VC Investors: If Cleantech is to Thrive, It Needs to Be Redefined

Investment opportunities in cleantech are still plenty abundant—this was the common theme running through the “Who’s Funding Cleantech?” panel at the recent Cleantech Innovation Summit in Newport Beach, California. However, the venture capitalists’ optimistic conclusion did repeatedly come with a caveat: to find those opportunities, it may be necessary to let go of some outdated perceptions about the space.

“Despite all the doom and gloom, companies that have interesting technologies that are disruptive or fantastic management teams that have a track record for executing are getting funded,” said Andrew Chung, a partner with Khosla Ventures. “In our portfolio in the last 12 to 18 months, we’ve had more than 10 companies raise significantly large rounds.”

Enter New Co-Investors

Of course, it’s taking longer than it once did to raise that capital, he notes. It’s also taking “a lot more creativity to find the long-term investors that still have a belief in the space. Some of them have come out of the woodwork.”

Chung’s message to investors: start paying closer attention to that woodwork, and to the new investors who might come out of it. He says that in several of Khosla’s recent funding announcements, several new investor names have emerged. “Some we’ve never heard of,” he says, “but formidable sources of capital are now emerging.”

Other investors on the panel echoed his point. Brook Porter, a partner at Kleiner Perkins Caufield and Byers says that the investors who were burned by the downturn have largely recused themselves as co-investors with his firm—but that’s left room for new entrants.

“There’s been a change-out of that community of co-investors,” he says. “Those that are burdened with portfolios and struggling from the downturn aren’t really there for us as co-investors. It’s a new wave of investors that we’re working with and forming strategic relationships with. It’s the high-net-worth funds, the sovereign wealth funds, family offices. They recognize that the macro trends haven’t changed, and they want to invest for the long term.”

Corporates are also more boldly entering the cleantech fray, said many of the panelists. Many companies are stepping forward to provide a higher level of corporate strategic support for cleantech companies—especially those that have a manufacturing component, and see new technologies solving a mission critical problem.

Chung says he’s working with a number of VC firms in China to get them up to speed on cleantech. Extensive clean infrastructure is needed in China, he explains, because of pollution problems there, but many corporate investors and others have been hesitant to invest there because it remains an unfamiliar area. He says he’s hoping to create “pockets of corporate venture activities in new geographies where the local need for these technologies is so high.”

Top Investment Themes

Raj Atlaru, a managing director at SilverLake Kraftwerk, also brought up collaborative consumption and new models of financing, like crowdsourcing, as areas cleantech observers should be sure to watch. He cited Lending Club as an example of a platform that offers peer-to-peer financing, which could offer an alternative to more traditional forms of capital raising. Another area that Atlaru cites as a “big theme” is the financing of energy efficiency upgrades for commercial and industrial complexes.

The panelists highlighted capital flexibility as an important tactic in fundraising in today’s cleantech environment. Chung cited Ambri as an example of a company that has excelled in this. Ambri’s all liquid metal batteries are easy to manufacture and have a high return on capital invested, making them attractive to corporate manufacturing partners.

“It’s not just important to be capital efficient; the type of tech should have multiple [funding options],” he says. “Models that have elegance and simplicity and the ability to fund it in multiple ways ends up becoming much more important criteria across all of the traditional sub-sectors in cleantech.”

“Cleantech” Redefined

The VCs on the panel also stressed another way in which cleantech might consider updated its perspective: stop calling itself “cleantech.”

“Look at a company like Nest, and the question of what sector it belongs in,” Porter said. “I think it’s an example of the fact that really, cleantech is not a sector.”

Atlaru argued that many of the VC investors who participated in the investment exodus from cleantech in recent years will be back once the space is more clearly defined.

“I think venture guys will come back once we define the type of companies they’re investing in,” he said. “The venture community will define whether Nest is a cleantech company, or what is it? Does it even matter? I think people are really looking for high-quality teams.”

A Focus on Sustainability

Chung says that within Khosla, he and his colleagues have dispensed with the term “cleantech” altogether. Now, it’s “sustainability,” which they see as a broader mandate. As Khosla sees it, the “sustainability” category includes renewable means of food and agricultural production (the firm has invested in 8 or 9 companies, he said, that are working on better, non-animal food-producing processes); LED materials, storage technology, new types of material fabrication technologies, and connectivity with 3D printing. “Sustainability is much broader,” he says.

Porter of KPCB says that his firm, too, has taken an interest in agriculture. He and his colleagues are also paying close attention to Big Data, and “power hardware,” a sub-category that includes displays, batteries, and memory. “They all need to be reimagined,” he said.

But some things haven’t changed, and probably won’t. Chung of Khosla said that despite the extent to which the cleantech space has evolved, the way the firm looks at where to invest remains essentially the same.

“We are still very focused on black-swan type technologies that have the ability to transform infrastructure. We’re willing to take significant technology risk and if it means that it’s a manufacturing-based business, so be it,” he said. “We’ll find a way to fund it.”

Chung highlighted “waste to value” as an important new investment theme for Khosla. He is looking for companies that can process waste or create products from waste materials, such as plastics or CO2, which will generate a return for plants.

Kleiner Perkins’ Porter added that the near- to immediate-term is likely to be a promising time for cleantech, and that if investors have given up hope on the space, they’ve done so prematurely.

Optimism

“Over the next two years, there are a lot of really exciting companies in the pipeline,” he said. “There are a lot of companies that were funded four or five years ago, real breakthroughs in technologies that are maturing. From that perspective, we are really optimistic. These are technologies that are changing the energy landscape such as in: distributed generation, electronic transportation, and the solar phenomenon, which continues to grow.”

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