The Real Problem with Green Venture Investing
As a Managing Partner in a VC with an exclusive focus on Green/Clean Tech Investing, I've come to realize that there's a very significant issue that impacts both key parties in this space: the entrepreneurs seeking funding and the individual investors and investment funds that have the capital to invest. At its core, the problem is simply expertise within each technology silo in the space.
Let me give you an example. When we launched our fund one of the primary areas into which we were interested in making investments was solar. Like any fund, we put the word out that we were evaluating solar opportunities and like any source of funding we were immediately deluged with compelling solar investment opportunities from all directions.
At first this didn't seem like a problem until we stood back and looked at the ever-growing pile of business plans we'd received. On their surface many of these plans were compelling. In many cases the companies had already created products and were in various stages of deploying their technologies. Sometimes these companies also had management teams that were highly qualified and sometimes the teams had even achieved previous successes making them all that much more appealing.
The issue however reared its ugly head when we tried to drill down into each plan and get a concrete understanding of the technology being presented. Here are some of the questions we asked:
Was the solution viable - did it actually work?
Would the solution scale to meet the kinds of demand projected or more importantly, scale to a level that allowed the company to become profitable?
Was the energy output sufficiently cost-effective to compete (and win) when compared to conventional means of generating electricity?
Was the energy output sufficiently cost-effective to compete (and win) when compared to other similar technologies?
Was a particular technology truly unique?
Was the technology defensible in a meaningful way?
Were there unknown obstacles that could prevent this technology from gaining a foothold (such as insufficiently available material resources that were necessary to implement the full scale solution as envisioned?
Are there other uses/markets for the technology that haven't been identified?
As we reviewed each plan and ran them through this gauntlet of questions the problem become obvious - as a team we simply weren't qualified to get clarity on enough of these critical questions to make a funding decision.
As a result we ended up passing on making a single investment into solar (at least up to today). This isn't to say that none of the plans we received were good. Many were excellent. The problem is that lacking clear answers to so many important questions we felt that the risk of making a poor investment decision was too high for our comfort.
In speaking with colleagues from other funds we learned that we were not alone. In fact a substantial percentage of capital earmarked for Green/Clean Tech investing is sitting on the sidelines as I write this, largely because the funds themselves feel too uncertain of their expertise in these areas to conduct adequate due diligence or sort out one technology from the other. Sadly the more innovative and bleeding edge a technology, the more likely it becomes that the entrepreneur behind the idea will find themselves struggling for capital become there is too much uncertainty about whether the tech is truly viable.
One of the other Partners of our fund, Nikhil R. Jain, realized that this was a problem that could be readily solved by finding groups of credentialed experts in each key area of Clean/Green tech and recruiting them to help the investors understand the critical distinctions between plans and even more crucially to actually vet the technological aspects of the opportunities presented and help the investors make decisions armed with true insight into each technology, its strengths, weaknesses, how it stacks up in the competitive landscape as well as all the other key questions that a fund needs to answer in order to feel confident enough about a business to offer them a term sheet.
If you're an entrepreneur seeking funding for your Clean/Green tech startup think about the potential value you might realize by having a group of recognized authorities in your space carefully review your technology and provide a written document detailing the most critical facts about what you are doing and providing an unbiased analysis that you could prevent to potential investors.
Such a report could be a key component of your business plan and would potentially go a long way towards making it possible for an investor to get a firm enough grasp upon what you are trying to do that he or she might actually have the confidence to make an investment in your company.
Of course the downside to this is that most entrepreneurs are not connected with major universities or other research institutions and even if they do have some connections to the sort of experts that are qualified to evaluate their specific technological innovation it is unlikely that they can round up enough experts from divergent sources and get them to produce a consolidated report specific to what they are doing.
Not only is the cost high for the entrepreneur in terms of the time they might have to invest in order to recruit these experts but has the potential to be costly in terms of dollars as well to pay a group of experts to put the time into generating such a report. Further, if a company goes out and by itself recruits a cadre of experts to do this sort of evaluation there are several other issues that beyond making it costly may also make the report less credible to the investment community.
This is because the company might have selected the experts specifically to yield a highly positive report - and further, since the company is directly paying for expertise these experts may be beholden to the company and thus it is possible that the report might be more positive than it would have been if it had been created by a truly unbiased review committee.
As a result, there is a double risk involved - first, to the company - it could end up spending the time and money for a report that fails to serve its purpose because the investors are not certain that the information comes from truly neutral parties. Second to the investors because they may rely on information that has been created by a source that for all intents and purposes appears unbiased but is actually not so.
Of course, I wouldn't be writing this article if all I intended to do was point out a problem and not be able to offer potential solutions. In fact, it's the solution to this problem that ultimately drove our first investment decision at my fund, Blue Marble Ventures .
As I said above, our fund's focus is on Green and Clean Tech investment opportunities however our first investment was made into OnGreen.com, a web based business resource for the Clean/Green Tech community including not just the entrepreneurs themselves, but also the investors, the service providers that can help startups run their companies (accounting professionals, HR experts, patent attorneys, etc), the scientific authorities that are interested in working with Clean/Green Tech startups, and even people seeking jobs in this space as well as interested members of the general public that want to be aware of the latest innovations in this sector.
Of course OnGreen.com is not the only provider of services that can benefit GreenTech entrepreneurs. Other sites like ChubbyBrain.com can be used to identify experts, expose their business concepts to the investment community and locate other resources that can help their companies take further steps down the road to funding or building a successful business.
Entrepreneurs can also find expertise using GigSalad.com - a site that features an enormous range of qualified experts in almost any area you can think of. Of course you can also find expertise via various universities, however none of these sites specialize in Clean/Green Tech and they don't provide the option of having your technology vetted by a credentialed team of experts that will create your report either for free or for a very small fee.
As I stated previously, from the investor perspective verifying that the technology is truly viable, defensible, scalable and unique is a challenge that is keeping a lot of money on the sidelines. As an entrepreneur, it is critical that you do whatever you can to make your technology palatable to the investment community and one way to make your company much more exciting to a prospective investor is to take steps in advance to address the questions I've posed above and provide the investment community with answers that come from a credible and unbiased source. If you can do this and then make those answers available to the Angels, VCs and Institutional Investors there's a much greater chance that some of the vast sums of cash that are currently not in the game could come your way and help you become a Green Tech success story.
Disclosure: Oliver Starr is a Managing Partner in Blue Marble Ventures which is an investor into OnGreen.com
That was an interesting perspective from an investors standpoint. I also agree for the point for the investor that solar technology is not the way to go for green technology if their main point for investing is the rates of return. The environmental issues are of concern and can be met but solar being the costs that they are and the rates for a break even between 8-10 years from the research and data I compiled was not feasible. This is too long for a return as well as many other technologies can achieve the power solutions and alternatives for a fossil fuel source and electricity generation. There is Bio-Mass which is an old technology even improved is not really a suitable method either. This solution is good for removing the organics and the methane they produce but in the process it is destroying many retrievable products which would have a longer lasting environmental effect for our soils, and have no methane produced and mainly there are venues for those removed items in a more profitable manner. The organics can make fertilizers which even at wholesale pricing can improve our crops, land and farmers yields with no methane. The sale of this is also above the returns on electricity and short time frames for achieving the investment returns on equipment costs. There is still a use for this process after the sorting of the useful waste they are using but not to the extent nor expensive equipment requirements the industry proposes. I am not a fan of only seeking a solution to the electrical demands or a choice on fossil fuels alternates. We in the USA have a problem with landfills and waste streams. In 1995 there were 20,000 landfills in the USA and now today we have less than 3500. These are closing or needing to expand with permits at a rate of 2 per day. That means more land is being consumed for waste disposal. This also means those older landfills pre-1978 filled with lead are being classified as brownfields. We also have the electronic wastes, bio hazard wastes going to separate landfills regulated for such. I bring these to light for the reason that there is a solution.
Our company is able to remove the heavy metals from the pre-1978 landfills including removal of lead, cadium, chromium. Removing the chemicals from brownfields is a timely process but is being achieved. Then the solution of the waste streams going to landfills so we dont keep adding to them we can reduce by 86.4% including the biohazards and the tires, electronics included. We have abilities to do this and have a break even for our investors in 18-24 months. I bring this to light as was previously posted that investors are sitting on the sidelines or their are a lot of people stating things which can not be verified, proven and shown and scammers are out in full force. I bring this out as not a sales pitch but to show from a private company trying to go public with 2 contracts in hand for valuation of more than 25M a year and growth rates forecast to be double this within 3 years. Our investment needed is less than 250,000 to go public to do a IPO an raise the necessary funds to build our facilities at a cost of 10M per. I have had invites to China, Canada, Mexico, India and several locations on Native lands with agreements in place. We not only reduce the waste streams, dig out landfills, bring solar farms of 1MW per site, remove heavy metals from brownfields, turn all kinds of plastics to oil and tires to electricity and salable products. We bring in capabilities to produce 20 new products and bring in 2 other companies where we locate in joint ventures to create ethanol from milk waste. These technologies and information can answer yes to all the above questions, answer with scientific data and proof of ability, and rates of return are estimated forecasts on a low end of the spectrum to say we use 50% of a conservative pricing on commodities in todays market (ie. OCC sells at 195/ton we use 100/ton then use a multiplier of 75% of that latter number for losses in plant, travel, misappropriation by human interaction).
Have I approached investors. the answer is yes. I was told my business plan is too big for too many problems with it not reading properly with a table of contents or like a smooth Hollywood script. I agree it needs work but I spend more time on the research and backing the numbers up and data updates for this field changes daily if not weekly. I have more than 3 years of daily research put into this as well as 20 years experience on a small personal scale. There are many more things we have to come into the mix but I would not to be overbearing since i am new to the site.
I bring these to light for the fact that not all investors will even look at a proposal if not in their format desired and yet there are people who have proof, contracts, and patent pending processes to show which have not been in business 2 years to be able to approach the green funds from the SBA and not enough data done nationally for satisfying the superfund for brownfield clean up. I was even told that what we have is too big for one company in any aspect to go public and should be broken into sectors. This was not an option to me with belief it is not about the size of the company but the size of the problem, job creation and environmental improvement and education of the next generation all while making the bottom line feasible in an unstable economy. My goal is to create, keep and grow the American job force and the dependency on fossil fuel sources and landfills. Waste is not waste but rather a negative commodity which has yet to find a new home for reprocessing.
I apologize for the ranting and self promotions as it was not my intentions. I simply get engulfed in it all and love the field and what I am able to do.
This is a great post, Oliver. One thing which is important to do is to actually help make sense of green and that is how our community can really help us with it as they are the consumers and the customers in many cases and also greentech is primarily funded by tax dollars anyways - thus further fuelling the need for public-private partnerships.
--nrj