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