Venturing Into The Future

Last week, I attended a breakfast hosted by the Michigan Venture Capital Association, at which the President of the National Venture Capital Association, Mark Heesen, made some comments and fielded Q&A about the state of the U.S. venture capital sector.

Mark presented a mixed picture.  On the one hand, the VC industry is clearly contracting:  about half of the firms that existed at the peak in the early 2000s have withered away.  Moreover, distressingly, venture capital investment outflow has exceeded capital raised by venture capital firms each year for the past several.  As Mark noted, “this is clearly not sustainable.”

According to Mark, it appears that the venture capital industry is coalescing around two models:  (1) mega-firms with >$500 million funds, multiple offices/geographies, and spanning most vertical segments and stages, or (2) niche firms with <$100 million funds that specialize either in geography, stage, or vertical markets.  The firms that fall between these extremes are the ones that are vanishing, presumably unsuccessful. 

Turning to the cleantech sector specifically, Mark noted that – contrary to what is sometimes alleged by naysayers – cleantech VC activity is holding its own, accounting for roughly 15-20% of all U.S. VC investments.  However, what is changing is the nature of cleantech investments:  whereas big/bold bets in game-changers to save the world were the rage a few years ago, it has become abundantly clear that such possibilities are extremely capital-intensive and subject to very long maturation cycles.  Accordingly, rather than investing in the next electric vehicle, battery, biofuel or photovoltaic technology, cleantech VCs have ratcheted down their aspirations somewhat and are seeking more modest incremental  or enabling technology improvements.

Another trend in VC highlighted by Mark, one that is critically important for cleantech, is the re-emergence of corporate venture groups.  Corporate VC activity seems to come in and out of vogue every few years, and at least for the moment, it’s back on the rise again.  Notably, it is increasingly common for (1) corporates to invest in a technology without having the view of being the eventual acquirer, (2) corporate venture investors to take Board seats, and (3) multiple corporate venture groups to be in the same deal. 

I just reviewed the portfolio of one of the most significant cleantech venture capital firms in the U.S., from which I culled the following roster of corporate co-investors:  GE (NYSE: GE), Intel (NASDAQ: INTC), General Motors (NYSE: GM), DuPont (NYSE: DD), ConocoPhillips (NYSE: COP), Dow (NYSE: DOW), Waste Management (NYSE: WM), Valero (NYSE: VLO)Bunge (NYSE: BG).  And, it’s not just American giants:  also MitsuiUnilever (NYSE: UN), Cenovus (NYSE: CVE).

Consistent with the main message of a recent article in Technology Review called “Can Energy Startups Be Saved?”, it’s becoming apparent that partnering with corporations to gain access to their financial, technical and marketplace heft is virtually essential for cleantech venture success.  Or, put another way, traditional venture capital may be necessary but alone may not be sufficient to build a great cleantech venture.

Interacting with companies that are literally many thousands of times larger than a start-up company can accurately be called “dancing with elephants”:  one must be creative to capture the attention of the big beasts, strong enough to harness their power, and yet deft enough to avoid getting squashed.  It’s pretty clear that this is an important skill to cultivate in the cleantech sector — VC and entrepreneur alike.

2 replies
  1. Tim MacDonald
    Tim MacDonald says:

    Richard

    How do you respond to the observation that there is a fundamental mismatch in return strategies for VC and clean tech?

    The return realization model for VCs is classic, old-line, buy-low, sell-high Capital Markets trading. Profits are not important. Scale is. And Liquidity. When Profits support scale+liquidity, that is great. If they do not, hyperbole will do. When hype fails, M&A comes next. The familiar pattern of booms-that-g0-bust comes into sharp focus.

    Cleantech is more of a cash-flow business. Scale is good, but not the real point. Liquidity is important to every business, but in due measure. Sustainability is the real competitive advantage of CleanTech.

    So, where VCs live on scale+liquidity (the conventional way things are now being done), CleanTech lives on scale+liquidity+sustainability. A third, new value is being added.

    The VC model, and the Capital Markets generally, cannot value that third new value. That's just not what they are built to do. (Think about it: sustainability was not really important when the Capital Markets were first invented, about 150 years ago.)

    Curiously enough, the Institutional Investment Partnership model can, and does. And yet CleanTech, Renewables, the whole sustainability/triple bottom line community continues to look the Capital Markets for funding.

    Why not look direct, to the Institutions who have become the new stewards of our personal wealth, and who build their own core business and the new triple value proposition of scale+liquidity+sustainability that lines up so nicely with the values of Cleantech?

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  1. […] Mark presented a mixed picture.  On the one hand, the VC industry is clearly contracting:  […] Cleantech Blog TAGS:  Future, Into, Venturing This entry was posted on Monday, May 7th, 2012 at 9:38 […]

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