Lessons Learned: How These VCs Raised Capital in 2013

When Tim Streit began courting investors for Huron River Ventures 1, an $11 million cleantech investment fund that focuses on early stage companies in Ann Arbor, Michigan, he realized his biggest obstacle was one of semantics.

The number one question among the family offices, high net worth individuals and corporate partners with whom he spoke was always, “What do you mean by cleantech?” says Streit.

“The word ‘cleantech’ instantly brings to mind images of solar and biofuels and batteries and power generation in more capital-intensive cleantech sectors,” Streit says.

But the fund, overseen by Streit and fellow managing director Ryan Waddington, never intended to invest in those kind of companies, which need hundreds of millions of dollars and decades to commercialize. Rather, Streit was focused on smaller early stage companies like Sidecar, a peer-to-peer ride sharing system that started out as a fleet management platform for the University of Michigan bus system. Or a company like Farmlogs, which uses technology to optimize farm output and make farming more profitable.. The firm invests anywhere from $50,000 to $500,000 initially, with the expectation of putting as much as $1.5 million into each company over the course of several rounds of financing.

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SJF Ventures says it encountered similar concerns about the term “cleantech” when it raised money for its $90 million fund – the company’s third — says founder and managing director David Kirkpatrick. Investors think the sector is risky on account of regulatory, incentive and commodity price issues and because they believe it is reliant on a strong IPO market, which is not always available, Kirkpatrick said.

“We had to convince investors we were different from what they feared. What they feared was early stage, regulatory-driven areas like biofuels,” Kirkpatrick says. “We are different from that in almost every way.”

Besieged by investor preconceptions and concerns about “cleantech,” VC’s are trying to change investors’ minds about the sector, which shrunk 61% in the first quarter over the comparable period last year. U.S. venture capital firms attracted just $369 million in new investments in that period.

As Dallas Kachan, the managing partner of the cleantech research and advisory firm Kachan & Co., pointed out in a recent blog post, “intelligentsia in the sector are distancing themselves from the phrase.”

Like Huron River Ventures, SJF’s interests lie in energy and resource efficiency, intelligent infrastructure and sustainable agriculture and food, as well as asset recovery, recycling and reverse logistics, and businesses operating in the education, health and wellness sectors. It sells investors on capital efficient companies with proven technology and business models that prosper regardless of government incentives. Kirkpatrick likes to use the term “resource efficiency and sustainability” when articulating SJF’s version of cleantech.

The firm invests in later-stage companies already producing revenues and seeking expansion capital rounds of $1 million to $10 million. Its 36 portfolio companies average more than $10 million annually. Backers include large banks like Citi and Deutsche Bank, foundation endowments, insurance and financial services firms like MetLife and Prudential Financial, Inc., mutual and pension funds and family offices.

Most recently, SJF invested inVital Farms, the country’s largest producer of pasture-raised eggs and poultry. For its third fund, SJF did the capital-raising themselves, reaching out to hundreds of investors over a 15 month period. Some potential limited partners raised concerns about the fund’s ability to achieve scale.

“They didn’t want to invest in a fund of less than 100 million.” Kirpatrick says.

He and Streit stand among a crop of VC’s who have successfully raised cleantech funds in recent months. These include the Westly Group, which closed on a $160 million fund on March 16, and Lux Capital, which raised $245 million for a fund partially focused on “energy tech” on Feb. 13. Reaching out to corporate investors, Braemar Energy Ventures raised $300 million.

Other firms haven’t had as much success hitting their stated goals. Hudson Clean Energy Partners stopped fundraising for a $1 billion cleantech fund and began scaling back its team in February. Likewise, a lack of interest from potential limited partners caused VantagePoint Capital Partners to halt fundraising earlier this year for a fund the company hoped would reach $1.25 billion

If Huron River Partners’ recent fundraising efforts indicate what’s in store for the future of cleantech investments, semantic changes are likely to spread industry-wide. Kachan writes of how Deloitte rebranded its annual Napa Valley cleantech event last week as “Energy Tech.”

“Is it just a matter of time until others start picking similar monikers,” Kachan wrote.

Streit says Huron River Ventues stopped using the term “cleantech” altogether, opting for more specific terms like energy efficiency transportation.

“Because of the very negative public analysis in the cleantech sector related to other industries, and the last generation of cleantech companies, I think the sector as a whole needs to retrench a little bit and rebrand,” Streit says.

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