Cleantech’s “Rising Stars” Get Critical of VC’s

Choose wisely and know when to walk away from money, say some of cleantech’s most promising young startups. The cautionary advice was one of many tips shared during the Cleantech Group forum held in Washington, D.C. last month, which featured a panel of rising stars brought together to reveal their “lessons learned.”

The roster of speakers included a maker of solar thermal collectors, a maker of bio-pesticides, a firm that uses IT to manage water pressure, and a maker of renewable acrylics. The panel’s moderator was Rob Day, a partner at Boston-based private equity firm Black Coral Capital.

The panelists recommended that firms seeking venture capital funding also consider three other key pieces of advice.

First, do not take money from just one investor. Instead, the panelists suggested taking smaller amounts from several sources in order to keep the varying interests of the venture capitalists in balance, particularly around issues like rate of return and dilution. Second, start-ups should only take money from investors with a strong, existing relationship to the young company because their participation on the company board can ‘make or break’ the partnership. And finally, fledgling companies should be highly selective when choosing investors and be willing to end the relationship if the investor’s strategic vision differs from the founder’s.

On the flip side, key takeaways for venture capitalists in this discussion is to develop relationships with rising cleantech startups early, before making an investment, and to gain their trust that your appointment to the company’s board of directors will be seamless.

Adam Kingdom, CEO of i20 Water, says he once thought “money was money,” but his view changed after going through several funding rounds. He now believes that board members inserted by venture capital firms can add value to companies beyond just the capital invested by the firm, so companies need to be very selective.  i20’s products manage pressure in water distribution networks at utilities, creating a solution for leakage, a huge global problem. To date, the company has raised over $22 million in funding.

Companies need to be cautious and approach investors as if entering into a long-term relationship, says Zvika Klier, CEO of Israel-based TIGI, a maker of solar thermal collectors. He councils that choosing the right investor has  a significant impact on the future of the company, and shared that he only takes money from investors he already has a personal relationship with, who he knows will be exert a positive influence on the board. TIGI recently won the prestigious Intersolar Award and expects to start marketing its product in the first half of 2013.  Klier said that he expects the company to raise additional funding to finance its growth.

There was general agreement on the panel that having only one investor has pitfalls. Black Coral Capital’s Rob Day agrees with the panelists who stated so. In a post-forum email, he wrote: “If you only have one major investor you’re completely beholden to them and their investment reserves, which may not be sufficient.” But, Day also points out that having too many investors on the board can be a distraction and lead to inefficient decision making. He said that having two to three major investors on the board probably brings the right balance of skills and networks to the boardroom, as well as the ability to resolve disputes.

Relationships are not just important for raising capital, but for accessing all types of partnerships, Day also points out. For example, OPX Biotechnologies’ strategic partnership with Dow Chemical lent the firm credibility in the marketplace, which is extremely important for a chemicals startup. The partnership brought along with it access to Dow’s customers and its capability to operate large plants, says panelist CEO Chaz Eggart.  OPX Bio uses renewable feedstock in a biological process that produces known chemicals, such as acrylics used in household items. The company has raised $62 million in funding and plans to fund a series D round in the second quarter of 2013.  Eggart said that the company will commercialize its products in either 2014 or 2015.

Venture capitalists’s partnership with the companies they invest in should include bringing with them a variety of industry relationships and expertise that is brought to bear for the benefit of the funded companies, in addition to access to other investors, notes Day.

However, OPX Bio’s Eggart said that venture capitalists can do a better job at leveraging knowledge and information across their portfolio companies. And i20’s Kingdom pointed out that a major, yet unanticipated, challenge early on was developing the sales resources and skills required to sell their IT product to conservative utilities, a skill set that the right investor may have been able to teach them.

Another interesting point raised during the panel by Marrone Bio Innovation’s CFO, Don Glidewell, was that investors have recently gotten very excited and knowledgeable about investing in the cross section of biotechnology and agriculture, a $44 billion market that’s being driven by the need to feed a huge growing population, he says.  He noted that just a few years ago he had to spend a lot more time “educating” them about this market.  Marrone Bio has raised $48 million to date and is currently funding its latest round, which will bring them to $60 million total.

To summarize the panel, Day pointed out that success in venture capital investing or running a cleantech startup, “all comes down to individual dialogues and relationships.”

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