

For emerging technology companies it is increasingly important to understand where in the value chain you are innovating and where you leverage existing infrastructure both from a technology and manufacturing standpoint as well as in the go-to-market strategy where partnership with sales channels that already have key relationships can be crucial.

With those words of wisdom for entrepreneurs, the investors finished the panel on an optimistic note predicting that with a more focused approach the VC community will continue to actively invest sizable amounts in promising early stage companies that are addressing global energy and resource challenges.

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