What Greenstart’s Reboot Means for Cleantech—And For Accelerators
When Greenstart set up shop in San Francisco in 2011, it was the nation’s first accelerator dedicated to nurturing cleantech startups. Co-founder and managing partner Mitch Lowe said at the time that the organization’s mission was to fill a big gap: He wanted to give alternative energy entrepreneurs access to the same type of training, mentoring, resources, and connections that founders of Internet or mobile companies could get at traditional software accelerators like TechStars or Y Combinator.
But it turned out that wasn’t quite what the companies wanted.
Greenstart announced last week that it’s killing the accelerator program and transforming itself into a seed-stage venture firm focused on the “cleanweb” (more on that term in a moment). A total of 15 firms entered the accelerator, in three batches—Fall 2011, Spring 2012, and Fall 2012—and Lowe says 11 of them have obtained follow-on funding, which isn’t a bad track record. “In general the portfolio is holding up nicely,” he says.
But the companies themselves were never all that interested in the classroom sessions, the group mentoring sessions, the legal advice, and the other elements of Greenstart’s entrepreneurship curriculum, Lowe says. What they were interested in was the help they got designing their actual products and services—and they continued to need that help after the 13-week accelerator session ended. “What we heard loud and clear was that 90 days is not enough,” Lowe says.
The artificial strictures of a traditional accelerator program, with its climactic demo day, after which the companies clear out to make room for the next batch, just weren’t working for Greenstart’s companies. “The best companies are looking for a lifetime partner,” Lowe says. “For both sides to invest a lot of time and energy into getting to know each other, and to have that all disappear, didn’t make sense.”
So from now on, Greenstart will continue to invest $250,000 to $500,000 (through a combination of cash and services) in 10 to 12 seed-stage companies per year. It will also offer extensive help with product and service design, which has been one of its specialties ever since it hired former Frog Design creative director David Merkoski (pictured above, in the green T-shirt, and at left). It just won’t put the companies through a formal training program.
The announcement about the shift came the day after St. Patrick’s Day, which also happened to be Greenstart’s two-year anniversary. Lowe says the company held a “good old Irish wake” to commemorate the change, complete with fiddlers.
The open question now is whether those fiddlers should also have played a dirge for the very notion of cleantech accelerators. In the two years since Greenstart’s founding, only one other cleantech-focused accelerator has come onto the scene—Houston-based Surge. Meanwhile, the Solyndra debacle, which cost private backers more than $1.1 billion, has cast a lingering pall over alternative-energy investing. The whole point of an “accelerator” is to get a startup up to the speed at which it’s ready for venture backing. But the number of venture firms still fearless enough to put money into early stage cleantech companies has dwindled to just a handful. (Greenstart joins a very short list that also includes firms like Braemar Energy, Khosla Ventures, Lux Capital, RockPort Capital, and NEA.)
It’s not that startups trying to change the way we generate, distribute, use, or manage energy don’t need help getting off the ground. It’s just that the Y Combinator-style accelerator—more than 120 of which have popped up across the country, by Xconomy’s last count—may not work as well in the energy business as it does in the world of pure software.
It starts with the companies themselves. In the world of Web, mobile, and cloud software, a group of founders can get into an accelerator with no prior funding and no product—in fact, with little more than an idea scribbled on a napkin. But in the energy world, Greenstart discovered, companies tend to do more homework before they apply for help. And because there are fewer veteran angel investors in the energy sector, these companies have usually found ways to make it through this earliest phase on their own. By the time they apply to join an organization like Greenstart, they need practical product advice more than they need entrepreneurship lessons.
“When we started we were very clearly trying to fill the angel gap in cleantech—after friends-and-family funding but before Series A,” Lowe says. “We found that there were a lot of companies that were beyond that napkin stage. They had bootstrapped, or raised more money from friends and family. Having discussions with companies that had three customers and were trying to make changes to real products was not only more interesting for us, it was a better investment.”
In a way, the companies joining Greenstart were like kids starting kindergarten at age 7. At their age, they didn’t need naps and coloring books; they needed reading and handwriting lessons. So, really, for Greenstart to morph into a hands-on seed-stage venture investor isn’t much of a shift.
Another big factor working against Greenstart’s accelerator was the financial math. To turn an accelerator into a lucrative investing operation, you have to place a lot of bets, in the hope that a few of them will pay off. But if you’re going to let in a lot of companies, you have to be ready to serve all of them—and Lowe says Greenstart always knew it wanted to stay small, bringing in fewer than a dozen companies a year.
(Even Y Combinator has been struggling with scaling issues. It admitted a record 84 companies to its Summer 2012 class, then slimmed down to about 50 for its Winter 2013 class after it found that “more things than usual broke” with 84 companies in the mix, in the words of co-founder Paul Graham.)
In addition, you need a strong enough brand to attract lots of applicants, so that you can be picky about whom you admit. But Greenstart is still very new. “I think only Y Combinator and possibly TechStars at this point have a brand and a track record that create so much demand that they can work with that many startups and still meet certain benchmark criteria,” Lowe says.
So Greenstart’s decision to focus on quality was another reason it had to stay small. That means there’s a lot more riding on each startup. Which means, in turn, that the companies need more individual attention and professional assistance, like Merkoski’s design services. At that point, the operation looks a lot more like a small venture fund than an incubator.
Because accelerators don’t generally share their financial data, it’s hard to know whether the dozens of accelerators that are less famous than Y Combinator, TechStars, or 500 Startups are confronting similar math. “My suspicion, though we don’t spend any time talking to other accelerators, is that the growth curve of the other new accelerators is probably having some of the same issues,” Lowe says.
There’s one final challenge facing accelerators in the energy world and other sectors outside the pure software world, though Lowe says it was not a factor in Greenstart’s decision to pivot. It’s the sheer difficulty of innovating in sectors of the economy that aren’t yet fully digitized, and that are dominated by entrenched players and decades-old consumer behaviors.
If you’re building a photo-sharing app, iterating is easy. You can often zoom from the napkin stage to early product testing and beta launch in just months. In other sectors, including cleantech, it can just take longer to revise your product in response to customer feedback. Is your solar panel less efficient than you expected? Is your biofuel mixture more expensive to produce than you thought? Then it’s back to the drawing board, or the laboratory.
“For most companies, and particularly companies that are dealing in energy-related products and services, to get to product-market fit in less than 90 days is pretty unrealistic,” Lowe says.
Again, though, Lowe says the difficulty of finding a lucrative market and building a product that satisfies it before demo day wasn’t what inspired Greenstart’s shift. “It was all about how do we attract the best entrepreneurs and how do we add value,” he says.
And all along, Greenstart has tried to minimize the difficulties inherent in energy innovation by steering toward the cleanweb—its term for the larger group of companies using the power of information technology to transform inefficient parts of the economy.
That definition is broad enough to include collaborative-consumption companies like Zipcar or Airbnb, which reduce overall demand for energy by encouraging sharing and re-use. “We’ve identified 13 subsectors in cleanweb, and all of them have the characteristics of being able to get feedback quickly, so companies can be nimble and have multiple opportunities,” Lowe says. In fact, most of the follow-on investments raised by Greenstart companies have come from traditional technology investors, not from cleantech investors, he says.
Only one of the 15 companies in Greenstart’s portfolio has gone out of business—it was called Wa.tt, and had been developing games to get consumers to pay more attention to their energy consumption. At least one of the companies, Ridepal, is “crushing it,” in Lowe’s words. The company helps big Bay Area employers organize bus rides to work for employees. (You couldn’t invent a more perfect business for the traffic-clogged peninsula.)
All of the rest are shipping products, raising money, winning grants, running pilots, and doing all of things startups are supposed to do. Including pivoting: former bike sharing startup Liquid “has changed its business model dramatically,” Lowe says, though to what is still a secret.
Greenstart will continue to invest in new companies, as venture funds do, and in each case there will be an initial “immersion period” in the fund’s sunny top-floor space on Battery Street while Lowe, Merkoski, and the rest of the team dig in on business-model and product-design questions. But there will be none of the structure of an accelerator program, and the companies will be welcome back at any time.
“I think what we’re trying to do is bring together what a First Round Capital or a True Ventures would do, in terms of the investing stage, and then bring the capacity of a boutique Ideo or Frog to bear,” Lowe says. The reboot, he says, simply reflects the discovery that “the 90-day construct does not make sense…The only real change we’ve made is stripping away that construct and saying we want to be a partner for life.”