Former Element 8 Angels Board Chair, Bill Lemon, steps in for me today to offer some thoughts on the cleantech investing landscape.

Looking back on ten years as a cleantech angel investor, I carry with me ten truths (or opinions, if you must).

1. Investing in cleantech companies is easy. Making money at it is hard. Getting to an “exit” – IPO or acquisition is takes longer than in software. We are not funding a new iPhone app – “It’s like Tinder for dogs!” We are supporting cleaner, more sustainable alternatives to business as usual, often, without significant pure cost advantages. Customers of our companies’ products want these substitutes to work, but they are reluctant to bet on them. Good cleantech companies with valuable products shut-down all too often because product acceptance and large quantity orders take a long time.

2. The more I know about cleantech investing, the harder it becomes to write a check. When I started, I, like many of my colleagues at E8 Angels, was hoping to fund companies that would fundamentally change the energy production landscape. These days, I’m much more apt to get interested in a company that has identified an inefficiency in existing products and services, which can be hip-checked out of the way with a smarter/better/easier direct or nearly direct substitute solution. Reinventing the wheel is like a layman trying to hit a 100-mph fastball.

3. The energy density of petroleum is a b*tch to beat without some accounting for greenhouse gas impacts. The infrastructure (gas stations) and technology (internal combustion engines) of conventional cars are functionally superior on a dollar per mile over a lifetime as long as the associated CO2 emissions are free. I love our Nissan Leaf EV, but my wife and I keep a third car with a gas engine because life takes us in different directions, regularly beyond the range of the Leaf. EVs are improving, but to a significant extent they are and will continue to be for at least a few more years, a niche market. On the power side, the intermittency of our cheapest renewable sources-wind and solar requires energy storage to operate 24/7. As a result of the cost of those batteries, the price for this clean energy is much higher currently than what you’d get with a natural gas-fired power plant.

4. On the bright side state regulatory enthusiasm for energy storage is high because it is the “lid-lifter. ” Integration of more and more renewables on the grid is directly enabled with more storage. Backed by this enthusiasm, utility-scale energy storage will be the most significant area of disruption to utility status quo for the next 25 years. When combined with our further passion for electric vehicles it means that batteries will continue to get cheaper, longer-lived and of higher capacity. Because there is much less of an economy of scale for energy storage than in conventional power, the utilities will have to, more and more, (re)engineer the distribution network for bilateral operations as more homes and businesses send power to the substation at times, not just take from it. The full value of energy storage goes beyond keeping my lights on; it’s helping utilities keep everybody’s lights on. This slow-moving part of the utility business needs new instrumentation, controls and operating procedures to make it work.

5. GHGs are the most pernicious example of “tragedy of the commons” problem I’ve ever seen. The tragedy of the commons, according to Investopedia, is an economic problem in which every individual tries to reap the greatest benefit from a given resource. As the demand for the resource overwhelms the supply, every individual who consumes an additional unit directly harms others who can no longer enjoy the benefits (of a sustainable climate, for example). Generally, the resource of interest is readily available to all individuals; the tragedy of the commons occurs when individuals neglect the well-being of society in the pursuit of personal gain. I’m apprehensive that as the developed world cuts back on petroleum-based energy, it will serve to make such “dirty” energy more affordable and a siren song to the developing world.

6. Regulation can help or even make markets for cleantech products, but entrenched high carbon emitting incumbents are exquisitely skilled at deferring, deflecting or defanging such regulation. Some may do this out of mustache-twirling greed, but many are just unwilling to “bet” on the cleaner substitutes yet. I’ve been caught before in the promise of regulation-driven markets for cleaner alternatives. It is entirely possible that I’ll end up losing every dime I put into companies chasing that promise.

7. “This is the only capital raise we will need” is right up there with “the check is in the mail” and “these numbers are very conservative.” Entrepreneurs are, by necessity, optimists. They have to be able to imagine the success of their little company. As mentioned in #1, things rarely work out as quickly or efficiently as one might hope. I tend to invest in early stages only where I see a plan for subsequent investment rounds because it’s a sign the entrepreneur is grounded in reality. On the other hand, investors need to be careful as with each following series of investment, their initial money buys an ever-dwindling final stake in the startup.

8. The technology will generally be commercially available on time. Market uptake will be late, sometimes very late. As a sector of technology investing, cleantech has brought very few technological disappointments to me. There are indeed some big, hairy audacious cleantech start-ups trying to develop fusion power, to cite one example, but such deals are rarely appropriate for angels. While I root hard for them, they have no place in my portfolio.

9. To me, the best cleantech angel investment opportunities these days are not revolutionary (too capital intensive, few big money investors) but evolutionary, particularly products/services that open up choke points in markets or streamline processes. Even better if this product/service fits into a product gap of a larger, well-heeled company. I want to see that there are potential acquirers before I take out my checkbook.

10. Belonging to an angel group has helped me limit my risk by pooling our knowledge and asking questions beyond my level of understanding. Every investment has an element of the unknown – is there a market for this? How long will it take to make sales sufficient to break even? What makes it particularly daunting is that you find yourself wondering what other questions you should have asked the entrepreneur or researched on your own. Working in a group to conduct due diligence on investments, comparing notes with other investors and talking to people who bring varied expertise to the deal is comforting and essential as I reach for my checkbook.

There you have it. Angel investing in cleantech is as “simple” as that. OK, maybe not so simple but I find it to be a worthwhile endeavor. I know the numbers. Within five years, 80% of all startups go out of business. Within the average angel investor’s portfolio, 70% will return nothing. Some 20% will give you your money back. Only 10% will generate profits. I get that. I am putting my money to work not only in search of that 10% but to also make the planet a better place. I’m doing so alongside some of the best people I’ve ever had the pleasure to know and, in spite of relatively modest gains so far, I’m going to make some money doing it. As Seattle Seahawk quarterback, Russel Wilson, likes to say “why not you?”

 

CleanTech Focus