Cleantech venture capitalists are looking for new ways to reduce risk. But that doesn’t mean avoiding big bets entirely, especially when the potential payoff is massive, two top VC’s argued during a recent panel discussion at the Wall Street Journal ECO-nomics Summit.
“Storage is one of the breakthrough areas where you’re going to see very successful companies because there’s just a gigantic need,” said Alan Salzman co-founder of VantagePoint Capital Partners.
VantagePoint’s cleantech investments include solar panel company 1335 Technologies, lithium ion battery firm Amprius and Trilliant, a smart grid company.
“Absolutely,” said Josh Green, general partner of Mohr Davidow and the new chair of the National Venture Capital Association. “These kinds of game-changing events are going to take years to happen.”
Mohr Davidow has staked claims in cleantech companies including battery company Simbol Materials and Honest Buildings, a social media platform for companies looking for green building solutions. The firm has participated in investment rounds that raised $45 million in 2011 and $41.5 million in 2012 for Genomatica, a maker of sustainable chemicals.
This week has seen more major cleantech investments, including $500 million for SolarCity by Goldman Sachs to finance U.S. rooftop installations.
However, on the venture capital side, such large moves are rare. And not all bets have been successful. In April Nanosolar announced massive layoffs, barely a year after Mohr Davidow participated in a $70 million funding round for the thin film solar company. VantagePoint has also shown signs of weakness lately, as when it was forced to stop fundraising for a new cleantech fund in January due to low investor interest.
Outside a few large, risky investments, however, these two industry leaders advanced messages similar to those that have been making the rounds in VC circles all year, including:
1) Go capital light.
Venture capitalists are focused on deals that are light on capital, heavy on near-term payoff. That includes cleanweb and collaborative consumption companies, which often use established technologies to create internet-based efficiencies. Green pointed out Uber, which gives consumers a mobile app to bid on unused black limo cars.
He also mentioned Mohr Davidow’s own “small investment” in Root3, which helps universities, hospitals and other campuses run their dedicated energy plants more efficiently using sensors tied into Web-based software. He envisions Root3 expanding to help campuses sell power back to the grid. “It will turn these cost centers within these companies into revenue generators,” said Green.
Capital-light opportunities also exist in industries traditionally viewed as heavy. Green pointed out his investment in Gordon Murray Design, which designs cars and keeps investment needs low by licensing its designs to manufacturers.
“They’ve done quite well. They’re in significant discussions” with automakers, Green said.
Capital efficiency goes hand-in-hand with system efficiency. When corporations find themselves looking for “greater efficiency roped in with resource constraints,” Green said, “you can create control elements that give you greater flexibility, greater control” over assets, earning profits while improving sustainability.
2) Sometimes you have to swing for the fences.
Being capital light doesn’t mean passing up major opportunities. For Salzman that includes the $22 million investment round that VantagePoint led for LiquidRobotics, which engineered an oceangoing drone powered by solar panels and wave energy. While that’s an expensive feat, it may beat current systems of ocean exploration and resource exploitation, which are now entirely dependent on ships that Salzman says cost up to $150,000 a day to supply.
“It opens up a huge portion of our planet,” he said.
Another opportunity is LED lighting, Green said. The average LED bulb will cost $2.50 within four years, he said, making it competitive with incandescent bulbs while delivering 25-year lifespans and 85-percent electricity savings. Usage rates and electricity savings are easy to calculate and monitor with LEDs, so “it makes sense in terms of paybacks and a rational economic decision,” Green said.
Mohr Davidow’s bets on LED’s include Sensity and Xicato. VantagePoint has invested broadly in the space, including funds to BridgeLux, glo-AB, Huga, Optotech, Light-Based Technologies and Switch.
Salzman agrees that the potential is huge, especially since LEDs digital platforms enable add-on functionalities including WiFi hotspots, alarm system sensors, and data generation points to optimize building operation systems.
The two men disagree how quickly this transformation will take place, however.
Salzman foresees LEDs taking over 100 percent of the $100-bllion lighting market by 2020. Green counters that “if LED’s have penetrated 30 to 40 of the overall market for lighting, that would be good.”
Finally, the biggest bets may be energy storage, “the holy grail of energy itself,” Green says.
While the price tag is daunting, Salzman agrees energy storage has the capability of transforming multiple industries.
“The big sea change that will come in wind is when you have storage options to deal with some of the intermittency,” Salzman said.
And during the panel discussion, an electronic spot poll of the WSJ’s audience revealed that conference attendees believe that energy efficiency holds the greatest venture capital investment potential, followed by storage and biochemicals.
3) Forget launching in stealth mode.
The days of keeping a startup quiet until it emerges, giftwrapped and ready for sale, are over, Green said, especially in capital-intensive fields such as energy storage. That’s partly due to venture’s newfound risk aversion, which brings them to rely increasingly on funding partnerships with strategics.
As corporates play an increased role, so do their business needs. Getting corporates into the game early also helps VC’s identify more potential exits beforehand.
“We need strategics involved from the get-go to understand their priorities,” Green said, which helps investors in “understanding exits from the beginning,” he said.
One way to win corporates’ interest may be to give them increased tax incentives. As NVCA chair, Green plans to lobby for the Innovation Tax Credit, which innovative companies can pass on to investors. The group introduced its proposal last summer, and has won bipartisan supporters including Senators Mike Enzi (R – WY) and Chris Coons (D – DE), who introduced the Startup Innovation Credit Act in January. The bill is currently before the finance committee.
“Rather than shutting our startups out of the R&D tax credit, let’s open the doors to these innovators and see what they can do,” Coons and Enzi said in an editorial in March.