Tuesday, August 4, 2009

Why cleantech venture investments fail

From Greentech's "Cleantech Investing":
Rob Day is a Boston-based cleantech venture capital investor and entrepreneur, and is also the President of the Renewable Energy Business Network (REBN). The views expressed on this blog are those of Rob and his friends and colleagues, not necessarily the views of REBN or Greentech Media or any other group. Contact Rob Day at: cleantechvc@gmail.com

I have been spending time sitting down with a variety of cleantech VCs on both coasts lately, and I find it to be always a very humbling experience. Hearing how all these smart investors approach this unique sector -- and in a variety of different ways, I might add -- always serves to remind me how much more I have to learn about venture investing in this sector.

And that's one of the things that's broken about venture capital in general: The relative dearth of learning opportunities. An investor may look at hundreds of investment opportunities per year, but they only invest in a handful of them. And while nothing teaches like failure, very few investors talk openly about their failures. Even successes are viewed through a distorted lens -- and the skeptic would say "what successes?", since huge cleantech exits (as with all venture exits) have been so hard to find over the past couple of years, which happen to be a couple of pretty formative years for this sector. So as an individual investor, it's difficult to learn by watching what other investors have done, either successfully or unsuccessfully. And while there's no substitute for learning by doing, it doesn't happen quickly.

However, for those active investors in the sector, we know that there have been plenty of stories of failure (or at least highly mediocre outcomes) that just aren't broadcast very widely. It's just that none of the insiders talk about them very much. And for very good reason...

But in the interest of sharing and learning, I thought I would describe some of the basic reasons why I've seen cleantech investments "fail" over the five years I've been an active investor. Not in terms of specific examples, of course, but as a means of trying to understand the key risk factors involved in doing cleantech venture investing....

...At a basic level, all such failures are the same: The company in question runs out of capital, and either no one is willing to put in any new capital at all, or the existing investors are pretty much wiped out when the new capital comes in at a significantly reduced price. But there are a myriad of reasons why this happens.

I see three basic factors that have led to failures in the past...MORE