What's Wrong With Cleantech VC
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Transcript of What's Wrong With Cleantech VC
What's wrong with cleantech venture capital?
December, 2008
DRAFT
This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
2
We are all convinced cleantech = $$, right???
This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
3
Some very smart VCs are 110% on board
“John Doerr said to me: ‘Are we going to have any more Googles?’ And I said: ‘You're damn right we are, because we are at the point of new wealth creation when it comes to green technology.’”
Bill Joy
“The underlying markets of cleantech are among the largest markets in the world. India and China represent 40 percent of the world's population, and they're undergoing the type of industrialization that we experienced in the twentieth century. The energy demands that will cause is a tremendous opportunity.”
Ira Ehrenpreis
“There are many such things going on that are radical, implausible – each individually (is) somewhat implausible, on the aggregate (it is) highly plausible that one plan will work. That's the key to the solution.”
Vinod Khosla
“I think the oil industry is actually getting fat and lazy, and I think there are some great opportunities there in clean tech.”
Tim Draper
This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
4
Just one little problem...
Almost no exits yet
VCs don’t yet know what works and what DOESN’T
work in this sector
And few failures either
This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
5
So what should cleantech VC look like?
What structural and strategic considerations would
maximize IRRs?
This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
6
’95-’96: What VC used to look like
• 1996 average fund size = $138M
• 2,000 total VC investments per year-Avg. around $4.5M per investment across all stages-50% in seed and early stage investments-37% of venture dollars into CA, 9% into MA-Top 5 MoneyTree sectors (out of 17) garnered 57% of venture dollars1995: Software, telecom, media, biotech,
medical devices
• 20-35% of investments resulting in IPO-Accounting for the bulk of the profits-Average holding time to exit = 4 years-IRRs >20%
MoneyTree; Gompers and Lerner, 1999
This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
7
-20
0
20
40
60
80
100
120
140
160
1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
VCs shifted in the late '90s, and learned hard lessons
Average Annual Rate of Return to
Investors in U.S VC Funds
Source: Venture Economics
This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
8
But are cleantech VCs now making the same mistakes?
Circa 2000
This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
9
We can make some assumptions (1 of 2)
1) VC economics haven’t changed• Buy low, sell high• Still looking for 5-10x return potential • Still operating under 2.5 and 20 comp structure• Still looking for 3-7 year holding periods
2) VC operations haven’t changed• Pick one out of a hundred opportunities, lots of time
spent in search and evaluation• Serve on Boards, lots of time spent on portfolio• Raise new funds every two years
3) Valuations are often affected by round size*• Entrepreneurs focused on dilution more than a dollar
valuation*Even if they shouldn’t be!
This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
10
We can make some assumptions (2 of 2)
4) The money needs to go to where the ideas and entrepreneurs are
5) Over time, cleantech exits will look like other VC-backed exits• The usual mix of M&A and IPO, at similar values
6) Exits require profits, not to mention strong revenues• See point #7 below if you disagree
7) THE LATE 1990s WERE AN ABERRATION AND THOSE KINDS OF RESULTS WON’T EVER HAPPEN AGAIN IN VENTURE CAPITAL
This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
11
$27M
$18M $24M$39M
$47M $52M
$98M
$63M
2001 2002 2003 2004 2005 2006 2007 1Q08
$54M
$29M$38M
$57M
$74M $77M
$153M
$98M
0
50
100
150
$200M
MeanMedian
So what are cleantech exits likely to look like?
IPO
M&A
2002 2003 2004 2005 2006 2007 1-3Q08
340 313 439 408 426 445 205
0
20
40
60
80
100%
# of US VC-backed exits, all sectors
Most VC exits are via M&A
And the median M&A exit is <$100M
Thomson Reuters/ NVCA, Dow Jones Venture Source
Finding IPO-worthy companies is still important, but you can’t price deals with that expectation
This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
12
Even IPOs aren’t a guaranteed big return
Company Year Raised Pre Exchange
Comverge 2007 $95M $286M Nasdaq
Largest US-domiciled VC-backed cleantechIPOs, 2001-1H08
EnerNOC 2007 $92M $486M Nasdaq
Clean Air Power 2006 $18M $29M AIM
Protonex 2006 $16M $52M AIM
Hoku Scientific 2005 $21M $80M Nasdaq
Ocean Power 2003 $42M $73M AIM
Metabolix 2006 $95M $233M Nasdaq
PolyFuel 2005 $14M $26M AIM
E&Y
This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
13
So how do you get a 5x out of a decent trade sale?
And you can’t end up putting gobs of money
into the company
It helps to be an early investor
Rnd $$ Pre-
Series A $6M $6M 25%
FirmA own%
Series B $8M $18M 25%
Series C $10M $50M 23%
Oversimplified example
FirmATotal 23%
ILLUSTRATIVE
Early rounds need to be at reasonable valuations
FirmA $$
$3M
$2M
$1M
$6M
$130M exit * 23%$6M in
= 5x return
This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
14
Yet VCs are putting more $$ into each deal
1995
1995
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
(3Q)
0
5
10
15
$20M
Water
Energy Eff.
Biofuels
Solar
Transportation
$13.9M
$13.9M
$39.1M
$40.9M
$61.0M
0 20 40 60 80
Avg. US cleantech round size(all stages)
Avg. total capital per VC-backed company(so far!)
MoneyTree; E&Y
This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
15
Cleantech is complex and varied…
GreenTech Media
This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
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…Yet VCs are piling into just a couple of techs…
Cleantech Group; GreenTech Media
• GreenTech Media is tracking 150 solar startups
• Solar is now >35% of global cleantech VC dollars
• Together, solar, biofuels and transportation are now ~60% of global cleantech VC investments (1H08)
As new investors get into the market, by default they jump into the sectors where money is already flowing
This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
17
...And techs which don't always have good economics
Includes many
demand-related
solutions
Includes most of the
supply-related
solutions VCs are
investing in
This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
18
Cleantech VCs are shifting to late stage
• Clean technologies in the lab can
take longer to commercialize than
I.T., Web2.0, etc.
- But not longer than biotech! Shh!
• The returns this decade have been
stronger in later stage
- But that’s not true for longer term
returns, shh!!!
• The herd is moving to later stage
and “balanced” (ie: 80% late stage)
• It’s also the only way to spend all
the money in the latest mega-funds
in the sector
Seed
Firstround
Followon
2003 2004 2005 2006 2007 2008*0
50
100
150
200
North American # ofcleantech deals by stage
Source: Cleantech Group* Annualized from Q1-Q3 data
So let’s go later!
This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
19
The problem is… Everyone is going later.
How will so many firms going after the same few deals find reasonable valuations?
How does a $10M minimum check size (as some investors now have) work within an M&A-driven exit environment?
It raises a few questions…
How will we create enough early stage companies to fulfill the appetites of the late stage investors???
Are more big late-stage funds really the answer???
Later stage investors with good brand and networks in cleantech will have successes, but how much will the “winners curse” otherwise impact a crowded market?
This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
20
Cleantech isn't just in CA and MA…
"solar" "wastewater" "ethanol" "energy" +"consumption"
1,012 610 389 265
0
20
40
60
80
100%
No. of U.S. patents filed since2000, by keyword in abstract
CaliforniaNew England
Mid-Atlantic/NY
Southeast/TX
Great LakesRockiesSouthwestPNW+AK/HIPlains
Other USA
Boston
CA
Renewable Energy BusinessNetwork: LinkedIn members
6,193
0
20
40
60
80
100%
Cleantech entrepreneursCleantech innovations
Author’s patent search; REBN
This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
21
But VCs aren’t happy travelers
AK/HI/PR
Rockies/Plains
SoutheastNorthwest
Southwest
Midwest
Northeast
California
1st round VC deals
330
0
20
40
60
80
100%
Cleantech deals(first round only, since 2004)
Cleantech Group
This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
22
What Cleantech VC looks like today
• >100 VC firms investing in cleantech, with most dollars and deals going into late stage
• Mega-funds (>$300M) being raised, locking in the crowded late stage as an entrenched feature of the market
• Most clean technology subsectors being relatively neglected as everyone piles into the increasingly zero-sum-games of solar, biofuels and electric vehicles
• Most investments going into California and New England, artificially limiting the pool of possible investments
• Many VCs gambling that they can find “black swans” that will be huge IPOs, even knowing that such outcomes will be very rare
• Lack of exits and failures means little track record to differentiate between VCs – so P.R. is heavily deployed
This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
23
What Cleantech VC needs to look like
• Probably fewer funds in the sector overall, but definitely fewer late stage focused funds
• More smaller funds writing smaller checks into capital efficientbusinesses with high-growth and good exit potential
• Early stage specialists and sophisticated seed stage funders acting as “scouts” in the underdeveloped subsectors/ technologies, leading the way where generalists can then co-invest and follow
• Investments where the innovations and entrepreneurs are, not where the VCs are based
• Building subsector ecosystems, not betting on singular “black swans”
• A focus on building high-growth and PROFITABLE companies that then become natural acquisition and IPO candidates
This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
24
Conclusion
VCs need to stop trying to figure out what new investment models work in cleantech…
…They need to start figuring out what parts of cleantech work for the proven VC model.
This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
25
Questions?
Peter [email protected]
650-322-3245
Matt [email protected]
650-322-3246
Rob [email protected] x5
Marc [email protected]
978-658-8980 x1