Time to get down to business

For those of us involved in cleantech investments for a number of years, we got used to making excuses long ago:

“No, it’s not commercialized yet, but the market isn’t ready for it anyway.”

“Adoption will take longer because of the introduction of hybrid vehicles.”

“Okay, the CEO is a bit wacky, but it’s the best technology of its kind.”

“We need a sustained $60 per barrel before we can IPO.”

At the same time, the companies themselves always seemed to have excuses:

“We’re still pre-revenue ’cause we’re busy saving the planet, man!”

“Balance sheet? What’s that?”

“Commercialization will take more money than expected due to a big oil-backed government conspiracy to suppress our technology.”

The term “cleantech” didn’t exist when I started in venture capital in early 2001. We called it “Energy & Environmental.” In fact, the category was so small at that time (and shrinking) that I argued against putting resources into it. Little did I know that the dot.bomb crash would force me down the cleantech investment path that very year.

Since then, cleantech has grown considerably, becoming a major investment category, attracting financial players worldwide. Have we run out of excuses to stay away? What has changed since 2001 to make this happen? We’ve had cultural events—“An Inconvenient Truth,” the Priusing of California—galvanized by a string of “extreme weather” events. The rising price of oil hasn’t hurt either. But within cleantech itself, some important changes have improved the attractiveness of this once-unfashionable sector. To my mind, cleantech always had three persistent excuses:

Excuse #1: Management

Back in the day, cleantech seemed to attract an inordinate number of crazy inventors. I remember utopians asking for the $2 million it would take for their ocean power technology to reach break even. I remember the CEO who proudly reported a famous 1960’s singer had joined his board of directors. I remember the perpetual motion machine business plans, claiming, “Our technology harnesses a powerful force not yet understood by mainstream science.” And I remember the first General Hydrogen business plan—as well as the much-improved second one, which did get impressively financed.

Since then, we’ve come a long way. We expect to see marquee-quality management teams with great track records and serious star power. We expect CFOs who can give us comprehensible reports on time and keep their company’s cash flow under control. We expect sales and business development people with the skills and network to take their companies to the international stage. We expect these companies to be run like real businesses.

Excuse #2: Investors

In 2001, we had a good excuse not to invest in cleantech—hardly anybody else was doing it! Most of them were angels. Large strategic parties were in, but it was often hard to figure out their valuation methodologies. A few credible players were in, and we owe a lot to their pioneering efforts in this space, but they were few and far between.

Both financial investors and strategic investors now play together in this space, positively impacting each other’s ability to make good investments. This cross-pollination brings necessary knowledge from both sides to help produce outstanding portfolios of innovative and successful companies. More syndicates are welcoming the right strategic investors, rather than merely tolerating them, building boards of active and knowledgeable investors. These are the kind of deals we can get passionate about.

Excuse #3: Exits

Okay, so we’re still working on this one, but we’re a lot further ahead than we were in 2001 (even pre-dot.bomb). Having some sort of liquidity on the AIM has helped, as has a healthy appetite for acquisitions large and small. VCs are not going to invest without the reasonable promise of exit opportunities on the horizon. Spectacular IPOs like SunPower, SunTech and VeraSun are enough to turn any investor’s head.

The majority of dollars have come into cleantech only since these great exit multiples have started showing up in the real world. They’re still the exception, not the rule, but hopefully good management and active syndicates will compound and create better exit opportunities for companies with real value. Then the last of the big excuses will be removed.

The Big Picture

So, are we running out of excuses? Judging by the dollars going into the sector and the number of people attending cleantech conferences, I’d say we’re getting there. Of course, there are always more excuses, but now we have a functioning venture ecosystem, with management, syndicates, and the hopeful promise of successful exits. It’s time for cleantech to demonstrate its potential.

Keith Gillard is a principal at BASF Venture Capital America Inc.

BASF Venture Capital America Inc. was established in 2001 as the American arm of BASF Venture Capital GmbH, a wholly owned subsidiary of BASF Future Business GmbH, Ludwigshafen, Germany. BASF Venture Capital participates in startup companies and funds by providing venture capital to open up new growth potentials.

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