March, 2010

I am speaking at the Wall Street Green Trading Forum next week and tried to work up a fresh perspective.   I came up with a presentation contrasting two styles of cleantech VC, the first focused on ‘today markets’ typified by funds like SJF Ventures, Expansion Capital, NGP Energy Technology Partners, and Element Partners and the second focused on ‘tomorrow markets’ such as Khosla Ventures, Kleiner Perkins, Quercus Trust or Chrysalix.   I argue that both strategies are valuable and important, though the tomorrow strategy gets more press (think Bloom Energy).

A list of characteristics of the ‘today strategy’ include 1) commercial revenues, 2) execution plays 3) existing markets 4) incremental approaches 5) system integrators 6) capital raises < $20MM and 7) exits via strategic sales.

The ‘tomorrow strategy’ is typically characterized by 1) pre-revenue 2) technology plays 3) new or emerging markets 4) transformative approaches 5) component innovators 6) capital raises >$50MM and 7) exits via IPOs.

Rob Day has been writing with different language about these differences in strategy for some time, including his great slide show from when he was at @Ventures on ‘What’s Wrong with Cleantech Venture Capital’ and this recent posting on system integrators vs component innovators as cleantech VC investment opportunities.   My presentation is not as negative on the technology-centric, ‘tomorrow strategy’ practiced by funds like Khosla Ventures as is some of Rob’s commentary… my theme is we need both strategies to transform the global economy with cleantech innovations.

I will post my presentation here once I deliver it in New York, but I provide examples in solar power, smart grid and infrastructure, and recycling and waste management of companies pursuing the two strategies.   For solar power, I list ‘today’ examples of groSolar, Solar City, SunRun, SolarTotal in Europe, Solar Century in the UK, and SiC Processing in Germany.   For ‘tomorrow’ examples, I list companies like Konarka, Nanosolar, Solyndra, Megawatt Solar, Sencera, and SpectraWatt.   Eric Wesoff maintains a very comprehensive list of VC funded solar start-ups, most of which are pursuing the technology breakthrough approach.  SJF did a webinar more than two years ago on the investment opportunities in downstream solar, such as our investment in groSolar.

I summarize some of the advantages of a ‘today market’ strategy as lower risk, capital efficient, current market ROI, niche markets viable, diversified geography, and domestic advantages.  ‘Tomorrow market’ strategy advantages include high exit multiple potential, transformative technologies, could be rapidly scalable, high margin, and attractive for PR and media.

Some drawbacks of the ‘today market’ strategy for VCs are lower exit multiples, less proprietary tech, smaller markets, lower margins, and more mundane business models.   Drawbacks for ‘tomorrow market’ VCs include higher risk, more capital required, market evangelization, and global competition.   We have certainly seen this risks evidenced in the upstream solar tech market with the plummeting PV prices due to Chinese manufacturers scaling up and dropping silicon prices, making global competition that much tougher for new solar tech plays.

That said, the breakthrough investments being made by the large funds in solar, smart grid, efficiency, transportation, and biofuels all have the potential to be transformative and lucrative, so I applaud those VCs with the capital and risk appetite to pursue them.  SJF Ventures will be busy investing and building those innovative cleantech integrators that will be deploying new and existing technology in the markets of today.