Renewable Energy and Venture Capital
A great number of readers have written in recently asking about raising investment capital. Most are fairly non-specific about this, hoping, I suppose, to find an extremely wealthy angel investor who likes their idea – in terms of both its risk/reward profile and its philanthropic merits – and is willing to roll the dice. This can happen – in fact, is does happen every day.
Yet I want to write a short post on venture capital. By contrast to angel investors, VCs tend to:
1) Use other people’s money rather than their own; they represent large pools of capital that come from pension funds, government entities, endowments, etc., and
2) Be extremely selective about the deals they take on, looking to “swing for the fences,” as I like to say, i.e., embracing deals whose upside potential is enormous, where an occasional success more than compensates them for their many (smaller) failures.
Looking back on my 25-year career as a marketing consultant to high-tech companies, I remember the good old days fondly. Most of our clients were Fortune-sized: Sony, Pioneer, Oracle, Microsoft, National Semiconductor, IBM, 3M, Philips, 3Com, ITT, Fedex, Xerox, Hewlett-Packard, as so forth — but many were venture-capitalized start-ups. As one of several examples, I worked for years for a nascent company called etNetworks – a joint venture with IBM that was focused on using satellite technology to deliver IBM courseware to computer resellers worldwide. Representatives of the venture team were in most of our meetings, and I got to know the type of expectations they have and the way they like to interact with the management teams (and consultants) within their portfolio companies.
The upside potential of etNetworks, as I demonstrated in my numerous research presentations, was most definitely there. The numbers penciled out beautifully in terms of the size of the reseller market-base, their disdain for travelling to receive training, and their willingness to pay for training and educational services. Initially, a venture capital giant took a huge position in the company.
And, to a lesser extent, so did I; in exchange for a substantial reduction in billings, I received over $1 million in etNetworks’ stock. I remember my seven-year-old son was so excited when, in an effort to get him to grasp the concept of equity ownership, I explained this all to him. “How many Lamborghinis can we buy if etNetworks goes public at $5 a share?” he’d ask, his eyes as wide as tennis balls. “A whole parking lot full of ’em,” I replied, hugging him close.
Its current value? Zero. It wasn’t the homerun it looked like a few years earlier — more like a ground-out to the shortstop — a disappointment for everyone – including my son and me. Essentially, the advent of a reliable, ubiquitous, high-bandwidth Internet did the same thing to etNetworks that it’s in the process of doing to the video rental industry.
Of course, new venture deals happen every day — and many create huge rewards for all concerned. In the process of discussing renewable energy business consulting with 2GreenEnergy readers, I’ve provided my experiences with this process, and offered whatever advice I’m able to.
To add to that, I just came across this truly excellent article on the realities of pitching VCs on an idea; the author explains this process far better than I can from my perspective. Enjoy, and good luck.
What I would say is VC’s look to triple their initial investment in any venture they look at and generally want controlling interest in your company. Angel Investors may be more gentle and not ask for controlling interest but they will require double their initial investment.
Private equity investors will generally be satisfied with a return that is better than the stock market is offering, and will not try to take over your company. For small start-ups like we are you are often better off going for lines of “trade credit” first rather than court either Angels or VC’s.
Thanks Craig, for a good effort to discuss this. I was talking about it with my wife last night in the context of my experience working for an inventor and the current deception of “business startups” which causes no end of destruction to communities and feeds the banking System.
The perspective that needs to be addressed is that of the potential entrepreneur. It used to be called the Inventor’s Syndrome. The inventor has a bias to believing that HIS idea is going to be desired by everyone, and since he invented it, he (or she) knows more about it than any silly Marketing Expert or ‘Investor’. The ’80’s and ’90’s didn’t help, with high risk loans available and pumping a ‘service’ economy that wasn’t. Self-help gurus pushed everyone into “Positive Thinking” just to sell books about positive thinking (which worked for THEM, of course).
The bottom line is this: you shouldn’t be the one deciding to start a business: get someone else to make that decision. Create a board of directors who can honestly evaluate your idea from outside immediate friends and family.
If they can’t find at least a 10% profit per year in the idea (REAL profit, after you pay yourself a real salary), then don’t waste time trying to become the next Microsoft or bothering to try and find the next Warren Buffet to fill your wallet. If it is an idea you love and work you want to do, then continue to do it as you have time and enjoy it. If someone else comes along and figures out how to do it more profitably, pat yourself on the back and remember that ideas are like armpits: everyone has at least two and they both probably stink. If someone else comes up with the same idea, then it might have been a good one.
There’s a reason they are called “Vulture Capitalists”: they clean up the opportunistic carrion and circle around. They’ve got time: you don’t.
There is no hurry for implementing Green ideas. The current System of systems cannot be ‘saved’ with energy because the problems it has are not ones of energy, but the culture of Consumption. The people who are alive after it fails will need good, useful ideas and they will be willing to pay for them. The majority alive now are not willing to pay for Net Useful things as long as they can be entertained and fed Cheez Doodles cheaply.
If you want to consume resources and increase GDP, then by all means, seek investors. If you want to do something truly Green, look no further than your hands in front of your face.