What's Wrong With Cleantech VC

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Written for an upcoming limited partner event, this presentation explores current trends in cleantech venture capital and what's working and what's not.

Text of What's Wrong With Cleantech VC

  • DRAFT What's wrong with cleantech venture capital? December, 2008
  • 2 We are all convinced cleantech = $$, right??? This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 3 Some very smart VCs are 110% on board John Doerr said to me: Are we going to have any more Googles? And I said: You're damn right we are, because we are at the point of new wealth creation when it comes to green technology. Bill Joy The underlying markets of cleantech are among the largest markets in the world. India and China represent 40 percent of the world's population, and they're undergoing the type of industrialization that we experienced in the twentieth century. The energy demands that will cause is a tremendous opportunity. Ira Ehrenpreis There are many such things going on that are radical, implausible each individually (is) somewhat implausible, on the aggregate (it is) highly plausible that one plan will work. That's the key to the solution. Vinod Khosla I think the oil industry is actually getting fat and lazy, and I think there are some great opportunities there in clean tech. Tim Draper This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 4 Just one little problem... Almost no exits yet And few failures either VCs dont yet know what works and what DOESNT work in this sector This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 5 So what should cleantech VC look like? What structural and strategic considerations would maximize IRRs? This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 6 95-96: What VC used to look like 1996 average fund size = $138M 2,000 total VC investments per year -Avg. around $4.5M per investment across all stages -50% in seed and early stage investments -37% of venture dollars into CA, 9% into MA -Top 5 MoneyTree sectors (out of 17) garnered 57% of venture dollars 1995: Software, telecom, media, biotech, medical devices 20-35% of investments resulting in IPO -Accounting for the bulk of the profits -Average holding time to exit = 4 years -IRRs >20% MoneyTree; Gompers and Lerner, 1999 This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 7 VCs shifted in the late '90s, and learned hard lessons 160 140 Average Annual Rate 120 of Return to 100 Investors in U.S VC Funds 80 60 40 20 0 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 -20 Source: Venture Economics This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 8 But are cleantech VCs now making the same mistakes? Circa 2000 This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 9 We can make some assumptions (1 of 2) 1) VC economics havent changed Buy low, sell high Still looking for 5-10x return potential Still operating under 2.5 and 20 comp structure Still looking for 3-7 year holding periods 2) VC operations havent changed Pick one out of a hundred opportunities, lots of time spent in search and evaluation Serve on Boards, lots of time spent on portfolio Raise new funds every two years 3) Valuations are often affected by round size* Entrepreneurs focused on dilution more than a dollar valuation *Even if they shouldnt be! This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 10 We can make some assumptions (2 of 2) 4) The money needs to go to where the ideas and entrepreneurs are 5) Over time, cleantech exits will look like other VC-backed exits The usual mix of M&A and IPO, at similar values 6) Exits require profits, not to mention strong revenues See point #7 below if you disagree 7) THE LATE 1990s WERE AN ABERRATION AND THOSE KINDS OF RESULTS WONT EVER HAPPEN AGAIN IN VENTURE CAPITAL This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 11 So what are cleantech exits likely to look like? Most VC exits are via M&A # of US VC-backed exits, all sectors 340 313 439 408 426 445 205 100% IPO 80 60 M&A 40 20 0 2002 2003 2004 2005 2006 2007 1-3Q08 And the median M&A exit is 35% of global cleantech VC dollars Together, solar, biofuels and transportation are now ~60% of global cleantech VC investments (1H08) Cleantech Group; GreenTech Media This information is not investment advice and should not be used to inform any investment decisions by anyone at any time
  • 17 ...And techs which don't always have good economics Includes most of the supply- related solutions VCs are investing in Includes many demand- related solutions This information is not investment advice and should not be used to inform any investment decisions by anyone at any time