April 5, 2011
Green Tech Media
Hardly surprising to see that the major headlines coming out of the release today of the Cleantech Group's Q1 numbers focused on the top-line dollar count -- $2.57B!
But here's what you need to read in that:
1. Yes, deal dollars were up, but deal counts were way down.
As we've talked about for a while now, cleantech VCs are continuing to shift to later-stage companies. In fact, 93% of dollars in the quarter went into follow-on rounds. That bears repeating: Only 7% of cleantech venture dollars tracked in the first quarter were for first rounds.
This is not a sign of health for the sector. It's not a sign that VCs are actively putting money into the sector. Rather, it's a sign that VCs are predominantly putting money into existing portfolio companies. Their own, and maybe each others' -- maybe. Which brings us to point number two.
2. No one -- the Cleantech Group or otherwise -- is tracking "new" money into cleantech companies.
Because it's pretty much impossible to do so, no one is able to tally up how many of these announced deals represent re-ups from existing investors supporting existing portfolio companies, and how much is coming from new investors making an affirmative investment into a company they hadn't invested in before.
This is an important distinction. When a VC makes a new investment, they typically reserve follow-on funds for investing in that same company later. If the company crashes and burns, they won't do so. But if the company goes sideways, they may still opt to put more money into it, in hopes that it can turn the corner. It's a lower bar. Comparatively, in the case of a new investment, the VC will put a higher bar on a decision to invest -- especially now.
That's not to say that insider-only or insider-heavy deals are necessarily a sign that a company isn't going well. I have seen situations where a company is doing so well that insiders don't want to give up any ownership to outsiders, all things being equal, so this isn't necessarily a bad thing.
But my sense (and again, there are no real numbers to support this, but it's just my sense) is that many of these follow-on rounds have been insider-only or deals where the insiders set the terms. And that's a sign that valuations offered by new outside investors remain low, which in turn is a sign of a continued imbalance between supply and demand of investment opportunities -- investors with money for new deals have lots of these opportunities, so why pay up for anything? And then insiders, who may not be doing new deals at the tail end of their fund but do have reserves for follow-ons into portfolio companies, decide just to fund it themselves and save the headache.
This is further bolstered by the sectoral breakdown, which doesn't show much evidence of any shift in how investors are spending money sector-to-sector. That's a sign of follow-on activity, not new thinking.
This means that mark-to-market in cleantech VC portfolios is even more suspect than usual, by the way.
It means that new cleantech entrepreneurs don't have many choices when it comes to finding investors.
And this tells me there will be a reckoning sometime soon, when insiders start running out of reserves, and before new investment activity picks up.
All of which means, despite the headline dollar total, this is a very tough time for cleantech entrepreneurs to raise money, unless they're already backed by deep-pocketed investors.
3. Corporate investors are getting more and more involved in the sector.
In the specific deals that have been announced, there's a lot of evidence (and I see it echoed anecdotally) to suggest that large corporate players are, contrary to VC pullback, getting more active in the sector.
This is a good thing. Corporate investment into follow-on rounds, even those that are insider-led, can help address the need for new capital and can also -- when the relationships work out as hoped -- give startups a leg up in getting into the marketplace.
There's some worry that corporations getting involved in venture capital has typically been a lagging indicator. But generally, I believe cleantech startups, since the channels in their markets aren't equipped to handle new products and services very well, might get more value out of such corporate venture activity than we might see in other venture sectors. Also, since so many of these follow-on stage cleantech startups are in capital-intensive plays, corporate balance sheets can be a critical way to get around the lack of project financing.
In the past, we've seen that this is a lot easier said than done. I know of several cleantech startups that have been disappointed by the lack of promised value from corporate investors that actually gets delivered, thanks to organizational inertia, mismatched expectations, NIH syndrome, etc.
Generally speaking, however, seeing corporations get more involved in funding cleantech startups feels like a very good thing. It's validation of the market opportunity. It's vital capital and market expertise. And it may be the first step toward a wave of acquisitions.
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