Some things I learned about cleantech and venture capital in 2010….

For the past couple of years I wrote end of year notes as predictions in the cleantech space for the next year. (cleantech predictions for 2010).

But this year I have already read too many cleantech predictions for 2011. Some make sense, some are self-serving, some seem out there, and some just too generic to worth spending more time on. So I won’t add anything to them. Instead I will share just a few things I learned as a relatively new venture capitalist in 2010.

Related to Cleantech:

  • Government seems to have way too much say in who succeeds and who doesn’t in cleantech. This is troubling. Look at the IPOs of A123 and Tesla. Without taking anything away from their founders/investors, would you and I have predicted them to be success stories even 6 months before government handed them hundreds of millions of dollars each? I have met venture capitalists who now tout their DC connections, fly in/out regularly and spend time sitting on various gov’t advisory bodies. Others put government internships they did out of high school/college prominently on their online profiles, and others directly engage with lobbyists on behalf of their VC firms not just their portfolio companies. I understand this seems necessary given strong regulatory impact on the industry but is this a good thing?
  • Biofuels and solar are not exactly terms that many cleantech VCs wanted to hear in 2010. There are exceptions (such as equipment for biofuels/biochemicals processing & solar downstream integration + BoS) but by and large a contrarian VC in 2010 would have done more deals in those sectors than not.
  • Downstream solar, esp innovative business models like SunRun and SolarCity, became hot. People finally realized that two basic problems in mass adoption of distributed renewables & energy efficiency are: (1) cost of customer acquisition, (2) seamless process including financing. I am expecting more of that in 2011.
  • The year started off with everybody thinking EVs were inevitable. Middle of the year saw people warming up to the idea of plug-ins with range-extenders, and the latter half saw news about start/stop micro hybrids. This is a trend towards less electrification, not more, even though the general idea of electrified cars is now a foregone conclusion. I called my car dealer yesterday and he told me the hottest cars on his lot are the heavy/bulky BMW X5 SUVs. Depressingly, somebody tweeted today that apparently 95% of Americans will give up 5mpg of additional fuel economy to get better cup holders.Yikes! Would these people pay more for 20% additional fuel economy benefit if I threw in better cup holders for free?
  • New hot cleantech subsectors emerged but few stayed hot for remainder of the year. Unclear to me why some things suddenly become hot before fizzling back into oblivion? Solar and biofuels were declared dead until massive venture rounds and IPOs happened. Smart meter companies were expected to be multi-billion dollar IPOs but the business case for utilities is still murky? Water technologies are hot now, but business models still need work. I am not complaining, just pointing out that we are still trying to figure out how each of these cleantech verticals would evolve in the long term.
  • University startups are obviously sexy and bring dramatic technology innovations to the market place. But it ain’t easy being a cleantech university spinout. While many factors contribute to successes and failures, I learned that perhaps the most critical one towards accelerating university startups was the entrepreneur DNA behind them.
  • Cleantech journalists are doing a great job but more is needed. Thank you GreentechMedia (Cleantech’s TechCrunch), Earth2Tech, and many other bloggers, tweeters etc.
  • Cleantech venture capital seems to have shrunk for sure. Fewer firms, fewer partners and fewer dollars. John Doer wearing a hoodie and Khosla Ventures leading high profile IT financings should be a message, no? That said, the reality is that I believe diversified venture funds that play across sectors will be able to support cleantech better through the trough that we are in right now (until LPs see some dollars returned). At the end of the day, many LPs look for IRRs and frankly if NEA can make it out big time on GroupOn, who cares if they lose money on a gazillion solar deals for a few years until it gets better? (NEA is a great investment firm, by the way, and so are KPCB and KV. So not picking on them in any way).
  • Strategics and corporate venture capital are starting to play a more prominent role. Hopefully they will bring some sector expertise into the field and help develop M&A value chains where early innovators can be rewarded handsomely to keep the cycle continuing.
  • There are some very exciting companies that I have on my wish list. Companies I would like to have been in and/or would like to invest in going forward if given a chance at the right price. Nothing for sure yet, but I am excited about their prospects, and that is a good feeling to have even if they are not in my portfolio.
  • Cleantech community needs to better organize itself and communicate with each other. When will this community embrace new social media tools (like Twitter/Quora etc) so there is a way for people to learn from each other, develop connections, share ideas, and receive real-time feedback? As we develop a new energy economy for this country, lets not become too exclusive like the old utility industry guards  – the comb-overs who you only get to meet at private industry cocktail receptions. How are young graduate students, MBAs, executives from other industries supposed to learn about our field and innovate within it if it is terribly hard to have meaningful and educational conversations? And fellow cleantech VCs:  lets drop the pretense of knowing everything while we are at it. We are all learning the ropes in this new space and nobody has the answers.

Venture Capital in general:

  • This was certainly the IT year in the VC world. IT investments rebounded big time as we saw unbelievable rise of companies like Twitter, GroupOn, Quora, Square, Zynga etc. Can you believe it that the reason I did not add Facebook to the list is because it seems too mature among others? Facebook, a company that started just a few years ago, is now listed alongside juggernauts like Apple, Google, Microsoft.
  • I learned from a successful VC that there are at least two kinds of plays in the consumer/IT world: (1) aiming for ubiquity without necessarily having a business model (Twitter, Quora) and (2) defined business models in well defined markets. VCs in 2010 would pay whacky valuations for the first because they had no idea if the company would be worth $50m or $5B. The second category demanded more reasonable valuations, even if slightly inflated given the times.
  • Learning venture capital certainly follows an apprenticeship model. When I started in 2008, I thought I knew a lot. 2009 made me realize how little I knew and 2010 allowed me to focus on a few things that I wanted to learn better. Same for 2011. Its gradual learning and a humbling experience.
  • Venture capital is about helping great entrepreneurs build great companies. Building companies is hard work and one really has to put a lot of effort into it. This year I played at least the following roles for some of our portfolio companies (and truly enjoyed doing so): recruited executive teams, engineering teams, Board/Advisory Board members; compensation plans; IP strategy; market analyses & business development; competitive landscapes; customer interactions; marketing and PR plans; personal mentoring/coaching; travel reservations and occasionally bringing donuts etc. Thank you guys for allowing me to add some value as an investor.
  • Finding the best entrepreneurs to back is the lifeblood of this industry and I learned that the only way for a VC to do so is by being genuine in offers of help/advice/feedback, respecting entrepreneurs and their ideas, and by keeping the entrepreneurial DNA alive in own self. Its easy to say so, but hard to do. I am working on it.

2010 was a fun year. I learned a lot. I have to thank my colleagues at General Catalyst for giving me the opportunity to do so. I leaned on their experience and advice so much this year. And I have to thank all the great entrepreneurs, executives, professors, policy wonks and other VCs that I interacted with this year. You are awesome, and meeting you is the best part of my job! I look forward to meeting more of you in the new year. Happy 2011!

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