39. Cleantech Investing (Rob Day)

The Full Ratchet Podcast on iTunesNick Moran Angel List

Rob Day of Black Coral Capital joins Nick to cover Cleantech. We will address questions including:

  • Day CleantechAs many in the venture space are aware the cleantech sector overall has underperformed over the last decade and many VCs and LPs have decided to no longer invest in Cleantech. Last year CBS’ 60 minutes even aired a segment titled “The Cleantech Crash”, featuring some of Vinod Khosla’s failed investments. Since our audience includes a broad range of investors that may not be as familiar with the cleantech space, can you start off by illustrating the scope and sub-sectors within cleantech and which have performed poorly?
  • I know that you are actively involved in supporting the ‘next wave’ of clean tech investment, can you describe the current state of cleantech investing, and how investors like yourself are approaching the next wave of cleantech?
  • I’ve heard a lot about some clean tech investor’s rebranding cleantech investments or pivoting to other sectors such as agriculture, IoT, automation, or the sharing economy investments and branding them as “resource efficiency” plays. what are your thoughts on the cleantech brand and if startups need to avoid being labeled as a greentech or cleantech to secure funding?
  • Where do you see the most significant growth opportunities in the cleantech sector over the next 10 years and what advice do you have for early-stage investors that are interested in the sector?
  • I noticed that in your column on GreenTech Media you started the year with some Bold Cleantech Investing Predictions for 2015. Seeing as we are about a third of the way through the year are there any predictions that you would like to comment on so far, or potentially revise?

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Before we jump in, as some of you know, for a couple months now I’ve been in the process of a deep-dive on crowdfunding platforms, how the whole process of syndication works and trying to setup a syndicate on AngelList. Speaking of which, the next episode features Jon Medved of OurCrowd and we will be covering crowdfunding and the socialization of finance. But, in the meantime, I’d really like to get the feedback from you all if you wouldn’t mind sharing your perspective. My partner, Jeff, and I are trying to decide on a name for the syndicate and we’ve narrowed the list down to five options. The first option that came to mind, of course, was calling it Full Ratchet Ventures… but while it’s a fun name for the show that works well, the term itself carries negative connotation toward founders from an investment standpoint, so I don’t think it works as well in this context. Of the five options we’ve come up with, each is very different. Some are more run-of-the-mill, others are more unique to our approach and there’s one that’s really outside-of-the-box, so I’m curious to see what you all think. Seeing as many of you have listened for some time, I hope you’ve got a good sense for me and my philosophy and can help choose the name that feels most appropriate.

Guest Links:

Key Takeaways:


1- CleanTech Composition & Returns?

Rob cited energy, food, water, materials, and the transportation sectors within clean tech. Anything that’s directly relevant to the use or production of natural resources. And his approach looks at it more in terms of long-term drivers that are on the right side of natural resource usage with strong potential for capital returns.

As Rob mentioned, Cambridge Associates publishes their cleantech report and breaks it down into subsegments including:

* Renewable Power Manufacturing
* Renewable Power Development
* Resource Solutions
And while the overall performance of CleanTech has returned capital, net of fees, which is not a positive result, it’s the Manufacturing category, including production of solar panels for example, that has dragged down the performance of the overall sector.


2- Suspect Decisions

Rob talked about one of the major reasons that cleantech investors got in trouble and mentioned an anecdote about an excited venture capitalist that finally got a nuclear deal in the portfolio. These “”permanent dillatante”” investors that targeted startups in every cleantech category. As one might expect, this shotgun approach resulted in investments across a broad rage of segments, business models and verticals. And clearly, the drivers and nuances within each were very different, resulting in investments that were chasing trends instead of getting in front of them. There’s a good lesson for all of us here, extending beyond cleantech, that investments should be strategic and driven by those with a deep-understanding of segment. And also that once a major trend becomes obvious and well-publicized it may no longer be a value. Incorporating this, Rob now backs multiple bets in the same basic value-chain.


3- Emergence of Project Finance

The final takeaway relates to the changing nature of capital investment in the cleantech and other related spaces. No longer is it an industry capital is solely traded for equity on the hopes of hockey-stick growth. Rather individual projects are assessed and funded, creating a return of capital paid over a term instead of one-time, upon an exit. This has typically been the domain of private equity but the PE players are working with large pools of cash and often can not move the needle with smaller projects. The other advantage to this type of finance is that it can provide runway and the opportunity for innovative businesses to scale and roll-out additional projects in a capital efficient manner. While this will not replace the venture for equity funding model, it is a viable alternative for capital-intensive businesses that can produce near-term value.


Tip of the Week:   The Lost Category Capital