Patience, Honesty, and The Strings of Free Money: Five Financing Themes from the Seventh Annual Conference on Clean Energy
The relationship between venture capitalists and cleantech startups sure seems pretty lukewarm these days, at least from what I saw yesterday at the seventh Conference on Clean Energy in Boston.
The lunchtime “VC” panel on cleantech funding 2.0 actually focused more on why venture capital isn’t necessarily the best move for financing transformative energy technologies, and was represented by the Department of Energy, strategic investors at major energy giants, and a cleantech investment banker. After that I checked out the session on seed funding, where panelists dished on how they identify cleantech startup opportunities. The day included a mix of themes like supplying the grid, energy innovations for developing countries, and waste-to-energy tech, but my five highlights came from a couple panels on investing trends.
So here are the key takeaways:
—Venture capital is a bit too impatient for cleantech. “You need someone who has a longer than two-year election cycle,” says Bic Stevens, founder of the cleantech focused investment banking services firm Stevens Capital Advisors. The nature of the VC fund lifecycle requires funds to post good returns in a short period of time, much shorter than the time needed for clean tech innovations to really develop and succeed, Stevens said.
Strategic investors in the energy space, meanwhile, are looking to bankroll and work with startups not just for financial return, but to improve their own technology and product portfolio. “Our goal is to treat that opportunity or company as either a platform for tremendous future growth or as a key enabler of our businesses that need an extra tool,” says Shaun Parvez, managing director and head of U.S. corporate development for Korean conglomerate SK Holdings. “It’s not about buying at 10 and selling at 20. It’s about buying at 10 and growing to a billion forever.”
—What is cleantech seed funding exactly? “The money that can go right after 3Fs go in (friends, family, and fools)—prior to Series A,” says Arif Padaria, the Massachusetts Clean Energy Center’s managing director of investments. But really it’s about “research and development, moving the needle, and making [the technology] more commercially viable. David Wells, greentech investment partner at the Palo Alto, CA, venture capital firm Kleiner Perkins Caufield and Byers, looks at seed as the “science stage” and Series A funding as “technology stage.” Even at the science stage level, a team has to show that its product has the potential to disrupt the marketplace and succeed as a standalone company (not just become an incremental innovation for an existing energy giant).
—How to impress a potential seed investor for your cleantech startup? Having “landscape knowledge—when someone really, really knows their field, knows where their innovation sits in that field and relates to the other innovation,” says Kleiner Perkins’ Wells. “Here’s someone who’s reality based and really understands what’s going on here and how their innovation might play out.”
How not to impress an investor? “Being a little slippery about a point or coming across as dishonest is one sure way to lose potential investors,” says Ron Rubbico, a member of CommonAngels and Boston Cleantech Angels. In essence, don’t make up an answer to investor questions. “Its OK to say, ‘I don’t know, we’re going to find that out with the money you give us,'” Wells adds.
—All free money is good, right? Maybe not. Rubbico says “anytime you can get non-dilutive financing into your early venture it’s a great thing.” Though he and the other panelists cautioned entrepreneurs closely to examine the time it takes to pursue and satisfy the conditions of grants and how it might detract from actually developing their product. “Figure out what the strings are,” says Padaria.
—Re-think government funding. Just dumping a bunch of money into an industry or company isn’t really the way to enable cleantech innovations to succeed in the market. Cheryl Martin, deputy director for commercialization at the Department of Energy’s ARPA-E program, expressed concern that the money a government like China is pouring into cleantech is accelerating the space too fast and might topple. And recent flops in political cleantech bets have also proven that governments have to “be careful of what they support publicly,” says Issam Dairanieh, global director of BP’s Alternative Energy Venture team.
The better move for government is to enact regulatory changes that allow cleantech to succeed in the marketplace,” said SK’s Parvez. “Subsidies don’t last forever and they’re hard to predict.”