Say you’ve got a groundbreaking cleantech product—a small device that converts household dust into energy that can power an average family’s living room, for example. The business plan is written, the small basement office procured, and the Chief Operating Officer spot filled by your best friend from grad school. And yet, an inevitable challenge remains: how can you bring your product to market with no funds or discernible cash flow?
Grants and investors are options, but increasingly, upstart cleantech companies are going the corporate route as well—partnering with established companies to leverage their capital, access to markets, and technical expertise.
“In cleantech, access to market scale adoption is so key that startups need corporates,” Cleantech Group CEO Sheeraz Haji told attendees of a panel discussion at the Global Cleantech 100 Summit and Gala in Washington, D.C., in October.
Between 2006 and 2011, partnerships between corporations and cleantech ventures increased by 108%, and there’s no sign this will abate. Though cleantech deals as a whole declined in 2012, the percentage of deals featuring corporate relationships continued at a steady pace.
It’s easy to recognize the advantages corporations offer startups. For starters, they offer a framework for validating and distributing products. They offer established, more recognizable brands. They allow startups to test technology in a risk-free environment, and in cases where products rely on capital-intensive technologies for development, they help them establish manufacturing plants.
But the prevalence of such arrangements is not a marker of success. In fact, the Cleantech Group studied the relative success of cleantech-corporate partnerships and found that only 37% of cleantech companies with corporate relationships had “successful exits” from the marketplace. More commonly, 47% of these companies had distressed exits.
The group’s report found that partnerships fizzle for any number of reasons. Startups require shorter timelines than corporations can accommodate, the faster pace is needed for securing competitive advantage. And corporations that have longer processes for developing products will hinder a startup’s ability to raise additional funds for new product rollouts.
Cultural and leadership differences can also be an impediment, the study revealed.
Partnerships can take any number of forms, including distribution agreements, joint ventures, R&D relationships, and simple customer arrangements in which the corporation buys the startups’ goods and services. Over the past 10 years, an increasing number of corporations have established dedicated venturing units—Respol and GM are two recent examples—as well as cooperative funds, like those established by EDF and Allianz. According to the Cleantech Group, the oil and gas, energy, industrial and technology industries have been the most active investors, with companies including GE, ConocoPhillips, Mitsui, and Google posting the highest number of cleantech deals in the past two years.
Speaking at a later panel discussion during the Cleantech Summit, Grant Allen, the senior vice president of the technology venture arm of ABB, said he sees corporates filling the “Series A” gap that opened when venture capitalists began doing less and less Series A deals. To that end, his firm is investing smaller amounts—from $100,000 to $250,000—in more seed rounds, and developing relationships with universities and labs to get in on earlier stage technology breakthroughs.
Fellow panelist Rob Day, a partner at Black Coral Capital, said partnerships can have a downside if objectives aren’t aligned. “One thing that does worry me, if it’s not handled the right way, is when you see corporates coming in and partnering early with companies; it’s not necessarily from our standpoint a validation. If the validation wasn’t done by the right people at the corporation and if it wasn’t done with an eye towards not boxing out competitive bids when the company is eventually ready to acquire,” he said. “We can all pull out examples of our personal history as investors of companies that got killed by corporate partnerships. So, it’s in vogue right now and there are even firms out there that are investment shops basing their entire sort of thesis around it. I worry that that pendulum, through some examples yet to be uncovered, will have to swing back at some point.”
Stephan Dolezalek, managing director at VantagePoint Capital Partners, speaking on the same panel, said that his firm is much more likely to invest in a startup if they’ve already developed a partnership with a major corporate player. He said that the insight of a major industry player can shed light on the startup’s ability to scale, and help decide on the proper milestones used in the company’s next round of funding.
When corporations invest in startups, situations can arise in which competitors find themselves aligned as fellow investors. Asked about this scenario during the Global Cleantech Meetup in Boston, held the second week of November, investors offered mixed perspectives.
Osram Sylvania R&D Manager Karl Jessen said his organization typically avoids investing alongside competitors. GE Ventures Senior Vice President Steve Taub, meanwhile, said his company is fine working alongside other strategic investors with companies involved in businesses GE would never see itself getting into, but avoids the situation with companies that have offerings similar to those GE might one day provide.
Would the fact that a startup took an investment from a corporation actually hurt its chances of being purchased by another company that is a competitor to that investor? “There’s a fear by startups that if you are invested in by a strategic partner then you are held captive or there will be restrictions on how you are going to be perceived in an exit,” Siemens Venture Capital Senior Investment Associate Eric Bielke explained at the Cleantech Open Strategic Investor Panel held Sept. 24 in Brooklyn.
But that perception doesn’t necessarily jibe with the perspective of some corporate investors. “It wouldn’t stop us,” GE Energy Ventures Executive Director Colleen Calhoun told attendees, explaining that GE wouldn’t refuse to work with a startup just because the company received money from Siemens, which she said she respects as an investor.
Willem Rensink of Shell International Exploration and Production added: “Getting somewhere with BP or Chevron might actually help technology get deployed by Shell. Entrepreneurs need to keep their options open.”
For entrepreneurs interested in working with corporate partners, here are some tips from the Cleantech Group on how to make them work:
– Set up a team and internal processes capable of navigating complexities;
– Establish executive relationships and a succession plan for relationships;
– Diversify among the different players in a company’s business and venture units; and
– Remain patient and take the necessary time to develop a product in order to ensure a successful exit.
To read the full report by the Cleantech Group, click here